3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-1
5) Managers typically receive reports on cost planning and controls that should be considered for external use only. Answer: FALSE Diff: 2 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-1
6) There are three (3) basic business strategies: low cost, premium products, and customer satisfaction. Answer: FALSE Diff: 1 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-1
7) Companies with a strategy of low prices compete on their ability to offer unique new products or services that are priced higher than their competition. Answer: FALSE Diff: 1 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-1
8) Cost management only involves short-term decisions that attempt to increase value for customers and lower the costs of products or services. Answer: FALSE Diff: 1 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-1
9) The key to a company's success is always to be the low cost producer in a particular industry. Answer: FALSE Explanation: The low cost producer in a particular industry will not necessarily be successful. Diff: 2 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-1
10) Companies generally follow one strategy: providing a quality product or service at low prices. Answer: FALSE Diff: 2 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-1
11) The Global Reporting Initiative (GRI) is a nonprofit organization established to develop guidelines so that reporting on economic, environmental and social performance by all organizations is as routine and comparable as financial reporting. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-1
12) Corporate social responsibility is now mandatory for all publicly traded companies in Canada. Answer: FALSE Explanation: Corporate social responsibility (CSR) is the voluntary integration of social and environmental concerns into business decisions. Diff: 2 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-1
13) In what way do managers benefit from the use of a management information system? A) Data can be entered at numerous input terminals within the organization. B) The managers would not be completely responsible for the information that is entered into the database system. C) The managers could combine or adjust data to answer the questions from particular internal and external users. D) The managers do not benefit, as the information requires technical expertise to retrieve. E) Managers can store old documents in hard copy. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-1
14) Financial accounting is concerned primarily with A) cost planning and cost controls. B) external reporting to investors, government authorities, etc. C) profitability analysis. D) providing information for strategic and tactical decisions. E) providing analysis to facilitate long term decision making. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-1
15) The text identifies six ways to classify the major differences between management and financial accounting. The "managers of the organization" is an example of which of the following classes of differences? A) purpose of information B) primary users C) focus and emphasis D) rules of measurement and reporting E) time span and type of reports Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-1
16) The text identifies six ways to classify the major differences between Management and Financial Accounting. The statement "Varies from hourly to 15 to 20 years" is an example of which of the following classes of differences? A) purpose of information B) primary users C) focus and emphasis D) rules of measurement and reporting E) time span and type of reports Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-1
17) The text identifies six ways to classify the major differences between Management and Financial Accounting. The statement "Past oriented (reports on 2011 performance prepared in 2012)" is an example of which of the following classes? A) purpose of information B) primary users C) focus and emphasis D) rules of measurement and reporting E) time span and type of reports Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-1
18) The text identifies six ways to classify the major differences between Management and Financial Accounting. The statement "Communicate organization's financial position to external users" is an example of which of the following classes? A) purpose of information B) primary users C) focus and emphasis D) rules of measurement and reporting E) time span and type of reports Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-1
19) Which of the following is something management accountants should do to satisfy their users?
A) provide specialized information that given users can use B) consider only financial measures C) focus exclusively on internal users D) follow generally accepted accounting principles E) focus on planning more than control Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-1
20) "Cost management" describes A) the actions by managers to increase value for customers while continuously reducing and controlling costs. B) the identification of excessive costs in the production process. C) the satisfaction of customers' needs. D) actions by managers to satisfy customers while maintaining current cost levels. E) ensuring all costs remains constant. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-1
21) Do you agree that prior management decisions affect cost management? A) Yes. Managers should always follow prior management decisions, for example, in the determination of the EOQ. B) No. Managers should ignore prior management decisions. C) Yes. Managers should always strive to lower the costs incurred last year, as their number 1 priority. D) Yes. The only prior management decisions that can affect cost management going forward, are concerned with employee wages. All other decisions can be changed. E) Yes. Prior management decisions can affect any area of the business operations, and commit the organization to the subsequent or continued incurrence of costs in such areas as material handling, and plant construction, for example. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-1
22) Management accounting A) helps creditors evaluate the company's performance. B) helps managers make decisions. C) is useful for external and internal users. D) creates technical reports that require external audit for verification. E) is the same as cost accounting. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-1
23) Enterprise Resource Planning software (ERP) A) integrates data and provide managers with reports that highlight the interdependence of different business activities. B) facilitates "Easy Reporting for Proposals." C) provides financial reports for each separate enterprise in a conglomerate. D) is used only by plant managers to create "Exceptional Reports for Production." E) is free software downloaded over the Internet. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-1
24) Management accounting A) measures, analyzes, and reports financial and nonfinancial information to internal managers. B) provides information about the company as a whole. C) reports information that has occurred in the past that is verifiable and reliable. D) provides information that is generally available only on a quarterly or annual basis. E) must follow generally accepted accounting principles. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-1
25) Financial accounting A) focuses on the future and includes activities such as preparing next year's operating budget. B) must comply with IFRS/ASPE. C) reports include detailed information on the various operating segments of the business such as product lines or departments. D) is prepared for the use of department heads and other employees. E) is primarily concerned with profitability analysis. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-1
26) An Enterprise Resource Planning System can best be described as A) a collection of programs that use a variety of unconnected databases. B) a single database that collects data and feeds it into applications that support each of the company's business activities, such as purchases, production, distribution, and sales. C) a database that is primarily used by a purchasing department to determine the correct amount of a particular supply item to purchase. D) a sophisticated means of linking two or more companies to facilitate their planning processes. E) exception reporting system for plant managers. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-1
27) The approaches and activities of managers in short-run and long-run planning and control decisions that increase value for customers and lower costs of products and services are known as A) value chain management. B) enterprise resource planning. C) cost management. D) customer value management. E) management information system. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-1
28) Strategy specifies A) how an organization matches its own capabilities with the opportunities in the marketplace. B) standard procedures to ensure quality products. C) incremental changes for improved performance. D) the demand created for products and services. E) that a company's financial procedures are in compliance with IFRS/ASPE. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-1
29) In designing strategy, a company must match the opportunities and threats in the marketplace with A) those of the CFO (Chief Financial Officer). B) its resources and capabilities. C) branding opportunities. D) capabilities of current suppliers. E) its competitors. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-1
30) Which of the following statements refers to management accounting information? A) There are no regulations governing the reports. B) The reports are generally delayed and historical. C) The audience tends to be stockholders, creditors, and tax authorities. D) It primarily measures and records business transactions. E) The reports are audited so can be used in confidence by potential investors. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-1
31) The people who rely most exclusively on the information in a company's audited financial statements are A) senior management. B) the accounting staff. C) auditors. D) operating managers. E) shareholders. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-1
32) Management accounting ________. A) focuses on estimating future revenues, costs, and other measures to forecast activities and their results B) provides information about the company as a whole C) reports information from the past that is verifiable and reliable D) provides information that is generally available only on a quarterly or annual basis Answer: A Explanation: Management accounting has a forward-looking orientation compared to financial accounting, which has a historical perspective. Diff: 1 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-1
33) Describe management accounting and financial accounting. Answer: Management accounting provides information to internal decision makers of the business such as top executives, managers, sales representatives, and production supervisors. Its purpose is to help managers predict and evaluate future results. Reports are generated often and usually broken down into smaller reporting divisions such as department or product line. There are no rules to be complied with since these reports are for internal use only. Management accounting embraces more extensively such topics as the development and implementation of strategies and policies, budgeting, special studies and forecasts, influence on employee behaviour, and nonfinancial as well as financial information. Financial accounting, by contrast, provides information to external decision makers such as investors and creditors. Its purpose is to present a fair picture of the financial condition of the company. Reports are generated quarterly or annually and report on the company as a whole. The financial statements must comply with IFRS/ASPE. A CPA audits, or verifies, that the IFRS/ASPE are being followed. Diff: 2 Type: ES CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-1
34) Generally, companies follow one of two broad strategies: offering a quality product at a low price, or offering a unique product or service priced higher than the competition. Assume you are opening a small food outlet across the street from your campus. How might that business be operated under each of the two broad strategies? Consider the following specific operational areas: a. target customers b. products offered c. product pricing d. location choice e. advertising content f. advertising media Answer: The purpose of this question is to explore some of the differences in business operations as a result of a broad strategic choice. Answers will differ from student to student, but you should see some specific themes. Operational Area Target customers
Low Price Strategy
Differential Strategy Target customers might be more wealthy students, faculty, or perhaps neighbours who live nearby.
Target customers might be students on a tight budget. Few products, heavy emphasis on tight cost High quality products, probably a Products offered control, probably set up as a reasonable choice, restaurant might high-volume operation. have a lot of ambience. Product pricing Priced at or lower than the competition in the area. Higher priced products. Not as convenient, perhaps in a higher-end shopping or entertainment area. Customers might Location choice Convenient to the target seek out the high quality and be customers. willing to travel a bit for it. Advertising would Advertising content emphasize the low price of Advertising would emphasize the products offered. quality or ambience. Media that would be seen by Media that would be seen by the Advertising media the target customers, such as target customer, local student newspapers. magazines and newspapers. Diff: 3 Type: ES CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-1
35) Generally, companies follow one of two broad strategies: offering a quality product at a low price, or offering a unique product or service priced higher than the competition. Is it possible to follow a strategy that is "in the middle"? Answer: There is some dispute about the correct answer to this question. Some will argue that it is not good for companies to get "caught in the middle" because the customer might get confused as to whether or not the company is competing on price or is trying to make some other appeal. If the customer is confused about how the company is giving them value, they might perceive they are getting no value and abandon the product to a competitor with a clearer customer value proposition. The other side of the argument is that cost management is a necessary part of any strategy and even if the company chooses to pursue a differential strategy, management of the company should always be seeking ways to manage costs and increase customer value simultaneously regardless of their strategy. The student should be able to articulate one or the other arguments coherently. Diff: 2 Type: ES CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-1
36) What competitive advantage could a company obtain from a successful cost management program? Answer: There are three broad outcomes from a successful cost management program: 1) costs are reduced with no loss in customer value. In this scenario, a company might gain a competitive advantage by lowering its price with no loss in profit, or maintain the same price and increase profit; 2) customer value is increased with no change in costs. This scenario might increase customer satisfaction resulting in increased customer loyalty and perhaps increase the overall demand for the product; 3) customer value might be increased while costs are reduced simultaneously. This scenario would result in the benefits described in both 1) and 2). Also, a reduction in cost may outweigh the potential loss in revenue from delivering less value to the customer. Diff: 2 Type: ES CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-1
1.2 Explain how business functions help management accountants organize accounting information. 1) In the value chain, research and development generates and experiments with new ideas related to new products. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-2
2) The value chain includes the following functions: research and development; design of products, services, or processes; production; marketing; distribution; customer service; and management satisfaction. Answer: FALSE Explanation: Does not include management satisfaction. Diff: 2 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-2
3) In the value chain, research and development is the detailed planning and engineering of products, services, or processes. Answer: FALSE Explanation: R & D involves generating and experimenting with ideas related to new products, services, or processes. Diff: 1 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-2
4) Value chain and supply chain are two terms describing the same set of business functions. Answer: FALSE Explanation: Supply chain refers to the flow of goods, services, and information. Value chain refers to value added activities. Diff: 1 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-2
5) Sub-contracting a business function can be part of supply chain management. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-2
6) Success factors are methods for improving quality. Answer: FALSE Diff: 1 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-2
7) TQM Key Success Factors such as quality, time, and the provision of innovative products and services must be executed well to achieve corporate performance. Answer: FALSE Diff: 1 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-2
8) The supply chain refers to the sequence of business functions in which customer usefulness is added to products or services. Answer: FALSE Explanation: The value chain refers to the sequence of business functions in which customer usefulness is added to products or services. Diff: 2 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-2
9) For best results, cost management emphasizes independently coordinating supply chain activities within a company and not interfering with other companies. Answer: FALSE Explanation: Cost management emphasizes integrating and coordinating supply chain activities across all companies within the supply chain. Diff: 2 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-2
10) Key success factors are geared to improving customer satisfaction. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-2
11) Key success factors include time management. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-2
12) What aspect of business analysis focuses on the sequence of business functions? A) customer service B) value chain C) quality D) research and development E) product design Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-2
13) Which of the following is TRUE concerning the value chain of business functions? A) Managers should always proceed sequentially through the value chain, since distribution, for example, cannot occur before production is completed. B) Senior managers from individual parts of the value chain do not have a responsibility in deciding on the organization's overall strategy. C) An organization can only realize gains from having individual parts of the value chain work sequentially. D) The value chain refers to the value added to the customer from marketing. E) Senior managers from individual parts of the value chain have a responsibility in deciding how resources are to be obtained and used, and how rewards are to be given. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-2
14) When a company works with its supplier to reduce material-handling costs, this is an example of A) the customer-driven approach. B) a conflict of interest. C) a key success factor. D) a strategic marketing focus. E) total value chain or supply chain analysis. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-2
15) Determining the number of components to put into a computer monitor is an example of which of the following value chain functions? A) research and development B) design of products, services, and processes C) production D) marketing E) distribution Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-2
16) Developing a new web site to display and demonstrate the company's products would be part of which value chain function? A) research and development B) design of products, services, and processes C) production D) marketing E) distribution Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-2
17) To be successful a company should be A) customer driven. B) "driven" by the board of directors. C) employee driven. D) management driven. E) executive driven. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-2
18) There are many aspects of a company that managers should focus on. Which of the following sets most completely describes key success factors for managers in terms of delivering performance to customers? A) cost and efficiency, time, quality, innovation B) cost and efficiency, quality, innovation C) cost and efficiency, shareholder value, quality, innovation D) cost and efficiency, management by exception, quality, innovation E) cost and efficiency, budgeting, quality, innovation Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-2
19) R&D, production, and customer service are business functions that are all included as part of A) the value chain. B) benchmarking. C) marketing. D) the supply chain. E) the company strategy. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-2
20) The value chain is the sequence of business functions in which A) value is deducted from the products or services of an organization. B) value is proportionately added to the products or services of an organization. C) rational experimentation is performed to enhance product compatibility. D) products and services are evaluated with respect to their value to the supply chain. E) usefulness is added to the products or services of an organization. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-2
21) Whose perceptions of the company's products or services are the most important to the manager? A) board of directors' perception B) customers' perception C) president's perception D) stockholders' perception E) competitors' perception Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-2
22) Place the five business functions in the order they appear along the value chain: A = Customer service B = Design C = Distribution D = Production E = Research and Development F = Marketing A) A, E, B, D, C, F B) A, C, D, B, F, E C) E, B, D, F, C, A D) E, B, A, D, F, C E) B, E, D, F, C, A Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-2
23) ________ is the generation of, and experimentation with, ideas related to new products, services, or processes. A) Research and development B) Design of products, services, or processes C) Production D) Marketing E) Quality control Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-2
24) The value chain A) for all companies starts with research and development. B) is a strategy that integrates people and technology in all business functions to enhance relationships with customers, partners, and distributors. C) describes the flow of goods, services, and information from their initial sources to the delivery to consumers regardless if those activities occur in one or more organizations. D) is a strategy that can be focused on providing consumer goods at the lowest possible cost. E) is the sequence of business functions in which customer usefulness is added to products or services. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-2
25) ________ describe(s) the flow of goods, services, and information from the purchase of materials to the delivery of products to consumers, regardless of whether those activities occur in the same organization or with other organizations. A) Supply chain B) Key success factors C) Continuous improvement D) Customer focus E) Value chain Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-2
26) ________ is a philosophy in which management improves operations throughout the value chain to deliver products and services that exceed customer expectations. A) Cost-benefit approach B) Customer focus C) Customer relationship management D) Total quality management E) Management by objectives Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-2
27) ________ refers to a strategy that integrates people and technology across all business functions and enhances relationships with customers, suppliers, and other stakeholders. A) Customer relationship management B) Strategic management C) Supply chain management D) Total quality management E) Customer enhancement strategy Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-2
28) ________ is an operational activity that is essential to corporate performance. A) Customer focus B) A key success factor C) Continuous improvement D) Supply chain E) Value chain Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-2
29) The amount of money that a company spends on research and development (R&D) relates most closely to which of the following key success factors? A) cost and efficiency B) quality C) time D) customer service E) innovation Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-2
30) Which of the following statements about a company's supply chain is TRUE? A) A company's supply chain is always internal to the firm. B) A company's supply chain is always external to the firm. C) A company's supply chain is the same thing as a company's value chain. D) Management accountants provide information to enhance a company's supply chain. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-2
31) List and briefly describe each function in the value chain. Provide an example for each of the value chain functions identified. Answer: RESEARCH AND DEVELOPMENT—the generation of, and experimentation with, ideas related to new products, services, or processes. DESIGN OF PRODUCTS, SERVICES, AND PROCESSES—the detailed planning and engineering of products, services, or processes. PRODUCTION—the coordination and assembly of resources to produce a product or deliver a service. MARKETING—the manner by which individuals or groups (a) learn about and value the attributes of products or services and (b) purchase those products or services. DISTRIBUTION—the mechanism by which products or services are delivered to the customer. CUSTOMER SERVICE—the support activities provided to customers. Diff: 2 Type: ES CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-2
32) Customers are demanding that companies use the value chain and supply chain to deliver everimproving levels of performance regarding key success factors. Briefly describe each of the following key success factors: cost and efficiency; quality; time; innovation. For each key success factor give an example an activity that relates to that factor; and, the effect of that activity on the value chain. Answer: Cost and Efficiency: Organizations are under continuous pressure to reduce the cost of the products or services they sell. Understanding the tasks or activities that cause costs is useful in calculating and managing the cost of products. Outsourcing is an example of a function that can reduce product costs; e-business is another example. Both activities can reduce costs along the value chain. Quality: Customers are expecting higher levels of quality and are less tolerant of low quality than in the past. TQM is a management process undertaken to improve operations throughout the value chain to produce and deliver products and services that exceed customers' expectations with zero or minimal defects and waste. Time: Time has many components: the time taken to develop and bring new products to market; the speed at which an organization responds to customer requests; and the reliability with which promised delivery dates are met. Organizations are under pressure to complete activities faster and to meet promised delivery dates more reliably than in the past in order to increase customer satisfaction. Reducing bottlenecks along the value chain is one method of being more time efficient. Innovation: There is now heightened recognition that a continuing flow of innovative products or services is a prerequisite for the ongoing success of most organizations. R&D decisions are at the beginning of product development so affect many of the processes that follow in the value chain. Diff: 2 Type: ES CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-2
33) Describe the value chain and how it can help organizations become more effective. Answer: A value chain is a sequence of business functions whose objective is to provide a product to a customer or provide an intermediate good or service in a larger value chain. These business functions include R&D, design, production, marketing, distribution, customer service. An organization can become more effective by focusing on whether each link in the chain adds value from the customer's perspective and furthers the organization's objectives. Diff: 2 Type: ES CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-2
34) Cyclone Car Company tries to assign appropriate responsibilities to all of its managers. Production managers receive reports which accumulate information of the shop operations for each plant. Plant operations are further aggregated in the report received by the vice president of manufacturing. These reports show the budgeted and actual operating results for the current month and year-to-date. These, along with inventory status reports, provide the major source of production information for the next planning period. Managers evaluate the variances between actual and budgeted amounts and determine whether operations are in or out of control. If variances are large, appropriate action is taken, i.e., the plans are changed. The company's profits have been decreasing, and management has requested similar aggregate sales data from marketing. It is felt that this added information will suffice for its decision-making needs. Required: Do you agree? Why? Do you foresee any needs that will not be met by this information? If so, what additional information do you suggest that management be provided by the management accounting system? Answer: The operating and variance information received by management of Cyclone Car is only a part of the total information set required to make managerial decisions which deal with the efficient allocation of the firm's resources in accordance with the policies and goals of the firm. The firm's collection of information needs to be expanded to encompass external market and economic information, analysis of causes of unacceptable variances, and evaluations of production efficiency using measures other than dollars (for example, quality). Also, student may provide metrics that support KSFs. Diff: 2 Type: ES CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-2
Classify each cost item into one of the business functions of the value chain listed. A) distribution B) customer service C) production D) marketing 35) cost of samples mailed to promote sales of a new product Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-2
36) labour cost of workers in the manufacturing plant Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-2
37) bonus paid to a person with a 90% satisfaction rating in handling customers with complaints Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-2
38) transportation costs for shipping products to retail outlets Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-2
Answers: 35) D 36) C 37) B 38) A
Hardcover Company incurs the following costs when it manufactures books. Match each one of them to one of the value chain functions listed. A) production B) research and development C) marketing D) distribution 39) cost of customer order forms Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-2
40) cost of paper used in manufacture of books Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-2
41) cost of paper used in packing cartons to ship books Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-2
42) cost of paper used in display at national trade show Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-2
43) amortization of delivery trucks Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-2
44) amortization of the wood used in the manufacturing plant
Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-2
45) salary of the scientists attempting to find another source of printing ink Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-2
Answers: 39) C 40) A 41) D 42) C 43) D 44) A 45) B
Johnson Advertising Agency incurs the following costs in its service activities. Match each one of them to one of the value chain functions listed. A) marketing B) production C) customer service D) design of products, services, and processes 46) amortization of the artist design desk Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-2
47) cost of computer time used to create designs for customers Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-2
48) cost of updating an ad for a customer Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-2
49) cost of computer time used by a salesperson Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-2
50) cost of reworking an unsuccessful ad after client complains that ad targeted wrong customers Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-2
51) cost of materials used in the layout of a customer's magazine ad Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-2
Answers: 46) D 47) D 48) B 49) A 50) B 51) B
1.3 Identify the five steps of decision making and the role of relevant accounting information. 1) Planning is choosing goals, predicting results under various alternative ways of achieving those goals, and then deciding how to attain the desired goals. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
2) A bonus paid to high performing sales persons is an example of an intrinsic reward. Answer: FALSE Explanation: A bonus in an example of an extrinsic reward. Diff: 1 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
3) Planning includes the performance evaluation of personnel and operations. Answer: TRUE Explanation: Control includes the performance evaluation of personnel and operations. Diff: 2 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
4) Management should evaluate the difference between planned and budgeted amounts. Answer: FALSE Explanation: Planned an budgeted amounts are synonymous. Diff: 1 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-3
5) The problem identification function is the accumulation of data and reporting reliable results to all levels of management. Answer: FALSE Explanation: Problem identification does not include reporting. Diff: 2 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
6) Learning arises from comparing actual performance to expected performance. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-3
7) The process of preparing a budget enhances coordination and communication throughout the company. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-3
8) A budget may be used as a planning tool, but not as a control tool. Answer: FALSE Explanation: A budget may be used as a planning tool and also as a control tool. Diff: 1 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-3
9) Coordinating includes deciding what feedback to provide to help with future decision making. Answer: FALSE Explanation: Control includes deciding what feedback to provide to help with future decision making. Diff: 2 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
10) Performance measures must be based on financial information to be verifiable. Answer: FALSE Explanation: Both quantitative and qualitative measures of performance can be measured. Diff: 3 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
11) A budget is defined as A) the qualitative expression of a plan. B) an aid in controlling income. C) the quantitative expression of a plan of action by management. D) the quantitative expression of a plan and an aid in controlling income. E) an aid in coordinating and implementing a plan. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-3
12) Understanding the reasons for any difference between actual results and budgeted amounts is an important aspect of A) extended value-chain analysis. B) forecasting for the next accounting period. C) kaizen management. D) control. E) management by perception. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-3
13) Which of the following is a major benefit of utilizing a budgeting system? A) It always results in more profitable decisions. B) It is easier for managers than traditional decision-making models. C) It saves costs by utilizing historical data to make projections. D) It facilitates coordination and communication. E) Once a successful budget is developed, it can be re-used year after year. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
14) Once an action plan is implemented, it should A) ensure that managers follow the pre-existing plan. B) allow the originating manager(s) to keep lower-level managers from making changes. C) be flexible. D) should be followed rigidly. E) requires top management permission to change. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-3
15) A well conceived plan allows managers to have the ability to A) stay with the pre-existing plan when things start to change for the better. B) leave the system and let the plan continue on its own. C) underestimate the costs so that actual operating results will be favourable when comparisons are made. D) take advantage of unforeseen opportunities. E) stay the course regardless of the outcome. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
16) The budgetary control function may include evaluating the difference A) between current operating costs and last year's operating costs. B) between budgeted amounts and actual results. C) between the original budget and the final adjusted budget. D) allowed in the current production costs. E) between the historical cost and the current cost. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-3
17) Which of the following is NOT a use of feedback, from a manager's perspective? A) to improve past performances B) to search for alternative ways of reaching goals C) to change goals D) to predict future events E) to change the reward system Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
18) Which of the following is an example of an intrinsic reward? A) participation in a stock option plan B) receiving a cash performance bonus C) being acknowledged for a job well done D) receiving an all expenses paid vacation as a bonus E) receiving a salary increase to keep up with inflation Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
19) Place the five steps in the decision-making process in the correct order: A = Obtain information B = Decide on and implement one of the alternatives C = Identify the problem and uncertainties D = Implement the decision, evaluate performance, and learn E = Make predictions about the future A) D, B, E, A, C B) E, D, A, B, C C) C, A, E, B, D D) A, E, B, D, C E) A, C, B, D, E Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-3
20) Collecting information to follow through on how actual performance compares to planned or budgeted performance is referred to as A) an accounting system. B) scorekeeping. C) management accounting. D) attention directing. E) problem solving. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-3
21) Which of the following elements is contained within the Implement the Decision, Evaluate
Performance, and Learn category in the Five-Step Decision-Making Process? A) Identify the problem and uncertainties. B) Obtain information. C) Make predictions about the future. D) Provide feedback. E) Make decisions by choosing among alternatives. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-3
22) ________ includes reporting and interpreting information that helps managers to focus on operating problems, imperfections, inefficiencies, and opportunities. A) Scorekeeping B) Control C) Problem-solving D) Planning E) Budgeting Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-3
23) Measuring and evaluating performance, and providing feedback are aspects of A) scorekeeping. B) information gathering. C) problem identification. D) record keeping. E) control. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-3
24) Preparation of a monthly report comparing the actual phone bill with the expected phone costs would be classified as A) problem identification. B) learning. C) planning. D) control. E) information gathering. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
25) A report showing the actual financial results for a period compared to the budgeted financial results for that same period would most likely be called a A) strategic plan. B) management forecast. C) performance report. D) revised plan. E) comparative income statement. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
26) Control measures should A) be set and not changed until the next budget cycle. B) be flexible to allow for employees who are slackers. C) be kept confidential from employees so that competitors don't have an opportunity to gain a competitive advantage. D) be linked by feedback to planning. E) provide continuous feedback. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
27) Which of the following is an example of an extrinsic reward? A) thank you letter from someone outside the company B) the feeling of satisfaction from a job well done C) receiving employee of the month honours D) stock option plan E) an employee being thanked publicly by the company's president Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
28) Management accountants serve as key business partners in the planning process because they understand the key ________ factors that create ________. A) success; value B) accounting; profits C) financial; value D) success; income Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-3
29) For each type of report listed below, identify one planning decision and one control decision for which the information would be helpful. Item: a. annual financial statements for the past three years b. report detailing sales by department by each hour of the day for the past week c. special study regarding increased road traffic due to the construction of a new shopping mall at a nearby intersection Answer: Note that answers will vary, but may include the following: a. Planning: Decision by shareholder about whether to purchase more stock in the company. Control: Decision by bank to determine if financial ratios maintained in the line-of-credit (LOC) agreement warrant increasing the LOC amount. b. Planning: Decisions regarding future staffing needs. Control: Decision regarding whether the recent sales promotion led to an increase in revenue. c. Planning: Decision of the store manager about whether to change the types of retail items carried. Control: Decision of the store manager regarding performance of the analyst that prepared the special study. Diff: 3 Type: ES CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
30) List the Five-Step Decision-Making Process in order. Answer: 1. Identify the problem and uncertainties. 2. Obtain information. 3. Make predictions about the future. 4. Decide on and implement one of the alternatives. 5. Implement the decision, evaluate performance, and learn. Diff: 2 Type: ES CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-3
31) Explain how a budget can help management implement strategy. Answer: A budget is a planning tool, a quantitative expression of a plan of action that is developed within the framework of the strategic plan. Executing the activities quantified in the budget is synonymous to executing the strategic plan. The budgeting process facilitates communication and coordination throughout the organization which is also necessary in the execution of the strategic plan. Diff: 3 Type: ES CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
32) Jayhawk Basketballs manufactures and distributes rebounding equipment. The company is having a problem coordinating its marketing and production efforts. Every time marketing has a special promotion in a certain part of the country, production either cannot deliver the products or distribution has them in the wrong part of the country. In addition, the company has had several production stoppages due to insufficient raw material stock at the manufacturing plant. Required: In terms of the information system, what appears to be the main problems? What action can be taken to improve the situation? Answer: The system does not provide timely, accurate, clear, or relevant information to management. Without this type of information, management cannot manage the physical activities of the organization. It is not able to make correct managerial and strategic decisions without proper information. It needs to set up an information system in which both marketing and production communicate directly with each other about all special marketing plans and production runs. The management accounting system should be involved in the production system anyway, and it could be the conduit to provide the interchange of information between production and marketing. Diff: 3 Type: ES CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
33) Briefly explain the planning and control activities in management accounting. How are these two activities linked to each other? Answer: Planning business operations relates to designing, producing, and marketing a product or service. This includes preparing budgets and determining the prices and cost of products and services. A company must know the cost of each product and service to decide which products to offer and whether to expand or discontinue product lines. Controlling business operations includes comparing actual results to the budgeted results and taking corrective action when needed. Feedback links planning and control. The control function provides information to assist in better future planning. Diff: 2 Type: ES CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
34) Complete a performance report for the month of May, 2015, for the Daily Bulletin, a regional newspaper. Use four columns: 1) Actual Result; 2) Budgeted Amount; 3) Difference: Actual Result minus Budgeted Amount; 4) Difference as a Percentage of Budgeted Amount; AND, three rows: 1) advertising pages sold; 2) average rate per page; 3) advertising revenues. Use the following data: Advertising pages sold Budgeted advertising pages Advertising revenue Budget advertising revenue
910 900 $4,368,000 $4,410,000
Does the report indicate any cause for managerial investigation? Answer: The performance report should look something like the following: Actual Result (1) Advertising pages sold Average rate per page (Advertising Revenues)/(Ad vertising pages sold) Advertising revenues
910 pages $4,800
Budgeted Amount (2)
Difference (Actual Result - Budgeted Amount) (3) = (1) - (2) 900 pages 10 pages Favourable $4,900
$100 Unfavourable
Difference as a Percentage of Budgeted Amount (4) = (3)/(2) 1.1% Favourable 2.0% Unfavourable
$4,368,000 $4,410,000 $42,000 Unfavourable 1.0% Unfavourable
The overall 1% unfavourable difference in advertising revenue is caused by offsetting differences in advertising pages sold (favourable) and the average rate per page (unfavourable). The performance report highlights the unfavourable drop in the advertising rate per page. While the percentage drop in advertising revenue per page is not dramatic, management might want to investigate the reasons behind such a drop. Some possibilities include: aggressive price reductions to obtain revenue, a general drop in newspaper media spending, some aggressive competition, or an unrealistic budget. Diff: 3 Type: ES CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Applying Objective: LO 1-3
35) Complete a performance report for the month of February, 2016, for the Daily Mirror, a regional newspaper showing four columns: 1) Actual Result; 2) Budgeted Amount; 3) Difference: Actual Result minus Budgeted Amount; 4) Difference as a Percentage of Budgeted Amount; AND, three rows: 1) advertising pages sold; 2) average rate per page; 3) advertising revenues. Use the following data: Actual pages sold Budgeted advertising pages Actual Advertising revenue Budgeted Advertising revenue
550 500 $3,850,000 $4,000,000
Does the report indicate any cause for managerial investigation? Answer: The performance report should look something like the following: Actual Result (1)
Budgeted Amount (2)
Advertising 550 pages 500 pages pages sold Average rate $7,000 $8,000 per page (Advertising Revenues)/(Ad vertising pages sold) Advertising $3,850,000 $4,000,000 revenues
Difference (Actual Result - Budgeted Amount) (3) = (1) - (2) 50 pages favourable
Difference as a Percentage of Budgeted Amount (4) = (3)/(2)
$1,000 Unfavourable
12.50% Unfavourable
$150,000 Unfavourable
3.75% Unfavourable
10.00% Favourable
The overall 3.75% unfavourable difference in advertising revenue is caused by offsetting differences in advertising pages sold (favourable) and the average rate per page (unfavourable). The performance report highlights the favorable increase in the advertising pages sold. While the percentage drop in advertising revenue per page is also dramatic, management might want to investigate the reasons behind such a drop. Some possibilities include: aggressive price reductions to obtain revenue, or some aggressive competition, or an unrealistic budget. Diff: 3 Type: ES CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Applying Objective: LO 1-3
Match each independent statement with the appropriate use of feedback. A) Changing managers. B) Changing goals. C) Changing reward systems. D) Changing the range of information collected in order to make predictions. E) Changing how the company operates. F) Changing how decision alternatives are identified. 36) Quality control activities have been moved from the end of the assembly line to critical points along the assembly line. Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
37) Home office changes stock option plans. Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
38) Jackson Company increases emphasis on cash flow rather than income, after prior liquidity problems lead to bankruptcy. Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
39) The Economic Order Quantity (EOQ) and reorder points of the inventory system are being converted to automatic processing on the computer to increase the information for forecasting inventory demand. Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
40) MLB Company contracts with an outside janitorial service rather than continuing with its own cleaning crew. Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
41) AMB Company is adopting online meetings to identify which product lines to establish. Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
42) Local Computer Company incorporates average inflation forecasts for wages when predicting future labour costs. Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
43) Altec Company considers basing its marketing bonuses on the profitability of sales rather than on the dollar amount of sales. Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
Answers: 36) E 37) C 38) B 39) D 40) E 41) F 42) D 43) C
For each of the independent activities give the aspect of the Five-Step Decision-Making Process that best describes what is being undertaken. A) Obtain information B) Decide on and implement one of the alternatives C) Identify the problem and uncertainties D) Implement the decision, evaluate performance, and learn E) Make predictions about the future 44) Preparing a report comparing actual and budgeted waste percentages from a chemical process in a herbicide plant. Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
45) Changing the selling price of a product. Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
46) Explaining the variances in Department 23's labour report. Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
47) Evaluating a new environmental law. Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
48) Estimate possible outcomes from outsourcing production to another country. Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
49) Conduct a consumer survey. Diff: 2 Type: MA CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-3
Answers: 44) D 45) B 46) D 47) C 48) E 49) A
1.4 Describe key guidelines management accountants follow and roles they assume to support management decisions. 1) The cost-benefit approach should be used to make resource allocation decisions. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-4
2) Line management exists to provide advice and assistance to staff departments. Answer: FALSE Explanation: Staff management provide advice and assistance to line management. Diff: 2 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-4
3) The senior factory officer is also called the CFO. Answer: FALSE Explanation: The CFO is the senior financial officer. Diff: 2 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-4
4) Line management is directly responsible for attaining the goals of the organization. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-4
5) A cost concept used for external reporting purposes may be appropriate for internal, routine reporting to managers. Answer: FALSE Diff: 1 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-4
6) Controllership includes short- and long-term financing and investments, banking, cash management, foreign exchange, and derivatives management. Answer: FALSE Explanation: These are treasury functions. Diff: 2 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-4
7) The method recommended for a management accountant in dealing with a resource allocation decision is A) management by exception. B) total value chain analysis. C) analysis based on feedback. D) the variance analysis approach. E) the cost-benefit approach. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-4
8) The primary criterion when faced with a resource allocation decision is A) cost minimization. B) reduction in the amount of time required to perform a particular job. C) achievement of organizational goals. D) how well the alternative options help achieve organizational goals in relation to the costs incurred. E) improving information flow. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-4
9) Which of the following statements about the cost-benefit approach is TRUE? A) Resources should be spent if they are expected to better attain company goals in relation to the expected costs of these resources. B) In a cost-benefit analysis, both costs and benefits are easy to obtain. C) Resources should be spent if the costs of a decision outweigh the benefits of the decision. D) A cost-benefit approach would not be appropriate for a decision to install a budget system or not. E) The cost-benefit approach is more important than behavioural considerations. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-4
10) An example of a staff management function would be A) determining that new equipment is required. B) preparing operating cost estimates for proposed new equipment. C) managing production. D) ensuring that environmental standards are met. E) being responsible for attaining a set level of plant income. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-4
11) The person(s) directly responsible for the attainment of organizational objectives is/are A) staff management. B) line management. C) both staff and line management. D) the chief financial officer. E) the internal auditor. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-4
12) As teamwork has become more prominent in the last few years, the traditional distinctions between staff and line management A) has increased. B) has become more important relative to promotions. C) has diminished. D) has only been evident in the employee reward system. E) has become less clear cut in the employee reward system. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-4
13) The ________ is also called the chief financial officer. A) controller B) finance director C) internal auditor D) treasurer E) chief executive Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-4
14) Which of the following individuals focuses on reporting and interpreting relevant financial information used to manage the company? A) chief financial officer B) controller C) line management D) treasurer E) accounting manager Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-4
15) The person(s) responsible for providing advice and assistance to line managers is/are A) the controller. B) the chief financial officer. C) staff management. D) the treasurer. E) the president. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-4
16) Staff management includes A) manufacturing managers. B) human-resource managers. C) purchasing managers. D) distribution managers. E) sales persons. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-4
17) The ________ is primarily responsible for the quality of the information supplied in both internal and external reports. A) COO (Chief Operating Officer) B) CIO (Chief Information Officer) C) treasurer D) controller E) accountant Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-4
18) Controllership includes responsibility for A) audit B) taxation C) treasury D) risk management E) profitability reporting Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-4
19) In a cost-benefit approach, managers should spend resources if the ________. A) marginal costs to the company exceed the marginal benefits B) expected benefits to the company exceed the expected costs C) marginal costs to the company equal the marginal benefits D) expected benefits to the company equal the expected costs Answer: B Diff: 3 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-4
20) Discuss the cost-benefit approach guideline management accountants use to provide value in strategic decision making. Answer: Management accountants continually face resource allocation decisions. The cost-benefit approach should be used in making these decisions. Resources should be spent if the expected benefits to the company exceed the expected costs. The expected benefits and costs may not be easy to quantify, but it is a useful approach for making resource allocation decisions. Diff: 3 Type: ES CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-4
21) Discuss the potential behavioural implications of performance evaluation. Answer: As measurements are made on operations and, especially, on individuals and groups, the behaviour of the individuals and groups are affected. People react to the measurements being made. They will focus on those variables or the behaviour being measured and spend less attention on variables and behaviour that are not measured. In addition, if managers attempt to introduce or redesign cost and performance measurement systems, people familiar with the previous system will resist. Management accountants must understand and anticipate the reactions of individuals to information and measurements. The design and introduction of new measurements and systems must be accompanied with an analysis of the likely reactions to the innovations. Diff: 3 Type: ES CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-4
22) What areas of responsibility does a chief financial officer have in a typical organization? Answer: The responsibilities vary among organizations, but generally include the following areas: controllership, treasury, risk management, taxation, investor relations, and internal audit. Diff: 2 Type: ES CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-4
23) How does a controller help "control" a company? Answer: By reporting and interpreting relevant data, the controller exerts a force or influence that impels management toward making better-informed decisions. The controller of Caterpillar described the job as "a business advisor to ... help the team develop strategy and focus the team all the way through recommendations and implementation." Diff: 2 Type: ES CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-4
1.5 Distinguish among corporate governance, professional codes of conduct, ethics, and corporate social responsibility. 1) An accountant, as a member of a professional organization, must follow only those ethical requirements as are prescribed by the organization they belong to, such as the Chartered Professional Accountants of Canada. Answer: FALSE Explanation: Accountants are also bound by legislation and corporate codes of ethics. Diff: 2 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-5
2) CPAs are required to follow the formal codes of ethical conduct provided by their professional association. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-5
3) Management accountants have important ethical responsibilities that are related to competence, duty of care, objectivity, and professionalism. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-5
4) If a managerial accountant were not keeping up with current developments in managerial accounting, that behaviour might violate the enabling competency guideline of CPA ethical behaviour. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-5
5) Corporate social responsibility (CSR) is the legislated integration of social and environmental concerns into business decisions. Answer: FALSE Explanation: Corporate social responsibility (CSR) is the voluntary integration of social and environmental concerns into business decisions. Diff: 2 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-5
6) Sustainability accounting focuses on reporting nonfinancial information on activities that impact society, the environment, and the financial (or economic) aspects of an organization's performance to an organization's stakeholders. Answer: FALSE Explanation: Sustainability accounting focuses on reporting both financial and nonfinancial information on activities that impact society, the environment, and the financial (or economic) aspects of an organization's performance to an organization's stakeholders. Diff: 2 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-5
7) The Global Reporting Initiative has developed and supports several frameworks, however, the most common form of sustainability accounting is the Balanced Scorecard. Answer: FALSE Explanation: The Global Reporting Initiative has developed and supports several frameworks, however, the most common form of sustainability accounting is the Triple Bottom-Line Approach (TBL). Diff: 2 Type: TF CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-5
8) Corporate social responsibility is A) legislated by government and enforced by the courts. B) the same as code of ethics passed by the board of governors of a company. C) the mandatory integration by companies of social and environmental concerns into their business operation. D) the voluntary integration by companies of social and environmental concerns into their business operation. E) codified in international trade agreements. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-5
9) Which of the following would likely constitute a breach of ethics for a management accountant? A) to omit pertinent information from a report because it is personally unfavourable B) to consider disclosing confidential information in order to further your own career C) to consider disclosing confidential information (ie gained from a third party) in order to assist your employer/client D) to report the unethical actions of another party, with the expectation that this will further your own career E) to be disruptive in a meeting Answer: A Diff: 3 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-5
10) Corporate governance A) relates to the role of the corporate governor. B) comprises activities undertaken to ensure legal compliance with laws. C) is legislated by the federal government. D) relates only to the regulations provided by the Canadian Securities Administrators. E) is a voluntary system of compliance approved by each company's board of directors. Answer: B Diff: 3 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-5
11) An accountant that agrees with the company president to defer the recognition of an earned revenue is in a breach of which of the following dimensions of professional conduct? A) adherence to rules of professional conduct B) conduct that contravenes an act, the regulations, or the bylaws C) conduct that displays a lack of competence D) failure or refusal to co-operate in a practice review E) participating in a conflict of interest Answer: A Diff: 3 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-5
12) Professional codes of conduct relating to the accounting profession A) supercede the provincial laws but not federal laws. B) are enforced by the solicitor general of the relevant province. C) specify penalties up to and including incarceration. D) are not enforceable as they are not actually laws. E) specify how professional accountants must behave. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-5
13) For which of the following areas is a chief operating officer (COO) typically responsible? A) treasurer B) non-financial operating functions C) risk management D) taxation E) controllership Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-5
14) Which of the following is an example of the Integrative Analysis guideline from the CPA Guidelines for Ethical Behaviour? A) planning and identifying possible conflicts of interest B) having the requisite knowledge to perform certain tasks C) no ownership interest in an audit client D) scrutinizing ethical constraints to determine the best way forward E) providing advice on bank loan covenants Answer: D Diff: 3 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-5
15) The purpose of the triple bottom line (TBL)approach is draw management's focus A) primarily to financial prosperity but also people and products. B) to environmental sustainability, economic prosperity, and social networking. C) to financial prosperity, but also to areas of environmental stewardship and protection, as well as adhering to the laws of the jurisdictions in which the company operates. D) to profit, people, and planet. E) to what is important to shareholders. Answer: D Explanation: The purpose of the TBL approach is draw management's focus to financial prosperity, but also to areas of environmental stewardship and protection, as well as the contribution the organization makes to the communities in which it operates and society in general. Diff: 3 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-5
16) Which of the following statements is TRUE regarding sustainability accounting? A) The Global Reporting Initiative (GRI) is a for profit organization established to develop guidelines so that "reporting on economic, environmental and social performance by all organizations is as routine and comparable as financial reporting." B) Statutory requirements describe the elements that must be included in reports based on sustainability accounting. C) Since 2002 it has been a criminal offence for the Chief Financial Officer to sign off on a report based on sustainability accounting that does not include a section on environmental management. D) Corporate Social Responsibility (CSR) is a subset of sustainability accounting. E) The trend to sustainability in reporting has emphasized value creation as well as risk mitigation in financial reports and management discussion and analysis of organizations. Answer: E Diff: 3 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-5
17) ________ focuses on reporting both financial and nonfinancial information on activities that impact society, the environment, and the financial (or, economic) aspects of an organization's performance to an organization's stakeholders. A) ASPE/IFRS B) Sustainability accounting C) Alternative reporting D) Triple bottom line E) Management accounting Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-5
18) Which of the following is an example of a reporting element of the social bottom line category in the triple bottom line approach? A) shareholder return B) emission reduction C) sustainable business practices D) benefits to stakeholders E) risk management Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-5
19) A company may employ CPAs and other persons who are required to meet certain standards of professional conduct due to their membership in relevant professional organizations. These standards of conduct often include the areas of responsibility, competence, fairness and independence. However, holding only a few people responsible for sound professional conduct does not make a company behave ethically. Required: What can a company do to increase the likelihood of its employees being ethical in all their undertakings? Answer: A company can begin by establishing its own code of professional ethics. This establishes the general value system that the organization wishes to apply to its employees' activities. A code communicates the organizational purposes and beliefs to employees and establishes uniform guidelines for all decision making. Because laws and rules cannot cover all situations, organizations can benefit from having an ethical code to provide guidance in situations which have unclear solutions. A code establishes standards against which individuals can measure their own performance. Finally, there needs to be clear ethical leadership from the top. Diff: 2 Type: ES CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Remembering Objective: LO 1-5
20) Define Corporate Social Responsibility (CSR), and describe why it is important for corporate profitability. In addition describe the elements of the CSR approach called the Triple Bottom Line (TBL). Answer: a. Defined - Corporate social responsibility (CSR) is the voluntary integration of social and environmental concerns into business decisions. b. It is important because the actions of business need to be in-line with stakeholder values. For example, many multinational corporations refuse to do business with suppliers who endanger their workers or families. Consumers are increasingly unwilling to purchase products from companies that act in ways that are seen to negatively impact society and the environment. c. The triple bottom line consists of strategic goals concerning economic prosperity, environmental sustainability, and social equity (profit, planet, people). Diff: 3 Type: ES CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-5
21) Define sustainability accounting and describe why this is an important area for management and cost accounting. Answer: Sustainability accounting focuses on reporting both financial and nonfinancial information on activities that impact society, the environment, and the financial (or, economic) aspects of an organization's performance to an organization's stakeholders. This is an important area for management and cost accounting as its emphasis is on information and accounting used for internal decision making and strategy development. Diff: 3 Type: ES CPA Competencies: Chapter 1 3.1.1 Evaluates management information requirements, 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.4 Identifies ethical and privacy issues related to information technology Skill: Understanding Objective: LO 1-5
Cost Accounting: A Managerial Emphasis - Cdn. Ed., 9e (Datar) Chapter 2 An Introduction to Cost Terms and Purposes 2.1 Identify and distinguish between two manufacturing cost classification systems: direct and indirect, prime and conversion. 1) "Loss" is defined by accountants as a resource sacrificed or foregone to achieve a specific objective. Answer: FALSE Explanation: "Cost" is defined by accountants as a resource sacrificed or foregone to achieve a specific objective. Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-1
2) Costs of Purchases is another way of saying Costs of Goods Sold. Answer: FALSE Explanation: Costs of Sales is another way of saying Costs of Goods Sold. Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-1
3) An actual cost is a predicted cost. Answer: FALSE Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-1
4) Nearly all accounting systems accumulate forecasted costs. Answer: FALSE Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-1
5) A cost object is anything for which a separate measurement of costs is desired. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-1
6) Indirect costs cannot be economically traced directly to the cost objective. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-1
7) Delivery charges are typically considered to be an indirect cost because it cannot be traced to each customer. Answer: FALSE Diff: 2 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
8) A cost is classified as a direct or indirect cost based on the change on the level of activity. Answer: FALSE Explanation: A cost is classified as a direct or indirect cost based on the applicable cost object. Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-1
9) Cost tracing assigns indirect costs to the chosen cost object. Answer: FALSE Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-1
10) Factors affecting direct/indirect cost classifications are the materiality of the cost in question, the information-gathering technology used, and the operations. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-1
11) Rent for the building that contains the manufacturing and marketing departments can be charged as manufacturing overhead costs. Answer: FALSE Diff: 2 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
12) The plant supervisor's salary is an indirect labour cost. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
13) Conversion costs include all direct manufacturing costs. Answer: FALSE Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-1
14) Prime costs consist of direct and indirect manufacturing labour. Answer: FALSE Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-1
15) Conversion costs are all manufacturing costs other than direct labour. Answer: FALSE Explanation: Conversion costs are all manufacturing costs other than direct materials. Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-1
16) Products, services, departments, and customers may be cost objects. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
17) Costs are accounted for in two basic stages: assignment followed by accumulation. Answer: FALSE Explanation: Costs are accounted for in two basic stages: accumulation followed by assignment. Diff: 2 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
18) A cost object is always either a product or a service. Answer: FALSE Explanation: A cost object could be anything management wishes to determine the cost of, for example, a department. Diff: 2 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-1
19) Assigning direct costs poses more problems than assigning indirect costs. Answer: FALSE Explanation: Tracing direct costs is quite straightforward, whereas assigning indirect costs to a number of different cost objects can be very challenging. Diff: 2 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
20) A department could be considered a cost object. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
21) Cost assignment is a term that refers solely to allocating indirect costs among diverse cost objects. Answer: FALSE Explanation: Cost assignment is a general term that encompasses both (1) tracing direct costs to a distinct cost object and (2) allocating indirect costs among diverse cost objects. Diff: 2 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-1
22) Materiality refers to the significance of the cost in question. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-1
23) Anything for which a separate measurement of costs is desired is known as A) a cost item. B) a cost object. C) a fixed cost item. D) a variable cost object. E) a cost driver. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-1
24) Which of the following is a cost object? A) direct materials B) customers C) conversion costs D) cost assignments E) indirect labour Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
25) Which of the following is an indirect production cost? A) materials placed into production B) calibrating factory equipment C) labour placed into production D) cost of shipping a product to the customer E) advertising Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
26) Actual costs are defined as A) costs incurred. B) direct costs. C) indirect costs. D) predicted costs. E) sunk costs. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-1
27) Whether a company traces costs directly to an output unit or not depends upon A) the materiality of the contribution a cost makes to the total cost per output unit. B) the amount of similar costs in the cost assignment. C) the effect of cost tracing on overhead. D) the employment of cost management. E) the amount of customer satisfaction. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-1
28) Which one of the following items is typically an example of an indirect cost of a cost object? A) courier charges for shipment delivery B) manufacturing plant electricity C) direct manufacturing labour D) wood used for furniture manufacture E) refundable sales tax on direct materials Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
29) Prime costs can include A) conversion costs. B) direct material costs. C) indirect manufacturing labour. D) machine set up costs. E) advertizing costs. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
30) Which one of the following examples could be classified as a direct cost? A) The costs of an entire factory's electricity related to a product; the product line is the cost object. B) The printing costs incurred for payroll cheque processing; the payroll cheque processing is the cost object. C) The salary of a maintenance supervisor in the manufacturing plant; Product A is the cost object. D) The costs incurred for electricity in the office; the accounting office is the cost object. E) The cost of advertising the products. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
31) The determination of a cost as being either direct or indirect depends upon A) the accounting system. B) the allocation system. C) the cost tracing system. D) only the cost object chosen to determine its individual costs. E) the choice of the cost object, and the materiality of the cost in question. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-1
32) Cost assignment is A) always arbitrary. B) linking actual costs to cost objects. C) the same as cost accumulation. D) finding the difference between budgeted and actual costs. E) the same as cost conversion. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-1
33) Wages paid to machine operators on an assembly line are an example of which type of cost? A) direct manufacturing labour costs B) direct manufacturing overhead costs C) direct materials costs D) indirect manufacturing overhead costs E) indirect material costs Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
34) Which of the following is TRUE concerning prime costs? A) Prime costs are direct manufacturing costs. B) They include indirect manufacturing labour. C) They equal the sum of direct manufacturing costs plus conversion costs. D) They equal the sum of fixed manufacturing costs plus conversion costs. E) They are indirect manufacturing costs. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-1
35) Cost tracing is A) the assignment of direct costs to the chosen cost object. B) a function of cost allocation. C) the process of tracking both direct and indirect costs associated with a cost object. D) the process of determining the actual cost of the cost object. E) the assignment of both direct and indirect costs associated with a cost object. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-1
36) Cost allocation is A) the process of tracking both direct and indirect costs associated to a cost object. B) the process of determining the actual cost of the cost object. C) the assignment of indirect costs to the chosen cost object. D) a function of cost tracing. E) the assignment of direct costs to the chosen cost object. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-1
37) Classifying a cost as either direct or indirect depends upon A) the behaviour of the cost in response to volume changes. B) whether the cost is expensed in the period in which it is incurred. C) whether the cost can be traced to the cost object. D) whether an expenditure is avoidable or not in the future. E) the inventory classification system. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-1
38) A manufacturing plant produces two product lines: football equipment and hockey equipment. Direct costs for the football equipment line are the A) beverages provided daily in the plant break room. B) monthly lease payments for a specialized piece of equipment needed to manufacture the football helmet. C) salaries of the clerical staff that work in the company administrative offices. D) utilities paid for the manufacturing plant. E) advertising costs. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
39) A manufacturing plant produces two product lines: football equipment and hockey equipment. An indirect cost for the hockey equipment line is the A) material used to make the hockey sticks. B) labour to bind the shaft to the blade of the hockey stick. C) shift supervisor for the hockey line. D) plant supervisor. E) salesperson travelling expenses. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
40) Factors affecting direct/indirect cost classification include all of the following EXCEPT the A) cost assignment method. B) materiality of the cost in question. C) selection of the cost object. D) available information-gathering technology. E) design of operations. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-1
41) Manufacturing overhead includes A) corporate insurance cost. B) the executive officers' salaries. C) marketing costs. D) supplies used in the human resources department. E) plant utilities. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
42) Which of the following statements about the direct/indirect cost classification is TRUE? A) Indirect costs are always traced. B) Indirect costs are always allocated. C) The design of the sales target affects the direct/indirect classification. D) The direct/indirect classification depends on the cost control measures. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
43) What is the meaning of the term "cost object"? Give an example of a cost object that would be used in a manufacturing company, a merchandising company, and a service sector company? Answer: A cost object is anything for which a measurement of costs is desired. An example of a cost object for a manufacturing company might be the cost of manufacturing a particular product. An example of a cost object for a merchandising company might be a particular department of a retail store. An example of a cost object for a service sector company might be the cost to serve or supply a particular customer. Diff: 2 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
44) What are the differences between direct costs and indirect costs? Give an example of each. Answer: Direct costs are costs that can be traced easily and economically to the product manufactured or the service rendered. Examples of direct costs include direct materials and direct manufacturing labour used in a product. Indirect costs cannot be easily identified in a cost efficient manner (economically)with individual products or services rendered, and are usually assigned using allocation formulas. In a plant that manufactures multiple products, examples of indirect costs include the plant supervisor's salary and the cost of machines used to produce more than one type of product. Diff: 2 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
Chris Manufacturing has four manufacturing cost pools and many types of costs, some of which are listed below. Match the type of cost with the most appropriate cost pool or as a period cost. A) Period cost B) Cost pool - direct factory labour C) Cost pool - indirect factory labour D) Cost pool - indirect factory operating costs 45) amortization on buildings and equipment Diff: 1 Type: MA CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
46) fringe benefits for factory workers Diff: 1 Type: MA CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
47) idle time wages Diff: 1 Type: MA CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
48) lubricants for machines Diff: 1 Type: MA CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
49) night security Diff: 1 Type: MA CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
50) factory worker overtime premiums Diff: 1 Type: MA CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
51) factory worker overtime premiums Diff: 1 Type: MA CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
52) property insurance on the factory Diff: 1 Type: MA CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
53) property taxes on the administration office Diff: 1 Type: MA CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
54) safety hats and shoes Diff: 1 Type: MA CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
55) factory supervisor's salaries Diff: 1 Type: MA CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
56) utilities on the administrative building Diff: 1 Type: MA CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
57) utilities on the factory Diff: 1 Type: MA CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
Answers: 45) D 46) C 47) C 48) D 49) D 50) D 51) C 52) D 53) A 54) D 55) C 56) A 57) D
58) Office Wood Company manufactures office furniture. Recently, the company decided to develop a formal cost accounting system. The company is currently converting all costs into classifications related to its manufacturing processes. Required: For the following items, label each as being appropriate for: ∙ direct cost tracing of the finished furniture, ∙ indirect cost allocation of an indirect manufacturing cost to the finished furniture, or ∙ a nonmanufacturing item.
Item Carpenter wages Amortization - office building Glue for assembly Lathe department supervisor Lathe amortization Lathe maintenance Lathe operator wages Lumber Sales staff wages Metal brackets for drawers Washroom supplies Answer: Item Carpenter wages Amortization - office building Glue for assembly Lathe department supervisor Lathe amortization Lathe maintenance Lathe operator wages Lumber Sales staff wages Metal brackets for drawers Washroom supplies
Direct Cost Tracing
Indirect Cost Allocation
Nonmanufacturing
________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________
________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________
________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________
Direct Cost Indirect Cost Tracing Allocation
Nonmanufacturing
X X X X X X X X X X X
Diff: 2 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-1
2.2 Differentiate fixed from variable cost behaviour, and explain the relationship of cost behaviour to direct and indirect cost classifications. 1) A relevant range is the range of the cost driver in which a specific relationship between cost and driver is valid. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-2
2) Changes in particular cost drivers automatically result in decreases in overall costs. Answer: FALSE Explanation: Changes can also result in cost increases. Diff: 2 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-2
3) A fixed cost is a cost that changes per unit as cost driver volume changes. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-2
4) Total variable costs change in direct proportion to changes in cost driver volume. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-2
5) The variable cost per unit of a product should stay the same throughout the relevant range of production. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-2
6) An appropriate cost driver for shipping costs might be the number of units shipped. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-2
7) Fixed costs do not have cost drivers, at least in the short-run. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-2
8) Costing systems that identify the cost of each activity such as testing, design, or setup are called management-based costing systems. Answer: FALSE Explanation: Costing systems that identify the cost of each activity such as testing, design, or setup are called activity-based costing systems. Diff: 2 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-2
9) Competition places an increased emphasis on cost reductions. For an organization to reduce costs it must focus on A) maximizing the cost allocation system. B) reporting non-value added costs separately from value-added costs. C) efficiently managing the use of the cost drivers in those value-added activities. D) the cost allocation process. E) reducing the number of cost drivers. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-2
10) Which of the following statements about cost management is TRUE? A) It requires that managers actively strive to increase revenues. B) It only focuses on inventoriable costs. C) It is not affected by the organization's customers. D) It only applies to period costs. E) It requires efficient management of the use of the cost drivers in the value-added activities. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-2
11) Which one of the following is a variable cost in a grocery store? A) rent B) president's salary C) inventory of vegetables D) property taxes E) administrative salaries Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-2
12) Which of the following is a fixed cost in a clothing store? A) store manager's salary B) electricity C) sales commissions D) inventory E) paper for the cash register Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-2
13) If each furnace required a hose that costs $20 and 2,000 furnaces are produced for the month, the $40,000 total cost for hoses A) is considered to be a direct fixed cost. B) is considered to be a direct variable cost. C) is considered to be an indirect fixed cost. D) is considered to be an indirect variable cost. E) is considered to be variable or fixed, depending on the relevant range. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-2
Use the information below to answer the following question(s). Pecan Co. produced and sold 40,000 units last year. PER UNIT revenue and costs were as follows: Revenue Cost of Goods Sold: Direct Materials Direct Labour Variable Manufacturing Overhead Fixed Manufacturing Overhead Total Cost of Goods Sold Gross Margin Selling and Administrative Costs: Sales Commissions (10% of Sales) Administrative Salaries Total Selling and Administrative Operating Income <Loss>
$100.00 $15.00 30.00 20.00 10.00 75.00 $25.00 $10.00 20.00 30.00 <$5.00>
Fixed manufacturing overhead and administrative salaries are fixed costs. The per unit amounts are based on last year's production. 14) Calculate last year's operating income when the company produced and sold 40,000 units. A) $0 B) $<200,000> C) $<500,000> D) $<800,000> E) $<1,000,000> Answer: B Explanation: 40,000 × [100 - (15 + 30 + 20 + 10)] - [40,000 × (20 + 10)] = $<200,000> Diff: 1 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-2
15) Calculate this year's operating income if the company plans to produce and sell 50,000 units. A) $50,000 B) $0 C) $<250,000> D) $<550,000> E) $250,000 Answer: A Explanation: 50,000 × [100 - (15 + 30 + 20 + 10)] - [40,000 × (20 + 10)] = $50,000 Diff: 3 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-2
16) Calculate this year's operating income if the company plans to produce and sell 60,000 units. A) $150,000 B) $0 C) $<300,000> D) $<650,000> E) $300,000 Answer: E Explanation: 60,000 × [100 - (15 + 30 + 20 + 10)] - [40,000 × (20 + 10)] = $300,000 Diff: 3 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-2
Use the information below to answer the following question(s). Big Island Coffee Co. produced and sold 120,000 units last year. PER UNIT revenue and costs were as follows: Revenue Cost of Goods Sold: Direct Materials Direct Labour Variable Manufacturing Overhead Fixed Manufacturing Overhead Total Cost of Goods Sold Gross Margin Selling and Administrative Costs: Sales Commissions (10% of sales) Administrative Salaries Total Selling and Administrative Operating Income
$34.50 $20.00 3.00 2.00 1.00 26.00 $8.50 $3.50 6.00 9.50 <$1.00>
Fixed manufacturing overhead and administrative salaries are fixed costs. The per unit amounts are based on last year's production. 17) Calculate last year's operating income when the company produced and sold 120,000 units. A) $0 B) $<120,000> C) $<500,000> D) $<800,000> E) $<1,000,000> Answer: B Explanation: 120,000 × -$1.00 = $<120,000> Diff: 1 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-2
18) Calculate this year's operating income if the company plans to produce and sell 200,000 units. A) $360,000 B) $0 C) $<100,000> D) $900,000 E) $980,000 Answer: A Explanation: 200,000 × [34.5 - (20 + 3 + 2 + 3.50)] - [120,000 × (1 + 6)] = $360,000 Diff: 3 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-2
19) Calculate this year's operating income if the company plans to produce and sell 60,000 units. A) $120,000 B) $0 C) $<30,000> D) $<100,000> E) $<480,000> Answer: E Explanation: 60,000 × [34.5 - (20 + 3 + 2 + 3.50)] - [120,000 × (1 + 6)] = $<480,000> Diff: 3 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-2
20) Cost behaviour refers to A) how costs react to a change in the level of activity. B) whether a cost is incurred in a manufacturing, merchandising, or service company. C) classifying costs as either inventoriable or period costs. D) whether a particular expense has been ethically incurred. E) how costs react to a change in selling price. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-2
21) A mixed cost is A) a fixed cost. B) a cost with fixed and variable elements. C) a variable cost. D) always an indirect cost. E) a cost with direct and indirect elements. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-2
22) Variable costs A) are always indirect costs. B) increase in total when the actual level of activity increases. C) include most personnel costs and depreciation on machinery. D) can always be traced directly to the cost object. E) change in relation to selling price. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-2
23) The relevant range is important because A) it specifies which costs should be used for a given decision. B) it provides a basis for determining a range of acceptable cost alternatives. C) it is required to determine inventoriable costs under ASPE/IFRS. D) it specifies the limits beyond which the relationship of cost to cost drivers may not be valid. E) it determines the time horizon. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-2
24) Which of the following statements about the key features of cost accounting and cost management is TRUE? A) When making decisions about what products to produce, managers need to know how revenue and costs vary with changes in output levels. B) Managers need to understand that period costs remain the same from one period to the next. C) The costing system allocates direct costs and traces indirect costs to products. D) When making decisions, managers must understand that all revenue and costs are relevant. E) Cost accounting is used for managerial decision making, not for financial statements. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-2
25) Fixed costs A) may include either direct or indirect costs. B) vary with production or sales volumes. C) include parts and materials used to manufacture a product. D) can be adjusted in the short run to meet actual demands. E) remain fixed regardless of the relevant range of production. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-2
26) Fixed costs depend on the A) amount of resources used. B) amount of resources acquired. C) volume of production. D) volume of sales. E) allocation method. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-2
27) Which one of the following is a variable cost for an insurance company? A) rent B) president's salary C) sales commissions D) property taxes E) amortization on the office equipment Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-2
28) Which of the following is a fixed cost for an automobile manufacturing plant? A) straight-line amortization on factory equipment B) electricity used by assembly-line machines C) sales commissions D) windows for each car produced E) labour cost of assembly line workers Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-2
29) Which of the following is a fixed cost with respect to units produced in a factory? A) monthly rent payment for the building B) electrical expenses C) utilities cost for the building D) direct material costs Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-2
30) CBC, Inc., reports the following information for September: Sales Variable costs Fixed costs Operating income
$25,000 6,000 5,000 $14,000
Required: If sales double in October, what is the projected operating income? Answer: ($25,000 × 2) - ($6,000 × 2) - $5,000 = $33,000 Diff: 2 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-2
31) Parksville, Inc., reports the following information for September: Sales Variable costs Fixed costs Operating income
$25,000 6,000 5,000 $14,000
Required: If sales decrease by half in October, what is the projected operating income? Answer: ($25,000 × 1/2) - ($6,000 × 1/2) - $5,000 = $4,500 Diff: 2 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-2
32) A new employee in the accounting department is having difficulty understanding two sets of accounting terms—variable and fixed costs as opposed to period and product costs. He understands that variable costs change during an accounting period while fixed costs do not. However, he explains that a period cost implies that it is for a period of time and is, therefore, also fixed. Does his assumption imply that all product costs are then variable? Required: As part of your responsibility to train new staff, explain the difference between these terms. Answer: First, you should explain that all costs should be first classified as either variable or fixed. This concept deals with cost behaviour and not with what the costs are associated in the organization. Many decisions are made about costs because of the type of behaviour they exhibit. Second, a cost can be assigned to "why you are in business" activities (product costs) of the organization or to "support" activities (period costs) of the organization. For a manufacturing firm period costs are all costs which have no direct relationship to the manufacturing process. Period costs are always expenses during the accounting period while product costs are inventoriable because they can be assigned to the products being produced. Diff: 2 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-2
33) A manufacturing company contracts with the labour union to guarantee full employment for all employees with at least 10 years seniority. The Company expects to be working at capacity for the next 2 years (the life of the contract), so this was seen as a bargaining concession without any cost to the company. On average, an employee earns $30 per hour, including benefits. The work force consists of 800 employees, with seniority ranging from 1 year to 18 years. Required: Analyze the direct labour cost in term of variable costs, fixed costs, and the relevant range. Answer: Usually, we think of direct labour as a variable cost, since it increases in proportion to the increases in output. However in this case, the manufacturer has converted a portion of the direct labour cost into a fixed cost, since the union contract appears to require the company to pay full wages to all employees with at least 10 years seniority, regardless of the level of production. The direct labour costs in excess of this amount would still be a variable cost. The relevant range would be the number of employees with at least 10 years seniority, times the wage for a regular work week. This will be the case until the contract expires. Diff: 2 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-2
34) Describe a variable cost. Describe a fixed cost. Explain why the distinction between variable and fixed costs is important in cost accounting. Answer: Total variable costs increase with increased production or sales volumes; Unit variable cost remains constant no matter the level of activity; all within the relevant range. Fixed costs are not influenced by fluctuations in production or sales volumes. Unit fixed costs will decrease as activity level increases; within the relevant range. Without the knowledge of cost behaviors, budgets and other forecasting tools will be inaccurate and unreliable. Understanding whether a cost behaves as a variable or a fixed cost is essential to estimating and planning for business success. Diff: 2 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-2
35) Swift Company's Process Engineering department has the responsibility of rearranging the individual work tasks for each assembly line worker with the goal of utilizing each worker as much as possible. Currently, on average, each assembly line worker only has tasks that require 47 minutes per hour, and the plant manager wants this increased by at least 10%. The company builds the Swift Roadster, which is selling out of dealers' showrooms faster than the company's assembly plants can produce them. If production can't be increased, then sales will soon suffer. Required: Explain the effect on total costs of production, using the number of engineering changes (from Process Engineering) and at least two other cost drivers. Choose the cost driver that you think is most logical in these circumstances, and begin your answer with a brief explanation of a cost driver. Answer: A cost driver is any factor that affects total costs. When a new engineering change has to be implemented, there will obviously be down time for staff to learn the new work processes and for any physical changes required on the assembly line that may result from rearranging the workload tasks (such as material handling changes). These costs would have to be balanced against the expected savings by being able to utilize the production worker's time more efficiently. The costs of the engineer's time would not be relevant. A second cost driver would be the units of production. As the workers' time utilization becomes more efficient, production should increase, so total variable costs will increase. Total fixed costs will not increase, assuming no problems with the relevant range. The direct manufacturing labour costs would increase in total, but as indicated above, we expect decreased variable direct manufacturing labour cost per unit. Another possible cost driver is the number of setups. To the extent that the number of setups is increased by the engineering changes, then total costs will increase, and these costs would have to be considered when contemplating the engineering changes. In this situation, it appears that production must be increased, and the plant manager is most concerned with achieving this through reducing the direct labour required per unit rather than by reducing labour costs per unit. Therefore, the most likely cost driver in this situation would be the number of units produced. Diff: 3 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-2
36) George Hospital wants to determine, to the extent possible, the actual cost for each patient stay. It is a general health care facility with all basic services, but it does not perform specialized services such as organ transplants. Required: Complete the following table by a. Classifying each cost as a direct or indirect cost with respect to each patient. b. Classifying each item as fixed or variable with respect to the number of patient days (sum of days each patient was in hospital) the hospital incurs. Cost Cleaning activities Electronic monitoring Lab test charges Meals for patients Medicine Nurses' salaries Operating room usage Parking maintenance Security
Direct
Indirect
Fixed
Variable
Answer: Cost Cleaning activities Electronic monitoring Lab test charges Meals for patients Medicine Nurses' salaries Operating room usage Parking maintenance Security
Direct
Indirect X
Fixed
Variable X
X
X
X
X
X
X
X X X
X X X X
X
X
X
Diff: 2 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-2
37) Komoka manufacturing wants to estimate costs for each product they produce at their Hudson plant. The Hudson plant produces three products and runs two flexible assembly lines. Each assembly line can produce all three products. Required: a. Classify each of the following costs as either direct or indirect for each product. b. Classify each of the following costs as either fixed or variable with respect to the number of units produced of each product. Direct
Indirect
Fixed
Variable
Direct
Indirect
Fixed
Variable
X X
X X
Assembly line labour wages Plant manager's wages Depreciation on the assembly line equipment Component parts for the product Wages of security personnel for the factory Answer:
Assembly line labour wages Plant manager's wages Depreciation on the assembly line equipment Component parts for the product Adhesive to hold the parts together, which is an insignificant part of the final cost of the product
X
X
X
X X
X
Diff: 2 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-2
38) Victoria Hospital wants to estimate the cost for each patient stay. It is a general health care facility offering only basic services and not specialized services such as organ transplants. Required: a. Classify each of the following costs as either direct or indirect with respect to each patient. b. Classify each of the following costs as either fixed or variable with respect to hospital costs per day. Direct
Indirect
Fixed
Variable
Electronic monitoring Meals for patients Nurses' salaries Parking maintenance Security Answer:
________ ________ ________ ________ ________ Direct
________ ________ ________ ________ ________ Indirect
________ ________ ________ ________ ________ Fixed
________ ________ ________ ________ ________ Variable
Electronic monitoring Meals for patients Nurses' salaries Parking maintenance Security
X X
X X X X X
X X X
Diff: 2 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-2
2.3 Interpret unitized fixed costs appropriately when making cost management decisions. 1) A unit cost is computed by dividing a total cost by some number of units. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-3
2) Unit costs are considered to be an average cost per unit. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-3
3) When a manager is making a decision based on cost figures, it is preferable that he (she) thinks in terms of unit costs. Answer: FALSE Explanation: As a general rule, first calculate total costs, then compute a unit cost, if it is needed for a particular decision. Diff: 2 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-3
4) When 50,000 units are produced the fixed costs are $10 per unit. Therefore when 100,000 units are produced fixed costs will remain at $10 per unit. Answer: FALSE Diff: 2 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-3
5) Grip Manufacturing currently produces 1,000 tires per month. The following per unit data apply for sales to regular customers: Direct materials Direct manufacturing labour Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing costs
$20 3 6 10 $39
The plant has the capacity to produce 3,000 tires and is considering expanding production to 2,000 tires. What is the total cost of producing 2,000 tires? A) $39,000 B) $78,000 C) $68,000 D) $62,000 Answer: C Explanation: [($20 + $3 + $6) × 2,000 units] + ($10 × 1,000 units) = $68,000 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-3
6) Christi Manufacturing provided the following information for last month: Sales Variable costs Fixed costs Operating income
$10,000 3,000 5,000 $2,000
If sales increase by 60% next month, what is the projected operating income? A) $4,000 B) $7,000 C) $6,200 D) $12,000 E) $6,000 Answer: C Explanation: ($10,000 × 1.6) - ($3,000 × 1.6) - $5,000 = $6,200 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-3
7) Tim Manufacturing provided the following information for last month: Sales Variable costs Fixed costs Operating income
$12,000 4,000 1,000 $7,000
If sales double next month, what is the projected operating income? A) $14,000 B) $15,000 C) $18,000 D) $19,000 E) $20,000 Answer: B Explanation: ($12,000 × 2) - ($4,000 × 2) - $1,000 = $15,000 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-3
8) Masks Inc. provided the following information for last month: Sales Variable costs Fixed costs Operating income
$25,000 10,000 3,000 $12,000
If sales fall to half the amount in the next month, what is the projected operating income? A) $1,000 B) $6,000 C) $4,500 D) $18,500 Answer: C Explanation: Projected operating income = ($25,000 × 0.5) − ($10,000 × 0.5) − $3,000 = $4,500 Diff: 3 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-3
9) Riverside Manufacturing produces electronic storage devices and uses the following three-part classification for its manufacturing costs: direct materials, direct manufacturing labour, and indirect manufacturing costs. Total indirect manufacturing costs for January were $300 million, and were allocated to each product on the basis of the direct manufacturing labour costs of each line. Summary data for January for the most popular electronic storage device, the Big Bertha, was:
Direct manufacturing material costs Direct manufacturing labour costs Indirect manufacturing costs Units produced
Big Bertha $9,000,000 $3,000,000 $8,500,000 40,000
Required: a. Compute the total manufacturing cost per unit for each product produced in January. b. Suppose production will be reduced to 30,000 units in February. If indirect manufacturing costs include fixed costs, then explain if the total cost per unit will be higher or lower than in January. Answer: a. Unit costs for January were: ($9,000,000 + $3,000,000 + $8,500,000)/40,000 = $512.50 per unit b. Unit costs will be higher in February if only 30,000 units are to be produced. Since fewer units are expected to be produced in February, total fixed costs will be spread over fewer units. This will result in an increase in total cost per unit since variable costs per unit will most likely not change with the decreased production. Diff: 2 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-3
10) Boing Manufacturing, Inc., makes vibration control springs for heating, ventilating, and air conditioning (HVAC) equipment. Materials cost $52 per spring set, and the machinists are paid $44 per hour. A machinist can produce four sets of springs per hour. Fixed manufacturing costs for springs are $5,000 per period. Non-manufacturing spring set costs are fixed at $11,000 per period. Each spring set sells for $75 and Boing sells, on average, 4,000 spring sets per period. Required: a. Competition has entered the market and is selling spring sets for an introductory price of $66. Can Boing Manufacturing, Inc., meet this price and still make a profit? b. How would your answer to requirement a. change if Boing sells, on average, 8,000 spring sets per period. c. What should Boing Manufacturing, Inc.'s management do in the short-run and for the long-term if it appears that $66 is going to be the new market price for the future. Answer: a. No. Revenue (4,000 × $66) $ 264,000 Cost of goods sold: Materials (4,000 × $52) $ 208,000 Direct labour (4,000 × ($44/4) 44,000 Fixed manufacturing costs 5,000 Cost of goods sold 257,000 Gross margin $ 7,000 Fixed non-manufacturing costs 11,000 Net operating loss $ (4,000) b.
Yes. Revenue (8,000 × $66) Cost of goods sold: Materials (8,000 × $52) Direct labour (8,000 × ($44/4) Fixed manufacturing costs Cost of goods sold Gross margin Fixed non-manufacturing costs Net operating loss
$ 528,000 $ 416,000 88,000 5,000 509,000 $19,000 11,000 $ 8,000
c. The spring sets have a unit contribution margin of $3 ($66 - $52 - $11), so meeting the price in the short-run will at least contribute to fixed costs. In the long-term, the company will have to lower costs or differentiate its product in such a way that it can command a higher price. Diff: 3 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Analyzing Objective: LO 2-3
11) Things are not going well for the widget industry this year. The well-known cyclical nature of widget sales is in a downturn and your plant has been ordered to cut costs by its American parent corporation. The plant manager explains that he has shown the lead by negotiating a $1.50 hourly wage decrease with the production workers, based on a formula that pegs a $1.50 per hour wage increase/decrease to sales volume, and since sales are down this year, so are hourly wage costs. In the quarterly management meeting, the sales manager complained that sales could have been higher, but that somehow costs had increased, at least that's what the reports out of your office in management accounting, indicated. The Purchasing manager assured everyone that she was able to obtain raw materials at the same price as last year, and unfortunately, you as the management accountant, were not in attendance at the meeting. Your assistant, a new employee attended in your place, and promised at the meeting to redo the reports and find the errors. Your assistant has come to you as he cannot find any errors in the reports. Consequently, the plant manager wants you to redo the reports, find the error reports produced by your department for the last quarter and to explain to your boss, the plant manager, why average costs have increased. Required: Assuming there are no errors in the cost reports, explain to the plant manager how direct labour costs could be decreased and direct materials costs could be the same as last year, and yet the selling price cannot be lowered without sacrificing net income for the plant. Answer: The key to the problem lies in recognizing the difference between variable and fixed costs, and understanding the implication that declining volume has on average costs. Part of the solution may be due to indirect materials, but one would assume this is a minor factor. The major factor is that there are fewer units of widgets to absorb the fixed costs. On a per widget basis, the plant is saving say, $1.50 per hour in labour costs, but each widget has to absorb more of the fixed costs. If the $1.50 per hour component is not a significant part of the cost, compared to the fixed cost per unit at that level of production, for example, if the direct labour per widget is only 6 minutes, then the savings in variable cost per widget is only $0.15. This isn't much in savings when the fixed costs per unit have to increase. The next point is that setting the sales price perhaps should not consider actual fixed cost burden, but the plant could consider using a budgeted amount, and lower the sales price somewhat in hopes that this would increase sales. Diff: 3 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-3
12) The vice president of production has just completed the January meeting with all production department heads. Everyone is upset that the production variances for the month were unfavourable. They do not understand why everything was unfavourable. January is typically the company's lowest production month of the year. The company uses annual average unit costs for production evaluation purposes. The average costs are based on the prior year's actual performance with adjustments for any predicted changes in the coming year. Both production and economic items are considered in setting the averages for each new year. Required: Explain the problems with using average costs in evaluating production. Answer: One of the problems with average unit costs is that actual costs may never be average. The probable shortcoming with the situation presented is that the costs included a fixed cost element and with the production low the fixed costs were averaged using a denominator that was smaller than the year's average which caused the unit averages to increase. Diff: 2 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-3
2.4 Apply cost information to produce a GAAP-compliant statement of comprehensive income showing proper cost of goods sold and a statement of financial position showing proper inventory valuation. 1) Merchandising companies purchase materials and other resources for conversion into various finished goods. Answer: FALSE Explanation: Merchandising companies purchase products and sell them to customers without changing their basic form. Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-4
2) Manufacturing firms have three types of inventory: direct materials, work in process, and merchandise. Answer: FALSE Explanation: finished goods Diff: 2 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-4
3) Direct materials inventory is products held for resale. Answer: FALSE Explanation: finished goods inventory Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-4
4) Work-in-process consists of partially completed goods not yet ready for sale. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-4
5) Operating income does not include interest expense and income taxes. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-4
6) Service-sector companies provide services or intangible products to their customers. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-4
7) Manufacturing-sector companies purchase products and sell them to customers without changing their basic form. Answer: FALSE Explanation: Manufacturing-sector companies purchase materials and other resources for conversion into various finished goods. Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-4
8) Manufacturing sector firms normally hold three types of inventory: direct materials inventory, workin-process inventory, and finished goods inventory. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-4
9) Inventoriable costs are reported as an asset when incurred and expensed on the income statement when the product is sold. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-4
10) Period costs are never included as part of inventory. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-4
11) Inventoriable costs for merchandising companies are held in the work-in-process account. Answer: FALSE Explanation: Inventoriable costs for merchandising companies are held in the finished goods inventory account. Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-4
12) Total costs of goods manufactured (finished goods) are comprised of ________. A) direct materials costs and period costs B) Work-in-process beginning balance plus direct materials costs, direct manufacturing labour costs, and manufacturing overhead costs, less work-in-process ending balance C) indirect materials costs, indirect manufacturing labour costs, and manufacturing overhead costs D) prime costs and period costs Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-4
Use the information below to answer the following question(s). Consider the following data from the Montreal Company for the year 2022: Sandpaper-Plant
$10,000 Leasing costs - plant
$120,000
Materials handling-Plant
100,000 Amortization- equip.
70,000
Coolants-Plant
7,000 Property taxes - equip.
10,000
Indirect manufacturing labour
86,000 Fire insurance - equip.
5,000
Direct manufacturing labour
680,000 Direct material purchases
980,000
Direct materials, 1/1/2022
120,000 Direct materials 12/31/2022
86,000
Finished goods, 1/1/2022
210,000 Sales
Finished goods, 12/31/2022
400,000 Sales commissions
200,000
WIP, 1/1/2022
30,000 Sales salaries
180,000
WIP, 12/31/2022
20,000 Advertising costs
150,000
Administration costs
250,000
4,000,000
13) What is the unit cost for the direct materials for 2022 assuming direct materials costs are for the production of 1,014,000 units? A) $0.80 B) $0.95 C) $1.00 D) $1.08 E) $1.11 Answer: C Explanation: ($120,000 + $980,000 - $86,000)/1,014,000 units = $1.00 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
14) What is the unit cost for the plant leasing costs for 2022, assuming plant leasing costs are for the
production of 1,014,000 units? A) $0.119 B) $0.118 C) $0.110 D) $0.900 E) $0.943 Answer: B Explanation: $120,000/1,014,000 units = .1183431 or .118 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
15) What is the unit cost for the direct materials for 2022 assuming direct materials are for the production of 507,000 units? A) $0.80 B) $0.95 C) $2.00 D) $1.08 E) $1.10 Answer: C Explanation: ($120,000 + $980,000 - $86,000)/507,000 units = $2.00 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
16) What is the unit cost for the plant leasing cost for 2022 assuming plant leasing costs are for the production of 2,000,000 units? A) $0.35 B) $0.18 C) $0.12 D) $0.06 E) $0.04 Answer: D Explanation: $120,000/2,000,000 units = $0.06 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
Use the information below to answer the following question(s). The following information pertains to Leonard's Shoe Manufacturing: Manufacturing costs Shoes manufactured Beginning inventory
$1,000,000 100,000 0 pairs
99,500 pairs of shoes are sold during the year for $18. 17) What is Leonard's manufacturing cost per pair of shoes? A) $10.00 B) $10.05 C) $100.00 D) $18.00 E) $9.95 Answer: A Explanation: $1,000,000/100,000 = $10.00 Diff: 1 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
18) What is the amount of Leonard's ending finished goods inventory? A) $99,500 B) $8,000 C) $5,000 D) $500 E) $0 Answer: C Explanation: (100,000 - 99,500) × $10.00 = $5,000 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
19) What is the amount of Leonard's gross profit? A) $995,000 B) $1,000,000 C) $1,791,000 D) $796,000 E) $896,000 Answer: D Explanation: 99,500 × ($18 - $10) = $796,000 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
20) The following information pertains to the Tillsonburg Company: Beginning finished goods inventory Cost of goods manufactured Ending finished goods inventory
$60,000 410,000 34,000
What is the cost of goods sold? A) $436,000 B) $384,000 C) $376,000 D) $316,000 E) $444,000 Answer: A Explanation: $60,000 + $410,000 - $34,000 = $436,000 Diff: 1 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
Use the information below to answer the following question(s). Montreal Industries Inc. had the following activities during the year: Direct materials: Beginning inventory Purchases Ending inventory Direct manufacturing labour Manufacturing overhead Ending work-in-process inventory Beginning work-in-process inventory Ending finished goods inventory Beginning finished goods inventory
$40,000 141,000 26,000 30,000 30,000 7,000 2,000 40,000 60,000
21) What is Montreal's cost of direct materials used during the year? A) $204,000 B) $155,000 C) $128,000 D) $24,000 E) $218,000 Answer: B Explanation: $40,000 + $141,000 - $26,000 = $155,000 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
22) What is Montreal's cost of goods manufactured during the year? A) $268,000 B) $248,000 C) $210,000 D) $238,000 E) $260,000 Answer: C Explanation: $155,000 + $30,000 + $30,000 + $2,000 - $7,000 = $210,000 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
23) What is Montreal's cost of goods sold during the year? A) $230,000 B) $232,000 C) $220,000 D) $200,000 E) $240,000 Answer: A Explanation: $60,000 + $210,000 - $40,000 = $230,000 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
Use the information below to answer the following question(s). Ottawa Industries Inc. had the following activities during the year: Direct materials: Beginning inventory Purchases Ending inventory Direct manufacturing labour Manufacturing overhead Ending work-in-process inventory Beginning work-in-process inventory Ending finished goods inventory Beginning finished goods inventory
$40,000 126,000 36,000 45,000 35,000 12,000 3,000 50,000 55,000
24) What is Ottawa's cost of direct materials used during the year? A) $122,000 B) $126,000 C) $130,000 D) $166,000 E) $162,000 Answer: C Explanation: $40,000 + $126,000 - $36,000 = $130,000 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
25) What is Ottawa's cost of goods manufactured during the year? A) $211,000 B) $197,000 C) $219,000 D) $201,000 E) $193,000 Answer: D Explanation: $130,000 + $45,000 + $35,000 + $3,000 - $12,000 = $201,000 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
26) What is Ottawa's cost of goods sold during the year? A) $216,000 B) $202,000 C) $224,000 D) $225,000 E) $206,000 Answer: E Explanation: $55,000 + $201,000 - $50,000 = $206,000 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
27) Manufacturing-sector companies A) purchase materials and convert them to finished goods. B) buy goods and resell them. C) provide services or intangible products. D) have only period costs. E) have one classification of inventory. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-4
28) Merchandising-sector companies A) purchase materials and convert them to finished goods. B) buy goods and resell them. C) provide services or intangible products. D) have only variable costs. E) have period and some manufacturing costs. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-4
29) Manufacturing-sector companies report on the balance sheet A) only merchandise inventory. B) only finished goods inventory. C) direct materials inventory, work-in-process inventory, and finished goods inventory accounts. D) no inventory accounts. E) only work in progress inventory. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-4
30) For a manufacturing company, direct material costs may be included in A) direct materials inventory only. B) merchandise inventory only. C) both work-in-process inventory and finished goods inventory. D) direct materials inventory, work-in-process inventory, and finished goods inventory accounts. E) period costs. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-4
31) Which of the following statements would be correct in a manufacturing business? A) Completed goods are not normally included in the finished goods inventory. B) Completed goods are part of the work in process category. C) Work-in-process inventory, at the end of the accounting period, includes direct materials but not direct labour. D) Materials put into production are classified as work-in-process inventory. E) There can be no beginning finished goods inventory. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-4
32) Goods available for sale that are not in ending inventory A) are included in goods available for sale in the next year. B) are included in the work-in-process inventory at the end of the year. C) are not accounted for until the next year. D) are incorporated in the cost of goods sold amount. E) are included in beginning inventory. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-4
Answer the following question using the information below. Barry Company reported the following: Manufacturing costs Units manufactured Units sold Beginning inventory
$2,000,000 50,000 47,000 units sold for $75 per unit 0 units
33) What is the average manufacturing cost per unit? A) $40.00 B) $42.55 C) $75.50 D) $35.00 E) $42.25 Answer: A Explanation: $2,000,000/50,000 = $40 Diff: 1 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
34) What is the amount of gross margin? A) $1,750,000 B) $3,525,000 C) $3,405,000 D) $1,645,000 E) $1,525,000 Answer: D Explanation: 47,000 × ($75 - ($2,000,000/50,000)) = $1,645,000 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
35) What is the amount of finished goods inventory? A) $2,000,000 B) $12,000 C) $225,000 D) $127,659 E) $120,000 Answer: E Explanation: (50,000 - 47,000) × ($2,000,000/50,000) = $120,000 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
Answer the following question(s) using the information below. The following information pertains to Alleigh's Mannequins: Manufacturing costs Units manufactured Units sold Beginning inventory
$2,100,000 30,000 29,000 units sold for $85 per unit 0 units
36) What is the average manufacturing cost per unit? A) $70.00 B) $50.85 C) $17.65 D) $85.00 E) $49.50 Answer: A Explanation: $2,100,000/30,000 = $70.00 Diff: 1 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
37) What is the amount of ending finished goods inventory? A) $42,500 B) $24,750 C) $70,000 D) $25,425 E) $42,500 Answer: C Explanation: (30,000 - 29,000) × ($2,100,000/30,000) = $70,000 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
38) What is the amount of gross margin? A) $1,475,000 B) $1,500,000 C) $1,047,250 D) $435,000 E) $1,007,425 Answer: D Explanation: 29,000 × ($85 - ($2,100,000/30,000)) = $435,000 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
Use the information below to answer the following question(s). Robin Inc. had the following activities in the year: Direct materials: Beginning inventory Purchases Ending inventory Direct manufacturing labour Manufacturing overhead Ending work in process inventory Beginning work in process inventory Ending finished goods inventory Beginning finished goods inventory
$100,000 308,000 52,000 80,000 60,000 20,000 4,000 80,000 120,000
39) What is Robin's cost of direct materials used during the year? A) $356,000 B) $360,000 C) $308,000 D) $364,000 E) $372,000 Answer: A Explanation: $100,000 + $308,000 - $52,000 = $356,000 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
40) What is Robin's cost of goods sold? A) $520,000 B) $464,000 C) $440,000 D) $400,000 E) $516,000 Answer: A Explanation: $120,000 + $480,000 - $80,000 = $520,000 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
41) What is Robin's cost of goods manufactured? A) $536,000 B) $496,000 C) $480,000 D) $476,000 E) $512,000 Answer: C Explanation: ($100,000 + $308,000 - $52,000) + $80,000 + $60,000 + $4,000 - $20,000 = $480,000 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
42) Which of the following formulas would determine costs of goods sold in a merchandising entity? A) Purchases - Ending inventory B) Beginning inventory + Purchases - Ending inventory C) Beginning inventory - Purchases + Ending inventory D) Beginning inventory - Ending inventory - Purchases E) Ending Inventory - Beginning inventory - Purchases Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-4
43) Which of the following formulas determines cost of goods sold in a manufacturing entity? A) Beginning work-in-process inventory + Cost of goods manufactured - Ending work-in-process inventory = Cost of goods sold B) Beginning work-in-process inventory + Cost of goods manufactured + Ending work-in-process inventory = Cost of goods sold C) Cost of goods manufactured - Beginning finished goods inventory - Ending finished goods inventory = Cost of goods sold D) Cost of goods manufactured + Beginning finished goods inventory - Ending finished goods inventory = Cost of goods sold E) Beginning work-in-process inventory - Cost of goods manufactured + Ending work-in-process inventory = Cost of goods sold Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-4
44) The following information pertains to Jack's Timber Shop: Beginning finished goods, 1/1/2020 Ending finished goods, 12/31/2020 Cost of goods sold Sales Operating expenses
$15,000 9,500 56,000 112,500 25,000
What is the cost of goods manufactured for 2020? A) $56,500 B) $31,500 C) $50,500 D) $61,500 E) $66,500 Answer: C Explanation: $56,000 + $9,500 - $15,000 = $50,500 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Analyzing Objective: LO 2-4
45) The following information pertains to Mike's Timber Shop: Beginning finished goods, 1/1/2021 Ending finished goods, 12/31/2021 Cost of goods sold Sales Operating expenses
$14,000 6,500 55,000 116,500 26,000
What is the cost of goods manufactured for 2021? A) $61,500 B) $88,500 C) $62,500 D) $47,500 E) $73,500 Answer: D Explanation: $55,000 + $6,500 - $14,000 = $47,500 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Analyzing Objective: LO 2-4
46) Which of the following is TRUE of period costs? A) They are also called fixed costs. B) They are part of the cost of goods sold. C) They are expected to benefit future periods. D) They are costs incurred to generate revenue in a specific time period except the cost of manufacturing accumulated as cost of goods sold. E) For merchandising sector companies they include all costs not related to the cost of goods purchased for resale. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-4
47) Generally, costs which are initially recorded as an asset and subsequently become an expense are called A) inventoriable costs. B) non-manufacturing costs. C) manufacturing costs. D) non-capitalized costs. E) non-inventoriable costs. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-4
48) Finished goods inventory would normally include A) direct materials in stock and awaiting use in the manufacturing process. B) goods partially worked on but not yet fully completed. C) goods fully completed but not yet sold. D) products in their original form intended to be sold without changing their basic form. E) goods completed and sold. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-4
49) Inventoriable costs A) include administrative and marketing costs. B) are expensed in the accounting period in which the products are sold. C) are particularly useful in management accounting. D) are also referred to as nonmanufacturing costs. E) are similar to period costs. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-4
Answer the following question(s) using the information below. The Singer Company manufactures several different products. Unit costs associated with Product ICT101 are as follows: Direct materials Direct manufacturing labour Variable manufacturing overhead Fixed manufacturing overhead Sales commissions (2% of sales) Administrative salaries Total
$50 8 16 30 4 15 $123
50) What are the variable costs per unit associated with Product ICT101? A) $18 B) $22 C) $88 D) $78 E) $28 Answer: D Explanation: $50 + $8 + $16 + $4 = $78 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
51) What are the fixed costs per unit associated with Product ICT101? A) $102 B) $45 C) $52 D) $32 E) $36 Answer: B Explanation: $30 + $15 = $45 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
52) What are the inventoriable costs per unit associated with Product ICT101? A) $104 B) $140 C) $50 D) $88 E) $70 Answer: A Explanation: $50 + $8 + $16 + $30 = $104 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
53) What are the period costs per unit associated with Product ICT101? A) $4 B) $16 C) $19 D) $52 Answer: C Explanation: $4 + $15 = $19 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
Answer the following question(s) using the information below. The West Company manufactures several different products. Unit costs associated with Product ORD203 are as follows: Direct materials Direct manufacturing labour Variable manufacturing overhead Fixed manufacturing overhead Sales commissions (2% of sales) Administrative salaries Total
$40 8 12 23 6 9 $98
54) What are the variable costs per unit associated with Product ORD203? A) $60 B) $83 C) $66 D) $48 E) $12 Answer: C Explanation: $40 + $8 + $12 + $6 = $66 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
55) What are the inventoriable costs per unit associated with Product ORD203? A) $60 B) $66 C) $48 D) $83 E) $92 Answer: D Explanation: $40 + $8 + $12 + $23 = $83 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
56) What are the fixed costs per unit associated with Product ORD203? A) $23 B) $32 C) $35 D) $44 E) $38 Answer: B Explanation: $23 + 9 = $32 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
57) What are the period costs per unit associated with Product ORD203? A) $15 B) $6 C) $9 D) $27 E) $48 Answer: A Explanation: $6 + 9 = $15 Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
Use the information below to answer the following question(s). Ontario Industries Inc. had the following activities during the year: Direct materials: Beginning inventory Purchases Ending inventory Direct manufacturing labour Manufacturing overhead Ending work-in-process inventory Beginning work-in-process inventory Ending finished goods inventory Beginning finished goods inventory Cost of goods manufactured Manufacturing costs incurred Cost of goods sold Total manufacturing costs to account for
$40,000 165,000 32,000 46,000 ? 12,000 ? ? 80,000 242,000 248,000 247,000 254,000
58) What is the amount of Ontario Industries Inc.'s ending finished goods inventory? A) $55,000 B) $75,000 C) $70,000 D) $65,000 E) $60,000
Answer: B Explanation: $247,000 - $242,000 - $80,000 = $75,000 Direct materials: Beginning inventory Purchases Ending inventory Direct materials used Direct manufacturing labour Manufacturing overhead Manufacturing costs incurred Beginning work-in-process inventory Total manufacturing cost to account for Ending work-in-process inventory Cost of goods manufactured
$40,000 165,000 32,000 $173,000 46,000 29,000 $248,000 6,000 $254,000 12,000 $242,000
Beginning finished goods inventory Cost of goods manufactured Ending finished goods inventory Cost of goods sold
$80,000 242,000 75,000 $247,000
Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Analyzing Objective: LO 2-4
59) What is the amount of direct materials used by Ontario Industries Inc.? A) $168,000 B) $165,000 C) $173,000 D) $205,000 E) $170,000 Answer: C Explanation: $40,000 + $165,000 - $32,000 = $173,000 Diff: 1 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
60) What is the amount of the manufacturing overhead incurred at Ontario Industries Inc.? A) $16,000 B) $41,000 C) $35,000 D) $23,000 E) $29,000 Answer: E Explanation: $248,000 - $173,000 - $46,000 = $29,000 Diff: 3 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Analyzing Objective: LO 2-4
61) What is the amount of the beginning work-in-process inventory at Ontario Industries Inc.? A) $1,000 B) $5,000 C) $12,000 D) $6,000 E) $4,000 Answer: D Explanation: $254,000 - $248,000 = $6,000 Diff: 3 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Analyzing Objective: LO 2-4
62) Macadamia Co. produced and sold 40,000 units last year. Per unit revenue and costs were as follows: Revenues Cost of Goods Sold: Direct Materials Direct Labour Variable Manufacturing Overhead Fixed Manufacturing Overhead Total Cost of Goods Sold Gross Margin Selling and Administrative Costs: Sales Commissions (10% of Sales) Administrative Salaries Total Selling and Administrative Operating Income <Loss>
$120.00 $15.00 20.00 10.00 6.00 51.00 $69.00 $12.00 5.00 17.00 $52.00
The Fixed Manufacturing Overhead provides a capacity of 50,000 units. The Production Manager has proposed leasing a new machine at a cost of $80,000 per year. This will reduce Direct Labour by 30% and improve quality so the the selling price per unit can be increased by $10. Production and sales are expected to remain the same as last year. Required: Prepare a statement of operating income assuming the leasing proposal is accepted. Answer: 1 unit 40,000 units Revenue ($120 + $10) $130 $5,200,000 Cost of goods sold DM $15 $600,000 DL $20 × (1 - 30%) 14 560,000 VMOH 10 400,000 FMOH ($6 × 40,000 + 8 47 320,000 1,880,000 $80,000)/40,000 Gross Profit $83 $3,320,000 Selling & Administration Costs Sales Commissions (10% of Sales) $13 $520,000 Administration Salaries 5 18 200,000 720,000 Operating Income $65 $2,600,000 Recommendation: Accept the leasing proposal as it raises OI by $13 per unit or $520,000. Diff: 3 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
63) Big Bird Pet Store had the following financial activities for June. Revenue was $860,000 with cost of goods sold equalling $440,000. Salaries and wages of all employees were $100,000. Fringe benefits were 15 percent of salaries and wages. Rent on the building was $100,000 and equipment amortization was $46,000. Office supplies and utilities totalled $28,000. Income taxes withheld from employees totalled $46,000 for the month while ending accounts payable were $24,680. Cash flows from accounts receivable totalled $880,000. Required: Using an income statement format, determine the operating income of the store. Answer: Big Bird Pet Store Income Statement For the Month of June Revenues Cost of Goods Sold Salaries and Wages Fringe Benefits Rent Equipment Amortization Office Supplies and Utilities Operating Income <Loss>
$860,00 $440,000 100,000 15,000 100,000 46,000 28,000
729,000 $131,000
Diff: 2 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
64) Ames Power Point had sales in October of $28,000,000 for its three stores in Toronto. The beginning merchandise inventories for October and November were $5,000,000 and $4,000,000, respectively. October purchases totalled $19,000,000. All sales are on account (terms 2/15, net 30 days) and are collected 50 percent in the month of the sale and 50 percent in the following month. One-half of all sales discounts are taken for a total of $265,000. September sales totalled $25,000,000 while November sales were $30,000,000. Additional information for October is as follows: Supplies used Salaries and benefits Maintenance Amortization Utilities Principal payment on maturing bonds
$1,000,000 1,500,000 45,000 9,000 35,000 2,000,000
Required: Using an appropriately formatted income statement, determine the operating income of the company. Answer: Ames Power Point Company Income Statement For the Month of October Sales Less: Sales Discounts Net Sales Cost of Goods Sold Beginning inventory Purchases Cost of Goods Available for sale Ending inventory Gross Margin Other costs Supplies Amortization Salaries & benefits Maintenance Utilities Total other costs Operating Income <Loss>
$28,000,000 265,000 $27,735,000
$5,000,000 19,000,000 $24,000,000 4,000,000
20,000,000 $7,735,000
$1,000,000 9,000 1,500,000 45,000 35,000 2,589,000 $5,146,000
Diff: 3 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
65) Eschliman Manufacturing Company had the following account balances for the quarter ending September 30, unless otherwise noted: Amortization of manufacturing equipment Amortization of office equipment Direct manufacturing labour Direct materials used Finished goods inventory (July 1) Finished goods inventory (September 30) General office expenses Indirect manufacturing labour Indirect materials used Marketing distribution costs Miscellaneous plant overhead Plant utilities Property taxes on plant building Property taxes on salespersons' company vehicles Work-in-process inventory (July 1) Work-in-process inventory (September 30)
$88,000 41,200 160,000 126,000 180,000 170,000 101,800 62,000 28,000 10,000 45,000 30,800 9,600 4,000 46,800 57,000
Required: a. Prepare a cost of goods manufactured schedule for the quarter. b. Prepare a cost of goods sold schedule for the quarter.
Answer: a. Eschliman Manufacturing Company Cost of Goods Manufactured Schedule For the Quarter Ending September 30 Direct materials used Direct manufacturing labour Manufacturing overhead Amortization of mfg. equip. Indirect mfg. labour Indirect materials Miscellaneous plant overhead Plant utilities Property taxes on building Manufacturing costs incurred Add beginning work-in-process inventory Total manufacturing costs Less: ending work-in-process inventory Cost of goods manufactured
$126,000 160,000 $88,000 62,000 28,000 45,000 30,800 9,600
263,400 $549,400 46,800 $596,200 57,000 $539,200
b. Eschliman Manufacturing Company Cost of Goods Sold Schedule For the Quarter Ending September 30 Beginning finished goods inventory Cost of goods manufactured Cost of goods available for sale Ending finished goods inventory Cost of goods sold
$180,000 539,200 $719,200 170,000 $549,200
Diff: 3 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
66) Reichman Manufacturing Company had the following account balances for the quarter ending September 30, unless otherwise noted: Amortization of manufacturing equipment Amortization of office equipment Direct manufacturing labour Direct materials used Finished goods inventory (July 1) Finished goods inventory (September 30) General office expenses Indirect manufacturing labour Indirect materials used Marketing distribution costs Miscellaneous plant overhead Plant utilities Property taxes on plant building Property taxes on salespersons' company vehicles Work-in-process inventory (July 1) Work-in-process inventory (September 30)
$88,000 41,200 175,000 142,000 190,000 175,000 101,800 63,000 28,000 10,000 45,000 33,800 14,600 4,000 52,800 57,000
Required: a. Prepare a cost of goods manufactured schedule for the quarter. b. Prepare a cost of goods sold schedule for the quarter.
Answer: a. Reichman Manufacturing Company Cost of Goods Manufactured Schedule For the Quarter Ending September 30 Direct materials used Direct manufacturing labour Manufacturing overhead Amortization of mfg. equip. Indirect mfg. labour Indirect materials Miscellaneous plant overhead Plant utilities Property taxes on building Manufacturing costs incurred Add beginning work-in-process inventory Total manufacturing costs Less: ending work-in-process inventory Cost of goods manufactured
$142,000 175,000 $88,000 63,000 28,000 45,000 33,800 14,600
$272,400 $589,400 52,800 $642,200 57,000 $585,200
b. Reichman Manufacturing Company Cost of Goods Sold Schedule For the Quarter Ending September 30 Beginning finished goods inventory Cost of goods manufactured Cost of goods available for sale Ending finished goods inventory Cost of goods sold
$190,000 585,200 $775,200 175,000 $600,200
Diff: 3 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
67) The following information is taken from the records of Britton Company for March: Purchases: Direct materials $9,000,000 Indirect materials 200,000 Office supplies 420,000 Sales 36,000,000 Salaries and Benefits: Selling and administrative 4,000,000 Direct manufacturing labour 6,000,000 Rent* 4,000,000 Utilities* 1,200,000 Advertising 700,000 Inventories: Direct materials Indirect materials Office supplies Finished goods
March 1 $4,400,000 500,000 150,000 24,000,000
March 31 $1,600,000 600,000 180,000 16,000,000
* Of these costs, 60 percent are assigned to manufacturing and 40 percent to selling and administration. Required: a. Prepare a schedule of cost of goods manufactured. b. Prepare an income statement for the month. c. Compute the prime costs using a two-part production costing system, conversion costs, and indirect manufacturing costs.
Answer: a. Britton Company Cost of Goods Manufactured Schedule For March Direct materials: Beginning inventory $4,400,000 Purchases of direct materials 9,000,000 Cost of direct materials available $13,400,000 Ending inventory 1,600,000 Direct materials used Direct manufacturing labour Manufacturing overhead: Rent (60%) $2,400,000 Utilities (60%) 720,000 Indirect materials ($200,000 + $500,000 - $600,000) 100,000 Cost of goods manufactured b. Britton Company Income Statement For the Month of March Sales Cost of goods sold Beginning inventory $24,000,000 Cost of goods manufactured 21,020,000 Cost of goods available for sale $45,020,000 Ending inventory 16,000,000 Gross margin Other costs Supplies ($420,000 + $150,000 - $180,000) $390,000 Selling and administrative salaries 4,000,000 Rent (40%) 1,600,000 Utilities (40%) 480,000 Advertising 700,000 Operating Income <Loss> c. Prime costs $11,800,000 Conversion costs $3,220,000 + $6,000,000 = $9,220,000 Indirect manufacturing costs = $3,220,000
$11,800,000 6,000,000
3,220,000 $21,020,000
$36,000,000
29,020,000 $6,980,000
7,170,000 $(190,000)
Diff: 3 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
68) Farley Muffler Inc. received the following monthly report from its newly hired accountant, who quit after only a week on the job. Farley Muffler Inc. Cost of Goods Sold Schedule Finished Goods Inventory (beginning) Work-in-Process Inventory (beginning) Total Current Manufacturing Costs: Salaries and wages: Direct manufacturing labour Indirect manufacturing labour Sales salaries Administrative
$15,000 3,000 $18,000
$5,000 2,000 4,000 3,000
$14,000
Other: Manufacturing supplies $1,500 Manufacturing amortization 3,500 Insurance on showroom 1,000 Miscellaneous factory overhead 6,500 12,500 Total Work in Process Ending Work-in-Process and Finished Goods Inventory Cost of Goods Sold
26,500 $44,500 0 $44,500
Farley Muffler, Inc. Income Statement Sales Less direct materials Gross profit Less other expenses: Cost of goods sold Office supplies Manufacturing utilities Office utilities Net Income Required: a. Prepare a cost of goods manufactured schedule. b. Prepare an income statement in good form.
$100,000 20,000 $80,000
$44,500 250 1,000 250
46,000 $34,000
Answer: a. Farley Muffler Inc. Cost of Goods Manufactured Schedule Direct materials Direct Manufacturing labour Indirect manufacturing cost: Utilities Supplies Amortization Indirect manufacturing labour Miscellaneous factory overhead Manufacturing cost incurred Add beginning work in process inventory Total manufacturing costs Less ending work in process inventory Cost of goods manufactured
$20,000 5,000 $1,000 1,500 3,500 2,000 6,500
14,500 $39,500 3,000 $42,500 0 $42,500
b. Farley Muffler Inc. Income Statement Sales Cost of goods sold: Beginning finished goods inventory Cost of goods manufactured Cost of goods available for sale Ending finished goods inventory Cost of goods sold Gross margin
$100,000 $15,000 42,500 $57,500 0
Other costs: Office supplies Office utilities Sales salaries and wages Administrative salaries and wages Insurance on showroom Operating income
$250 250 4,000 3,000 1,000
57,500 $42,500
8,500 $34,000
Diff: 3 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
69) Find the required amounts, assuming each is an independent case. a. Direct Materials
Beginning balance Ending balance Purchases Direct materials used
$14,000 28,000 96,000 ?
b. Finished Goods Inventory
Cost of goods manufactured Ending balance Cost of goods sold Beginning balance
124,000 40,000 122,000 ?
c. Work in Process Inventory
Ending Balance Cost of goods manufactured Beginning balance Current manufacturing costs
44,000 42,000 16,000 ?
d. Merchandise Inventory
Purchases Cost of goods sold Beginning balance Ending balance
420,000 446,000 82,000 ?
Answer: a. Direct materials used $14,000 + $96,000 - $28,000 = $82,000 b. Beginning balance of finished goods inventory $40,000 + $122,000 - $124,000 = $38,000 c. Current manufacturing costs $42,000 + $44,000 - $16,000 = $70,000 d. Ending balance of merchandise inventory $82,000 + $420,000 - $446,000 = $56,000 Diff: 3 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
70) Evans Inc., had the following activities during 2018: Direct materials: Beginning inventory Purchases Ending inventory Direct manufacturing labour Manufacturing overhead Beginning work-in-process inventory Ending work-in-process inventory Beginning finished goods inventory Ending finished goods inventory
$40,000 123,200 20,800 32,000 24,000 1,600 8,000 48,000 32,000
Required: a. What is the cost of direct materials used during 2018? b. What is cost of goods manufactured for 2018? c. What is cost of goods sold for 2018? Assume that Evans uses a two-part classification system for prime and conversion costs. d. What amount of prime costs was added to production during 2018? e. What amount of conversion costs was added to production during 2018? Answer: a. $40,000 + $123,200 -$20,800 = $142,400 b. $142,400 + $32,000 + $24,000 + $1,600 - $8,000 = $192,000 c. $192,000 + $48,000 - $32,000 = $208,000 d. $142,400 + $32,000 = $174,400 e. $32,000 + $24,000 = $56,000 Diff: 2 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
71) Messinger Manufacturing Company had the following account balances for the quarter ending March 31, unless otherwise noted: Work-in-process inventory (January 1) Work-in-process inventory (March 31) Finished goods inventory (January 1) Finished goods inventory (March 31) Direct materials used Indirect materials used Direct manufacturing labour Indirect manufacturing labour Property taxes on manufacturing plant building Salespersons' company vehicle costs Amortization of manufacturing equipment Amortization of office equipment Miscellaneous plant overhead Plant utilities General office expenses Marketing distribution costs
$120,000 171,000 540,000 510,000 300,000 84,000 450,000 186,000 28,800 12,000 264,000 123,600 135,000 92,400 305,400 30,000
Required: a. Prepare a cost of goods manufactured schedule for the quarter. b. Prepare a cost of goods sold schedule for the quarter.
Answer: a. Messinger Manufacturing Company Cost of Goods Manufactured Schedule For quarter ending March 31 Direct materials used Direct manufacturing labour Manufacturing overhead Amortization of manufacturing equipment Indirect manufacturing labour Indirect materials Miscellaneous plant overhead Plant utilities Property taxes on building Manufacturing costs incurred Add beginning work-in-process inventory Total manufacturing costs Less ending work-in-process inventory Cost of goods manufactured
$300,000 450,000 $264,000 186,000 84,000 135,000 92,400 28,800
790,200 $1,540,200 120,000 $1660,200 171,000 $1,489,200
b. Messinger Manufacturing Company Cost of Goods Sold Schedule For the quarter ending March 31 Beginning finished goods inventory Cost of goods manufactured Cost of goods available for sale Ending finished goods inventory Cost of goods sold
$540,000 1,489,200 2,029,200 (510,000) $1,519,200
Diff: 2 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
72) Albright Manufacturing Company had the following account balances for the quarter ending March 31, unless otherwise noted: Work-in-process inventory (January 1) Work-in-process inventory (March 31) Finished goods inventory (January 1) Finished goods inventory (March 31) Direct materials used Indirect materials used Direct manufacturing labour Indirect manufacturing labour Property taxes on manufacturing plant building Salespersons' company vehicle costs Amortization of manufacturing equipment Amortization of office equipment Miscellaneous plant overhead Plant utilities General office expenses Marketing distribution costs
$149,400 175,000 565,000 505,000 368,000 79,000 495,000 183,000 32,800 14,000 264,000 123,600 135,000 91,400 325,400 30,000
Required: a. Prepare a cost of goods manufactured schedule for the quarter. b. Prepare a cost of goods sold schedule for the quarter.
Answer: a. Albright Manufacturing Company Cost of Goods Manufactured Schedule For quarter ending March 31 Direct materials used Direct manufacturing labour Manufacturing overhead Amortization of manufacturing equipment Indirect manufacturing labour Indirect materials Miscellaneous plant overhead Plant utilities Property taxes on building Manufacturing costs incurred Add beginning work-in-process inventory Total manufacturing costs Less ending work-in-process inventory Cost of goods manufactured
$368,000 495,000 $264,000 183,000 79,000 135,000 91,400 32,800
785,200 $1,648,200 149,400 $1,797,600 175,000 $1,622,600
b. Albright Manufacturing Company Cost of Goods Sold Schedule For the quarter ending March 31 Beginning finished goods inventory Cost of goods manufactured Cost of goods available for sale Ending finished goods inventory Cost of goods sold
$565,000 1,622,600 2,187,600 (505,000) $1,682,600
Diff: 2 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
73) Helmer Sporting Goods Company manufactured 100,000 units in 2018 and reported the following costs: Sandpaper $30,000 Materials handling 320,000 Coolants & lubricants 22,400 Indirect manufacturing labour 275,200 Direct manufacturing labour 2,176,000 Direct materials, 1/1/18 384,000 Finished goods, 1/1/18 672,000 Finished goods, 12/31/18 1,280,000 Work-in-process, 1/1/18 96,000 Work-in-process, 12/31/18 64,000
Leasing costs-plant $284,000 Amortization-equipment 224,000 Property taxes-equipment 32,000 Fire insurance-equipment 16,000 Direct material purchases 3,200,000 Direct materials, 12/31/18 275,200 Sales revenue 12,800,000 Sales commissions 640,000 Sales salaries 576,000 Advertising costs 480,000 Administration costs 800,000
Required: a. What is the cost of direct materials used during 2018? b. What manufacturing costs were added to WIP during 2018? c. What is cost of goods manufactured for 2018? d. What is cost of goods sold for 2018? Answer: a. $384,000 + $3,200,000 - $275,200 = $3,308,800 b. $3,308,800 + $2,176,000 + $30,000 + $320,000 + $22,400 + $275,200 + $284,000 + $224,000 + $32,000 + $16,000 = $6,688,400 c. $6,688,400 + $96,000 - $64,000 = $6,720,400 d. $6,720,400 + $672,000 - $1,280,000 = $6,112,400 Diff: 3 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
74) Saskatchewan Industries Inc. had the following account balances at the end of the current year: Direct materials: Beginning inventory Purchases Ending inventory Direct manufacturing labour Manufacturing overhead Cost of goods manufactured Beginning work-in-process inventory Ending finished goods inventory Beginning finished goods inventory Ending work-in-process inventory Manufacturing costs incurred Cost of goods sold Total manufacturing costs to account for Direct materials used
$
? 130,000 19,000 58,000 ? 232,000 ? ? 21,000 8,000 231,000 238,000 240,000 136,000
Required: Determine the amounts for direct materials beginning inventory, manufacturing overhead, beginning work-in-process inventory, and ending finished goods inventory. Answer: Direct materials: Beginning inventory $25,000 Purchases 130,000 Ending inventory 19,000 Direct materials used $136,000 Direct manufacturing labour 58,000 Manufacturing overhead 37,000 Manufacturing costs incurred $231,000 Beginning work-in-process inventory 9,000 Total manufacturing cost to account for $240,000 Ending work-in-process inventory 8,000 Cost of goods manufactured $232,000 Beginning finished goods inventory Cost of goods manufactured Ending finished goods inventory Cost of goods sold
$21,000 232,000 15,000 $238,000
Diff: 3 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Analyzing Objective: LO 2-4
75) Manitoba Industries Inc. had the following account balances at the end of the current year:
Direct materials: Beginning inventory Purchases Ending inventory Direct manufacturing labour Manufacturing overhead Cost of goods manufactured Beginning work-in-process inventory Ending finished goods inventory Beginning finished goods inventory Ending work-in-process inventory Manufacturing costs incurred Cost of goods sold Total manufacturing costs to account for Direct materials used
$13,000 ? 17,000 ? 28,000 210,000 11,000 17,000 ? ? 213,000 215,000 224,000 118,000
Required: Determine the amounts for direct material purchases, direct manufacturing labour, ending work-inprocess inventory, and beginning finished goods inventory. Answer: Direct materials: Beginning inventory $13,000 Purchases 122,000 Ending inventory 17,000 Direct materials used $118,000 Direct manufacturing labour 67,000 Manufacturing overhead 28,000 Manufacturing costs incurred $213,000 Beginning work-in-process inventory 11,000 Total manufacturing cost to account for $224,000 Ending work-in-process inventory 14,000 Cost of goods manufactured $210,000 Beginning finished goods inventory Cost of goods manufactured Ending finished goods inventory Cost of goods sold
$22,000 210,000 17,000 $215,000
Diff: 3 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Analyzing Objective: LO 2-4
76) Newfoundland Industries Inc. had the following account balances at the end of the current year:
Direct materials: Beginning inventory Purchases Ending inventory Direct manufacturing labour Manufacturing overhead Cost of goods manufactured Beginning work-in-process inventory Ending finished goods inventory Beginning finished goods inventory Ending work-in-process inventory Manufacturing costs incurred Cost of goods sold Total manufacturing costs to account for Direct materials used
$13,000 122,000 ? 67,000 28,000 210,000 ? ? 22,000 14,000 ? 215,000 224,000 118,000
Required: Determine the amounts for direct material ending inventory, manufacturing costs incurred, ending workin-process inventory, and ending finished goods inventory. Answer: Direct materials: Beginning inventory $13,000 Purchases 122,000 Ending inventory 17,000 Direct materials used $118,000 Direct manufacturing labour 67,000 Manufacturing overhead 28,000 Manufacturing costs incurred $213,000 Beginning work-in-process inventory 11,000 Total manufacturing cost to account for $224,000 Ending work-in-process inventory 14,000 Cost of goods manufactured $210,000 Beginning finished goods inventory Cost of goods manufactured Ending finished goods inventory Cost of goods sold
$22,000 210,000 17,000 $215,000
Diff: 3 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Analyzing Objective: LO 2-4
77) Explain the difference between an inventoriable cost and a period cost. What potential problems does an inaccurate classification of product and period costs cause? Answer: Inventoriable costs are all costs of a product that are considered as assets in the balance sheet
when they are incurred and which become cost of goods sold only when the product is sold. Period costs are treated as expenses of the accounting period in which they are incurred. An inaccurate classification of inventoriable and period costs could lead to violations of the matching principle, which states that costs used in producing revenue should be matched on the income statement when the revenue is recognized. In extreme cases, net income for a given period might be significantly misstated if proper matching does not occur. Diff: 2 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-4
Each of the following items pertains to one of these companies: Bedell Electronics (a manufacturing company), Gregory Food Retailers (a merchandising company), and Larson Real Estate (a service sector company). Match each item with either an inventoriable cost or a period cost. A) inventoriable B) period 78) salary of Bedell Electronics president Diff: 2 Type: MA CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-4
79) depreciation on Bedell Electronics assembly equipment Diff: 2 Type: MA CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-4
80) salaries of Bedell's assembly line workers Diff: 2 Type: MA CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-4
81) depreciation on freezers at Gregory Food Retailing Diff: 2 Type: MA CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-4
82) salary of a receptionist at Larson Real Estate Diff: 2 Type: MA CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-4
83) purchase of frozen food for sale to customers by Gregory Food Retailers Diff: 2 Type: MA CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-4
84) salaries of frozen food personnel at Gregory Food Retailing Diff: 2 Type: MA CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-4
85) depreciation on a computer at Larson Real Estate Diff: 2 Type: MA CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-4
86) salary of a real estate agent at Larson Real Estate Diff: 2 Type: MA CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-4
Answers: 78) B 79) A 80) A 81) B 82) B 83) A 84) B 85) B 86) B
2.5 Explain cost identification, classification, and management systems and their use within the decision framework. 1) Product costs are the sum of the costs assigned to a product for a specific purpose. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-5
2) For purposes of calculating inventory costs under ASPE/IFRS, only production costs can be used. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-5
3) Overtime premium is normally considered as a component of direct labour. Answer: FALSE Explanation: Overtime premium is normally considered as part of indirect labour since it is usually not associated with a particular job. Diff: 2 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-5
4) If a worker is paid for 8 hours, but is idle for 1 of those 8 hours, the 1 hour of idle time would be considered a component of direct labour. Answer: FALSE Explanation: Idle time is normally considered a component of indirect labour since it is usually not associated with a particular job. Diff: 2 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-5
5) Overtime premium consists of the wages paid to all workers (for both direct labour and indirect labour) in excess of their straight-time wage rates. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-5
6) The total of the costs assigned to a particular product for a specific purpose is called A) direct cost. B) inventoriable cost. C) marketing cost. D) product cost. E) prime cost. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-5
7) Which of the following statements is TRUE? A) Product costs and period costs are the same. B) Inventoriable costs are expensed as incurred according to ASPE/IFRS. C) Inventoriable costs are costs that remain in inventory after the product is sold. D) "Product costs" refers to the particular costs allocated to a product to make a specific decision. E) Conversion costs are non-manufacturing costs. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-5
8) Product costs used for pricing and product-mix decisions generally include A) manufacturing costs only. B) design costs plus manufacturing costs. C) all costs incurred along the value chain. D) distribution costs only. E) prime costs but not conversion costs. Answer: C Diff: 3 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-5
9) Product costs used for external reporting under ASPE/IFRS include A) manufacturing costs only. B) design costs plus manufacturing costs. C) all costs incurred along the value chain. D) prime costs but not conversion costs. E) only conversion costs. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-5
10) Why is it possible that a raw material such as glue might be considered as an indirect material for one furniture manufacturer and as a direct material for another furniture manufacture? Answer: It is possible for a raw material such as glue to be considered as an indirect material by one furniture manufacturer and as a direct material by another furniture manufacturer. The decision is largely a choice by the manufacturer and depends on a number of factors including the materiality of the cost in question, the cost of gathering the information, and the design of the manufacturing process. If the product in question has an insignificant cost, it might not be worth the trouble to trace the cost of the glue to each piece of furniture, and the glue would be considered indirect. If the cost of tracing the cost of the glue is high in relation to the benefits received from tracing it, the glue would likely be considered as indirect material. If the design of the manufacturing process easily permits all the glue to be traced to a single type of furniture, then it would be easy for a company to consider that material to be direct. Overall, the direct/indirect classification is decided on a cost/benefit basis. Diff: 3 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Applying Objective: LO 2-5
11) When should the overtime premium of direct manufacturing labour be considered an indirect manufacturing cost? A direct manufacturing cost? Answer: The overtime premium of direct manufacturing labour should be considered an indirect manufacturing cost when it is attributable to the overall volume of work, and a direct manufacturing cost when a "rush job" is the sole source of the overtime. Diff: 2 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Remembering Objective: LO 2-5
12) The types of costs included in the product cost differ depending on the purpose of the costing. Describe the generic value chain categories that are pertinent to product costs regarding ASPE/IFRScompliant inventoriable costs; and, product costs for product pricing and product mix decisions. Answer: ASPE/IFRS compliant inventoriable costs are limited to manufacturing costs which are represented in the production costs category on the value chain. For pricing and product mix decisions all costs related to a product are relevant so the product cost can include costs from all value chain categories. Diff: 2 Type: ES CPA Competencies: Chapter 2 3.1.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations Skill: Understanding Objective: LO 2-5
Cost Accounting: A Managerial Emphasis - Cdn. Ed., 9e (Datar) Chapter 3 Cost-Volume-Profit Analysis 3.1 Identify the essential elements of cost-volume-profit analysis, and calculate the breakeven point (BEP). 1) The contribution margin is computed by deducting all costs which vary on the basis of an outputrelated cost driver from revenues. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-1
2) To perform cost-volume-profit analysis, a company must be able to separate costs into fixed and variable components. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-1
3) In CVP analysis, total costs can be separated into a fixed component that does not vary with output and a component that is variable with output level. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-1
4) Variable operating costs and fixed operating costs constitute total operating costs. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-1
5) CVP analysis assumes that total costs can be separated into the fixed component and variable component with respect to the level of output. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-1
6) CVP analysis requires the time value of money to be factored into formula when comparing revenues and costs. Answer: FALSE Diff: 2 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-1
7) CVP analysis assumes that the behaviour of total costs is non-linear. Answer: FALSE Explanation: Linearity is an assumption of CVP. Diff: 2 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-1
8) In CVP analysis, an assumption is made that the total revenues are linear with respect to output units, but that total costs are non-linear with respect to output units. Answer: FALSE Explanation: In CVP analysis, an assumption is made that the total revenues and the total costs are nonlinear with respect to output units. Diff: 2 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-1
9) Total revenues less total fixed costs equal the contribution margin. Answer: FALSE Explanation: Total revenues less total variable costs equal the contribution margin. Diff: 1 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-1
10) In the graph method of CVP analysis, the break-even point is the (X-axis) quantity of units sold for which the total revenues line crosses the total costs line. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-1
11) A profit-volume graph shows the impact on operating income from changes in the output level. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-1
12) The contribution margin method of CVP analysis uses the equation: break-even units = unit contribution margin/fixed costs. Answer: FALSE Explanation: fixed costs/CM Diff: 2 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-1
13) The contribution margin method can be used to verify a break-even calculation. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-1
14) The total costs line includes all variable costs and all fixed costs when using the graph method of CVP analysis. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-1
15) In cost-volume-profit (CVP) analysis relevant costs include variable, fixed, and mixed costs. Answer: FALSE Explanation: All costs are classified as either fixed (FC) or variable (VC) with no mixed costs. Diff: 1 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-1
16) In cost-volume-profit analysis (CVP) it is assumed that both the product mix and the volume sold are
dynamic variables. Answer: FALSE Explanation: Either the product sold or the product mix remains constant, although the volume changes. Diff: 2 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-1
17) Cost-volume-profit analysis is useful for A) helping managers to answer "what-if" questions. B) implementing a differentiation strategy. C) eliminating uncertainty about external factors, such as interest rates. D) for long-range planning. E) assigning costs to products. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-1
18) Schuppener Company sells its only product for $18 per unit; variable production costs are $6 per unit, and variable selling and administrative costs are $3 per unit; fixed costs for 10,000 units are $10,000. The contribution margin is A) $12 per unit. B) $9 per unit. C) $11 per unit. D) $8 per unit. E) $18 per unit. Answer: B Explanation: $18 - $6 - $3 = $9 Diff: 1 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-1
19) Which of the following are necessary assumptions when using the contribution margin method of determining the break-even point? A) Average unit costs must be known. B) There must be an input-related cost driver. C) Fixed costs are irrelevant. D) Total variable cost must be known. E) Unit selling price and unit variable cost must be known. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-1
20) At the break-even point of 200 units, variable costs total $400 and fixed costs total $600. The 201st unit sold will contribute ________ to profits. A) $1 B) $2 C) $3 D) $5 E) $6 Answer: C Explanation: $1,000 - $400 - $600 = 0; Sales ($1,000/200) - Variable costs ($400/200) = $3 CM Diff: 3 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-1
21) Sales total $200,000 when variable costs total $150,000 and fixed costs total $30,000. The break-even point in sales dollars is A) $200,000. B) $120,000. C) $40,000. D) $30,000. E) $180,000. Answer: B Explanation: ($200,000 - $150,000)/$200,000 = 25% CM%; $30,000/0.25 = $120,000 BE sales Diff: 3 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-1
22) Cost-volume profit is used to analyze A) the behaviour of some costs and revenues as changes occur in the output level. B) the behaviour of total costs, total revenues, and operating income as changes occur in the output level. C) a single revenue driver and multiple cost drivers in special case CVP. D) multiple revenue drivers and a single cost driver in special case CVP. E) the behaviour of variable costs at all levels of output. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-1
23) Which of the following is an assumption of CVP analysis? A) Costs must be separated into separate fixed and variable components. B) Total revenues and total costs are curvilinear in relation to output units. C) Given revenue mixed of products is dynamic. D) There will be a change between beginning and ending levels of inventory. E) The time value of money must be taken into account. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-1
24) Which of the following is TRUE at the break-even point? A) The contribution margin equals variable cost. B) The contribution margin equals total fixed cost. C) The variable cost equals fixed cost. D) The contribution margin equals operating income. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-1
25) The fixed costs equal $18,000, operating income equals $6,000, and the number of units sold equals 1,000. The break-even point in units is ________. A) 300 B) 750 C) 30 D) 24 Answer: B Explanation: Contribution margin = $18,000 + $6,000 = $24,000 Contribution margin per unit = $24,000/1,000 = $24 Break-even point = $18,000/$24 = 750 Diff: 3 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-1
26) Which of the following statements about contribution margin and gross margin in CVP analysis is TRUE? A) Contribution margin equals total revenue minus cost of goods sold. B) Contribution margin equals total revenue minus non-variable costs. C) Gross margin equals total revenue minus cost of goods sold. D) Service companies can compute a gross margin but not a contribution margin. E) Gross margin equals total revenue minus non-variable costs. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-1
27) The contribution income statement highlights A) gross margin. B) products costs and period costs. C) different product lines. D) variable and fixed costs. E) gross margin and net operating income. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-1
Use the information below to answer the following question(s). Franscioso Company sells several products. Information of average revenue and costs is as follows: Selling price per unit $28.50 Variable costs per unit: Direct material $5.25 Direct manufacturing labour $1.15 Manufacturing overhead $0.25 Selling costs $1.85 Annual fixed costs $110,000 28) The Franscioso Company contribution margin ratio is A) 1.102:1. B) 1.425:1. C) 0.298:1. D) 0.637:1. E) 0.702:1. Answer: E Explanation: ($28.50 - $5.25 - $1.15 -$0.25 - $1.85)/$28.50 = 0.702:1 Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-1
29) The Franscioso Company break-even in sales dollars is A) $99,819. B) $77,193. C) $369,128. D) $172,684. E) $156,695. Answer: E Explanation: ($28.50 - $5.25 - $1.15 -$0.25 - $1.85)/$28.50 = 0.702:1 $110,000/0.702 = $156,695.16 Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-1
30) The Franscioso Company break-even in units is A) 5,500 units. B) 3,502 units. C) 2,709 units. D) 6,059 units. E) 12,952 units. Answer: A Explanation: $28.50 - $5.25 - $1.15 -$0.25 - $1.85 = $20.00 $110,000/$20 = 5,500 units Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-1
Use the information below to answer the following question(s). Bartwell Company sells several products. Information of average revenue and costs is as follows: Selling price per unit $31.50 Variable costs per unit: Direct material $4.25 Direct manufacturing labour $2.15 Manufacturing overhead $0.30 Selling costs $1.75 Annual fixed costs $140,000 31) The Bartwell Company contribution margin ratio is A) 0.944:1. B) 4.701:1. C) 3.728:1. D) 0.732:1. E) 0.213:1. Answer: D Explanation: $31.50 - $4.25 - $2.15 - $0.30 - $1.75 = $23.05 23.05:31.50 = 0.732:1 Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-1
32) The Bartwell Company break-even in sales dollars is A) $191,257. B) $657,277. C) $37,554. D) $29,781. E) $148,305. Answer: A Explanation: $140,000/0.732 = $191,256.83 Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-1
33) The Bartwell Company break-even in units is A) 5,645 units. B) 6,074 units. C) 20,866 units. D) 945 units. E) 4,708 units. Answer: B Explanation: $140,000/$23.05 = 6,074 units Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-1
34) The break-even point in CVP analysis is defined as the point A) where output units equal input units. B) where total revenue equals fixed costs. C) where revenues less variable costs equal operating income. D) where the unit contribution margin equals the selling price less the unit variable cost. E) where total revenue equals total costs. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-1
35) If unit sales exceed the break-even point when using the graph method A) there is a loss because the total cost line exceeds the total revenue line. B) total sales exceed total costs. C) there is a profit because the total cost line exceeds the total revenue line. D) expenses are extremely high relative to revenues. E) operating income is negative (an operating loss). Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-1
Use the information below to answer the following question(s).
Jill Bishop makes homemade soap, which she sells for $90 a case. Her variable costs are $40 per case. She has fixed costs of $600. 36) What is the break-even point in cases? A) 6 cases B) 12 cases C) 15 cases D) 20 cases E) 100 cases Answer: B Explanation: Q = $600/($90 - $40) = 12 cases Diff: 1 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-1
37) What is the contribution margin per case? A) $100.00 B) $50.00 C) $40.00 D) $15.00 E) $10.00 Answer: B Explanation: $90 - $40 = $50 per case Diff: 1 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-1
38) Ben's Custom Golf sells special clubs. Ben is able to purchase equipment from a manufacturing company for $100 each. The equipment is sold for $150 each. Required: a. What is the break-even in units assuming Ben incurred $2,500 in selling expenses, and there were no other expenses? b. What would be the break-even in units assuming Ben incurred $2,500 in selling expenses and had $10,000 in other fixed expenses? Answer: a. N = Break-even units $150N - $100N - $2,500 = 0 $50N - $2,500 = 0 N = $2,500/$50 N = 50 units b.
N = Break-even units $150N - $100N - $2,500 - $10,000 = 0 $50N - $12,500 = 0 N = $12,500/50 N = 250 units
Diff: 1 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-1
39) Janet's Custom Golf sells special clubs. Janet is able to purchase equipment from a manufacturing company for $90 each. The equipment is sold for $170 each. Required: a. What is the break-even in units assuming Janet incurred $4,500 in selling expenses, and there were no other expenses? b. What would be the break-even in units assuming Janet incurred $4,500 in selling expenses and had $9,000 in other fixed expenses? Answer: a. Contribution margin = $170 - $90 = $80 per unit Break-even units = $4,500/$80 = 57 units b.
Contribution margin = $170 - $90 = $80 per unit Break-even units = ($4,500 + $9,000)/$80 = 169 units
Diff: 1 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-1
40) What is meant by the term break-even point? Why should a manager be concerned about the breakeven point? Answer: The break-even point is the level of production and sales at which total revenues equal total costs. Managers should be concerned about the break-even point because it helps determine when a business venture will be profitable. Break-even point shows a company how far sales can decline before a net loss will be incurred. It helps to assess the risk of loss. Diff: 2 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-1
41) Explain when a manager would use cost-volume-profit analysis and sensitivity analysis. Answer: Cost-volume-profit analysis is helpful for evaluating the profit impact of management decisions that affect production and sales volume. Sensitivity analysis is helpful for identifying those estimates most critical for a decision. Diff: 2 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-1
42) List the assumptions required to identify relevant information in cost-volume-profit analysis. Answer: The following assumptions identify relevant information required to complete a CVP analysis: Changes in the sales volume and production (or purchase) volume are identical (purchase volume would apply to a merchandiser). The ending balances in all inventories are zero. Everything purchased is used in production; everything produced is sold. For a merchandiser, the sales volume of finished goods purchased for resale is identical to the sales volume sold. All costs are classified as either fixed (FC) or variable (VC) with no mixed costs. The fixed costs include both manufacturing and non-manufacturing fixed costs. The total variable costs include both manufacturing and non-manufacturing variable costs. All cost behaviour is linear (a straight line) within the relevant volume range. The sales price per unit, variable costs per unit, and total fixed costs and sales (or production) volume are known. The MIS provides all of this information. Either the product sold or the product mix remains constant, although the volume changes. All revenue and costs can be calculated and compared without considering the time value of money. Diff: 3 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-1
3.2 Apply the CVP model to calculate a target operating profit before interest and tax. 1) How many units would have to be sold to yield a target operating income of $22,000, assuming variable costs are $15 per unit, total fixed costs are $2,000, and the unit selling price is $20? A) 4,800 units B) 4,400 units C) 4,000 units D) 3,600 units E) 1,600 units Answer: A Explanation: ($2,000 + $22,000)/($20 - $15) = 4,800 units Diff: 3 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-2
2) What is the break-even point in units for a product line, assuming the unit selling price is $200, total fixed costs are $5,600, unit variable costs are $40, and the target operating income is $16,000,000? A) 35 units B) 75 units C) 100 units D) 125 units E) 100,000 units Answer: A Explanation: Q = $5,600/($200 - $40) = 35 units Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-2
3) What is the break-even point in units, assuming a product's selling price is $100, fixed costs are $8,000, unit variable costs are $20, and operating income is $32,000? A) 100 units B) 300 units C) 400 units D) 500 units E) 600 units Answer: A Explanation: $100N - $20N - $8,000 = 0; $80N = $8,000; N = 100 units Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-2
4) What would the target operating income be when fixed costs equal $6,000, the unit contribution margin equals $40.00, and the number of units equals 500? A) $6,000 B) $14,000 C) $16,000 D) $20,000 E) $60,000 Answer: B Explanation: 500 = ($6,000 + TOI)/$40; TOI = $14,000 Diff: 3 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-2
5) How many units would have to be sold to yield a target income of $11,000 assuming variable costs are $30 per unit, total fixed costs are $1,000, and the unit selling price is $40? A) 1,200 units B) 1,100 units C) 1,000 units D) 900 units E) 300 units Answer: A Explanation: Q = ($1,000 + $11,000)/($40-$30) = 1,200 units Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-2
6) Which of the following statements about using the equation method to determine the break-even point is TRUE? A) Operating income in the equation is set equal to the target income for the year. B) Operating income in the equation assumes that fixed costs are nil. C) Revenue in the equation includes only operating revenues plus fixed costs. D) The number of units required to reach the break-even point tends to be higher (as it incorporates total costs) using this method than when using the contribution margin method. E) Operating income in the equation is set equal to nil. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-2
7) Which of the following formulae is correct when using the contribution margin method to determine the break-even point? A) Revenues less operating income equal variable costs plus fixed costs. B) Unit contribution margin times unit variable cost equals the break-even number of units. C) Unit contribution margin times the break-even number of units equals total variable costs. D) Selling price less unit contribution margin equals unit fixed cost for all values below or at the breakeven number of units. E) Unit contribution margin times the break-even number of units equals fixed costs. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-2
Answer the following question(s) using the information below. Kaiser's Kraft Korner sells a single product. 7,000 units were sold resulting in $70,000 of sales revenue, $28,000 of variable costs, and $12,000 of fixed costs. 8) Contribution margin per unit is A) $4.00 B) $4.29 C) $6.00 D) $10.00 E) $5.71 Answer: C Explanation: ($70,000 - $28,000)/7,000 units = $6 per unit Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-2
9) Break-even point in units is A) 2,000 units. B) 3,000 units. C) 5,000 units. D) 7,000 units. E) 2,797 units. Answer: A Explanation: $10X - $4X - $12,000 = 0; X = 2,000 units Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-2
10) The number of units that must be sold to achieve $60,000 of operating income is A) 10,000 units. B) 11,666 units. C) 15,000 units. D) 18,000 units. E) 12,000 units. Answer: E Explanation: 10X - 4X - 12,000 = 60,000; X = 12,000 units Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-2
11) If sales increase by $25,000, operating income will increase by A) $10,000. B) $15,000. C) $22,200. D) $12,500. E) $8,000. Answer: B Explanation: [($70,000 - $28,000)/$70,000] × $25,000 = $15,000 Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-2
12) Following is the Becker Company Ltd. partial income statement for the most recent year: Becker Company Ltd. Partial Income Statement Most Recent Year Sales Cost of goods sold Gross margin Less operating expenses: Fixed Variable Operating income
$ 1,190,000 476,000 $ 714,000 $39,000 357,000 $
396,000 318,000
What would the Becker Company sales have to be in order for the company to have an operating income of $500,000? A) $1,796,667 B) $2,001,988 C) $1,372,000 D) $1,411,000 E) $1,567,824 Answer: A Explanation: CM% = ($1,190,000 - $476,000 - $357,000)/$1,190,000 = 30% ($39,000 + $500,000)/0.3 = $1,796,667 Diff: 3 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Analyzing Objective: LO 3-2
13) Berhannan's Cellular sells phones for $100. The unit variable cost per phone is $50 plus a selling commission of 10%. Fixed manufacturing costs total $1,250 per month, while fixed selling and administrative costs total $2,500. Required: a. What is the contribution margin per phone? b. What is the break-even point in phones? c. How many phones must be sold to earn pre-tax income of $7,500? Answer: a. CM per phone = $100 - $50 - 0.1($100) = $40 b.
N = Break-even in phones $100N - $50N - $10N - $1,250 - $2,500 = 0 $40N - $3,750 = 0 N = $3,750/$40 = 93.75 phones Break-even is 94 phones
c.
N = Phones to be sold $100N - $50N - $10N - $1,250 - $2,500 = $7,500 $40N = $11,250 N = $11,250/$40 = 281.25 phones 282 phones must be sold
Diff: 2 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-2
14) Gilley, Inc., sells a single product. The company's most recent income statement is given below. Sales (4,000 units) Less variable expenses Contribution margin Less fixed expenses Net income
$120,000 (72,000) 48,000 (40,000) $8,000
Required: a. Contribution margin per unit is: b. If sales are doubled to $240,000, total variable costs will equal: c. If sales are doubled to $240,000, total fixed costs will equal: d. If 10 more units are sold, profits will increase by: e. Compute how many units must be sold to break-even. f. Compute how many units must be sold to achieve profits of $20,000. Answer: a. Contribution margin per unit is $30 - $18 = $12 b. $72,000 × 2 = $144,000 c. $40,000 d. Contribution margin of $12 × 10 units = $120 e. Fixed costs of $40,000/Contribution margin per unit of $12 = 3,333 units f. (Fixed costs of $40,000 + Profits of $20,000)/CM per unit of $12 = 5,000 units
$ ________ $ ________ $ ________ $ ________ # ________ # ________
Diff: 2 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-2
15) Blankinship, Inc., sells a single product. The company's most recent income statement is given below. Sales Less variable expenses Contribution margin Less fixed expenses Net income
$200,000 (120,000) 80,000 (50,000) $30,000
Required: a. Contribution margin ratio is
________ %
b.
Break-even point in total sales dollars is
$ ________
c.
To achieve $40,000 in operating income, sales must total
$ ________
d. If sales increase by $50,000, net income will increase by $ ________ Answer: a. Contribution margin ratio is $80,000/$200,000 = 40% b. Fixed costs $50,000/0.40 CM% = $125,000 in sales c. [Fixed costs $50,000 + Operating income $40,000]/0.40 CM% = $225,000 in sales d. $50,000 × 0.40 CM% = $20,000 increase in net income Diff: 2 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-2
16) Black Pearl, Inc., sells a single product. The company's most recent income statement is given below. Sales Less variable expenses Contribution margin Less fixed expenses Net income
$50,000 (30,000) 20,000 (12,500) $ 7,500
Required: a. Contribution margin ratio is
________ %
b.
Breakeven point in total sales dollars is
$ ________
c.
To achieve $40,000 in net income, sales must total
$ ________
d. If sales increase by $50,000, net income will increase by $ ________ Answer: a. Contribution margin ratio is $20,000/$50,000 = 40% b. Fixed costs $12,500/0.40 CM% = $31,250 in sales c. [Fixed costs $12,500 + Net income $40,000]/0.40 CM% = $131,250 in sales d. $50,000 × 0.40 CM% = $20,000 increase in net income Diff: 2 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-2
17) Red Ruby, Inc., sells a single product. The company's most recent income statement is given below. Sales Less variable expenses Contribution margin Less fixed expenses Net income
$60,000 (24,000) $36,000 (11,000) $ 25,000
Required: a. Contribution margin ratio is
________ %
b.
Breakeven point in total sales dollars is
$ ________
c.
To achieve $40,000 in net income, sales must total
$ ________
d. If sales increase by $75,000, net income will increase by $ ________ Answer: a. Contribution margin ratio is $36,000/$60,000 = 60% b. Fixed costs $11,000/0.60 CM% = $18,333 in sales c. [Fixed costs $11,000 + Net income $40,000]/0.60 CM% = $85,000 in sales d. $75,000 × 0.60 CM% = $45,000 increase in net income Diff: 2 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-2
18) Symbol Manufacturing Inc. makes component parts for automobile navigation systems. For component A14 direct materials cost $47, and the assembly technicians are paid $42 per hour. A technician can produce two components per hour. Fixed manufacturing costs for A14 are $70,000 per unit based on current production of 12,000 units. Non-manufacturing costs are fixed at $120,000 per period. Each A14 component sells for $195. Required: a. Prepare an income statement in gross margin format. b. Calculate the dollar sales required to generate an operating profit of $1,500,000 and prepare an income statement in contribution margin format. c. What actions could Symbol Manufacturing Inc. management take to lower the required number of units sold necessary to generate the desired operating profit? Answer: a. Revenue (12,000 × $195) $ 2,340,000 Cost of goods sold: Materials (12,000 × $47) $564,000 Direct labour (12,000 × ($42/2) 252,000 Fixed manufacturing costs 840,000 Cost of goods sold 1,656,000 Gross margin $ 684,000 Fixed non-manufacturing costs 120,000 Net operating profit $ 564,000 b.
CM ratio = ($2,340,000 - $564,000 - $252,000)/$2,340,000 = 65.13% ($840,000 + $120,000 + $1,500,000)/0.6513 = $3,777,061.26 # of units required = $3,777,061.26/$195 per unit = 19,370 units (rounded up) Revenue (19,370 × $195) Variable costs: Materials (19,370 × $47) Direct labour (19,370 × ($42/2) Contribution margin Fixed costs: Fixed manufacturing costs Fixed non-manufacturing costs Net operating profit
$ 3,777,150 $910,390 406,770
840,000 120,000
1,317,160 $ 2,459,990
960,000 $ 1,499,990
c. The management could evaluate a number of options based on increasing the per unit revenue and decreasing costs both variable and fixed. Diff: 3 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Analyzing Objective: LO 3-2
3.3 Distinguish among contribution, gross, operating, and net income margins, and apply the
CVP model to calculate target net income. 1) An increase in the tax rate will increase the break-even point. Answer: FALSE Explanation: A change in the tax rate will not change the break-even point. Diff: 2 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-3
2) When making net income evaluations, CVP calculations for target income must be stated in terms of target operating income instead of target net income. Answer: FALSE Explanation: Target net income must be used as income taxes will reduce the operating income. Diff: 2 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-3
3) If planned net income is $21,000 and the tax rate is 30%, then planned operating income would be $27,300. Answer: FALSE Explanation: If planned net income is $21,000 and the tax rate is 30%, then planned operating income would be $30,000 [$21,000/(1.0 - .3) = $30,000]. Diff: 2 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-3
4) Target net income is computed by multiplying operating income by one minus the entity's tax rate, or by multiplying operating income by the tax rate, and subtracting that amount from operating income. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-3
5) Operating margin is the same as gross margin in CVP analysis. Answer: FALSE Explanation: Operating margin has the same meaning as operating income. It is the result of deducting all business function costs from revenue. Neither interest nor tax expense is considered a business function cost. Diff: 1 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-3
6) Operating income is equal to net income plus income taxes. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-3
7) Revenues less all costs that vary with respect to an output level is the gross margin. Answer: FALSE Explanation: Operating margin has the same meaning as operating income. It is the result of deducting all business function costs from revenue. Neither interest nor tax expense is considered a business function cost. Diff: 2 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-3
8) The gross margin is revenue minus all variable manufacturing costs. Answer: FALSE Explanation: The gross margin is revenue minus cost of goods sold, which includes both fixed and variable manufacturing costs. Diff: 1 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-3
9) In CVP analysis, focusing on target net income rather than operating income ________. A) will increase the break-even point B) will decrease the break-even point C) will not change the break-even point D) will help managers construct a better capital policy Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-3
Use the information below to answer the following question(s). Brian O'Neil intends to sell his customers a special round-trip airline ticket package. He is able to purchase the package from the airline carrier for $400 each. The airline intends to reimburse Brian for any unsold ticket packages. The round-trip tickets will be sold for $500 each. Brian has a tax rate of 30% on his business income. 10) How many units will he need to sell in order to break-even assuming Brian incurred $10,000 in expenses to advertise the sale, and there are no other expenses? A) 20 packages B) 25 packages C) 75 packages D) 100 packages E) 125 packages Answer: D Explanation: Q = $10,000/($500 - $400) = 100 packages Diff: 1 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-3
11) What would his break-even point be assuming Brian incurred $31,200 in fixed expenses? A) 312 packages B) 232 packages C) 125 packages D) 110 packages E) 100 packages Answer: A Explanation: Q = $31,200/($500 - $400) = 312 packages Diff: 1 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-3
12) What is the dollar amount of sales required for Brian to earn an after-tax profit of $7,000 if his fixed costs are $10,000? A) $17,000 B) $50,000 C) $70,588 D) $85,000 E) $100,000 Answer: E Explanation: Pre-tax profit = $7,000/(1-0.30) = $10,000 ($10,000 + $10,000)/($500-$400) = 200 packages $200 packages × $500 per package = $100,000 Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-3
Answer the following question(s) using the information below. Stephanie's Bridal Shoppe sells wedding dresses. The average selling price of each dress is $1,000, variable costs are $400, and fixed costs are $90,000. 13) What is the Bridal Shoppe's operating income when 180 dresses are sold? A) $120,000 B) $80,000 C) $200,000 D) $100,000 E) $18,000 Answer: E Explanation: 180($1,000) - 180($400) - $90,000 = $18,000 Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-3
14) How many dresses are sold when operating income is zero? A) 225 dresses B) 150 dresses C) 100 dresses D) 90 dresses E) 60 dresses Answer: B Explanation: $90,000/($1,000 - $400) = 150 dresses Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-3
15) How many dresses must the Bridal Shoppe sell to yield after-tax net income of $18,000, assuming the tax rate is 40%? A) 180 dresses B) 170 dresses C) 150 dresses D) 200 dresses E) 270 dresses Answer: D Explanation: $1,000N - $400N - $90,000 = $18,000/(1 - 0.4); $600N - $90,000 = $30,000; N = 200 units Diff: 3 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-3
16) To determine the effect of income tax on a CVP calculation, managers should consider A) target operating income. B) contribution margin. C) tax as a variable expense in determining contribution margin. D) selling price. E) target net income. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-3
17) If the tax rate is t, it is possible to calculate planned operating income by A) dividing net operating income by t. B) dividing net operating income by 1 - t. C) multiplying net operating income by t. D) multiplying net operating income by 1 - t. E) dividing net operating income by t - 1. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-3
18) Information Inc., sells accounting software. Each unit's cost may be separated as follows: selling price of $100 and variable costs of $30. Fixed costs are $10,000. What is Information Inc.'s operating income assuming 1,000 units are sold? A) $100,000 B) $90,000 C) $60,000 D) $40,000 E) $20,000 Answer: C Explanation: 1,000 ($100 - $30) - $10,000 = $60,000 Diff: 1 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-3
19) Operating costs include A) interest costs. B) income taxes. C) only cost of goods sold. D) all fixed and variable costs. E) operating expenses and cost of goods sold. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-3
20) Comparing contribution margin [CM] to gross margin [GM], which of the following is TRUE? A) If Cost of goods sold includes fixed costs, then CM will exceed GM. B) If Cost of goods sold does not include any fixed costs, then CM will equal GM. C) In the merchandising sector, CM and GM are equivalent terms. D) If CM and GM remain constant from one period to the next, operating income has to remain constant as well. E) CM is computed after all variable costs are deducted, but GM is computed by deducting only cost of goods sold from revenues. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-3
21) Operating income equals $12,000, fixed costs equal $36,000, and total units sold are 2,000. To achieve $30,000 in operating income, sales in units must total ________. A) 5,270 B) 7,250 C) 3,900 D) 2,750 Answer: D Explanation: contribution margin = $36,000 + $12,000 = $48,000 contribution margin per unit = $48,000/2,000 = $24 sales units to achieve $30,000 income = ($36,000 + $30,000)/24 = 2,750 Diff: 3 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-3
22) Which of the following statements about net income (NI) is TRUE? A) NI = operating income - income taxes B) NI = operating income + operating costs C) NI = operating income + non-operating revenues less non-operating costs D) NI = operating income less Cost of Goods Sold E) NI = operating revenue less Cost of Goods Sold Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-3
23) Gross margin in a merchandising organization is considered to be A) the same as the contribution margin. B) all revenues less costs which do not change with respect to an output-related driver. C) all revenues less cost of goods sold. D) all revenues plus costs which change with respect to an output-related driver. E) all revenues. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-3
24) Frank's Auto Supply Company sells cases of hydraulic hoses for $80. The unit variable costs per case are $40 plus a selling commission of 10 percent of sales. Fixed manufacturing costs total $1,000 per month, while fixed selling and administrative costs total $2,000. The company has a tax rate of 40%. Required: a. What is the contribution margin per case? b. What is the break-even point in cases? c. How many cases must be sold to earn a pre-tax profit of $6,000? d. How many cases must be sold to earn an after-tax income of $6,000? Answer: a. CM per case = $80 - $40 - 0.1($80) = $32 b. N = Break-even in cases $80N - $40N - $8N - $1,000 - $2,000 = 0 $32N - $3,000 = 0 N = $3,000/$32 N = 93.75 cases c.
N = Cases to be sold $80N - $40N - $8N - $1,000 - $2,000 - $6,000 = 0 $32N - $9,000 = 0 N = $9,000/$32 N = 281.25 cases
d. N = Cases to be sold $80N - $40N - $8N - $1,000 - $2,000 - [$6,000/(1-0.40)] = 0 $32N - $13,000 = 0 N = $13,000/$32 N = 406.25 cases Diff: 2 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-3
25) Widget Company sells cases of gaskets for $140. The unit variable costs per case are $65 plus a selling commission of 10 percent of sales. Fixed costs are $2,500 per month. The company has a tax rate of 25%. Required: a. What is the contribution margin per case? b. What is the break-even point in cases? c. How many cases must be sold to earn pre-tax profit of $9,000? d. How many cases must be sold to earn an after-tax income of $9,000? Answer: a. CM per case = $140 - $65 - 0.1($140) = $61 b. Break-even in cases $2,500/$61 = 41 cases c.
Cases to be sold ($2,500 + $9,000)/$61 = 189 cases
d. Cases to be sold Required pre-tax profit = $9,000/(1-0.25) = $12,000 ($2,500 + $12,000)/$61 = 238 cases Diff: 2 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-3
26) Gates Rubber Company sells widgets for $20.00 each. The manufacturing costs, all variable, are $6 each. The company is planning on renting an exhibition booth for display and selling purposes at the annual candy convention. The company's sales manager will earn a vacation bonus if she can earn a target net income of $150,000 for the sales operation at the convention. The convention organizers provide the advertising and guarantee a certain level of traffic in exchange for 15% of the net income. The 15% surcharge operates like a tax on net income. The company absorbs all of the fixed costs of production for the sales made at the convention. How many widgets does the sales manager have to sell to earn the vacation bonus? Answer: $20Q - $6Q - 0 = [$150,000 ÷ (1 - 0.15)] $14Q = $176,470.59 Q = 12,605 units Diff: 3 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-3
27) Stephanie Company, a producer of specialty cards, has asked you to complete several calculations based upon the following information: Income tax rate Selling price per unit Variable cost per unit Total fixed costs
25% $7.50 $5.28 $50,200.00
Required: a. What is the break-even point in cards? b. What sales volume is needed to earn an after-tax net income of $13,028.40? c. How many cards must be sold to earn an after-tax net income of $18,480? Answer: a. $50,200/($7.50 - $5.28) = 22,613 units b.
$13,028.40/0.75 = $17,371 $17,371 + $50,200 = $67,571 $67,571/$2.22 = 30,438 units 30,438 units × $7.50 = $228,285
c.
$18,480/0.75 = $24,640 $24,640 + $50,200 = $74,840 $74,840/$2.22 = 33,712 units
Diff: 2 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-3
28) Heady Company sells headbands to retailers for $5. The variable cost of goods sold per headband is $1, with a selling commission of 10 percent of sales. Fixed manufacturing costs total $25,000 per month, while fixed selling and administrative costs total $10,500. The income tax rate for Heady Company is 30 percent. Required: a. What is the break-even point in headbands? b. What are the target sales in headbands to generate a before-tax income of $3,000? c. What are the target sales in headbands to generate an after-tax income of $3,080? d. What is the net income assuming Heady sells a total 15,000 headbands? Answer: a. N = Break-even $5N - $1N - $5(0.10)N - $25,000 - $10,500 = 0 $3.50N - $35,500 = 0 N = $35,500/$3.50 N = 10,143 headbands b.
N = Target units $5N - $1N -$5(0.10)N - $25,000 - $10,500 - $3,000 = 0 $3.50 - $38,500 = 0 N = $38,500/$3.50 N = 11,000 headbands
c.
N = Target units $5N - $1N - $5(0.1)N - $25,000 - $10,500 - $3,080/0.7 = 0 $3.50N - $35,500 - $4,400 = 0 N = $39,900/$3.50 N = 11,400 headbands
d. Sales ($5 × 15,000) Variable costs: Manufacturing ($1 × 15,000) Selling ($5 × 15,000 × 0.10) Contribution margin Fixed: Manufacturing Selling and administrative Operating income Income taxes ($17,000 × 0.30) Net income
$75,000 $15,000 7,500
$25,000 10,500
22,500 $52,500
35,500 $17,000 5,100 $11,900
Diff: 3 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-3
29) Better Company reported the following:
Revenues Variable manufacturing costs Variable nonmanufacturing costs Fixed manufacturing costs Fixed nonmanufacturing costs
$1,000 $200 $230 $150 $140
Required: a. Compute the contribution margin. b. Compute the gross margin. c. Compute the operating income. Answer: a. Contribution margin: $1,000 - $200 - $230 = $570 b. Gross margin: $1,000 - $200 - $150 = $650 c. Operating income: $1,000 - $200 - $230 - $150 - $140 = $280 Diff: 2 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-3
30) Heady reported the following: Revenues Variable manufacturing costs Variable nonmanufacturing costs Fixed manufacturing costs Fixed nonmanufacturing costs
$4,500 $900 $810 $630 $545
Required: a. Compute the contribution margin. b. Compute the contribution margin percentage. c. Compute the gross margin. d. Compute the gross margin percentage. e. Compute the operating income. Answer: a. Contribution margin: $4,500 - $900 - $810 = $2,790 b. Contribution margin percentage = ($2,790/$4,500) × 100 = 62% c. Gross margin: $4,500 - $900 - $630 = $2,970 d. Gross margin percentage = ($2,970/$4,500) × 100 = 66% e. Operating income: $4,500 - $900 - $810 - $630 - $545 = $1,615 Diff: 2 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-3
31) Arthur's Accessories makes novelty electronic equipment for golf enthusiasts. One of their most popular accessories is the "Putting Magician." This electronic device analyses putts and provides instruction on the direction and pace of a putt. Although not allowed under the rules, amateur golfers have purchased or received as a gift 17,300 of these last year from a total production of 18,000 units. The recommended retail price is $139, and the wholesale price received by Arthur's Accessories is $90. The company's variable production costs are $62 per unit. Per unit fixed manufacturing costs are $7. Other fixed costs are $65,000 for rent, $290,000 in salaries, and $75,000 for a product endorsement. The tax rate is 25%. Required: a. How many units must be sold to break even? b. What is the amount of sales in dollars required to earn an after-tax profit of $300,000? Answer: a. Break-even in units CM = $90 - $62 = $28 BE in units = [(18,000 units × $7) + $65,000 + $290,000 + $75,000]/$28 per unit = 19,857 units b. Sales $ required for after-tax profit of $250,000 Pre-tax income = $300,000/(1-0.25) = $400,000 CM ratio = $28/$90 = 0.31111 Sales required = [(18,000 units × $7) + $65,000 + $290,000 + $75,000 + $400,000]/0.3111 = $3,072,967 Diff: 2 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-3
32) The parent group of the local university football team organizes an end of training camp bar-b-que dinner each year. The 110 player roster and 12 coaches eat for free, and ticket sales are used along with a fixed amount subsidy to fund the event. Last season 250 meals were produced and served. The following financial statement was prepared by one of the team parents: Revenue: Ticket sales Subsidy Expenditures: Food Supplies Fuel Bar-b-que rental Surplus/(deficit)*
$ 1,280 3,000 3,750 300 125 500 $ (395)
* The deficit was covered by a one-time donation from a parent whose son graduated and is consequently no longer on this years team. Required: Calculate the price per ticket that must be charged to breakeven based on the following assumptions: -the number of players and coaches meals remain the same, but the number of meals sold increases by 20 -the fixed costs are the same as last year -the variable costs per unit are the same as last year -the subsidy will remain at $3,000 Answer: Number of paid meals = (250 + 20) - (110 + 12) = 148 Variable unit cost last year = ($3,750 + $300 + $125)/250 = $16.70 per meal Price per ticket = X: 0 = 148X - (-$3,000 + (270 × $16.70) + $500) X = $13.57 per meal Diff: 3 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Analyzing Objective: LO 3-3
33) Better Battery has been in the battery renewal business for four years. It rents a building but owns all of its equipment. All employees are paid a fixed salary except for the busy season (April - June), when temporary help is hired by the hour. Utilities and other operating charges remain fairly constant during each month, except those in the busy season. Selling prices per battery average $100, except during the busy season. Because a large number of customers buy batteries prior to winter, discounts run above average during the busy season. A 15 percent discount is given when two batteries are purchased at one time. During the busy months selling prices per battery average $90. The president of Better Battery is somewhat displeased with the company's management accounting system because the cost behaviour pattern displayed by the monthly break-even charts are inconsistent; the busy month's charts are different from the other months of the year. The president is never sure if the company has a satisfactory margin of safety or if it is just above the break-even point. Required: a. What is wrong with the accountant's computations? b. How can the information be presented in a better format for the president? Answer: a. The accounting system includes some assumptions about the CVP model that don't hold for Better Battery. The CVP model requires cost and revenue to be linear. During the busy months the company has cost and revenue which behave differently than during the other months of the year. The revenue line turns down (less slope) with the average selling price per battery decreasing from $100 to $90. The variable costs line probably turns upward (increasing slope) with the additional hourly workers being added to the work force. b. The accountant may want to present two sets of information regarding the revenue and cost behaviour of the company; one for the busy season and one for the other months of the year. It would show that while the break-even point actually increases during the busy months (a negative), the marginal income increases because of increased sales (a positive). Diff: 2 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-3
3.4 Apply the CVP model in decision making, and explain how sensitivity analysis can help managers both identify and manage risk. 1) Sensitivity analysis may be used to determine how a result will change if the original data are changed or if the original results are not achieved. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-4
2) Margin of safety measures the difference between budgeted or actual revenues, and break-even revenues. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-4
3) Sensitivity analysis is a "what-if" technique that managers use to examine how a result will change if the originally predicted data are not achieved or if an underlying assumption changes. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-4
4) Companies with a greater proportion of fixed costs have a greater risk of loss from changes in demand than companies with a greater proportion of variable costs. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-4
5) The degree of operating leverage at a specific level of sales helps the managers calculate the effect that potential changes in sales will have on operating income. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-4
6) Capital intensive companies have less risk because their relatively lower operating leverage suggests that they have already made large investments in capital assets. Answer: FALSE Explanation: High fixed cost simultaneously increases the risk of losses if demand is weak, and magnifies profit if demand is strong. Diff: 2 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-4
7) Which of the following statements about sensitivity analysis is TRUE? A) It is a technique which is used to examine past results. B) It can be used in CVP to show changes in operating income if variable costs per unit change. C) It examines the relationship between production and service departments. D) It shows the impact of a manager's behaviour. E) It is relevant for isolating conversion costs. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-4
8) Chris Muss is going to sell Ad-hoc compact disks for $40 a box; one box is considered to be one unit. The disks cost Chris $10 a unit. She is planning to rent a booth at the up-coming Area Computer Show. She has three options for attending the show: 1. paying a fixed fee of $3,000; 2. paying a $1,000 fee plus 10% of her revenue made at the convention, or; 3. paying 25% of her revenue made at the convention. Which of the following statements is TRUE? A) CVP analysis can show that the risks are identical in each case. B) The break-even point is the identical in each case. C) Fixed costs are inherent in all of the options. D) One of the options will allow Chris Muss to break-even, even if she doesn't sell any disks, assuming she can return any unsold disks for a full refund. E) Operating income per unit is the same in each case, as both selling price and costs are the same. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-4
9) Which of the following statements is TRUE concerning operating leverage? A) It summarizes the risk-return tradeoff across alternate revenue possibilities. B) It measures the change in operating income when costs change proportionately with the change in the number of units sold. C) The degree of operating leverage increases inversely to the number of units sold. D) The degree of operating leverage remains constant (in the relevant range) when there is a change in the number of units sold. E) The degree of operating leverage equals contribution margin divided by operating income, at any specific sales level. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-4
10) In a company with low operating leverage A) fixed costs are high and variable costs are low. B) small increases in sales lead to large increases in operating income. C) there is a higher possibility of net loss than a higher-leveraged firm. D) less risk is assumed than in a highly leveraged firm. E) companies follow the strategy of replacing variable costs with fixed costs. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-4
11) Which of the following factors would be relevant in classifying costs as fixed or variable in a specific decision situation? A) if the time horizon is short or long B) the relevant range of the next best alternative situation C) the mix of revenues D) the sales mix E) if the time horizon is shorter in another alternative Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-4
Use the information below to answer the following question(s). Hard Sports University is planning to hold a fund-raising banquet at one of the local country clubs. It has two options for the banquet: 1. Foothills Country Club a. Fixed rental cost of $600 b. $15.00 per person for food 2. Downhill Country Club a. Fixed rental cost of $1,080 b. Hire a caterer who charges $12.00 per person for food Hard Sports has budgeted $900 for administrative and marketing expenses. It plans to hire a band, which will cost another $400. Tickets are expected to be $40 per person. Any other items required for the event will be donated by its local business supporters. 12) What is the break-even point in tickets sold for option one? A) 85 tickets B) 80 tickets C) 76 tickets D) 60 tickets E) 24 tickets Answer: C Explanation: Option 1 Rental Cost $600 Adm. & Mkt. 900 Band Expense 400 Fixed Cost
$1,900
$ per ticket Catering
$40.00 15.00
Cont. Margin
$25.00
Break-even point = total fixed cost/contribution margin Opt. 1: $1,900/$25 = 76 tickets Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-4
13) The break-even point in tickets sold of option two? A) 85 tickets B) 80 tickets C) 76 tickets D) 39 tickets E) 71 tickets Answer: A Explanation: Option 2 Rental Cost $1,080 Adm. & Mkt. 900 Band Expense 400 Fixed Cost
$2,380
$ per ticket Catering
$40.00 12.00
Cont. Margin
$28.00
Break-even point = total fixed cost/contribution margin Opt. 2: $2,380/$28 = 85 tickets Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-4
14) What is the "operating income" assuming 250 people attend and option one is chosen? A) $4,400 B) $4,350 C) $4,000 D) $6,250 E) $4,750 Answer: B Explanation: $40X - $15X - $1,900 = OI X = 250 $40(250) - $15(250) - $1,900 = OI $10,000 - $3,750 - $1,900 = $4,350 Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-4
15) What is the "operating income" assuming 250 people attend and option two is chosen? A) $7,000 B) $2,900 C) $2,750 D) $4,620 E) $5,080 Answer: D Explanation: $40X - $12X - $2,380 = OI $40(250) - $12(250) - $2,380 = OI $10,000 - $3,000 - $2,380 = $4,620 Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-4
16) How many people must purchase tickets assuming option two is chosen, and Big Sports expects to raise $4,820 for the athletic fund? Assume no one pays more than the cost of his/her ticket. A) 258 people B) 173 people C) 243 people D) 276 people E) 310 people Answer: A Explanation: $40X - $12X - $2,380 = $4,820 $28X = $2,380 + $4,820 $28X = $7,200 X = 257.14 or 258 people Diff: 3 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-4
Use the information below to answer the following question(s). Dr. Francis Finn performs a certain procedure for $400.00. The fixed costs are $8,000 and the variable costs are $200.00 per procedure. 17) What is the budgeted revenue assuming the procedure is performed 200 times? A) $40,000 B) $80,000 C) $120,000 D) $160,000 E) $320,000 Answer: B Explanation: 200 × $400 = $80,000 Diff: 1 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-4
18) What is the budgeted contribution margin assuming the procedure is performed 200 times? A) $20,000 B) $30,000 C) $8,000 D) $80,000 E) $40,000 Answer: E Explanation: 200 × $200 = $40,000 Diff: 1 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-4
19) What is the margin of safety assuming the procedure is performed 200 times? A) $80,000 B) $64,000 C) $40,000 D) $32,000 E) $16,000 Answer: B Explanation: [$8,000 ÷ $200] = 40 units. [$80,000 - (40 × $400)] = $64,000 Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-4
20) What is the margin of safety in units assuming the procedure is performed 200 times? A) 200 units B) 130 units C) 140 units D) 160 units E) 20 units Answer: D Explanation: [$8,000 ÷ $200] = 40 units. [$80,000 - (40 × $400)] = $64,000 $64,000 ÷ $400 = 160 units Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-4
21) What is the margin of safety assuming 100 procedures are performed? A) $16,000 or 40 times B) $20,000 or 50 times C) $24,000 or 60 times D) $40,000 or 100 times E) $50,000 or 110 times Answer: C Explanation: Break even in number of procedures = $8,000/($400 - $200) = 40 units Actual sales 100 units × $400 = $40,000 Break-even sales 40 units × $200 = $16,000 Margin of safety 60 units $24,000 Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-4
Answer the following question(s) using the information below. Southwestern College is planning to hold a fund-raising banquet at one of the local country clubs. It has two options for the banquet: OPTION 1: Crestview Country Club a. Fixed rental cost of $1,000 b. $11 per person for food OPTION 2: Tallgrass Country Club a. Fixed rental cost of $3,000 b. A caterer who charges $8.00 per person for food Southwestern College has budgeted $1,800 for administrative and marketing expenses. It plans to hire a band, which will cost another $2,000. Tickets are expected to be $35 per person. Local business supporters will donate any other items required for the event. 22) Which option provides the least amount of risk? A) Option one B) Option two C) Both options provide the same amount of risk. D) Neither option has risks. E) Without probability assignments, it is not possible to determine the riskier option. Answer: A Explanation: Option 1 has the lower operating leverage. Diff: 1 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-4
23) What is the break-even point in units for each option? A) 96 units and 114 units, respectively B) 120 units and 187 units, respectively C) 56 units and 137 units, respectively D) 200 units and 252 units, respectively E) 156 units and 219 units, respectively Answer: D Explanation: Option 1: ($1,000 + $1,800 + $2000)/($35 - $11) = 200 units Option 2: ($3,000 + $1,800 + $2000)/($35 - $8) = 252 units Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-4
24) What is the operating income for each option if 600 people attend? A) $14,400 and $12,400 respectively B) $9,800 and $10,200 respectively C) $8,000 and $8,400 respectively D) $7,900 and $8,000 respectively E) $9,600 and $9,400 respectively Answer: E Explanation: Option 1: (600 × $24) - $4,800 = $9,600 Option 2: (600 × $27) - $6,800 = $9,400 Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-4
25) What is the degree of operating leverage for each option if 600 people attend? A) 1.37 and 1.75 times, respectively B) 1.5 times and 1.72 times, respectively C) 1.10 and 1.29 times, respectively D) 0.75 and 1.07 times, respectively E) Operating leverage is indeterminable. Answer: B Explanation: Option 1: $24 × 600/$9,600 = 1.50; Option 2: $27 × 600/$9,400 = 1.72 Diff: 3 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-4
26) Mrs. Tisdale is going to sell Christmas tree lights for $40 a box. The lights cost Mrs. Tisdale $10 a box and any unsold lights can be returned for a full refund. She is planning to rent a booth at the upcoming Happy Holidays Convention, which offers three options: 1. paying a fixed fee of $3,000, or 2. paying a $1,000 fee plus 10% of revenues made at the convention, or 3. paying 25% of revenues made at the convention. Which of the following statements is FALSE? A) Her decision will determine the risk she faces. B) Contribution margin will vary depending upon the option chosen. C) One of the options will allow Mrs. Tisdale to break even, even if she doesn't sell any lights. D) Operating income will always be the greatest for Option 3. E) Option 3 has the lowest operating leverage. Answer: D Diff: 3 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-4
27) You have just been hired as the new management accountant for a pool chemical wholesaler. The company sells packages of pool chemicals to retail stores, consisting of all of the chemicals a typical pool would need for a week, for a price of $25, and a variable cost of $8. The company has fixed costs of $125,000. The previous accountant was promoted to an associated company but has left you her working papers for a project she was working on. The project involves advising management whether to accept an advertising arrangement with an industry publication. The arrangement being offered is a contract calling for a set payment per month (amount to be negotiated) for 6 months. The industry is cyclical and has no sales for 4 months [16 weeks] of the year. The previous accountant notes show her projection that this would result in an increase of 50 units per week, above the normal 1,000 units per week that the company sells currently. The increased demand would arise from more customers to existing outlets, and from new outlets as well. The advertiser is suggesting a monthly fee of $1,800. What is your advice, based on the previous accountant's notes and your own analysis? Answer: While one would expect the fee to be negotiable below the asking price, even at $1,800 per month, the company should agree to the contract, assuming the previous accountant's estimated sale increase is realistic. Students should identify the extra cost as a fixed cost.
Contrib margin (1,000 × 17 × 36) Contrib margin (1,050 × 17 × 36) Fixed costs Operating income
No Extra Advert. $612,000 125,000 $487,000
Extra Advert.
Difference
642,600 135,800 $506,800
30,600 10,800 $19,800
Diff: 3 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Analyzing Objective: LO 3-4
28) Seamless Gutter sells 10 metre sections of eaves trough for $12. The unit variable costs per section are $8.80. Fixed costs total $4,800. Required: a. What is the contribution margin per section? b. What is the break-even point in sections? . . . in dollars? c. How many sections must be sold to earn a pre-tax income of $4,000? d. What is the margin of safety assuming 1,800 sections are sold? Answer: a. Contribution margin per section = $12.00 - $8.80 = $3.20 b. N = Break-even point in sections $12.00N - $8.80N - $4,800 = 0 $3.20N - $4,800 = 0 N = $4,800/$3.20 N = 1,500 sections Break-even dollars = 1,500 × $12 = $18,000 c. N = Target sales in sections $12.00N - $8.80N - $4,800 - $4,000 = 0 $3.20N - $8,800 = 0 N = $8,800/$3.20 N = 2,750 sections d. Margin of safety = Sales - Break-even sales = ($12.00 × 1,800) - $18,000 = $21,600 - $18,000 = $3,600 Diff: 3 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-4
29) Disney Tires, Inc. sells tires to service stations for an average of $45 each. The variable costs of each tire are $30, and the monthly fixed manufacturing costs total $15,000. Other monthly fixed costs for the company total $12,000. Required: a. What is the break-even level in tires? b. What is the margin of safety assuming sales total $90,000? c. What is the break-even level in tires assuming variable costs increase by 20 percent? d. What is the break-even level in tires assuming the selling price goes up by 10 percent, fixed manufacturing costs decline by 10 percent, and other fixed costs decline by $150? Answer: a. N = Break-even units $45N - $30N - $15,000 - $12,000 = 0 $15N - $27,000 = 0 N = $27,000/$15 N = 1,800 tires b. Margin of safety = $90,000 - ($45 × 1,800) = $9,000 c.
N = Break-even units $45N - $36N - $15,000 - $12,000 = 0 $9N - $27,000 = 0 N = $27,000/$9 N = 3,000 tires
d. N = Break-even units $49.50N - $30N - $13,500 - $11,850 = 0 $19.50N - $25,350 = 0 N = $25,350/$19.50 N = 1,300 tires Diff: 2 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-4
30) Marshel Company sells pillows for $25.00 each. The manufacturing cost, all variable, is $10 per pillow. The company is planning on renting an exhibition booth at the annual crafts and art convention. The convention coordinator allows three options for each participating company. The options are: 1. paying a fixed booth fee of $5,010, or; 2. paying a $4,000 fee plus 10% of revenue made at the convention, or; 3. paying 20% of revenue made at the convention. Required: a. Compute the break-even sales in pillows for each option. b. Which option should Marshel Company choose, assuming sales are expected to be 800 pillows? c. Calculate the margin of safety for Option 1 if sales are expected to be 300 pillows. Answer: a. Option 1 N = Break-even in pillows $25N - $10N - $5,010 = 0 $15N - $5,010 = 0 N = $5,010/$15 = 334 pillows Option 2 N = Break-even in pillows $25N - $10N - 0.10($25N) - $4,000 = 0 $12.5N - $4,000 = 0 N = $4,000/$12.5 = 320 pillows Option 3 N = Break-even in pillows $25N - $10N - 0.20($25N) = 0 $10N - $0 = 0 N = $0/$10 = 0 pillows b.
Option 1 profit for 800 pillows = $15 × 800 - $5,010 = $6,990 Option 2 profit for 800 pillows = $12.5 × 800 - 4,000 = $6,000 Option 3 profit for 800 pillows = $10 × 800 = $8,000 Option 3 is the best choice.
c. There is no margin of safety as expected sales are less than break-even sales. Diff: 2 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-4
31) Anna Huk, a florist, operates retail stores in several shopping malls. The average selling price of an arrangement is $30, and the average cost of each sale is $18. A new mall is opening where Karen wants to locate a store, but the location manager is not sure about the rent method to accept. The mall operator offers the following three options for its retail store rentals: 1. paying a fixed rent of $15,000 a month, or 2. paying a base rent of $9,000 plus 10% of revenue received, or 3. paying a base rent of $4,800 plus 20% of revenue received up to a maximum rent of $25,000. Required: a. For each option, compute the break-even sales and the monthly rent paid at break-even. b. Beginning at zero sales, show the sales levels at which each option is preferable up to 5,000 units. Answer: a. Option 1 N = Break-even units $30N - $18N - $15,000 = 0 $12N - $15,000 = 0 N = $15,000/$12 = 1,250 units Rent at break-even = $15,000 Option 2 N = Break-even units $30N - $18N - 0.10($30N) - $9,000 = 0 $9N - $9,000 = 0 N = $9,000/$9 = 1,000 units Rent at break-even = $9,000 + (0.10 × $30 × 1,000) = $12,000 Option 3 N = Break-even units $30N - $18N - 0.20($30N) - $4,800 = 0 $6N - $4,800 = 0 N = $4,800/$6 = 800 units Rent at break-even = $4,800 + (0.20 × $30 × 800) = $9,600 b. Option 3 from 0 to 1,400 units for $4,800 plus $6 per unit. Option 2 from 1,401 to 2,000 for $9,000 plus $3 per unit. Option 1 above 2,000 for $15,000. The preferable option at zero will be Option 3 as it has the lowest fixed cost. The incremental contribution margin between Option 3 and Option 2 is (20% - 10% of revenue; $3/unit). The difference in fixed cost is ($9,000 - $4,800 = $4,200). Therefore, Option 3 will be preferable until the benefit of the lower fixed cost is eliminated by the cost of the lower contribution margin ($4,200/$3 per unit = 1,400 units). Similar calculations are used for determining the level at which Option 1 is preferable over Option 2: ($15,000 $9,000)/$3 per unit = 2,000 units. Diff: 3 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Analyzing Objective: LO 3-4
32) Happy Snow, Inc. manufactures two colours of snowmobiles: white and black. Marketing believes it can sell between 12,000 and 18,000 of either product during the upcoming year. Due to the overall economic slowdown, the company is preparing to produce only one model for next year. The following information has been provided by the accounting department:
Selling price Variable costs
White $2,250 1,350
Black $2,550 1,350
For next year, fixed costs will total $9,450,000 if white is produced and $11,640,000 if black is produced. Plant capacity allows up to 107,800 direct manufacturing hours. White takes 9.8 hours to produce, and black takes 11 hours. The company is subject to a 30 percent income tax rate. Required: Which model should Happy Snow, Inc. produce, assuming the marketing manager believes annual demand of either model will exceed production capacity? Why? Answer: Although black has the highest contribution margin, it also has the highest fixed costs. A break-even analysis could be undertaken to determine if both products are above break-even at plant capacity. Break-even units white = $2,250N - $1,350N - $9,450,000 = $900N - $9,450,000 = $9,450,000/$900 = 10,500 snowmobiles Break-even units black = $2,550N - $1,350N - $11,640,000 = $1,200N - $11,640,000 = $11,640,000/$1,200 = 9,700 snowmobiles Plant capacity of white = 107,800 hrs./9.8 = 11,000 snowmobiles Plant capacity of black = 107,800 hrs./11 = 9,800 snowmobiles
Both snowmobiles have break-even points below their plant capacity, so the decision process can continue. Management may decide that the further away from the break-even point a product can be sold, the safer the operation. Therefore, the margin of safety may be determined for each snowmobile. Remember that black is limited to 9,800 units.
Sales at maximum level Break-even sales Margin of safety
White $24,750,000 23,625,000 $1,125,000
Black $24,990,000 24,735,000 $255,000
Finally, a review of the contribution margin and income statement may be necessary.
Sales Variable costs Contribution margin Fixed costs Operating income
White $24,750,000 14,850,000 $9,900,000 9,450,000 $450,000
Black $24,990,000 13,230,000 $11,760,000 11,640,000 $120,000
Tax computations are not necessary for this decision. Therefore, one can conclude that the white is the best product to produce, even though its contribution margin is less than that of black. Diff: 3 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Analyzing Objective: LO 3-4
33) Kane Johnson, Inc., sells car batteries to service stations for an average of $30 each. The variable cost of each battery is $20, and the monthly fixed manufacturing costs total $10,000. Other monthly fixed costs of the company total $8,000. Required: a. What is the break-even point in batteries? b. What is the margin of safety, assuming sales total $60,000? c. What is the break-even level in batteries, assuming variable costs increase by 20%? d. What is the break-even level in batteries, assuming the selling price goes up by 10%, fixed manufacturing costs decline by 10%, and other fixed costs decline by $100? Answer: a. N = Break-even units $30N - $20N - $10,000 - $8,000 = 0 $10N - $18,000 = 0 N = $18,000/$10 = 1,800 batteries b. Margin of safety = $60,000 - ($30 × 1,800) = $6,000 c.
N = Break-even units $30N - $24N - $10,000 - $8,000 = 0 $6N - $18,000 = 0 N = $18,000/$6 = 3,000 batteries
d. N = Break-even units $33N - $20N - $9,000 - $7,900 = 0 $13N - $16,900 = 0 N = $16,900/$13 = 1,300 batteries Diff: 2 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-4
34) The Grace Maxwell Company sells car batteries to service stations for an average of $85 each. The variable cost of each battery is $48, and the monthly fixed selling costs total $6,000. Other monthly fixed costs of the company total $7,000. Required: a. What is the break-even point in batteries? b. What is the margin of safety, assuming sales total $32,000? c. What is the break-even level in batteries, assuming variable costs increase by 20%? d. What is the break-even level in batteries, assuming the selling price goes up by 10%, fixed selling costs decline by 10%, and other fixed costs decline by $1,000? Answer: a. Break-even units Contribution margin = $85 - $48 = $37 ($6,000 + $7,000)/$37 = 352 batteries b. Margin of safety = $32,000 - ($85 × 352) = $2,080 c.
Break-even units Contribution margin = $85 - (1.2 × $48) = $27.40 ($6,000 + $7,000)/$27.40 =475 batteries d. Break-even units Contribution margin = (1.1 × $85) - $48 = $45.50 ((0.9 × $6,000) + ($7,000 - $1,000))/$45.50 = 251 batteries Diff: 2 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-4
35) Samuel Linkletter is an importer of clay gardening pots. He has a six-month agreement with a local gardening store, West City Gardening, to set up a display to sell his product. Samuel can return any unsold items at no cost. The average selling price for the pots is $18, and, on average, they cost Samuel $7 each. The owner of West City Gardening has proposed two options: 1. A fixed payment of $375 per month, or 2. A fixed payment of $125 per month and 20% of sales revenues earned during the term of the agreement Required: a. Calculate the degree of operating leverage for both options at sales of 540 units b. Explain the results from part a in terms of risk c. What number of units must be sold to generate the same operating income for both options? Which option is favourable below this point, and which option is favourable above this point? Answer: a. Degree of operating leverage = CM/operating income Option 1: CM = ($18 - $7) × 540 units = $5,940 Operating income = $5,940 - ($375 × 6 months) = $3,690 Operating leverage = $5,940/$3,690 = 1.61 Option 2: CM = ($18 - $7 - $3.60) × 540 units = $3,996 Operating income = $3,996 - ($125 × 6 months) = $3,246 Operating leverage = $3,996/$3,246 = 1.23 b. Option 1 has more risk due to the larger fixed cost. c.
$11X - (6 × $375) = $7.40X - (6 × $125) $3.60X - $2,250 = -$750 X = ($2,250 - $750)/$3.60 X = 416.67 or 417 rounded Option 2 is favourable below this point; Option 1 is favourable above this point.
Diff: 3 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Analyzing Objective: LO 3-4
36) Suppose a company decided to automate a production line. Explain what effects this would have on a company's cost structure using CVP terminology. Could these changes have any possible negative effect on the firm? Answer: An automated production line would increase fixed costs through extra amortization on the new machinery and also decrease variable costs due to the elimination of direct labour as a result of automation. This would increase the break-even point. This could possibly have a negative effect on the firm if demand for the product produced by this production line is expected to decline in the future. With high fixed costs and low demand, a decline in profits might be more severe due to the presence of unchanging fixed costs as volume. Diff: 3 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-4
37) Jekyll and Hyde started the BC Restaurant a few years ago. They rented a building, bought equipment, and hired two employees to work full time at a fixed monthly salary. Utilities and other operating charges remain fairly constant during each month. During the past two years the business has grown with average sales increasing one percent a month. This situation pleases both Bonnie and Clyde, but they do not understand how sales can grow by one percent a month while profits are increasing at an even faster pace. They are afraid that one day they will wake up to increasing sales but decreasing profits. Required: Explain why the profits have increased at a faster rate than sales. Answer: The fixed costs per meal served are decreasing with increased volumes, while the contribution margin per meal served remains constant. Apparently, most of the restaurant's expenses are fixed. Therefore, as sales pass the break-even point the profit will increase even faster because the fixed expenses have already been covered. This allows sales to cover only variable expenses before contributing to the profit margin, thereby causing it to increase at a faster rate. Diff: 2 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-4
38) Freddie's company has mostly fixed costs and Valerie's company has mostly variable costs. Which company has the greatest risk of a net loss? Explain why. Answer: Freddie's company has the greatest risk of net loss because more units are required to reach breakeven point than for Valerie. Diff: 2 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-4
3.5 Analyze the implications of uncertainty on decision models. 1) A probability distribution describes the likelihood of each of the mutually exclusive and collectively exhaustive set of events. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-5
2) An expected value is the weighted-average of the outcomes based on the percentage combinations of the incomes. Answer: FALSE Explanation: Expected value is the sum of the risk-weighted average of the outcomes of each choice. Diff: 2 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-5
3) Risk neutral means the decision maker will feel as much pain at losing a dollar as joy at gaining a dollar. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-5
4) "Uncertainty" may be defined as A) the possibility that an actual amount will be the same as an expected amount. B) the possibility that an actual amount will be either higher or lower than the expected amount. C) the possibility that a budgeted amount will be the same as an estimated amount. D) the possibility that the budgeted amount will be lower than the estimated amount. E) the possibility that the budgeted amount will be either higher or lower than the expected amount. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-5
5) An expected value decision model is used for A) determining if a budgeted amount will deviate from an actual amount. B) determining if a budgeted amount will be the same as an actual amount. C) enabling managers to deal with events using a qualitative analysis method. D) enabling managers to deal with uncertainty using quantitative analyses. E) identifying factors that distinguish an action from an event. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-5
6) Expected monetary value may be defined as A) the weighted average of all possible outcomes. B) the probability that each outcome will not occur. C) the weighted average of the financial outcomes with the probability of each outcome serving as the weight. D) the average of all possible outcomes. E) the weighted average of all mutually exclusive outcomes. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-5
7) What would be the expected monetary value for the following data using the probability method? Probability 0.15 0.25 0.30 0.40
Cash Inflows $200,000 $175,000 $160,000 $0
A) $535,000 B) $250,000 C) $121,750 D) $200,000 E) $30,000 Answer: C Explanation: 0.15($200,000) + 0.25($175,000) + 0.3($160,000) = $121,750. Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-5
8) Joan Perry has three booth rental options at the bridal fair where she plans to sell her new product. The booth rental options are: Option 1: $4,000 fixed fee Option 2: $3,000 fixed fee + 5% of all revenues generated at the fair Option 3: 20% of all revenues generated at the fair. The product sells for $150 per unit. She is able to purchase the units for $50.00 each. Which option should Joan choose in order to maximize income assuming there is a 40% probability that 70 units will be sold and a 60% probability that 40 units will be sold? A) Option 1 with expected operating income of $1,200 B) Option 2 with expected operating income of $1,810 C) Option 3 with expected operating income of $3,640 D) Option 3 with expected operating income of $4,160 E) Option 2 with expected operating income of $4,060 Answer: C Explanation: Expected revenues = .4(70 × $150) +.6(40 × $150) = $7,800 Expected CM before options = 0.4(70 × $100) + 0.6(40 × $100) = $5,200 Option 1: $5,200 - $4,000 = $1,200 Option 2: $5,200 - $3,000 -.05($7,800) = $1,810 Option 3: $5,200 - 0.2($7,800) = $3,640* * = maximization of income Diff: 3 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-5
9) Lobster Liquidators will make $500,000 if the fishing season weather is good, $200,000 if the weather is fair, and would actually lose $50,000 if the weather is poor during the season. If the weather service gives a 40% probability of good weather, a 25% probability of fair weather, and a 35% probability of poor weather, what is the expected monetary value for Lobster Liquidators? A) $500,000 B) $750,000 C) $267,500 D) $200,000 E) $232,500 Answer: E Explanation: 0.40($500,000) + 0.25($200,000) + 0.35(-$5,0000) = $232,500 Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-5
10) ABC Grocery needs to know the kilograms of bananas to have on hand each day. Each kilogram of bananas costs $0.25 and can be sold for $0.40. Unsold bananas are worthless at the end of the day. The following demands were found after studying the last six month's sales: 200 kilograms of bananas one-fourth of the time 300 kilograms of bananas one-half of the time 400 kilograms of bananas one-fourth of the time Required: Determine whether ABC Grocery should order 200, 300, or 400 kilograms of bananas. Answer: Quantity Ordered Demand Probability Expected Value 200 300 400 200 $30 $30 $30 $30.00 300 5 45 45 $35.00 400 (20) 20 60 $20.00 p
.25
.50
.25
Demand example: 300 units ordered; but demand is 200 units: ($0.15 × 200) - ($0.25 × 100) = $5 Expected value example: Order 400: ($(20) × 0.25) + (20 × 0.50) + ($60 × 0.25) = 20.00 300 kilograms of bananas should be ordered in order to maximize profit. Diff: 3 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-5
11) Produce Company needs to know the kilograms of apples to have on hand each day. Each kilogram of apples costs $0.50 and can be sold for $0.80. Unsold apples are worthless at the end of the day. The following demands were found after studying the last six month's sales: 200 kilograms of apples 30% of the time 300 kilograms of apples 30% of the time Required: Determine whether Produce Company should order 200, 300, or 400 kilograms of apples. Answer: Quantity Ordered Demand Probability Expected Value 200 300 400 200 $60 $60 $60 $60.00 300 10 90 90 $6600 400 (40) 40 120 $40.00 p
.30
.40
.30
Demand example: 300 units ordered; but demand is 200 units: ($0.30 × 200) - ($0.50 × 100) = $10 Expected value example: Order 400: ($(40) × 0.30) + ($40 × 0.40) + ($120 × 0.30) = $40 Should order 300 kilograms of apples to maximize profit. Diff: 3 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-5
12) Loretta's Grocery needs to know the kilograms of pears to have on hand each day. Each kilogram of pears costs $2.40 and can be sold for $3.40. Unsold pears are worthless at the end of the day. The following demands were found after studying the last six month's sales: 100 kilograms of pears one-fourth of the time 150 kilograms of pears one-half of the time 175 kilograms of pears one-fourth of the time Required: Determine whether Loretta's Grocery should order 200, 300, or 400 kilograms of pears. Answer: Quantity Ordered Demand Probability Expected Value 100 150 175 100 $100 $100 $100 $100.00 150 (20) 150 150 $107.50 175 (80) 90 175 $ 68.75 p
.25
.50
.25
Demand example: 150 units ordered; but demand is 100 units: ($3.40 × 100) - ($2.40 × 150) = $(20) Expected value example: Order 150: ($(20) × 0.25) + ($150 × 0.50) + ($150 × 0.25) = $107.50 150 kilograms of pears should be ordered in order to maximize profit. Diff: 3 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-5
3.6 Interpret the results of CVP analysis in complex strategic, multi-product, and multiple cost driver situations. 1) The relative combination of quantities of products or services that constitute total revenues are called the sales target. Answer: FALSE Explanation: Sales mix is the quantities of various products (or services) that in sum are the total sales volume of a company. Diff: 1 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-6
2) The key to applying CVP analysis in non-profit and service organizations is to measure their output. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-6
3) Changes in product quality could be considered an example of a revenue driver. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-6
4) There is no unique break-even point when there are multiple cost drivers. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-6
5) In multi-product situations when sales mix shifts toward the product with the highest contribution margin, operating income will be higher. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-6
6) To calculate the break-even point in a multi-product situation, one must assume that the sales mix of the various products remains constant. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-6
Use the information below to answer the following question(s). The following information is for Winnie Company: Product A: Revenue Variable Cost Product B: Revenue Variable Cost Total fixed costs are
$4.00 $1.00 $6.00 $2.00 40,000
7) What is the break-even point assuming the sales mix consists of two units of Product A and one unit of Product B? A) 2,000 units of B and 4,000 units of A B) 2,025 units of B and 4,050 units of A C) 4,025 units of B and 8,050 units of A D) 4,000 units of B and 4,000 units of A E) 4,000 units of B and 8,000 units of A Answer: E Explanation: Q = units of product B; and 2Q = units of product A; ($4 - $1)2Q + ($6 - $2)Q - $40,000 = 0 $6Q + $4Q = $40,000 $10Q = $40,000 Q = 4,000 units Product B = 4,000 units; Product A = 8,000 units Diff: 3 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-6
8) What is the operating income assuming actual sales are 300,000 units, and the sales mix is one unit of Product A and two units of Product B? A) $100,000 B) $1,040,000 C) $1,060,000 D) $1,100,000 E) $1,100,100 Answer: C Explanation: Product A Product B Total Sales units
100,000
200,000
300,000
Revenue Variable costs
$400,000 100,000
$1,200,000 400,000
$1,600,000 500,000
Cont. Mar. Fixed costs
$300,000
$800,000
$1,100,000 40,000 $1,060,000
Diff: 3 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-6
9) A hospital receives $1,000,000 monthly in funding from various sources. Annual fixed costs are projected to be $5,000,000 and the variable cost per patient, across all departments is projected to be $534.80. Last year they treated 11,500 patients. The hospital expects a 5% increase in patients this year. A governing bylaw requires that the hospital be run as a non-profit organization. What is the maximum number of patients the hospital can expect to be able to treat assuming the operating income is zero? A) 11,500 B) 12,079 C) 13,000 D) more than 13,000 E) CVP analysis is not relevant for non-profit organizations. Answer: D Explanation: ($1,000,000 × 12) - $5,000,000 = $7,000,000 $7,000,000 ÷ $534.80 = 13,089 Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-6
10) A social agency receives a budget appropriation of $11,000 monthly from the municipality. Annual fixed costs are projected to be $20,000 and the variable cost per client was $238.50 last year. Although the agency projects its case load to increase by the usual 15% this year (as it has done historically), the municipality appropriated funds based on last year's case load. Which of the following strategies would be ineffective in dealing with the expected shortfall in budget appropriation for the agency? A) reducing the number of clients served B) reducing the variable cost of serving a client C) reducing the total fixed costs D) increasing funding from other sources E) changing the measure of output used to calculate service Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-6
11) The agency supervisor of a non-profit organization wants to know how many individuals may receive financial assistance during the year. The organization has fixed costs of $600,000. They aid the unemployed by supplementing their incomes by $8,000 annually, while they seek new employment skills. The budgeted appropriation for the year is $2,000,000. Based on this financial data, how many individuals can receive financial assistance? A) 175 people B) 130 people C) 100 people D) 75 people E) 50 people Answer: A Explanation: $2,000,000 - $8,000Q - $600,000 = 0; $1,400,000 = $8,000Q; Q = 175 people Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-6
12) Fan Inc. is a nonprofit organization that supplies fans during the summer for individuals in need. Fixed costs are $500,000. The fans cost $40.00 each. The organization has a budgeted appropriation of $1,200,000. How many people can receive a fan during the summer? A) 15,000 people B) 17,500 people C) 30,000 people D) 42,500 people E) 80,000 people Answer: B Explanation: $1,200,000 - $40Q - $500,000 = 0; $700,000 = $40Q; Q = 17,500 people Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-6
13) A revenue driver is defined as A) any factor that affects costs and revenues. B) any factor which could cause a change in revenue. C) any factor which could cause a change in the costs of a related revenue object. D) any factor which does not affect costs associated with a revenue. E) any factor that changes when revenue changes. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 3-6
14) White Oaks Company sells only two products, Product A and Product B.
Selling price Variable cost per unit Total fixed costs
Product A $40 $24
Product B $50 $40
Total
$840,000
White Oaks sells two units of Product A for each unit it sells of Product B. White Oaks faces a tax rate of 30%. White Oaks desires a net after-tax income of $73,500. The number of units needed to be sold to achieve the desired after-tax profit would be A) 21,750 units of Product A and 43,500 units of Product B. B) 22,500 units of Product A and 22,500 units of product B. C) 43,500 units of Product A and 21,750 units of Product B. D) 45,000 units of Product A and 22,500 units of Product B. E) 64,616 units of Product A and 32,308 units of Product B. Answer: D Explanation: Desired pre-tax net income $73,500/(1.0 -.3) = $105,000 Weighted contribution margin [2 × ($40 - $24)] + [1 × ($50 - $40)] = $42 Break-even point in composite units is ($105,000 + $840,000)/$42 = 22,500 22,500 composite units is (2 × 22,500) = 45,000 units of A and (1 × 22,500) = 22,500 units of B Diff: 3 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-6
15) Determine the break-even point in units based on the following information: Small Sales VC
$20 14
Large $30 18
Assume a constant mix of 2 units of Small for every 1 unit of Large. Total fixed costs: $48,000 A) 4,000 units of Small and 2,000 units of Large. B) 1,200 units of Small and 400 units of Large. C) 1,600 units of Small and 4,800 units of Large. D) 8,000 units of Small and 2,667 units of Large. E) 1,600 units of Small and 1,600 units of Large. Answer: A Explanation: Small Large Sales $20 $30 Variable costs 14 18 Contribution margin $6 $12 Sales mix × 2 × 1 Contribution margin per mix $12 $12 Total contribution margin per mix = $12 + $12 = $24 Break-even point in composite units = $48,000/$24 = 2,000 Small: 2,000 × 2 = 4,000 units Large: 2,000 × 1 = 2,000 units Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-6
Answer the following question(s) using the information below. The following information is for the Jeffries Corporation: Product A: Revenue Variable Cost
$16.00 $12.00
Product B: Revenue Variable Cost
$24.00 $16.00
Total fixed costs
$77,000
16) What is the break-even point, assuming the sales mix consists of three units of Product A and two units of Product B? A) 10,000 units of A and 5,000 units of B B) 3,750 units of A and 3,750 units of B C) 12,000 units of A and 4,000 units of B D) 18,750 units of A and 6,250 units of B E) 8,250 units of A and 5,500 units of B Answer: E Explanation: N = units of product B, and 3N = units of product A: ($16.00 - $12.00)3N + ($24.00 - $16.00) 2N - $77,000 = 0 $12N + $16N = $77,000 $28N = $77,000 N = 2,750 units Product A = 8,250 units; Product B = 5,500 units Diff: 3 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-6
17) What is the operating income, assuming the actual sales total 25,000 units, and the sales mix is three units of Product A and one unit of Product B? A) $300,000 B) $60,000 C) $225,000 D) $65,000 E) $75,000 Answer: D Explanation: Product A Product B Total Sales units 15,000 10,000 25,000 Revenue Var. costs CM Fixed costs
$240,000 180,000 $60,000
$240,000 160,000 $80,000
$480,000 340,000 $140,000 75,000 $65,000
Diff: 3 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-6
18) If the sales mix shifts to four units of Product A and three unit of Product B, then the weightedaverage contribution margin will be ________. A) $30 B) $16 C) $20 D) $12 E) $40 Answer: E Explanation: (4 × $4) + (3 × $8) = $40 Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-6
19) If the sales mix shifts to four units of Product A and one unit of Product B, then the break-even point will A) increase. B) stay the same. C) decrease. D) decrease then increase. E) increase then decrease. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-6
20) Best Choice sells blouses for women and girls. The average selling price and variable cost for each product are as follows: Women: Selling Price $18.00 Girls: Selling Price $15.00 Women: Variable Cost $12.75 Girls: Variable Cost $10.50 Fixed costs are $30,000 and cannot be separated evenly between the two products. Required: a. What is the break-even point in units for each type of blouse assuming the sales mix is 2:1 in favour of women's blouses? Total sales cannot exceed 7,000 units due to space constraints. b. What is the operating income assuming the sales mix is 2:1 in favour of women's blouses, and sales total 9,900 blouses? Answer: a. N = Break-even in girls' blouses 2N = break-even in women's blouses $15N + $18(2N) - $10.5N - $12.75(2N) - $30,000 = 0 $51N - $36N - $30,000 = 0 $15N - $30,000 = 0 N = $30,000/$15 N = 2,000 blouses Therefore, to break-even, 2,000 girls' blouses and 4,000 women's blouses need to be sold. b. Sales in units Revenue Variable costs Cont. Mar. Fixed costs Operating income
Girls 3,300 $49,500 34,650 $14,850
Women 6,600 $118,800 84,150 $34,650
Total 9,900 $168,300 118,800 $49,500 30,000 $19,500
Diff: 3 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-6
21) Popcorn Inc. currently sells plain popcorn at the ballpark. During a typical month the stand reports a profit of $18,000 with sales of $100,000 and fixed costs of $42,000 and variable costs of $0.64 per box. Next year the company plans to start selling candy-coated popcorn for $3 a box. The candy-coated popcorn will have a variable cost of $0.72. The new equipment and personnel to handle the popcorn will increase monthly fixed costs by $17,616. Two boxes of candy-coated popcorn are expected to sell for every box of plain popcorn. Required: a. Determine the monthly break-even sales in units before adding the candy-coated popcorn product. b. Determine the monthly break-even sales in units of each product during the first year of candycoated popcorn sales assuming a constant sales mix. Answer: a. Contribution margin = Fixed costs + Profit = $42,000 + $18,000 = $60,000 Variable costs = Sales - Contribution margin = $100,000 - $60,000 = $40,000 Units sold = $40,000/$0.64 Selling price = $100,000/62,500 = 62,500 boxes = $1.60 per box N = Break-even units $1.60 - $0.64N - $42,000 = 0 $0.96N - $42,000 = 0 N = $42,000/$0.96 N = 43,750 boxes b. Ratio equal to 1 plain popcorn boxes to 2 candy-coated popcorn boxes. N = Break-even in plain popcorn boxes 2N = Break-even in candy-coated popcorn boxes $3(2)N + $1.60N - $0.72(2N) - $0.64N - $59,616 = 0 $7.60N - $2.08N - $59,616 = 0 N = $5.52N - $59,616 N = $59,616/$5.52 N = 10,800 boxes Therefore, 10,800 boxes of plain popcorn and 21,600 boxes of candy-coated popcorn need to be sold to break-even. Diff: 3 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-6
22) Alexandra Manufacturing Company produces two products, X and Y. The following information is presented for both products: X Y Selling price per unit $36 $24 Variable cost per unit 28 12 Total fixed costs are $234,000. Required: a. Calculate the contribution margin for each product. b. Calculate the break-even point in units of both X and Y if the sales mix is 3 units of X for every unit of Y. c. Calculate break-even volume in total dollars if the sales mix is 2 units of X for every 3 units of Y. Answer: a. X: $36 - $28 = $8 Y: $24 - $12 = $12 b.
(3 × $8) + (1 × $12) = $36 $234,000/$36 = 6,500 units X: 6,500 × 3 = 19,500 units Y: 6,500 × 1 = 6,500 units
c.
(2 × $8) + (3 × $12) = $52 $234,000/$52 = 4,500 units X: 4,500 × 2 = 9,000 × $36 = $324,000 Y: 4,500 × 3 = 13,500 × $24 = $324,000 Total dollar sales = $648,000
Diff: 3 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-6
23) Toronto Best Supply sells only two products, Product X and Product Y.
Selling price Variable cost per unit Total fixed costs
Product X Product Y $25 $45 $20 $35
Total
$350,000
Toronto Best Supply sells three units of Product X for each two units of Product Y it sells; the tax rate is 25%. Required: a. What is the break-even point in units for each product, assuming the sales mix is 3 units of Product X for every two units of Product Y? b. How many units of each product would be sold if Toronto Best Supply desired an after-tax net income of $210,000, using its tax rate of 20%? Answer: a. 3N = break-even in product X 2N = break-even in product Y ($25 - $20) × 3N + ($45 - $35) × 2N - $350,000 = 0 $15N + $20N - $350,000 = 0 $35N - $350,000 = 0 N = $350,000/$35 = 10,000 Therefore, to break even, 30,000 (10,000 × 3) units of Product X and 20,000 (10,000 × 2) units of Product Y need to be sold. b.
3N = number of units of product X 2N = number of units of product Y ($25 - $20) × 3N + ($45 - $35) × 2N - $350,000 = $210,000/(1 -.20) $15N + $20N- $350,000 = $262,500 $35N - $350,000 = $262,500 $35N - $612,500 = 0 N = $612,500/$35 = 17,500
Therefore, to meet the profit goal, 3 × N = 52,500 units of Product X and 2 × N = 35,000 units of Product Y need to be sold. Diff: 3 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-6
24) Mount Carmel Company sells only two products, Product A and Product B.
Selling price Variable cost per unit Total fixed costs
Product A Product B $40 $50 $24 $40
Total
$840,000
Mount Carmel sells two units of Product A for each unit it sells of Product B. Mount Carmel faces a tax rate of 30%. Required: a. What is the breakeven point in units for each product assuming the sales mix is 2 units of Product A for each unit of Product B? b. What is the breakeven point if Mount Carmel's tax rate is reduced to 25%, assuming the sales mix is 2 units of Product A for each unit of Product B? c. How many units of each product would be sold if Mount Carmel desired an after-tax net income of $73,500, facing a tax rate of 30%? Answer: a. N = breakeven in product B 2N = breakeven in product A ($40 × 2N) + ($50 × N) - ($24 × 2N) - ($40 × N) - $840,000 = 0 ($130 × N) - ($88 × N) - $840,000 = 0 $42N - $840,000 = 0 N = $840,000/$42 = 20,000 Therefore, to break even, 40,000 units of Product A and 20,000 units of Product B need to be sold. b. The breakeven point would be the same. At the breakeven point there is no pre-tax income, so the tax rate change is irrelevant in this situation. c.
N = number of units of product B
2N = number of units of product A
($40 × 2N) + ($50 × N) - ($24 × 2N) - ($40 × N) - $840,000 = $73,500/(1 - .3) ($130 × N) - ($88 × N) - $840,000 = $105,000 $42N - $945,000 = 0 N = $945,000/$42 = 22,500 Therefore, to meet the profit goal, 2 × N = 45,000 units of Product A and N = 22,500 units of Product B need to be sold. Diff: 3 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-6
25) Ballpark Concessions currently sells hot dogs. During a typical month, the stand reports a profit of $9,000 with sales of $50,000, fixed costs of $21,000, and variable costs of $0.64 per hot dog. Next year, the company plans to start selling nachos for $3 per unit. Nachos will have a variable cost of $0.72 and new equipment and personnel to produce nachos will increase monthly fixed costs by $8,808. Initial sales of nachos should total 5,000 units. Most of the nacho sales are anticipated to come from current hot dog purchasers, therefore, monthly sales of hot dogs are expected to decline to $20,000. After the first year of nacho sales, the company president believes that hot dog sales will increase to $33,750 a month and nacho sales will increase to 7,500 units a month. Required: a. Determine the monthly break-even sales in dollars before adding nachos. b. Determine the monthly break-even sales during the first year of nachos sales, assuming a constant sales mix of 1 hotdog and 2 units of nachos. c. What is the expected monthly operating income for the second year that nachos are sold?
Answer: a. Contribution margin = Fixed costs + Profit = $21,000 + $9,000 = $30,000 Variable costs
= Sales - Contribution margin = $50,000 - $30,000 = $20,000
Units sold = $20,000/$0.64 = 31,250 units Selling price = $50,000/31,250 = $1.60 per unit Unit Variable costs = $20,000/31,250 = $0.64 N = Break-even units $1.60N - $0.64N - $21,000 = 0 $0.96N - $21,000 = 0 N = $21,000/$0.96 = 21,875 units b.
Ratio equal to 1 hot dog to 2 units of nachos. N = Break-even number of units of hot dogs 2N = Break-even number of units of nachos $3(2)N + $1.60N - $0.72(2N) - $0.64N - $29,808 = 0 $7.60N - $2.08N - $29,808 = 0 N = $29,808/$5.52 = 5,400 hot dogs Therefore, 5,400 hot dogs and 10,800 units of nachos need to be sold to break even.
c. Sales Variable costs Contribution margin Fixed costs Operating income
Hot Dogs $33,750 (13,500) $20,250
Nachos $22,500 (5,400) $17,100
Total $56,250 (18,900) $37,350 (29,808) $7,542
Diff: 3 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 3-6
26) Pennsylvania Valve Company makes three types of valves: Speedy Flow, Sure Flow, and Fine Flow. Each of the three products has a different contribution margin, and the proportions of the three products sold have remained steady over the years. How could Pennsylvania valve compute a break-even point given this situation? Answer: Pennsylvania Valve could consider that it makes a single composite product that represents all three products given the constant sales mix. For example, if the ratio is 3 Speedy, 2 Sure Flow, and 1 Fine Flow, Pennsylvania Valve could calculate a weighted average contribution margin for the composite product based on the contribution margins of the individual products using the relative sales mix as weights. Pennsylvania Valve could then divide the fixed costs by this composite contribution margin to determine how many composite units would be needed to be sold to cover the fixed costs. Then the sales mix could be used to determine how many units of each real product is in each composite units. Thus, if 10,000 composite units were required to break-even and the sales mix is 3 Speedy, 2 Sure Flow, and 1 Fine Flow, Pennsylvania Valve would need to sell 30,000 units of Speedy, 20,000 units of Sure Flow and 10,000 units of Fine Flow to break-even. Diff: 3 Type: ES CPA Competencies: Chapter 3 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 3-6
Cost Accounting: A Managerial Emphasis - Cdn. Ed., 9e (Datar) Chapter 4 Job Costing 4.1 Describe the building-block concepts of costing systems. 1) Cost assignment includes cost allocation for indirect costs and direct costs. Answer: TRUE Explanation: Cost assignment is a general term for assigning costs, whether direct or indirect, to a cost object. Diff: 1 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-1
2) Cost pools are defined as groupings of individual cost items which can range from broad, companywide categories to very narrow categories. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-1
3) A cost allocation base is only financial in nature, and is usually the cost driver of the particular costs being measured. Answer: FALSE Explanation: A cost-allocation base (e.g., number of machine-hours, or number of labour-hours) is a systematic way to link an indirect cost or group of indirect costs to cost objects. Diff: 2 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-1
4) Direct costs are allocated to the cost object using a cost-allocation method. Answer: FALSE Explanation: Indirect costs are allocated to the cost object using a cost-allocation method. Diff: 1 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-1
5) The objective of allocating indirect costs is to measure the underlying usage of indirect resources by jobs. Answer: FALSE Diff: 2 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-1
6) For each cost pool, the indirect cost rate equals the indirect cost pool divided by the cost allocation base. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-1
7) Raw materials that can be traced to a cost object are an example of an indirect cost. Answer: FALSE Explanation: Raw materials are an example of a direct cost. Diff: 1 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-1
8) Fixed and variable costs may be allocated to a cost object. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-1
9) The cost driver of an indirect cost is often used as the cost allocation base. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-1
10) Cost tracing is a specific term for assigning indirect costs. Answer: FALSE Explanation: Cost tracing is a specific term for assigning direct costs Diff: 1 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-1
11) Transferring costs from indirect cost pools to cost objects is called A) cost allocation. B) cost control. C) cost pool. D) cost factoring. E) cost processing. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-1
12) A factor used to systematically link an indirect cost to a cost object is called A) a cost allocation base. B) a cost pool. C) cost assignment. D) a traceable cost. E) a non-traceable cost. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-1
13) Which of the following includes both traced direct costs and allocated indirect costs?
A) cost tracing B) cost pools C) assigned costs D) cost allocation E) cost recording Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-1
14) In general terms the process of assigning costs to a particular product or service is called A) a cost allocation system. B) a cost assignment system. C) a job costing system. D) a process costing system. E) a cost recording system. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-1
15) Which of the following would most likely be a direct cost in a manufacturing company? A) supervision and engineering B) utilities C) repairs D) utilities and repairs E) raw materials Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-1
16) A grouping of individual cost items is called a A) cost objective. B) costing group. C) cost department. D) cost pool. E) cost base. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-1
17) Assigning direct costs to a cost object is called A) cost allocation. B) job costing. C) cost pooling. D) process costing. E) cost tracing. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-1
18) In a costing system A) cost tracing allocates indirect costs. B) cost allocation assigns direct costs. C) there may never be more than one indirect cost pool. D) a cost object should be a product and not a department or a geographic territory. E) a cost allocation base can be either financial or nonfinancial. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-1
19) Which of the following is NOT possible to use as a cost allocation base for manufacturing overhead? A) direct labour dollars B) direct labour hours C) direct material dollars D) direct labour hours or dollars E) indirect labour hours Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-1
20) Cost pools are often organized in conjunction with A) direct labour pools. B) the general ledger control accounts. C) variable and fixed costs. D) direct cost tracing techniques. E) cost-allocation bases. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-1
21) A ________ is anything for which a measurement of costs is desired. A) cost-allocation base B) cost pool C) cost object D) cost-application base Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-1
22) King's Appliance Shop operates retail stores that sell appliances. The cost objects are the individual sales of a given type of appliance and sales support. In July, the following costs were recorded for refrigerators: Professional sales staff commissions Amortization on office space Selling supplies Office staff expenses Customer relations Training expenses Utilities
$84,000 4,000 6,400 24,800 8,600 6,000 1,400
Required: a. Which of the costs will be subject to direct cost tracing? b. What is the total cost for refrigerators? c. What is the total cost of the Sales Support for refrigerators? Answer: a. Professional sales staff commissions are traced to each refrigerator sold. b. Total costs of refrigerators: Professional sales staff commissions Amortization on office space Selling supplies Office staff expenses Customer relations Training expenses Utilities Total
$84,000 4,000 6,400 24,800 8,600 6,000 1,400 $135,200
c. Total costs of sales support: Amortization on office space Selling supplies Office staff expenses Customer relations Training expenses Utilities Total
$4,000 6,400 24,800 8,600 6,000 1,400 $51,200
Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-1
23) The new manager of the insurance division does not understand how the company can have so many overhead rates for assigning costs to the activities of the company's life insurance underwriters. There is one rate schedule for average assignable costs when agents write standard policies. There is another rate schedule which the agents must complete when they write special policies, and these policies are costed out differently from those that are categorized as standard policies. Required: Why might the company have different costing systems with different overhead rates for the standard and specialized policies? Answer: Because the standard policies are written the same way each time, the company knows how long it takes to complete such a policy and the average effort expended by the agents in doing standard policy work. Special policies, on the other hand, are different and the amount of effort and time to complete such a policy is difficult to standardize. The agents are thus required to keep track of their time and expenses in completing such policies. A company needs to be able to accurately price its products, particularly in a competitive industry. While there is no mention of allocation of indirect costs, it appears that the company is using a modified job-costing system to price its various products. Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-1
4.2 Distinguish job costing from process costing. 1) A job costing system assigns costs to a distinct unit or set of units of a product or service. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-2
2) A process costing system assigns costs to groups of similar units during a specified time period and then computes the average unit cost. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-2
3) Process costing is a useful system for tracking the costs of building a house. Answer: FALSE Diff: 2 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-2
4) In each period, job costing divides the total cost of producing an identical or similar product by the total number of units produced to obtain a per-unit cost. Answer: FALSE Explanation: This describes process-costing. Diff: 2 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-2
5) In a job cost system, the cost object is a unit or multiple units of a distinct product or service called a job. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-2
6) Which of the following differentiates job costing from process costing? A) Job costing is used when each unit of output is identical, and process costing deals with unique products. B) Job costing is used when each unit of output is identical and not produced in batches, and process costing deals with unique products produced on large scale. C) Process costing is used when each unit of output is identical, and job costing deals with unique products not produced in batches. D) Job costing is used by manufacturing industries, and process costing is used by service industries. Answer: C Diff: 3 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-2
7) Job costing is ________. A) used by businesses to price identical products B) used by businesses to price unique products for different jobs C) used to calculate equivalent units D) used to calculate the percentage of work completed Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-2
8) Which of the following would be appropriately costed using a process costing system? A) oil refining B) a law firm managing individual legal cases C) assembly of individual aircraft by Bombardier D) movies produced by Lions Gate Entertainment E) audit engagements performed by KPMG Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-2
9) Which of the following would be appropriately costed using a job costing system? A) oil refining B) bank clearing at TD Canada Trust C) beverage production D) replacing a homeowner's furnace E) lumber dealing by Weyerhaeuser Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-2
10) Provide examples of three companies that would likely use job costing, and three companies that would likely use process costing. Answer: Students will offer varied examples. From exercise 4-17: Job costing: a. A CA firm c. A custom furniture manufacturer e. A textbook publisher g. An advertising agency h. An apparel manufacturing factory k. A medical care facility l. A landscaping company n. A movie studio o. A law firm p. A commercial aircraft manufacturer q. A management consulting firm s. A catering service u. An auto repair garage Process costing: b. An oil refinery d. A tire manufacturer f. A pharmaceutical company i. A flour mill j. A paint manufacturer m. A cola-drink-concentrate producer o. A law firm r. A breakfast cereal company t. A paper mill Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-2
11) Describe job-costing and process-costing systems. Explain when it would be appropriate to use each. Answer: Job costing accumulates costs for different jobs required by specific customers. Process costing computes and allocates an equal amount of cost to each product. Job costing is the logical choice when the production process has many distinct products or many heterogeneous jobs, while process costing is typically used when it is not necessary to keep separate cost records for individual jobs and the products are relatively homogeneous. Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-2
4.3 Describe the approaches to evaluating and implementing job-costing systems. 1) Actual costing systems are commonly found in practice because the indirect cost information is readily available. Answer: FALSE Explanation: Actual costing systems are not commonly found in practice because actual costs cannot be computed in a timely manner. Diff: 1 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-3
2) Actual costing allocates indirect costs based on the predetermined indirect-cost rates multiplied by the actual quantities of the cost-allocation bases. Answer: FALSE Explanation: Actual costing allocates indirect costs based on the actual indirect-cost rates multiplied by the actual quantities of the cost-allocation bases. Diff: 2 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-3
3) In the five-step decision-making process which of the following is an element of the last step in the process? A) evaluate performance B) choose among alternatives C) identify uncertainties D) identify the problems E) make predictions about the future Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-3
4.4 Distinguish between actual, budgeted, and normal costing. 1) The difference between the actual costing and normal costing methods is that actual costing uses a budgeted indirect cost rate while normal costing uses an actual indirect cost rate. Answer: FALSE Explanation: The reverse is true. Diff: 1 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-4
2) Actual costing can also be a method of job costing. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-4
3) Actual costing traces direct costs to a cost object by multiplying the budgeted direct cost rate and the actual quantity. Answer: FALSE Explanation: Actual costing traces direct costs to a cost object by multiplying the actual direct cost rate and the actual quantity. Diff: 1 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-4
4) At the end of the year, the direct costs traced to jobs using the budgeted rates will equal actual direct costs. Answer: FALSE Explanation: The actual rate and budgeted rate are different because they are developed at different times. Diff: 2 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-4
5) For normal costing, even though the budgeted indirect-cost rate is based on estimates, indirect costs are allocated to products based on actual levels of the cost-allocation base. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-4
6) Direct costs are traced the same way for actual costing and normal costing. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-4
7) Managers and accountants gather the information that goes into their cost systems through source documents, which are the original records that support journal entries in an accounting system. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-4
8) To smooth seasonal fluctuating levels of output, separate indirect-cost rates should be calculated for each month. Answer: FALSE Explanation: To smooth seasonal costs and fluctuating levels of output, indirect-cost rates should be calculated on an annual basis. Diff: 2 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-4
9) A job cost record (or job cost sheet) is a document where the costs are recorded and accumulated. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-4
10) Place the following steps in the order suggested by the seven steps used to assign costs to individual jobs: A. Select the cost-allocation bases to use for allocating indirect costs to the job B. Compute the rate per unit of each cost-allocation base used to allocate indirect costs to the job C. Compute the total cost of the job by adding all direct and indirect costs assigned to the job D. Identify the direct costs of the job E. Compute the indirect costs allocated to the job F. Identify the indirect costs associated with each cost-allocation base G. Identify the job that is the chosen cost object A) G, F, A, B, E, D, C B) G, D, A, B, F, E, C C) G, A, F, B, E, D, C D) G, A, D, F, B, E, C E) G, D, A, F, B, E, C Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-4
11) The first step in job costing is to A) identify the cost object. B) identify the direct costs. C) select the cost allocation base. D) identify the indirect costs. E) compute the rate per unit. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-4
12) Which of the following is one of the steps used in assigning manufacturing overhead costs to individual jobs? A) combine different cost objects into pools B) assign direct costs to the cost object C) identify the direct cost pools associated with the job D) calculate the direct cost allocation rate for each direct cost pool E) select the cost-allocation base to use in allocating indirect costs to the cost object Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-4
13) Managers and accountants collect most of the cost information that goes into their information systems through A) an information databank. B) computer programs. C) source documents. D) time surveys. E) interviewing workers. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-4
14) A materials requisition record and a labour time record are examples of which of the following? A) normal cost schedule B) job cost sheets C) job cost records D) cost object statements E) source documents Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-4
15) Normal costing refers to A) the average cost. B) costs within the relevant range. C) costs that behave like other similar costs. D) costs included in normal pools. E) allocating indirect costs at budgeted rates. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-4
16) Using normal costing the amount of supervisory salaries to allocate is determined by calculating A) actual direct-cost rates times actual quantities of direct-cost inputs. B) actual indirect-cost rates times actual quantities of cost-allocation bases. C) actual direct-cost rates times budgeted quantities of input. D) budgeted indirect-cost rates times actual quantities of cost-allocation bases. E) budgeted indirect-cost rates times budgeted quantities of cost-allocation bases. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-4
17) The difference between actual costing and normal costing is A) normal costing uses actual direct cost rates. B) actual costing uses actual quantities of direct cost inputs. C) normal costing uses budgeted quantities of actual direct cost inputs and budgeted indirect cost rates. D) actual costing uses actual quantities of cost allocation bases. E) normal costing uses budgeted indirect cost rates. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-4
18) The main advantage of using budgeted cost rates rather than actual cost rates is A) budgeted costs allow managers to have cost information on a timely basis. B) budgeted costs may be subject to short-run fluctuations. C) budgeted indirect-cost rates are known prior to the inception of a new job. D) actual indirect-cost rates are affected by work done on other jobs. E) budgeted rates are just as accurate and require less effort. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-4
19) Which of the following statements about normal costing is TRUE? A) Direct costs and indirect costs are allocated using an actual rate. B) Direct costs and indirect costs are traced using budgeted rates. C) Direct costs are traced using a budgeted rate, and indirect costs are allocated using an actual rate. D) Direct costs are traced using an actual rate, and indirect costs are allocated using a budgeted rate. E) Direct costs are traced by using the actual direct-cost rate times the budgeted quantity of the direct costs input. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-4
20) Which of the following is part of the approach to computing the budgeted indirect cost allocation rate? A) identify the costs which are part of the indirect cost pool B) identify costs associated with the direct cost pool C) estimate the cost items for direct cost pool D) adjust the cost allocation base for variances E) divide the total quantity of the cost allocation base into the total costs in the direct cost pool Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-4
21) A machine shop has a direct materials cost of $1,800,000, a direct labour cost of $4,200,000 (direct labour rate is $40 per hour), and budgeted indirect manufacturing costs of $850,000. Management believes that indirect manufacturing costs increase with direct labour hours. What is the budgeted indirect manufacturing cost rate? A) $2.12 B) $2.33 C) $4.94 D) $8.10 E) $17.00 Answer: D Explanation: $850/($4,200/$40) = $8.10 Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
22) A local financial consulting firm employs 30 full-time employees. The budgeted compensation per employee is $50,000. The annual maximum chargeable time to each client is 1,000 hours. Clients always receive their full amount of time. All labour costs are included in a single direct-cost category and are traced to jobs on a per-hour basis. Any other costs are included in a single indirect-cost pool, allocated according to professional labourhours. Budgeted indirect costs for the year are $1,050,000, and the firm expects to have 60 clients during the coming year. What is the budgeted indirect-cost rate per hour? A) $1,050.00 per hour B) $50.00 per hour C) $35.00 per hour D) $17.50 per hour E) $10.00 per hour Answer: D Explanation: Indirect cost rate per hour = $1,050,000/60,000 = $17.50 per hour Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
23) A local financial consulting firm employs 30 full-time staff. The budgeted compensation per employee is $50,000, for 2,000 hours. All direct labour costs are charged to clients. Any other costs are included in a single indirect-cost pool, allocated according to labour-hours. Actual indirect costs were $750,000. Budgeted indirect costs for the year are $525,000 and the firm expects to have 60 clients during the coming year. What is the total cost of a job which took 27 hours, using normal costing? A) $911.25 B) $1,012.50 C) $27,337.50 D) $30,375.00 E) $50,000.00 Answer: A Explanation: $50,000/2,000 hours = $25.00 per hour DL $525,000/(30 × 2,000) = $8.75 indirect total cost per hour = $33.75 total hours = 27 total cost = $911.25 Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
24) A company employs 25 full-time staff. The company spent $75,000 in advertising in the year (this amount is a period cost with a constant amount spent each year). Budgeted indirect manufacturing costs total $250,000 and the direct labour rate is $15 per hour. Budgeted labour hours were 500,000, and actual labour hours were 524,000. Actual indirect overhead was $274,600. What are the actual and normal indirect-cost rates respectively? A) $0.52 and $0.50 B) $0.50 and $0.52 C) $0.55 and $0.48 D) $0.67 and $0.65 E) $0.65 and $0.67 Answer: A Explanation: actual = 274,600/524,000 = 0.52 normal = 250,000/500,000 = 0.50 Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
25) For 2021, Peter Manufacturing uses machine-hours as the only overhead cost-allocation base. The estimated manufacturing overhead costs are $300,000, and estimated machine hours are 50,000. The actual manufacturing overhead costs are $420,000 and actual machine hours are 60,000. Using job costing, the 2021 budgeted manufacturing overhead rate is ________. (Round the final answer to the nearest cent.) A) $8.40 per machine-hour B) $5.00 per machine-hour C) $7.00 per machine-hour D) $6.00 per machine-hour Answer: D Explanation: $300,000 / 50,000 mh = $6.00 per machine-hour Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
26) Budgeted fixed indirect costs remain constant at $150,000 per month. During high-output months, variable indirect costs are budgeted at $120,000, and during low-output months, budgeted variable costs are $60,000. What are the respective high and low indirect cost rates if budgeted professional labour hours are 9,000 for high-output months and 4,000 for low-output months? A) $31.25 per hour, $87.50 per hour B) $45.00 per hour, $95.00 per hour C) $45.00 per hour, $105.00 per hour D) $56.20 per hour, $105.00 per hour E) $59.00 per hour, $105.00 per hour Answer: C Explanation: $120,000/9,000 = $13.33 $60,000/4,000 = $15.00 $150,000/9,000 = 16.67 $150,000/4,000 = 37.50 High Month = $30.00 Low Month = $5220 Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
27) Fixed costs remain constant at $200,000 per month. During high-output months variable costs are $240,000, and during low-output months variable costs are $80,000. What are the respective high and low indirect cost allocation rates if professional labour-hours are 8,000 for high-output months and 2,000 for low-output months? A) $45.00 per hour; $120.00 per hour B) $45.00 per hour; $45.00 per hour C) $25.00 per hour; $20.00 per hour D) $56.20 per hour; $120.00 per hour E) $25.00 per hour; $100.00 per hour Answer: A Explanation: $200,000/8,000 = 25.00 $200,000/2,000 = $100.00 $240,000/8,000 = 30.00 $80,000/2,000 = 40.00 High Month = $55.00 Low Month = $140.00 Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
Answer the following question(s) using the information below. A trust law office employs full-time attorneys and five paraprofessionals. For the current year, indirect costs were budgeted at $225,000, but actually amounted to $350,000. Direct and indirect costs are applied on a professional labour-hour basis which includes both attorney and paraprofessional hours. Total budgeted labour-hours were 25,000; however, actual labour-hours were 30,000. 28) What is the overhead applied to jobs if the law office uses normal costing? A) $225,000 B) $350,000 C) $291,667 D) $270,000 E) $420,000 Answer: D Explanation: Budgeted rate = $225,000/25,000 hours = $9.00 per hour 30,000 actual hours × $9.00 = $270,000 Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
29) What is the overhead applied to a 500 hour job if the law office uses actual costing? A) $5,200 B) $4,500 C) $3,750 D) $5,000 E) $5,835 Answer: E Explanation: Actual rate = $350,000/30,000 = $11.67 500 hours × $11.67 = $5,835 Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
Use the information below to answer the following question(s). Smile dental office is in the process of changing their costing system. Their system currently uses a single direct cost pool (professional labour) and a single indirect cost pool (staff support). The direct categories in the new, refined costing system include: 1. Professional partner labour. Average total annual compensation of the two partners is $100,000; and, each partner has 2,000 hours of budgeted billable time. 2. Dental assistant labour. Average total annual compensation of the four assistants is $22,500 each, and each assistant has 2,000 hours of budgeted billable time. 3. Office staff. Average total annual compensation of the two staff members is $15,000 each, and each has 2,000 hours of budgeted billable time. The indirect category in the new refined costing system includes professional liability insurance. The budgeted indirect amount is $200,000, and the allocation base is budgeted professional labour hours. The dentist and dental assistants are considered professional labour hours. 30) What is the budgeted indirect cost allocation rate per unit of the allocation base for the professional liability insurance? A) $16.67 B) $25.00 C) $1.67 D) $26.67 E) $12.50 Answer: A Explanation: $200,000/[2,000 × 2) + (2,000 × 4)] = $16.67 per hour Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
31) What is the budgeted direct cost rate per hour for professional partner labour? A) $25.00 per hour B) $50.00 per hour C) $44.50 per hour D) $38.00 per hour E) $46.00 per hour Answer: B Explanation: ($100,000 × 2)/(2,000 × 2) = $50.00 per hour Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
32) What is the budgeted direct cost rate for dental assistant labour? A) $17.875 per hour B) $16.125 per hour C) $13.750 per hour D) $11.250 per hour E) $9.125 per hour Answer: D Explanation: ($22,500 × 4)/(2,000 × 4) = $11.25 per hour Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
33) What is the budgeted direct cost rate per hour for office staff? A) $11.250 per hour B) $9.625 per hour C) $7.500 per hour D) $6.875 per hour E) $6.125 per hour Answer: C Explanation: ($15,000 × 2)/(2,000 × 2) = $7.50 per hour Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
34) What would be the percentage change in the budgeted direct cost rate if they consider hiring one more employee, as part of the office staff? A) 3.0% B) 2.0% C) 1.0% D) 0.5% E) 0% Answer: E Explanation: ($15,000 × 3)/(2,000 × 3) = $7.50; ($7.50 - $7.50)/$7.50 = 0 percent Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
35) What would be the new budgeted direct cost rate if they decided to give all of the dental assistants a 10% raise? A) $13.000 per hour B) $12.375 per hour C) $11.250 per hour D) $9.875 per hour E) $9.125 per hour Answer: B Explanation: [($22,500 × 110%) × 4]/(2,000 × 4) = $12.375 Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
Use the information below to answer the following question(s). A hospital uses a job cost system for all surgery patients. In February, the pre-operating room (PRE-OP) and operating room (OR) had budgeted allocation bases of 1,000 nursing hours and 500 nursing hours, respectively, and budgeted nursing overhead charges were $30,000 and $24,000, respectively. The hospital ward rooms for surgery patients had budgeted overhead costs of $220,000 and 2,500 nursing hours for the month. PRE-OP, OR and the hospital ward have separate indirect cost pools. The hospital uses a budgeted overhead rate for applying overhead to patient stays. For patient Jones, actual hours incurred were six and eight hours, respectively, in the PRE-OP and OR rooms. He was in the hospital for 5 days (120 hours). Other costs related to Jones were:
Patient medicine Direct nursing time
PRE-OP Costs $200 1,200
OR Costs $500 1,750
Ward In-room Costs $2,400 2,700
36) What is the budgeted overhead rate for the hospital floor for surgery? A) $28.00 B) $44.00 C) $45.75 D) $47.75 E) $88.00 Answer: E Explanation: $220,000/2,500 = $88 Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
37) What was the total OR cost for patient Jones? A) $2,418 B) $2,514 C) $2,250 D) $2,634 E) $2,474 Answer: D Explanation: $500 + $1,750 + [8 hours × ($24,000/500 hours)] = $2,634 Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
38) What was the total PRE-OP cost for patient Jones? A) $1,400 B) $1,580 C) $1,624 D) $1,664 E) $1,752 Answer: B Explanation: $200 + $1,200 + [6 × ($30,000/1,000 hours)] = $1,580 Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
Use the information below to answer the following question(s). Andy's Computer Products manufactures keyboards for computers. In June, the two production departments had budgeted allocation bases of 10,000 machine hours in Department 1 and 5,000 direct manufacturing labour hours in Department 2. The budgeted manufacturing overheads for the month were $34,500 and $37,500, respectively. For Job 501, the actual costs incurred in the two departments were as follows:
Direct materials purchased on account Direct materials used Direct manufacturing labour Indirect manufacturing labour Indirect materials used Lease on equipment Utilities
Department 1 $66,000 19,500 31,500 6,600 4,500 9,750 600
Department 2 $106,500 8,100 32,100 5,400 2,850 2,250 750
Job 501 incurred 1,000 machine hours in Department 1 and 300 manufacturing labour hours in Department 2. The company uses a budgeted departmental overhead rate for applying overhead to production. 39) What is the budgeted indirect cost allocation rate for Department 1? A) $3.45 per hour B) $3.75 per hour C) $6.90 per hour D) $7.50 per hour E) $8.00 per hour Answer: A Explanation: $34,500/10,000 = $3.45 Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
40) What is the budgeted indirect cost allocation rate for Department 2? A) $3.45 B) $3.75 C) $4.60 D) $7.50 E) $8.00 Answer: D Explanation: $37,500/5,000 = $7.50 Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
41) What is the total cost assigned to Job 501 based on normal costing? A) $27,600 B) $91,200 C) $96,900 D) $123,900 E) $126,500 Answer: C Explanation: $19,500 + $31,500 + 1,000 ($3.45) + $8,100 + $32,100 + 300 ($7.50) = $96,900 Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
Use the information below to answer the following question(s). Strong Carts manufactures custom carts for a variety of uses. The following data have been recorded for Job 892, which was recently completed. Direct materials used cost $6,300, and the budgeted direct materials were $5,900. There were 180 direct labour hours worked on this job at a direct labour wage rate of $20 per hour; the budgeted direct labour wage rate was $21 per hour. There were 75 machine hours used on this job. The budgeted and actual indirect cost allocation rates are $32 and $29 per machine hour used, respectively. 42) What is the total manufacturing cost of Job 892, using normal costing? A) $9,900 B) $12,300 C) $12,080 D) $12,255 E) $12,075 Answer: B Explanation: $6,300 + (180 × $20) + (75 × $32) = $12,300 Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
43) What is the total manufacturing cost of Job 892 using actual costing? A) $9,900 B) $12,300 C) $12,080 D) $12,255 E) $12,075 Answer: E Explanation: $6,300 + (180 × $20) + (75 × $29) = $12,075 Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
Use the information below to answer the following question(s). Power Engines Ltd. manufactures custom engines for use in the lawn and garden equipment industry. The company allocates manufacturing overhead based on machine hours. Selected data for costs incurred for Job 787 are as follows: Direct materials used Direct labour hours worked Machine hours used Direct labour rate per hour Predetermined overhead rate based on machine hours Budgeted direct labour rate per hour Budgeted direct labour hours Budgeted machine hours Overhead rate based on actual indirect costs and actual machine hours Direct materials budgeted
$4,500 300 400 $14 $20 $20 310 370 $17 $3,900
44) What is the total manufacturing cost of Job 787 using normal costing? A) $17,100 B) $14,960 C) $12,800 D) $16,700 E) $14,300 Answer: D Explanation: $4,500 + (300 hrs. × $14) + (400 hrs. × $20) = $16,700 Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
45) What is the total manufacturing cost of Job 787, using actual costing? A) $17,100 B) $14,960 C) $12,800 D) $15,500 E) $14,300 Answer: E Explanation: $4,500 + (300 hrs. × $14) + (400 hrs. × $17) = $15,500 Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
Use the information below to answer the following question(s).
The following data were taken from the records of Blue Sky Ltd., a manufacturing company. The company has been calculating the actual indirect cost allocation rate using direct labour hours as the allocation base. Actual total indirect costs Budgeted total indirect costs Actual direct labour costs Actual direct labour rate Actual machine hours # of employees
$1,152,000 $1,216,000 $3,200,000 $50 per hour 30,000 hours 32
46) What is the actual indirect cost rate at Blue Sky Ltd., using direct labour hours as the allocation base? A) $384.00 B) $7.68 C) $18.00 D) $19.00 E) $138.89 Answer: C Explanation: $1,152,000/64,000 = $18.00 Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
47) What is the actual indirect cost rate at Blue Sky Ltd. using machine hours as the allocation base? A) $60.67 B) $10.67 C) $7.89 D) $4.05 E) $38.40 Answer: E Explanation: 1,152,000/30,000 = $38.40 Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
48) Normandy Company's actual indirect cost pool amounted to $1,400,000, and the direct labour pool was $5,400,000. Overhead is allocated on the basis of direct labour hours. Actual and budgeted direct labour hours were 25,000 and 30,000 for the period. What is the manufacturing overhead cost allocation rate using actual direct labour hours as the cost allocation base? A) $46.67 B) $272.00 C) $75.00 D) $226.67 E) $56.00 Answer: E Explanation: $1,400,000/25,000 = $56.00 Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
49) A company currently has 30 full-time employees. Actual time for each employee was as follows: billable time for clients vacation time professional development nonbillable time sick leave
2,000 hours 200 hours 175 hours 0 hours 125 hours
Consumer demand for the company's services is at 100 percent of time available. Each employee receives a salary of $75,000 per year. What is the total actual indirect cost allocation rate if management believes that clients should be charged for the employees' benefits? A) $10.00 B) $6.67 C) $30.00 D) $6.00 E) $37.50 Answer: D Explanation: (200 + 175 + 125)/(2,000 + 200 + 175 + 125) × 75,000 = $15,000 $15,000/2,500 = $6.00 per hour Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
50) Michael wants to identify the total cost for computing the corporate tax return he prepared for his client. Labour is the only direct cost at $50 per hour. Indirect costs are $60 per labour hour. What is the total direct cost, indirect cost, and job cost, respectively, if 15 hours are spent preparing the tax return? A) $700, $850, $1,550 B) $750, $800, $1,550 C) $750, $900, $1,650 D) $800, $640, $1,440 E) $800, $900, $1,440 Answer: C Explanation: Direct cost 15 hours × $50.00 = $750 Indirect cost 15 hours × $60.00 = 900 $1,650 Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
51) Last week Job # WPP 298 was charged: DM of $4,606; DL of $1,579; and, MOH of $3,960 based on machine hours. The materials requisition record for this week showed an additional purchase of 10 brackets at a unit cost of $16; the direct labour costs were the same as the first week; and, the total machine hours for both weeks are now 140 hours at $45 per machine hour. Calculate the revised total job cost. (direct materials + direct labour + manufacturing overhead). A) $10,145 B) $11,884 C) $12,645 D) $18,184 E) $14,224 Answer: E Explanation: Direct materials = $4,606 + (10 × $16) = $4,766 Direct labour = 1,579 × 2 = 3,158 Manufacturing OVH = 140 × $45 = 6,300 $14,224 Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
52) Clyde Company gathered the following information for the year that ended December 31: Direct labour cost incurred for the year Manufacturing overhead costs Beginning finished goods inventory Work-in-process inventory, Dec. 31 Finished goods inventory, Dec. 31 Cost of goods sold Estimated direct labour hours
$240,000 $180,000 $200,000 $55,000 $67,500 $141,000 300,000
Clyde Company uses a job costing system. What is the indirect cost allocation rate for the year, using direct labour hours as the allocation base? A) $1.11 per direct labour hour B) $0.90 per direct labour hour C) $1.20 per direct labour hour D) $0.60 per direct labour hour E) $0.47 per direct labour hour Answer: D Explanation: $180,000/300,000 = $.60 Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
53) Zoom Tech Moldings allocates manufacturing overhead to jobs based on machine hours. The company has the following estimated costs for the upcoming year: Direct materials used Direct labour costs Salary of factory supervisor Advertising expense Heating and lighting costs for factory Depreciation on factory equipment Sales commissions
$25,000 $62,000 $41,000 $33,000 $21,000 $9,000 $8,000
The company estimates that 1,800 direct labour hours will be worked in the upcoming year, and 2,000 machine hours will be used during the year. The predetermined indirect allocation rate per machine hour is closest to ________. A) $56 B) $36 C) $100 D) $15 E) $40 Answer: B Explanation: $41,000 + $21,000 + $9,000 = $71,000/2,000 = $36 Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 4-4
54) Cloudy Enterprises manufactures digital video equipment. For each unit, $1,475 of direct material is used, and there is $1,500 of direct manufacturing labour at $30 per hour. Manufacturing overhead is applied at $35 per direct manufacturing labour hour. Calculate the cost of each unit. A) $2,975 B) $4,025 C) $1,750 D) $3,150 E) $4,725 Answer: E Explanation: $1,475 + $1500 + (($1,500/30 hours) × 35 hours) = $4,725 Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
55) Be Sure Company does residential real estate appraisals. There are 40 professionals on its staff. Each professional is allotted the following number of hours per year: Budgeted billable time for clients 1,800 hours Budgeted vacation time 180 hours Budgeted professional development 100 hours Budgeted nonbillable time due to lack of demand 0 hours Budgeted sick leave 120 hours The company receives more jobs than it can handle, and therefore, rejects most out of town work. The budgeted salary for each professional is $44,000 per year with fringe benefits of $11,000. During the previous year, the actual salaries were $46,500, plus fringe benefits of $11,500. Required: a. What was the total budgeted direct cost rate if the company believes that clients should be charged directly for its employees' salaries and benefits? b. What was the budgeted direct cost rate if the company wants to charge clients for employee vacation, sick leave, and professional development as an indirect cost? Answer: a. Total budgeted direct cost rate = ($44,000 + $11,000)/1,800 = $30.56 per hour b. Total budgeted direct cost rate = $44,000/1,800 = $24.45 per hour Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
56) Landscape Architects provides landscape consulting services to clients that range from small businesses to large corporations. The budgeted rate charged to customers for consulting is $100 per hour. The budgeted overhead for customer support costs is $55 per hour, and the budgeted other direct-cost pool rate is $35 per hour. The budgeted hourly rates charged to jobs are $40 for the architect and $25 for the assistants. Jobs #300 and #301 for Sheridan College incurred 90 and 240 hours respectively. Each job included one licensed architect and two assistants. The architect worked 12 hours on Job #300 and 60 hours on Job #301. Required: a. Identify the cost objects. b. Determine the costs of each job using budgeted overhead rates. Answer: a. There are two cost objects, Job #300 and Job #301. b. Direct costs @ $35 × 90, 240 Architects @ $40 × 12, 60 Assistants @ $25 × 78, 180 Customer support @ $55 × 90, 240 Total costs
Job #300 $3,150 480 1,950 4,950 $10,530
Job #301 $8,400 2,400 4,500 13,200 $28,500
Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
57) Professional Recruiting provides recruiting consulting services to clients that range from small businesses to large corporations. The budgeted rate charged to customers for consulting is $150 per hour. The budgeted overhead for customer support costs is $32 per hour, and the budgeted other direct-cost pool rate is $25 per hour. The budgeted hourly rates charged to jobs are $65 for the consultants and $22 for the assistants. Jobs #678 and #679 for Compudan Manufacturing incurred 60 and 75 hours respectively. Each job included one consultant and two assistants. The consultant worked 40 hours on Job #678 and 60 hours on Job #679. Required: a. Identify the cost objects. b. Determine the costs of each job using budgeted overhead rates. Answer: a. There are two cost objects, Job #678, and Job #679. b. Direct costs @ $25 × 60, 75 Consultants @ $65 × 40, 60 Assistants @ $22 × 20, 15 Customer support @ $32 × 60, 75 Total cost
Job #678 $1,500 2,600 440 1,920 $6,460
Job #679 $1,875 3,900 330 2,400 $8,505
Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
58) A wholesale automobile company that buys and resells cars has the following data for June:
Cost Total cost of sales Buyers' expenses Cleaning of sold units Customer relations Rent on showroom Sales staff commissions Utilities
Units bought Units sold
Actual 2,600 2,500
Assignment # of units sold # of units bought Cleaning dept. Sales support # of units bought # of units sold Sales support
Actual $ 30,000,000 162,000 150,000 244,000 20,000 300,000 3,500
Required: a. Compute the costing rates for each cost driver using actual costing. b. Calculate the total cost assigned to the each vehicle sold. Answer: a. Costing rates Actual
b.
Units sold cost
$30,300,000/2,500 = $12,120
Buying cost
$182,000/2,600 = $70
Cleaning cost
$150,000/2,500 = $60
Sales support cost
$247,500/2,500 = $99
Actual = $12,120 + $70 + $60 + $99 = $12,349
Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
59) General Hospital uses a job-costing system for all patients. In March, the Critical Care and Special Care facilities had cost allocation bases of 5,000 nursing days and 4,000 nursing days, respectively. The nursing care charges for each department for the month were $2,106,000 and $1,500,000, respectively. The General Care area had costs of $2,700,000 and 8,500 nursing days for the month. Patient Jim Hansen spent 5 days in Critical Care, 4 days in Special Care, and 21 days in General Care in March. Required: a. Determine the cost allocation rate for each department. b. What are the total charges to Mr. Hansen if he was in the facility the entire month of March? Answer: a. Overhead rate Critical Care = $2,106,000/5,000 nursing days = $421.20 per day. Overhead rate Special Care = $1,500,000/4,000 nursing days = $375 per day Overhead rate General Care = $2,700,000/8,500 nursing days = $317.65 per day b.
Mr. Hansen: Critical care $421.20 × 5 days = Special care $375.00 × 4 days = General care $317.65 × 21 days = overhead charges
$2106.00 1,500.00 6,670.65 $10,276.65
Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
60) Healthy County Hospital uses a job-costing system for all patients. In June, the nursing care charges for each department and the cost allocation bases of nursing days are as follows: June Nursing costs Nursing days
Critical Care $2,480,000 5,000
Special Care $1,644,000 4,000
General Care $1,280,400 8,000
Patient Ms. Graves spent six days in Critical Care and eight days in Special Care during the month of June. The remainder of the 30-day month was spent in the General Care area. Required: a. Determine the budgeted overhead rate for each department. b. What are the total charges to Ms. Graves if she was in the facility the entire month? Answer: a. Overhead rate critical care = $2,480,000/5,000 nursing days = $496.00 per day. Overhead rate special care = $1,644,000/4,000 nursing days = $411.00 per day Overhead rate general = $1,280,400/8,000 nursing days = $160.05 per day b. Ms. Graves: Critical care Special care General care Total overhead charges
$496.00 × 6 days = $411.00 × 8 days = $160.05 × 16 days =
$2,976.00 3,288.00 2560.80 $8,824.80
Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
61) GetBetter County Hospital uses a job-costing system for all patients who have surgery. In March, the Pre-Operating Room (PRE-OP) and Operating Room (OR) had budgeted allocation bases of 4,000 nursing hours and 2,000 nursing hours, respectively. The budgeted nursing overhead costs for each department for the month were $168,000 and $132,000, respectively. The hospital floor for surgery patients had budgeted overhead costs of $1,200,000 and 15,000 nursing hours for the month. For patient Fred Adams, the actual hours incurred were eight and four hours, respectively, in the PRE-OP and OR rooms. He was in the hospital for 4 days (96 hours). Other costs related to Adams were:
Patient medicine Direct nursing time
PRE-OP Costs $200 $1,000
OR Costs $500 $2,000
In-room Costs $2,400 $3,000
The hospital uses a budgeted overhead rate for applying overhead to patient stays. Required: What is the total cost of the stay of patient Fred Adams? Answer: Nursing overhead rate PRE-OP = $168,000/4,000 hrs. = $42 per hr. Nursing overhead rate OR
= $132,000/2,000 hrs. = $66 per hr.
Overhead rate for surgery floor = $1,200,000/15,000 hrs. = $80 per hr. Patient Fred Adams: PRE-OP Patient medicine $200 Direct nursing time 1,000 Nursing overhead: PRE-OP ($42 × 8) 336 OR ($66 × 4) In-room ($80 × 96) 0 Total $1,536
OR $500 2,000
264 0 $2,764
In-room $2,400 3,000
Totals $3,100 6,000
7,680 $13,080
336 264 7,680 $17,380
Diff: 3 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
62) A local attorney employs ten full-time professionals. The budgeted compensation per employee is $75,000. The maximum billable hours for each client are 200. Clients always receive their full amount of time. All professional labour costs are included in a single direct cost category and are traced to jobs on a per-hour basis. Any other costs are included in a single indirect cost pool, allocated according to professional labour-hours. Budgeted indirect costs for the year are $1,000,000 and the firm had 20 clients. Required: a. What is the direct labour budgeted cost rate per hour? b. What is the indirect cost pool budgeted cost rate per hour? Answer: a. Total direct cost = $75,000 × 10 = $750,000 Total hours = 200 × 20 = 4,000 Direct cost rate per unit = $750,000/4,000 = $187.50 per hour b. Indirect cost rate per unit = 1,000,000/4,000 = $250.00 per hour Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
63) A local attorney employs ten full-time professionals. The budgeted compensation per employee is $80,000. The maximum billable hours for each client are 400. Clients always receive their full amount of time. All professional labour costs are included in a single direct cost category and are traced to jobs on a per-hour basis. Any other costs are included in a single indirect cost pool, allocated according to professional labour-hours. Budgeted indirect costs for the year are $400,000 and the firm had 20 clients. Required: a. What is the direct labour budgeted cost rate per hour? b. What is the indirect cost pool budgeted cost rate per hour? Answer: a. Total direct cost = $80,000 × 10 = $800,000 Total hours = 400 × 20 = 8,000 Direct cost rate per unit = $800,000/8,000 = $100.00 per hour b.
Indirect cost rate per unit = $400,000/8,000 = $50.00 per hour
Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
64) A local engineering firm is bidding on a design project for a new client. The total budgeted direct labour costs for the firm are $800,000. The total budgeted indirect costs are $1,200,000. It is estimated that there are 16,000 billable hours in total. Required: a. What is the budgeted direct labour cost rate? b. What is the budgeted indirect cost allocation rate assuming direct labour cost is the cost allocation base? c. What should be the engineering firm bid on the project if the direct labour hours are estimated at 500 hours? Answer: a. $800,000/16,000 = $50/hour b. $1,200,000/$800,000 = 150% of direct labour cost c. (500 hours × $50 = $25,000) + ($25,000 × 1.5) = $62,500 Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
65) Oakland Manufacturing is a small textile manufacturer using machine-hours for the single indirect cost allocation rate to allocate indirect manufacturing costs to the various jobs contracted during the year. The following estimates are provided for the coming year for the company and for the Maize High School Science Olympiad job.
Direct materials Direct manufacturing labour Manufacturing overhead costs Machine-hours
Company $150,000 $65,000 $40,000 5,000 mh
Maize High School Job $1,500 $490 45 mh
Required: a. For Oakland Manufacturing, determine the annual manufacturing indirect cost allocation rate. b. Determine the amount of manufacturing overhead costs allocated to the Maize High School job. c. Determine the estimated total manufacturing costs for the Maize High School job. Answer: a. Manufacturing indirect cost allocation rate = $40,000/5,000 mh = $8.00 per mh b.
$360 estimated manufacturing overhead costs = 45 mh × $8.00 per mh
c.
Direct materials Direct manufacturing labour Manufacturing overhead costs Estimated total manufacturing costs
$1,500 490 360 $2,350
Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
66) Madeline Manufacturing is a small textile manufacturer using machine-hours for the single indirect cost rate to allocate manufacturing overhead costs to the various jobs contracted during the year. The following estimates are provided for the coming year for the company and for the Patterson High School Science Olympiad jacket job.
Direct materials Direct manufacturing labour Manufacturing overhead costs Machine-hours
Company $75,000 $45,000 $20,000 2,000 mh
Patterson High School Job $2,500 $450 12 mh
Required: a. For Madeline Manufacturing, determine the annual manufacturing overhead cost-allocation rate. b. Determine the amount of manufacturing overhead costs allocated to the Patterson High School job. c. Determine the estimated total manufacturing costs for the Patterson High School job. Answer: a. Manufacturing overhead cost-allocation rate = $10.00 per mh = $20,000/2,000 mh b.
$120 estimated manufacturing overhead costs = 12 mh × $10.00 per mh
c.
Direct materials Direct manufacturing labour Manufacturing overhead costs Estimated total manufacturing costs
$2,500 450 120 $3,070
Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
67) ABC Manufacturing is a small textile manufacturer using machine-hours for the single indirect cost rate to allocate manufacturing overhead costs to the various jobs contracted during the year. The following estimates are provided for the coming year for the company and for the Queen Elizabeth High School Football Team jacket job.
Direct materials Direct manufacturing labour Manufacturing overhead costs Machine-hours
Company $295,000 $152,000 $72,000 6,000 mh
QE High School Job $1,800 $1,100 40 mh
Required: a. For ABC Manufacturing, determine the annual manufacturing overhead cost-allocation rate. b. Determine the amount of manufacturing overhead costs allocated to the QE High School job. c. Determine the estimated total manufacturing costs for the QE High School job. Answer: a. Manufacturing overhead cost-allocation rate = $12.00 per mh = $72,000/6,000 mh b.
$480 estimated manufacturing overhead costs = 40 mh × $12.00 per mh
c.
Direct materials Direct manufacturing labour Manufacturing overhead costs Estimated total manufacturing costs
$1,800 1,100 480 $3,380
Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
68) High Hills Manufacturing uses departmental cost driver rates to apply manufacturing overhead costs to products. Manufacturing overhead costs are applied on the basis of machine hours in the Machining Department and on the basis of direct labour hours in the Assembly Department. The following estimates were provided at the beginning of the current year:
Direct labour hours Machine hours Direct labour cost Manufacturing overhead costs
Machining 10,000 dlh 100,000 mh $80,000 $250,000
Assembly 90,000 dlh 5,000 mh $720,000 $360,000
The accounting records of the company show the following data for Job #846:
Direct labour hours Machine hours Direct material cost Direct labour cost
Machining 50 dlh 170 mh $2,700 $400
Assembly 120 dlh 10 mh $1,600 $900
Required: a. Compute the manufacturing indirect cost allocation rate for each department. b. Compute the total cost of Job #846. c. Provide possible reasons why High Hills Manufacturing uses two different cost allocation rates. Answer: a. Machining Department cost-allocation rate: $2.50/mh = $250,000/100,000 mh Assembly Department cost-allocation rate: $4.00/dlh = $360,000/90,000 dlh b.
Total cost of Job #846 is $6,505 = Direct materials $4,300 + Direct labour $1,300 + Manufacturing overhead costs $905 (Machining $425 + Assembly $480).
c. Ideally, the cost-allocation base should reflect the factors that cause manufacturing overhead costs to increase. Apparently, Hill regards the use of machines as the principal cause of manufacturing overhead costs (such as amortization and repairs) in the Machining Department. In contrast, Hill regards direct labour-hours as the principal cause of manufacturing overhead costs (such as indirect labour) in the Assembly Department. Diff: 3 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
69) First Manufacturing uses departmental cost driver rates to apply manufacturing overhead costs to products. Manufacturing overhead costs are applied on the basis of machine hours in the Machining Department and on the basis of direct labour hours in the Assembly Department. The following estimates were provided at the beginning of the current year:
Direct labour hours Machine hours Direct labour cost Manufacturing overhead costs
Machining 15,000 dlh 120,000 mh $450,000 $360,000
Assembly 60,000 dlh 4,000 mh $1,200,000 $120,000
The accounting records of the company show the following data for Job #922:
Direct labour hours Machine hours Direct material cost Direct labour cost
Machining 50 dlh 170 mh $3,900 $1,650
Assembly 120 dlh 10 mh $1,800 $2,280
Required: a. Compute the manufacturing indirect cost allocation rate for each department. b. Compute the total cost of Job #922. c. Provide possible reasons why First Manufacturing uses predetermined rather than actual indirect manufacturing cost overhead rates. Answer: a. Machining Department cost-allocation rate: $3.00/mh = $360,000/120,000 mh Assembly Department cost-allocation rate: $2.00/dlh = $120,000/60,000 dlh b.
Total cost of Job #922 is $10,380 = Direct materials $5,700 + Direct labour $3,930 + Manufacturing overhead costs $750 (Machining $510 + Assembly $240).
c. Managers want to know manufacturing costs (and other costs, such as marketing costs) for ongoing uses, including pricing jobs, monitoring and managing costs, evaluating the success of the job, learning about what worked and what didn't, bidding on new jobs, and preparing interim financial statements. Because of the need for immediate access to job costs, few companies wait to allocate overhead costs until year-end when the actual manufacturing overhead is finally known. Instead, a predetermined or budgeted indirect-cost rate is calculated for each cost pool at the beginning of a fiscal year, and overhead costs are allocated to jobs as work progresses. Diff: 3 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
70) Jonson Company has two departments, A and B. Overhead is applied based on budgeted direct labour cost in Department A and budgeted machine hours in Department B. The following additional information is available. Budgeted Amounts Direct labour cost Factory overhead Machine hours
Department A $180,000 $225,000 51,000 mh
Department B $165,000 $180,000 40,000 mh
Actual data for Job #10 Department A Direct materials requisitioned $10,000 Direct labour cost $11,000 Machine hours 5,000 mh
Department B $16,000 $14,000 3,000 mh
Required: a. Compute the budgeted factory indirect cost allocation rate for Department A. b. Compute the budgeted factory indirect cost allocation rate for Department B. c. What is the total overhead cost of Job 10? d. If Job 10 consists of 50 units of product, what is the unit cost of this job? Answer: a. $225,000/$180,000 = 125% b. $180,000/40,000 hrs. = $4.50 per hour c. ($11,000 × 125 percent) + ($4.50 × 3,000 hrs.) = $27,250 d. $10,000 + $16,000 + $11,000 + $14,000 + $27,250 = $78,250 $78,250/50 units = $1,565 per unit Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
71) Sanders Company has two departments, X and Y. Overhead is applied based on budgeted direct labour cost in Department X and budgeted machine hours in Department Y. The following additional information is available. Budgeted Amounts Direct labour cost Factory overhead Machine hours
Department X $130,000 $208,000 41,000 mh
Department Y $205,000 $240,000 80,000 mh
Actual data for Job #11 Department X Direct materials requisitioned $12,000 Direct labour cost $17,000 Machine hours 3,500 mh
Department Y $18,000 $15,000 5,200 mh
Required: a. Compute the budgeted factory indirect cost allocation rate for Department X. b. Compute the budgeted factory indirect cost allocation rate for Department Y. c. What is the total overhead cost of Job 11? d. If Job 11 consists of 50 units of product, what is the unit cost of this job? Answer: a. $208,000/$130,000 =1.6 b. $240,000/80,000 hrs. = $3.00 per hour c. ($17,000 × 1.6) + ($5,200 × 3) = $42,800 d. $12,000 + $17,000 + $18,000 + $15,000 + $42,800 = $104,800 $104,800/50 units = $2,096 per unit Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
72) Sambell Manufacturing uses a predetermined manufacturing overhead rate to allocate overhead to individual jobs. At the beginning of the year, the company expected to incur the following: Manufacturing overhead costs Direct labour cost Machine hours
$280,000 500,000 30,000
At the end of the year, the company had actually incurred the following: Direct labour cost $920,000 Depreciation on manufacturing plant and equipment 250,000 Property taxes on plant 35,000 Sales salaries 12,000 Delivery drivers' wages 8,000 Plant janitors' wages 10,000 Machine hours 25,500 hours Required: 1. Compute Sambell's indirect cost allocation rate based on labour cost. 2. Compute Sambell's indirect cost allocation rate based on machine hours. 3. How much overhead was allocated during the year if the allocation base was direct labour cost? 4. How much manufacturing overhead was incurred during the year? Answer: 1. Estimated manufacturing overhead $280,000 Divided by expected direct labour cost $500,000 = predetermined overhead rate $0.56 of direct labour cost 2.
Estimated manufacturing overhead Divided by expected machine hours = predetermined overhead rate
3.
Actual direct labour cost Multiplied by predetermined overhead rate = Manufacturing overhead allocated
4.
$280,000 30,000 $9.33 per machine hour
×
$920,000 0.56 $515,200
Actual manufacturing overhead = $250,000 + $35,000 + $10,000 = $295,000
Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
73) Northern Manufacturing uses a predetermined manufacturing overhead rate to allocate overhead to individual jobs. At the beginning of the year, the company expected to incur the following: Manufacturing overhead costs Direct labour cost Machine hours
$320,000 640,000 20,000
At the end of the year, the company had actually incurred the following: Direct labour cost Depreciation on manufacturing plant and equipment Property taxes on plant Sales salaries Delivery drivers wages Plant janitors wages Machine hours
$920,000 290,000 55,000 12,000 8,000 40,000 20,500 hours
Required: 1. Compute Northern's indirect cost allocation rate based on labour cost. 2. Compute Northern's indirect cost allocation rate based on machine hours. 3. How much overhead was allocated during the year if the allocation base was machine hours? 4. How much manufacturing overhead was incurred during the year? Answer: 1. Estimated manufacturing overhead $320,000 Divided by expected direct labour cost $640,000 = allocation rate 50% of direct labour cost 2.
Estimated manufacturing overhead Divided by expected machine hours = allocation rate
$320,000 20,000 $16.00 per machine hour
3.
Actual machine hours Multiplied by predetermined overhead rate = Manufacturing overhead allocated
4.
Actual manufacturing overhead = 290,000 + 55,000 + 40,000 = $385,000
20,500 × $16 $328,000
Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-4
74) An accounting firm provides tax consulting for estates and trusts. Their job costing system has a single direct cost category (professional labour) and a single indirect cost pool (research support). The indirect cost pool contains all the costs except direct personnel costs. All budgeted indirect costs are allocated to individual jobs using actual professional labour hours. Required: a. Discuss the reasons a consulting firm might use normal costing in its job system rather than actual costing. b. What might be some ways for the firm to change from a one pool allocation concept? Answer: a. Budget rates are normally used because the actual costs of performing the work will not usually be available until sometime after a job is completed. Decisions about billing a client for services rendered generally must be made immediately after the job is completed. Also, actual costs may reflect short-run changes in the environment which may distort the billing process. Budgeted costs are not affected by weekly or monthly fluctuations and therefore offer a stable comparison and assignment of costs throughout the accounting cycle. b. Having separate professional labour hour rates assists in assigning the personnel costs to jobs closest to their real values. This helps to maintain different costs for jobs which have the same number of hours but a different mix of professionals doing the job. Seldom is there only one cause and effect relationship between a job and the tasks performed on the job; therefore, it may also be a good idea to develop multiple indirect cost assignments (i.e., one for staff support and others for such items as computer support or general administrative support). Diff: 3 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-4
75) Explain how a budgeted indirect cost allocation rate is determined. Answer: Manufacturing overhead cost allocation rates are determined by dividing the budgeted cost of the resources committed to the manufacturing overhead activity by the budgeted capacity made available by the resources committed to the activity. Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-4
76) What is the difference between an actual cost system and a normal cost system? Answer: An actual cost system is one that traces direct costs to a cost object by using the actual directcost rates times the actual quantities of direct-cost inputs, and allocates indirect costs based on the actual indirect cost rates times the actual quantities of the cost-allocation bases. A normal cost system is one that traces direct costs to a cost object by using the actual direct-cost rates times the actual quantities of directcost inputs, and allocates indirect costs based on the budgeted indirect cost rates times the actual quantities of the cost-allocation bases. Both systems trace direct costs to jobs the same way. An actual cost system traces indirect costs to jobs using actual indirect cost rates, but a normal cost system uses budgeted indirect cost rates to trace indirect costs to jobs. Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-4
77) In a job-costing system, explain why it is necessary to apply indirect costs to production through the use of a budgeted indirect-cost rate. Answer: First, actual manufacturing overhead costs are not known until the end of year. To price and invoice jobs in a timely manner, annual manufacturing overhead costs need to be estimated and allocated to specific jobs during the accounting period. Secondly, manufacturing overhead costs are usually not incurred evenly throughout the year. The use of a manufacturing overhead cost allocation rate evenly distributes manufacturing overhead costs over the entire year. Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-4
For each item below indicate the source documents that would most likely authorize the journal entry in a job-costing system. A) purchase invoice B) labour time card C) materials requisition record D) labour time card E) sales invoice F) job-cost record 78) direct materials purchased Diff: 1 Type: MA CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-4
79) direct materials used Diff: 1 Type: MA CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-4
80) direct manufacturing labour Diff: 1 Type: MA CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-4
81) indirect manufacturing labour Diff: 1 Type: MA CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-4
82) finished goods control Diff: 1 Type: MA CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-4
83) cost of goods sold Diff: 1 Type: MA CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-4
Answers: 78) A 79) C 80) B 81) D 82) F 83) E
4.5 Analyze the flow of costs from direct and indirect cost pools to inventory accounts, including adjustments for over- and underallocated costs. 1) The Work-in-Process Control account tracks job costs from the time jobs are started until they are completed. Answer: TRUE Explanation: Diff: 1 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-5
2) Underallocated indirect costs cannot occur when normal costing is used. Answer: FALSE Explanation: In normal costing there will almost always be a variance between the amount allocated using a budgeted rate and the actual indirect costs incurred. Diff: 2 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-5
3) Proration is the equalization of the overhead allocation rates between finished goods inventory and work-in-process inventory. Answer: FALSE Explanation: Proration also included cost of goods sold. Diff: 1 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-5
4) Instead of proration, a company could choose to simply write-off the balance of any underallocated overhead to cost of goods sold providing the amount is immaterial. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-5
5) The balance in the manufacturing overhead allocated account, is carried over to the balance sheet for the subsequent year, to properly track all costs for job costing. Answer: FALSE Explanation: This temporary accounts is written-off at year end. Diff: 2 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-5
6) The actual costs of all individual overhead categories are recorded in the manufacturing overhead control account as credit entries. Answer: FALSE Explanation: As debit entries. Diff: 1 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-5
7) The manufacturing overhead control account and the manufacturing overhead allocated account both have zero balances at the end of each year after all adjustments are recorded. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-5
8) The general ledger account that combines the separate job cost records is called the ________ account. A) Cost of Goods Sold B) Finished Goods Control C) Manufacturing Overhead Allocated D) Manufacturing Overhead Control E) Work-in-Process Control Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-5
9) XYZ Company uses a normal job costing system. The direct labour rate is $27 per hour; and, the budgeted indirect cost allocation rate is $20 and uses direct labour hours as the cost allocation base. Direct labour hours Direct materials cost Marketing costs Non-manufacturing overhead
1,000 $12,000 $17,000 $9,000
What amount should be added to Work-in-Process control? A) $12,000 B) $47,000 C) $59,000 D) $76,000 E) $85,000 Answer: C Explanation: The marketing and administration costs are not included. The direct costs are $12,000 for materials, and (1,000 × $47) $47,000 for direct labour and overhead, therefore total of $59,000. Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-5
10) In normal costing the manufacturing overhead control and manufacturing overhead allocated accounts in the general ledger respectively, refer to A) the record of actual overhead costs, and the record of overhead allocated to specific jobs using budgeted rates × actual base units. B) the record of total budgeted overhead costs and the record of actual overhead allocated to date. C) the record of actual overhead costs, and the record of overhead allocated to specific jobs using actual rates × budgeted base units. D) the record of total budgeted overhead costs, and the record of overhead allocated to specific jobs using budgeted rates × actual base units. E) the record of actual overhead costs, and the record of overhead allocated to specific jobs using budgeted rates × budgeted base units. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-5
11) To allocate or spread the under/overallocated overhead between ending Inventory, Cost of Goods Sold, and the Work-in-Process control accounts is called the A) adjusted allocation-rate approach. B) proration approach. C) flexible budget approach. D) allocation variance approach. E) inventory adjustment approach. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-5
12) When using the proration approach the final balance in the Manufacturing Overhead Control account can be closed to which account(s) at year-end? A) Work-in-Process Control B) Income Summary C) Finished Goods Inventory D) Cost of Goods Sold E) Work-in-Process Control, Finished Goods Inventory or Cost of Goods Sold would normally be used. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-5
13) The Manufacturing Overhead Control account is debited for A) the actual costs in all the individual overhead categories ( such as indirect materials and electric power). B) the amount of the under applied overhead. C) the budgeted costs in all the individual overhead categories ( such as indirect materials and electric power). D) the budgeted amount of indirect manufacturing overhead costs. E) the overhead allocated to Work-in-Process inventory. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-5
14) Which method(s) for dealing with under/over allocated overhead provides the most accurate inventory and cost of goods sold account balances when the amount is material? A) proration approach B) adjusted allocation-rate approach C) immediate write-off to cost of goods sold D) either proration or adjusted allocation-rate approach E) either the proration approach or the immediate write-off to cost of goods sold Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-5
15) Which method for dealing with under/over allocated overhead provides the most accurate individual job cost records? A) proration approach B) adjusted allocation-rate approach C) immediate write-off to cost of goods sold D) either proration or adjusted allocation-rate approach would give same result E) either the proration approach or the immediate write-off to cost of goods sold Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 4-5
16) What is the appropriate journal entry if $100,000 of materials were purchased on account for the month of August? A) Materials Control 100,000 Accounts Payable Control 100,000 B) Work-in-Process Control 100,000 Accounts Payable Control
100,000
C) Manufacturing Overhead Control 100,000 Accounts Payable Control
100,000
D) Manufacturing Overhead Allocated 100,000 Accounts Payable Control
100,000
E) Materials Control 100,000 Work-in-Process Control
100,000
Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-5
17) What is the appropriate journal entry if direct materials of $50,000 and indirect materials of $3,000 are sent to the manufacturing plant floor? A) Work-in-Process Control 50,000 Materials Control 50,000 B) Work-in-Process Control Materials Control
53,000
C) Manufacturing Overhead Control Materials Control Work-in-Process Control
3,000 50,000
D) Work-in-Process Control Manufacturing Overhead Control Materials Control
50,000 3,000
53,000
53,000
E) Work-in-Process Control 50,000 Manufacturing Overhead Allocated 3,000 Materials Control
53,000
53,000
Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-5
18) Manufacturing overhead costs incurred for the month are: Utilities Depreciation on equipment Repairs
$15,000 $25,000 $10,000
Which is the correct journal entry assuming utilities and repairs were on account? A) Manufacturing Overhead Allocated 50,000 Accounts Payable Control Accumulated Depreciation Control
25,000 25,000
B) Work-in-Process Control Accounts Payable Control
50,000 50,000
C) Manufacturing Overhead Control Work-in-Process Control
50,000 50,000
D) Accumulated Depreciation Control 25,000 Accounts Payable Control 25,000 Manufacturing Overhead Control
50,000
E) Manufacturing Overhead Control 50,000 Accounts Payable Control Accumulated Depreciation Control
25,000 25,000
Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-5
Answer the following question(s) using the information below. Sunny Company manufactures pipes and applies manufacturing overhead costs to production at a budgeted indirect cost allocation rate of $16 per direct labour hour. The following data are obtained from the accounting records for June of the current year: Direct materials Direct labour (7,000 hours @ $11/hour) Indirect labour Plant facility rent Depreciation on plant machinery and equipment Sales commissions Administrative expenses
$280,000 $77,000 $15,000 $60,000 $30,000 $40,000 $50,000
19) The actual amount of manufacturing overhead costs incurred in June totals ________. A) $557,000 B) $200,000 C) $105,000 D) $80,000 Answer: C Explanation: $15,000 + $60,000 + $30,000 = $105,000 Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-5
20) The amount of manufacturing overhead allocated to all jobs during June totals ________. A) $77,000 B) $112,000 C) $110,000 D) $200,000 E) $557,000 Answer: B Explanation: 7,000 × $16 per dlh = $112,000 Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-5
21) For June, manufacturing overhead was ________. A) overallocated by $90,000 B) overallocated by $7,000 C) neither underallocated or overallocated D) underallocated by $33,000 E) overallocated by $5,000 Answer: B Explanation: Overallocated: Allocated $112,000 (7,000 × $16 per dlh), while the actual overhead was $105,000 Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-5
Answer the following question(s) using the information below. Cloudy Company manufactures pipes and applies manufacturing overhead costs to production at a budgeted indirect cost allocation rate of $21 per direct labour hour. The following data are obtained from the accounting records for June in the current year: Direct materials Direct labour (8,000 hours @ $14/hour) Indirect labour Plant facility rent Depreciation on plant machinery and equipment Sales commissions Administrative expenses
$320,000 $112,000 $32,000 $55,000 $20,000 $28,000 $40,000
22) The actual amount of manufacturing overhead costs incurred in June totals A) $144,000. B) $175,000. C) $75,000. D) $107,000. E) $147,000. Answer: D Explanation: $32,000 + $55,000 + $20,000 = $107,000 Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-5
23) The amount of manufacturing overhead allocated to all jobs during June totals A) $168,000. B) $112,000. C) $107,000. D) $147,000. E) $75,000. Answer: A Explanation: 8,000 × $21 per dlh = $168,000 Diff: 1 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-5
24) For June, manufacturing overhead was A) overallocated by $5,000. B) underallocated by $32,000. C) neither underallocated or overallocated. D) underallocated by $30,000. E) overallocated by $61,000. Answer: E Explanation: Overallocated: Allocated $168,000 vs. $107,000 actual overhead Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-5
Use the information below to answer the following question(s). Because the Happy Times Company used a budgeted indirect cost allocation rate for its manufacturing operations, the amount allocated ($200,000) was different from the actual amount incurred ($225,000). These were the respective ending balances in the Manufacturing Overhead Allocated and Manufacturing Overhead control accounts. Before disposition of under/overallocated overhead, the following information was available:
Direct materials WIP Finished goods Cost of goods sold
Account Balance $60,000 $190,000 $250,000 $560,000
Overhead Allocated Included $nil $10,000 $20,000 $170,000
25) What is the journal entry Happy Times Company should use to write off the difference between allocated and actual overhead directly to cost of goods sold? A) Cost of Goods Sold 25,000 Manufacturing Overhead Allocated 200,000 Manufacturing Overhead Control 225,000 B) Cost of Goods Sold 25,000 Manufacturing Overhead Allocated
25,000
C) Manufacturing Overhead Allocated Cost of Goods Sold
25,000 25,000
D) Manufacturing Overhead Control Cost of Goods Sold
25,000
E) Cost of Goods Sold 25,000 Manufacturing Overhead Control 200,000 Manufacturing Overhead Allocated
25,000
225,000
Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-5
26) What is the journal entry Happy Times Company should use to write off the difference between allocated and actual overhead using the proration approach based on overhead allocated? A) Work-in-Process Control 4,750 Finished Goods Control 6,250 Cost of Goods Sold 14,000 Manufacturing Overhead Allocated 200,000 Manufacturing Overhead Control 225,000 B) Manufacturing Overhead Allocated Work-in-Process Control Finished Goods Control Cost of Goods Sold C) Manufacturing Overhead Control Work-in-Process Control Finished Goods Control Cost of Goods Sold D) Work-in-Process Control Finished Goods Control Cost of Goods Sold Manufacturing Overhead Allocated Manufacturing Overhead Control E) Work-in-Process Control Finished Goods Control Cost of Goods Sold Manufacturing Overhead Control Manufacturing Overhead Allocated
25,000 4,750 6,250 14,000
25,000 1,250 2,500 21,250
1,250 2,500 21,250 200,000 225,000
1,250 2,500 21,250 200,000 225,000
Answer: D Explanation: Work-in-process Finished goods Cost of goods sold
$10,000 20,000 170,000 $200,000
5% × $25,000 = $1,250 10% × 25,000 = 2,500 85% × 25,000 = 21,250 100% $25,000
Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-5
Use the information below to answer the following question(s). Because the Beckworth Company used a budgeted indirect cost allocation rate for its manufacturing operations, the amount allocated ($190,000) was different from the actual amount incurred ($175,000). These were the respective ending balances in the Manufacturing Overhead Allocated and Manufacturing Overhead control accounts. Before disposition of under/overallocated overhead, the following information was available:
Direct materials WIP Finished goods Cost of goods sold
Account Balance $50,000 $165,000 $219,000 $492,000
Overhead Allocated Included $nil $12,000 $27,000 $163,000
27) What is the journal entry Beckworth Company should use to write-off the difference between allocated and actual overhead directly to cost of goods sold? A) Cost of Goods Sold 15,000 Manufacturing Overhead Control 175,000 Manufacturing Overhead Allocated 190,000 B) Cost of Goods Sold 15,000 Manufacturing Overhead Allocated C) Manufacturing Overhead Allocated Cost of Goods Sold
15,000
D) Manufacturing Overhead Control Cost of Goods Sold
15,000
15,000
15,000
E) Manufacturing Overhead Allocated Cost of Goods Sold Manufacturing Overhead Control
15,000
190,000 15,000 175,000
Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-5
28) What is the journal entry Beckworth Company should use to write-off the difference between allocated and actual overhead using the proration approach based on overhead allocated? A) Work-in-Process Control 885 Finished Goods Control 2,010 Cost of Goods Sold 12,105 Manufacturing Overhead Control 175,000 Manufacturing Overhead Allocated 190,000 B) Manufacturing Overhead Allocated Manufacturing Overhead Control Work-in-Process Control Finished Goods Control Cost of Goods Sold C) Manufacturing Overhead Allocated Manufacturing Overhead Control Work-in-Process Control Finished Goods Control Cost of Goods Sold
190,000 175,000 885 2,010 12,105
190,000
D) Work-in-Process Control 2,825 Finished Goods Control 3,750 Cost of Goods Sold 8,425 Manufacturing Overhead Control 175,000 Manufacturing Overhead Allocated E) Cost of Goods Sold 15,000 Manufacturing Overhead Control 175,000 Manufacturing Overhead Allocated Answer: B Explanation: Work-in-process Finished goods Cost of goods sold
$12,000 27,000 163,000 $200,000
175,000 2,825 3,750 8,425
190,000
190,000
5.9% × $15,000 = $885 13.4% × 15,000 = 2,010 80.7% × 15,000 = 12,105 100.0% $15,000
Diff: 2 Type: MC CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-5
29) Correct the following journal entry, and explain your changes. Manufacturing overhead control 32,000 Work-in-process-control 32,000 To record the cost of machinery repair labour. Answer: It is correct to charge the machinery repair to manufacturing overhead, therefore the debit is correct. The credit should be to an account such as salaries payable control if the repair was completed by our own staff or accounts payable if the repair was sub-contracted to an outside firm. Diff: 1 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-5
30) Job-cost records for Boucher Company contained the following data: Total Cost Date Date Date of Job Job No. Started Finished Sold at June 30 220 May 18 June 12 June 20 $6,000 221 May 20 June 19 June 21 4,000 222 June 7 July 5 July 12 7,000 223 June 10 June 28 July 1 6,500 224 June 19 July 16 July 25 8,000 Required: a. Compute WIP inventory at June 30. b. Compute finished goods inventory at June 30. c. Compute cost of goods sold for June. Answer: a. $7,000 + $8,000 = $15,000 b. $6,500 c. $6,000 + $4,000 = $10,000 Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-5
31) Jupiter Company has just finished its first year of operations and must decide which method to use for adjusting cost of goods sold. The company used a budgeted indirect-cost rate for its manufacturing operations. The amount that was allocated ($435,000) to cost of goods sold was different from the actual amount incurred ($425,000). These were the respective ending balances in the Manufacturing Overhead Allocated and Manufacturing Overhead control accounts. Ending balances in the relevant accounts were: Work-in-Process Finished Goods Cost of Goods Sold
$40,000 80,000 680,000
Required: a. Prepare a journal entry to write off the difference between allocated and actual overhead directly to Cost of Goods Sold. Be sure your journal entry closes the related overhead accounts. b. Prepare a journal entry that prorates the write-off of the difference between allocated and actual overhead using ending account balances. Be sure your journal entry closes the related overhead accounts. Answer: a. Manufacturing Overhead Allocated 435,000 Cost of Goods Sold 10,000 Manufacturing Overhead Control 425,000 b. Work-in-process Finished goods Cost of goods sold Total
$40,000 80,000 680,000 $800,000
Manufacturing Overhead Allocated Work-in-Process Finished Goods Cost of Goods Sold Manufacturing Overhead Control
5 % × $10,000 = $500 10 × $10,000 = 1,000 85 × $10,000 = 8,500 100 % $10,000 435,000 500 1,000 8,500 425,000
Diff: 3 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-5
32) A manufacturing company has actual overhead of $570,000, budgeted overhead of $620,000, and budgeted 18,000 direct labour hours. Management believes that direct labour hours are the best allocation base to use for allocation of overhead. Actual direct labour hours were 20,000 hours. Assuming that the company used normal costing methods for allocation, and has the following account balances in its general ledger, what are the adjustments for each account using the proration method based on the amount of manufacturing overhead included in each account balance before proration?
Work-in-process control Finished Goods Cost of Goods Sold Answer: Work-in-process control Finished Goods Cost of Goods Sold Total
Account Balance $62,000 $91,000 $1,500,000 Balance $62,000 $91,000 $1,500,000
Manuf OVH Included $14,400 $17,800 $330,000 Manuf OVH Allocated $12,400 $16,380 $330,000 $358,780
Adjustment ________ ________ ________ Adjustment $1,988 2,457 45,555 $50,000
Calculations $14,400/$362,200 = 3.98% $17,800/$362,200 = 4.91% $330,000/$362,200= 91.11% Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-5
33) The Dougherty Furniture Company manufactures tables. In March, the two production departments had budgeted allocation bases of 4,000 machine hours in Department 100 and 8,000 direct manufacturing labour hours in Department 200. The budgeted manufacturing overheads for the month were $57,500 and $62,500, respectively. For Job A, the actual costs incurred in the two departments were as follows:
Direct materials purchased on account Direct materials used Direct manufacturing labour Indirect manufacturing labour Indirect materials used Lease on equipment Utilities
Department 100 $110,000 32,500 52,500 11,000 7,500 16,250 1,000
Department 200 $177,500 13,500 53,500 9,000 4,750 3,750 1,250
Job A incurred 800 machine hours in Department 100 and 300 manufacturing labour hours in Department 200. The company uses a budgeted indirect cost allocation rate for applying overhead to production. Required: a. Determine the budgeted manufacturing indirect cost allocation rate for each department. b. Prepare the necessary journal entries to summarize the March transactions for Department 100. c. What is the total cost of Job A?
Answer: a. Manufacturing overhead rate Department 100
Manufacturing overhead rate Department 200
= $57,500/4,000 hours = $14.375 per machine-hour = $62,500/8,000 hours = $7.8125 per labour-hour
b. Materials Control Department 100 Accounts Payable Control
110,000 110,000
Work-in-Process Control Department 100 Manufacturing Overhead Control Department 100 Materials Control Department 100
32,500 7,500
Work-in-Process Control Department 100 Manufacturing Overhead Control Department 100 Wages Payable Control
52,500 11,000
Manufacturing Overhead Control Department 100 Leaseholds Payable Control Utilities Payable Control
17,250
40,000
63,500
16,250 1,000
Work-in-Process Control Dept. 100 ($14.375 × 800 hrs) 11,500 Manufacturing Overhead Allocated
11,500
c. Job A: Direct materials Dept. 100 Direct materials Dept. 200 Direct manufacturing labour Dept. 100 Direct manufacturing labour Dept. 200 Manufacturing overhead Dept. 100 ($14.375 × 800) Manufacturing overhead Dept. 200 ($7.8125 × 300) Total
$32,500 13,500 52,500 53,500 11,500 2,344 $165,844
Diff: 3 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-5
34) LeBlanc Company has the following balances as of the year ended December 31, 2018. Direct Materials Inventory WIP Inventory Finished Goods Inventory Cost of Goods Sold
$15,000 Dr. 34,500 Dr. 49,500 Dr. 74,500 Dr.
Additional information is as follows: Cost of direct materials purchased during 2018 Cost of direct materials requisitioned in 2018 Cost of goods completed during 2018 Factory overhead applied (120% of direct labour) Underapplied factory overhead
$41,000 47,000 102,000 48,000 4,000
Required: a. Compute beginning direct materials inventory. b. Compute beginning WIP inventory. c. Compute beginning finished goods inventory. d. Compute actual factory overhead incurred. Answer: a. $47,000 - $41,000 + $15,000 = $21,000 b. $48,000/120% = $40,000 direct labour cost incurred $102,000 - $47,000 - $40,000 - $48,000 + $34,500 = $1,500 c. $74,500 - $102,000 + $49,500 = $22,000 d. $48,000 + $4,000 = $52,000 Diff: 3 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 4-5
35) LaFleur Company has the following balances as of the year ended December 31, 2018. Direct Materials Inventory WIP Inventory Finished Goods Inventory Cost of Goods Sold
$16,000 Dr. 35,500 Dr. 47,500 Dr. 81,500 Dr.
Additional information is as follows: Cost of direct materials purchased during 2018 Cost of direct materials requisitioned in 2018 Cost of goods completed during 2018 Factory overhead applied (120% of direct labour) Overapplied factory overhead
$42,000 48,000 125,000 60,000 4,000
Required: a. Compute beginning direct materials inventory. b. Compute beginning WIP inventory. c. Compute beginning finished goods inventory. d. Compute actual factory overhead incurred. Answer: a. $48,000 - $42,000 + $16,000 = $22,000 b. $60,000/120% = $50,000 direct labour cost incurred $125,000 - $48,000 - $50,000 - $60,000 + $35,500 = $2,500 c. $81,500 - $125,000 + $47,500 = $4,000 d. $60,000 - $4,000 = $56,000 Diff: 3 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 4-5
36) Langley Company has the following balances as of the year ended December 31, 2018. Direct Materials Inventory WIP Inventory Finished Goods Inventory Cost of Goods Sold
$17,000 Dr. 36,500 Dr. 68,500 Dr. 82,500 Dr.
Additional information is as follows: Cost of direct materials purchased during 2018 Cost of direct materials requisitioned in 2018 Cost of goods completed during 2018 Factory overhead applied (120% of direct labour) Overapplied factory overhead
$43,000 49,000 146,000 72,000 5,000
Required: a. Compute beginning direct materials inventory. b. Compute beginning WIP inventory. c. Compute beginning finished goods inventory. d. Compute actual factory overhead incurred. Answer: a. $49,000 - $43,000 + $17,000 = $23,000 b. $72,000/120% = $60,000 direct labour cost incurred $146,000 - $49,000 - $60,000 - $72,000 + $36,500 = $1,500 c. $82,500 - $146,000 + $68,500 = $5,000 d. $72,000 - $5,000 = $67,000 Diff: 3 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 4-5
37) Schulz Corporation applies overhead based upon machine-hours. Budgeted factory overhead was $266,400 and budgeted machine-hours were 18,500. Actual factory overhead was $287,920 and actual machine-hours were 19,050. Before disposition of under/overallocated overhead, the following information was available:
Direct materials WIP Finished goods Cost of goods sold
Account Balance $60,000 $190,000 $250,000 $560,000
Overhead Portion $nil $66,500 $75,000 $184,800
Required: a. Determine the budgeted factory overhead rate per machine-hour. b. Compute the over/underallocated overhead. c. Prepare the journal entry to dispose of the variance using the write-off to cost of goods sold approach. The corporation uses Manufacturing Overhead Allocated and Manufacturing Overhead control accounts. d. Prepare the journal entry to dispose of the variance using the proration approach. e. Identify three value chain categories and provide an example for each on how Klink Corporation could reduce its indirect costs.
Answer: a. $266,400/18,500 hrs. = $14.40 per hour b.
$14.40 × 19,050 hours = $274,320 - $287,920 = $13,600 underallocated overhead
c.
Manufacturing Overhead Allocated Cost of Goods Sold Manufacturing Overhead Control
274,320 13,600 287,920
d. $66,500 + $75,000 + 184,800 = $326,300 Cost of Goods Sold: $184,800/$326,300 = 0.566; 0.566 × $13,600 = $7,697.60 WIP: $66,500/$326,300 = 0.204; 0.204 × $13,600 = $2,774.40 Finished Goods: $75,000/$326,300 = 0.23; 0.23 × $13,600 = $3,128.00 Cost of Goods Sold WIP Inventory Finished Goods Inventory Manufacturing Overhead Allocated Manufacturing Overhead Control
7,697.60 2,774.40 3,128.00 274,320.00 287,920.00
e. One example is to reduce indirect labour costs with improved information systems in the production value chain category. Students will offer many other creative solutions. Diff: 3 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 1-2; 4-5
38) Klink Corporation applies overhead based upon machine-hours. Budgeted factory overhead was $295,400 and budgeted machine-hours were 21,100. Actual factory overhead was $319,800 and actual machine-hours were 18,090. Before disposition of under/overallocated overhead, the following information was available:
Direct materials WIP Finished goods Cost of goods sold
Account Balance $50,000 $160,000 $220,000 $510,000
Overhead Portion $nil $49,500 $70,000 $173,900
Required: a. Determine the budgeted factory overhead rate per machine-hour. b. Compute the over/underallocated overhead. c. Prepare the journal entry to dispose of the variance using the write-off to cost of goods sold approach. The corporation uses Manufacturing Overhead Allocated and Manufacturing Overhead control accounts. d. Prepare the journal entry to dispose of the variance using the proration approach. e. Identify three value chain categories and provide an example for each on how Klink Corporation could reduce its indirect costs.
Answer: a. $295,400/21,100 hrs. = $14.00 per hour b.
$14.00 × 18,090 hours = $253,260 - 319,800 = 66,540 underallocated overhead
c.
Manufacturing Overhead Allocated Cost of Goods Sold Manufacturing Overhead Control
253,260 66,540 319,800
d. $49,500 + $70,000 + $173,900 = $293,400 Cost of Goods Sold: $173,900/$293,400 = 0.5927; 0.5927 × $66,540 = $39,438 WIP: $49,500/$293,400 = 0.1687; 0.1687 × $66,540 = $11,226 Finished Goods: $70,000/$293,400 = 0.2386; 0.2386 × $66,540 = $15,876 Cost of Goods Sold WIP Inventory Finished Goods Inventory Manufacturing Overhead Allocated Manufacturing Overhead Control
39,438 11,226 15,876 253,260 319,800
e. One example is to reduce indirect labour costs with improved information systems in the production value chain category. Students will offer many other creative solutions. Diff: 3 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 1-2; 4-5
39) Hogan Corporation applies overhead based upon machine-hours. Budgeted factory overhead was $320,000 and budgeted machine-hours were 25,000. Actual factory overhead was $326,900 and actual machine-hours were 23,090. Before disposition of under/overallocated overhead, the following information was available:
Direct materials WIP Finished goods Cost of goods sold
Account Balance $55,000 $170,000 $230,000 $520,000
Overhead Portion $nil $51,500 $73,000 $176,700
Required: a. Determine the budgeted factory overhead rate per machine-hour. b. Compute the over/underallocated overhead. c. Prepare the journal entry to dispose of the variance using the write-off to cost of goods sold approach. The corporation uses Manufacturing Overhead Allocated and Manufacturing Overhead control accounts. d. Prepare the journal entry to dispose of the variance using the proration approach. e. Identify three value chain categories and provide an example for each on how Hogan Corporation could reduce its indirect costs.
Answer: a. $320,000/25,000 hrs. = $12.80 per hour b.
$12.80 × 23,090 hours = $295,552 - 326,900 =31,348 underallocated overhead
c.
Manufacturing Overhead Allocated Cost of Goods Sold Manufacturing Overhead Control
295,552 31,348 326,900
d. $51,500 + $73,000 + $176,700 = $301,200 Cost of Goods Sold: $176,700/$301,200 × $31,348 =$18,390 WIP: $51,500/$301,200 × $31,348 = $5,360 Finished Goods: $73,000/$301,200 × $31,348 = $7,598 Cost of Goods Sold WIP Inventory Finished Goods Inventory Manufacturing Overhead Allocated Manufacturing Overhead Control
18,390 5,360 7,598 295,552 326,900
e. One example is to reduce indirect labour costs with improved information systems in the production value chain category. Students will offer many other creative solutions. Diff: 3 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 1-2; 4-5
40) JamJee Enterprises uses a job costing system. Record the following transactions in JamJee Enterprise's general journal for the current month: a. Purchased raw materials on account, $49,000. b. Requisitioned $25,200 of direct materials and $3,400 of indirect materials for use in production. c. Factory payroll incurred, $54,000; 70% direct labour, 30% indirect labour. d. Recorded depreciation expense factory equipment $9,200, and other manufacturing overhead of $26,870 (credit accounts payable). e. Allocated manufacturing overhead costs based on 120% of direct labour cost. f. Cost of completed production for the current month, $95,800. g. Cost of finished goods sold, $79,000; selling price, $115,000 (all sales on account). Answer: General Journal Date Accounts Debit Credit a. Raw Materials Inventory 49,000 Accounts Payable 49,000 b. Work in Process Inventory 25,200 Manufacturing Overhead 3,400 Raw Materials Inventory 28,600 c. Work-in-Process Inventory 37,800 Manufacturing Overhead 16,200 Wages Payable 54,000 d. Manufacturing Overhead 36,070 Accumulated Depreciation — Factory Equipment 9,200 Accounts Payable 26,870 e. Work in Process Inventory 45,360 Manufacturing Overhead Allocated 45,360 (Direct labour cost from c) × Allocation % based on direct labour cost) f. Finished Goods Inventory 95,800 Work-in-Process Inventory 95,800 g. Accounts Receivable 115,000 Sales Revenue 115,000 Cost of Goods Sold 79,000 Finished Goods Inventory 79,000 Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-5
41) Indell Corporation uses a job costing system. Record the following transactions in Indell Corporation's general journal for the current month: a. Purchased raw materials on account, $24,000. b. Requisitioned $36,900 of direct materials and $7,200 of indirect materials for use in production. c. Factory payroll incurred, $68,000; 70% direct labour, 30% indirect labour. d. Recorded depreciation expense factory equipment $11,500, and other manufacturing overhead of $31,570 (credit accounts payable). e. Allocated manufacturing overhead costs based on 120% of direct labour cost. f. Cost of completed production for the current month, $103,000. g. Cost of finished goods sold, $81,000; selling price, $125,000 (all sales on account). Answer: General Journal Date Accounts Debit Credit a. Raw Materials Inventory 24,000 Accounts Payable 24,000 b. Work in Process Inventory 36,900 Manufacturing Overhead 7,200 Raw Materials Inventory 44,100 c. Work-in-Process Inventory 47,600 Manufacturing Overhead 20,400 Wages Payable 68,000 d. Manufacturing Overhead 43,070 Accumulated Depreciation — Factory Equipment 11,500 Accounts Payable 31,570 e. Work in Process Inventory 57,120 Manufacturing Overhead Allocated 57,120 (Direct labour cost from c) × Allocation % based on direct labour cost) f. Finished Goods Inventory 103,000 Work-in-Process Inventory 103,000 g. Accounts Receivable 125,000 Sales Revenue 125,000 Cost of Goods Sold 81,000 Finished Goods Inventory 81,000 Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-5
42) Frankenreid Corporation uses a job costing system. Record the following transactions in Frankenreid Corporation's general journal for the current month: a. Purchased raw materials on account, $15,000. b. Requisitioned $19,700 of direct materials and $8,800 of indirect materials for use in production. c. Factory payroll incurred, $142,000; 90% direct labour, 10% indirect labour. d. Recorded depreciation expense factory equipment $19,000, and other manufacturing overhead of $28,600 (credit accounts payable). e. Allocated manufacturing overhead costs based on 120% of direct labour cost. f. Cost of completed production for the current month, $205,000. g. Cost of finished goods sold, $190,000; selling price, $225,000 (all sales on account). Answer: General Journal Date Accounts Debit Credit a. Raw Materials Inventory 15,000 Accounts Payable 15,000 b. Work in Process Inventory 19,700 Manufacturing Overhead 8,800 Raw Materials Inventory 28,500 c. Work-in-Process Inventory 127,800 Manufacturing Overhead 14,200 Wages Payable 142,000 d. Manufacturing Overhead 47,600 Accumulated Depreciation — Factory Equipment 19,000 Accounts Payable 28,600 e. Work in Process Inventory 170,400 Manufacturing Overhead Allocated 170,400 (Direct labour cost from c) × Allocation % based on direct labour cost) f. Finished Goods Inventory 205,000 Work-in-Process Inventory 205,000 g. Accounts Receivable 225,000 Sales Revenue 225,000 Cost of Goods Sold 190,000 Finished Goods Inventory 190,000 Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 4-5
43) What are three possible ways to dispose of underallocated or overallocated overhead costs at the end of a fiscal year? Briefly comment on the theoretical correctness or incorrectness of each method. Answer: One way to dispose of underallocated or overallocated overhead costs at the end of a fiscal year would be to prorate the underallocated or overallocated overhead costs to the work-in-process control account, the finished goods control account, and to the cost of goods sold account based on the relative amounts of overhead in each account. This is a theoretically correct method since it is reasonable to believe that the underallocated or overallocated overhead costs should attach themselves to the goods as they are produced. A second way to dispose of the underallocated or overallocated overhead costs at the end of a fiscal year would be to adjust the allocation rate based on the actual amounts and reallocate the overhead to completed jobs. This is also a theoretically correct method. A third way is to clear all underallocated or overallocated overhead to the cost of goods sold account. This is not theoretically valid but it is practical if the amount of underallocated or overallocated overhead is not material. Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-5
44) Why does the Manufacturing Overhead Control account (debit) need to equal the Manufacturing Control account (credit)? What will be the effect of having an end of year remaining balance, debit or credit, on the evaluation of profitability? Answer: A balance in the account indicates that overhead has been over- or underallocated. Either situation manes that the cost object has not been correctly estimated during the period. Evaluation of profitability will be incorrect if the amount is material. Diff: 3 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-5
45) What is the purpose of subsidiary ledgers? How does a subsidiary ledger relate to the control account in the general ledger? Answer: The purpose of subsidiary ledgers is to provide underlying detail of the categories of items found in the corresponding control account. The balance of the individual accounts in the subsidiary ledger equals the balance in the corresponding control account in the general ledger. Diff: 2 Type: ES CPA Competencies: Chapter 4 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 4-5
Cost Accounting: A Managerial Emphasis - Cdn. Ed., 9e (Datar) Chapter 5 Activity-Based Costing and Management 5.1 Identify the basic elements of activity-based costing (ABC) systems as distinguished from traditional systems, and explain how preventable undercosting and overcosting of products and services affects profitability. 1) Peanut butter costing involves assigning costs in a non uniform manner to reflect the different utilization of resources by different products or services. Answer: FALSE Explanation: The term peanut butter costing describes a particular costing approach that uses broad averages for assigning (or spreading, as in spreading peanut butter) the cost of resources uniformly to cost. Diff: 1 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-1
2) Using a broad average to assign costs to products or services may lead to undercosting or overcosting. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-1
3) A top-selling product might actually result in recorded losses for the company. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-1
4) If a company undercosts one of its products from indirect cost smoothing, then it will overcost at least one of its other products. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-1
5) Product-cost cross-subsidization means that if a company undercosts one of its products, it will gain market share due to a more competitive price. Answer: FALSE Explanation: Product-cost cross-subsidization means that if a company undercosts one of its products, it will overcost at least one of its other products. Diff: 2 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-1
6) Inaccurate product costs can expose a company to the risk of losing market share to competitors. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-1
7) Using a broad average to allocate costs to products is called A) activity-based costing. B) refined costing. C) peanut butter costing. D) product undercoating. E) job costing. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-1
8) Which of the following statements is TRUE concerning product costing systems? A) Companies that undercost products always sell products at a loss. B) Companies that overcost run the risk of losing customers. C) Undercosting or overcosting does not relate to product cost cross-subsidization. D) Peanut butter costing is another term for direct costing. E) Companies that overcost will make more profit by passing along higher prices to customers. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-1
9) Uniformly assigning the costs of resources to cost objects when those resources are actually used in a non-uniform way is called A) activity-based costing. B) menu-based costing. C) full product-cost allocation. D) variable product-cost allocation. E) broad averaging or peanut butter costing. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-1
10) A product that consumes a relatively low level of resources but is reported to have a relatively high cost, is an example of A) increased market share. B) product marketing. C) product undercosting. D) product overcosting. E) product sub-optimization. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-1
11) A product that consumes a relatively high level of resources but is reported to have a relatively low cost, is an example of A) increased market share. B) product marketing. C) product undercosting. D) product overcosting. E) product sub-optimization. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-1
12) Which of the following is a sign that a "smoothing out" costing system exists? A) Managers rely on data originated by the cost system. B) The company wins bids they thought had low margins. C) A batch consumes a relatively high level of input materials and conversion activities and is reported to have a relatively high cost. D) A batch consumes a relatively low level of input materials and conversion activities and is reported to have a relatively low cost. E) The company loses bids they thought had low margins. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-1
13) The term used to describe a situation when at least one miscosted product causes other products to be miscosted in the organization is known as A) cross-subsidization. B) product marketing. C) product overcosting. D) product undercosting. E) product sub-optimization. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-1
14) Provided a single allocation base is used, jobs are typically overcosted if A) jobs consume proportionately less of the indirect activity but is reported to have higher cost. B) jobs require more employees. C) jobs consume proportionately more of the indirect activity and is reported to have higher cost. D) jobs consume proportionately more of the indirect activity but is reported to have lower cost. E) jobs cannot be overcosted; only products or service can be overcosted. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-1
15) The use of a single indirect cost rate is more likely to A) undercost high volume simple products. B) undercost low volume complex products. C) undercost lower priced products. D) overcost higher priced products. E) overcost low volume complex products. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-1
16) A busy law office has a central administration set up, with the administration work for all lawyers shared by the clerical staff. Clients are billed at the firm's hourly rate by the firm. The arrangement is that whenever there is administration work to be done, it is assigned to whoever is available at the time. One of the lawyers has complained that she hardly ever uses the administration services, and so her year end bonus should be larger than those who require the administration services. Therefore they are considering tracking the administration work done for each lawyer separately so that they know how many hours of administration services is being used by each lawyer. At the end of the year, the bonus of each lawyer would be reduced by a charge reflecting the administration services she/he used in the year. If the firm institutes this new approach, this will mean that A) there will be no more cross subsidization. B) there will still be cross-subsidization between lawyers but not between their clients. C) the new information gathered will enable the firm to be able to reduce its costs. D) there will still be cross-subsidization between clients but not between lawyers. E) they will be using a departmental costing system. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-1
17) Indications that a product cost system needs revision include A) the product line consists of a products which are produced at different locations. B) the product costing computer system does not use the latest technology. C) the company uses a single allocation base system developed long ago. D) prime cost represent the vast majority of product cost. E) managers lose bids they expected to win and win bids they expected to lose. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-1
18) Aqua Company produces two products–Alpha and Beta. Alpha has a high market share and is produced in bulk. Production of Beta is based on customer orders and is custom designed. Also, 55% of Beta's cost is shared between design and setup costs, while Alpha's major portions of costs are direct costs. Alpha is using a single cost pool to allocate indirect costs. Which of the following statements is TRUE of Aqua? A) Aqua will overcost Beta's direct costs as it is using a single cost pool to allocate indirect costs. B) Aqua will undercost Alpha's indirect costs because Alpha has high direct costs. C) Aqua will overcost Alpha's indirect costs as it is using a single cost pool to allocate indirect costs. D) Aqua will overcost Beta's indirect costs because Beta has high indirect costs. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-1
19) Product-cost cross-subsidization means that ________. A) when one product is overcosted, it results in more than one other product being overcosted B) when a company undercosts more than one of its products, it will overcost more than one of its other products C) when a company undercosts one of its products, it will overcost at least one of its other products D) when one product is overcosted, it results in all other products being overcosted Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-1
20) Simple cost systems distort product costs because A) they do not know how to identify the appropriate units. B) competitive pricing is ignored. C) they emphasize financial accounting requirements. D) they apply average support costs to each unit of product. E) they assign direct costs using direct cost tracing. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-1
21) Explain how a top-selling product may actually result in losses for the company. Answer: If indirect costs are not properly allocated to the products, a product may appear to cost less than it actually does cost to produce. If the selling price is based on these lower costs, the selling price may actually be lower than the costs needed to produce the product resulting in losses for the company. Diff: 1 Type: ES CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-1
22) Explain how traditional (simple) cost systems, using a single unit-level cost rate, may distort product costs. Answer: Unit-level measures can distort product costing because the demand for indirect activities may be driven by batch-level, product-sustaining, customer-sustaining, or facility-sustaining activities. Cost distortions are larger when the traditional systems' unit-level cost drivers and the alternative activity-cost drivers differ proportionately more from each other. Traditional systems are likely to undercost products with lower production volumes (relatively fewer units of production) and overcost products with higher production volumes (relatively greater units of production). Diff: 2 Type: ES CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-1
5.2 Identify and explain the problem of preventable over- and undercosting. 1) When ever possible use the number of units produced as the cost-allocation base for homogeneous indirect cost pools. Answer: FALSE Explanation: Whenever possible, use the cost driver (the cause of indirect costs) as the cost-allocation base for each homogeneous indirect-cost pool (the effect). Diff: 2 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-2
2) In a homogeneous cost pool, all costs have a similar cause-and-effect relationship with the costallocation base. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-2
3) Direct cost tracing will accomplish which of the following? A) identify homogeneous costs B) classify more costs as indirect C) focus on the cause-and-effect criterion when choosing allocation bases D) expand the number of indirect cost pools E) classify as many of the costs as direct costs, as is economically feasible Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-2
4) How does direct cost tracing improve cost accuracy? A) It identifies the cause-and-effect relationship between direct costs and indirect costs. B) It identifies the cause-and-effect relationship between activities and non-activities. C) It reclassifies costs or costs pools that vary with the quantity of a single activity cost driver as direct. D) It makes no assumptions about the cause-and-effect relationship between direct costs and activities. E) Because with a greater number of cost pools, it does not have to be concerned with the overhead costs used by different products. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-2
5) All costs in a homogeneous cost pool have A) only one cost driver that will accurately represent the relationship between the costs and the activity. B) to be adjusted at year end to actual costs. C) the same cost behaviour. D) the same or a similar cause-and-effect (or benefits-received) relationship with a single cost driver that is used as the cost-allocation base. E) a causal relationship with manufacturing costs. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-2
6) Cecelia is taking four clients (who are not related) on a tour of her retirement development. The clients incurred the following expenses while on the tour. All tour expenses are paid by Cecelia because she has business discounts for most of her business dealings. These expenses will be billed to the clients by Cecelia. Expense Bus ticket Morning break Lunch Afternoon break Cecelia's overhead Totals
Anna $80 8 24 10 56 $178
Jim $80 10 20 4 56 $170
Frank $80 16 28 8 56 $188
Bud $80 6 20 10 56 $172
Totals $320 40 92 32 224 $708
Required: Compute the total average cost per client showing average indirect (overhead) and average direct (other) charges separately. Answer: Average direct costs = ($320 + $40 + $92 + $32)/4 = $121 per client Average indirect costs = $224/4 = $56 per client Average total costs = $121 + $56 = $177 per client Diff: 1 Type: SA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-2
7) The Continental Group (CG) provides financial advice to individuals and corporations. CG charges clients for (a) direct professional time, and (b) support services. The three professionals in CG and their rates per professional hour are as follows:
Professional Sandra Lockheart Jamie Sanders James Liu
Billing Rate per Hour $250 225 200
Monthly support service costs are as follows: Monthly Cost $3,900 18,750
Reception Associates
Clients are charged a standard support service fee of $200 per month. There is one receptionist who covers the office and spends her time equally on each of the companies sixty clients. The three associate advisors work together on client files. They work a total of 500 hours per month on client accounts. During June, they worked a total of 0 hours on the XB Corp file and 18 hours on the JN Corp file. The associates provide support for the professional advisors and give advice to clients on matters that do not require a securities license. CG has just prepared the June bills for two client corporations owned by the same person:
Sandra Lockheart Jamie Sanders James Liu Support Services Total
XB Corp $ 3,000 900 0 200 $ 4,100
JN Corp $13,750 1,350 1,800 200 $ 16,900
The owner of the two corporations has questioned the June bill. She is wondering why support services is the same amount when XB Corp required no support service for the month. Required: Prepare more appropriate bills for June using the activity-based costing approach.
Answer: Sandra Lockheart Jamie Sanders James Liu Associate services* Support Services Total
XB Corp $ 3,000 900 0 0 65 $ 3,965
JN Corp $13,750 1,350 1,800 675 65 $ 17,640
*Associate billing rate = $18,750/500 hours = $37.50 Diff: 2 Type: SA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-2
8) List and describe the purposes of the three main guidelines for refining a cost system. Answer: 1. Direct-cost tracing. Identify as many direct costs as is economically feasible. This guideline aims to reduce the amount of costs classified as indirect, thereby minimizing the extent to which costs have to be allocated, rather than traced. 2. Indirect-cost pools. Expand the number of indirect-cost pools until each pool is more homogeneous. All costs in a homogeneous cost pool have the same or a similar cause- and-effect (or benefits-received) relationship with a single cost driver that is used as the cost-allocation base. 3. Cost-allocation bases. Use the cost driver (the cause of indirect costs) as the cost-allocation base for each homogeneous indirect-cost pool (the effect). Diff: 2 Type: ES CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-2
5.3 Apply the cost hierarchy to develop and activity-based costing (ABC) system. 1) An ABC system results in a better measure of the nonuniformity of a company's resources by jobs, products, or services than by using broad averages to assign costs. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-3
2) By defining activities and identifying the costs of performing each activity, ABC systems provide detailed information regarding how an organization utilizes its available resources. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-3
3) Improved direct cost tracing is a benefit of activity-based costing. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-3
4) A critical distinction in activity-based costing is the difference between an activity and an event. Answer: FALSE Explanation: An activity is an event, task, or unit of work with a specified purpose. Diff: 2 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-3
5) Activity-based costing relies heavily on broad averages to assign costs to jobs, products, and services. Answer: FALSE Explanation: Structuring activity cost pools with cost drivers for each activity leads to more accurate costing of activities. Diff: 2 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-3
6) One of the benefits of an ABC system is that by highlighting different activities, you can ignore the different levels of activities, such as individual units of output versus batches of output. Answer: FALSE Explanation: A cost hierarchy categorizes various activity cost pools on the basis of the different types of cost drivers, or cost-allocation bases, or different degrees of difficulty in determining cause-and-effect (or benefits-received) relationships. Diff: 2 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-3
7) A cost hierarchy is a categorization of costs into different cost pools on the basis of different classes of cost drivers or different degrees of difficulty in determining cause-and-effect relationships. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-3
8) Output unit-level cost is identical to batch-level cost in a system that costs based on activities. Answer: FALSE Diff: 1 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-3
9) Batch-level costs are resources sacrificed on activities undertaken to support specific products or services. Answer: FALSE Explanation: Output unit-level costs are the costs of activities performed on each individual unit of a product or service. Diff: 1 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-3
10) Product-sustaining (service-sustaining) costs are the costs of resources sacrificed on activities undertaken to support specific services. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-3
11) Product-sustaining (service-sustaining),and facility-sustaining costs are equivalent terms in ABC systems. Answer: FALSE Diff: 1 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-3
12) Understanding the hierarchy of costs is critical when allocating costs to products. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-3
13) In a cost system that doe not consider the cost hierarchy unit-level measures can distort product costing because the demand for overhead resources may be driven by batch-level or product-sustaining activities. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-3
14) Output unit-level costs cannot be determined unless you know how many units are in a given batch. Answer: FALSE Explanation: Output unit-level costs are the costs of the activities performed on each individual unit whereas batch-level costs are the costs of activities related to a group of units. Diff: 2 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-3
15) Using multiple unit-level cost drivers generally constitutes an effective activity-based cost system. Answer: FALSE Explanation: In addition to unit-level cost drivers, an effective activity-based cost system usually uses batch-level, product-sustaining, and facility-sustaining cost drivers. Diff: 2 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-3
16) A cost accounting system should be revised when A) the existing cost accounting system provides information that is representative of operations. B) the existing cost accounting system could be updated, just to keep ahead. C) the existing cost accounting system does not produce information that reflects the way various products use scarce resources. D) management wants to change the system, even though the information is relevant and correct. E) a new system would be easier to understand but would not be reliable. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-3
17) Which of the following statements is TRUE regarding activity-based costing systems? A) ABC systems accumulate overhead costs by departments. B) ABC costing systems are less complex and, therefore, less costly than traditional systems. C) ABC costing systems can be used in manufacturing firms only. D) ABC costing systems have multiple indirect cost allocation rates for each activity. E) ABC systems provide a greater level of detail to understand how an organization uses its common inputs differently for distinct products. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-3
18) When using activity-based costing in a manufacturing setting, its distinctive feature is the focus on A) activities as the fundamental cost objects. B) minimizing the number of journal entries related to the manufacturing process. C) minimizing manufacturing costs. D) materials handling. E) materials sorting. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-3
19) Which of the following statements about activity-based costing is TRUE? A) It does not affect cost control. B) Indirect cost allocation bases are unlikely to be cost drivers. C) It provides less information than traditional cost systems. D) It provides similar results to traditional costing when one activity creates a substantial amount of total cost. E) It provides similar results to traditional costing when different products use resources from different activities in different proportions. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-3
20) Which of the following statements does not represent the logic of an ABC system? A) Activity cost allocation bases are the activity cost drivers of costs in the activity cost pools. B) A strong cause-and-effect relationship between overhead costs and the cost allocation base is essential. C) The requirement to measure cost allocation bases of different activities used by different products is essential. D) The overhead used by different products is not important, as it is a fixed cost. E) A greater level of detailed information concerning costs will help organizations be more efficient. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-3
21) In an activity-cost pool A) a measure of the activity performed serves as the cost allocation base. B) the costs have a cause-and-effect relationship with the cost-allocation base for that activity. C) the cost pools are homogeneous over time. D) costs in a cost pool can always be traced directly to products. E) each pool pertains to a narrow and focused set of costs. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-3
22) Activity-based costing is a technique to improve the reliability of cost assignment A) to work-in-process inventory. B) from direct cost pools to distinct types of outputs. C) from both direct and indirect cost pools to distinct types of outputs. D) to all types of inventory. E) from indirect cost pools to distinct types of outputs. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-3
23) Which of the following is NOT an activity under an ABC system? A) an event B) a task C) a unit of work D) a process E) indirect cost Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-3
24) Which of the following is NOT an activity under an ABC system? A) designing products B) engineering C) setting up equipment D) distributing products E) customers Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-3
25) A costing system which focuses on individual event or tasks as the cost pool to be allocated is called A) activity-based costing. B) direct costing. C) job costing. D) process costing. E) normal costing. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-3
26) Which of the following is relevant concerning cost hierarchies? A) activity levels B) determining whether costs are variable or fixed C) costing on the value chain D) separating inventoriable costs from period costs E) minimum cost required for a particular process Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-3
27) A four-part cost hierarchy includes A) market-sustaining costs. B) research and development costs. C) manufacturing-level costs. D) output unit-level costs. E) period costs. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-3
28) If the cost of an activity increases with each hour of machine time, it is which of the following? A) market-sustaining cost B) output unit-level cost C) batch-level cost D) product-sustaining (service-sustaining) costs E) facility-sustaining cost Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-3
29) If the cost of an activity increases with the number of purchase orders placed, rather than to the quantity of items purchased, it is which of the following? A) market-sustaining cost B) output unit-level cost C) facility-sustaining cost D) product-sustaining (service-sustaining) costs E) batch-level cost Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-3
30) If the cost of an activity increases with the quantity of items used, it is which of the following? A) market-sustaining cost B) output unit-level cost C) batch-level cost D) product-sustaining (service-sustaining) costs E) facility-sustaining cost Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-3
31) Engineering costs incurred to change product designs are which of the following? A) market-sustaining costs B) output unit-level costs C) batch-level costs D) product-sustaining (service-sustaining) costs E) facility-sustaining costs Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-3
32) Resources sacrificed on activities undertaken to support product lines are which of the following? A) market-sustaining costs B) output unit-level costs C) batch-level costs D) facility-sustaining costs E) product-sustaining (service-sustaining) costs Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-3
33) A division of a company manufactures two products, which are in high demand in the defence industry. Product A is stamped out in a machine press, at the rate of 10,000 per hour. Product B is identical to product A, with the exception that it is made from thicker steel, and requires the machine press to be recalibrated. Product A is produced on the day shift and product B is produced on the afternoon shift, allowing set up changes to be done between shifts. In this case, set up hours are related to which of the following? A) units of output B) batches of output C) the number of customers D) machine hours E) labour hours Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-3
34) Resources sacrificed on activities that cannot be traced to individual products or services, but which support the organization as a whole are which of the following? A) output unit-level costs B) service-sustaining costs C) batch-level costs D) product-sustaining costs E) facility-sustaining costs Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-3
35) The costs of hiring building security would be which of the following? A) output unit-level costs B) batch-level costs C) general-level costs D) product-sustaining costs E) facility-sustaining costs Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-3
36) Activity-based cost systems create A) one large cost pool. B) homogeneous activity-related cost pools. C) activity-cost pools with a broad focus. D) activity-cost pools containing many direct costs. E) heterogenous activity-related cost pools. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-3
37) Activity-based cost systems A) apply average support costs to each unit of product. B) limit cost drivers to units of output. C) allocate costs based on the overall level of activity. D) generally undercost complex products. E) highlight the different levels of activities. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-3
38) A cost hierarchy describes A) a technique for direct cost tracing. B) the process of arranging costs by importance. C) the logic of segregating costs by value-chain classification. D) the logic of separating one indirect cost pool into multiple pools according to activity level. E) a technique of differentiating fixed and variable costs. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-3
39) Which of the following is NOT a characterization of activity-based costing? A) identification of only variable costs B) a focus on both operating and strategic decisions C) identifying all resources used by activities regardless of how individual costs behave in the short run D) using the cost hierarchy to allocate costs to products E) identification of all costs used by activities Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-3
40) Installing a new control panel on a factory production machine would be classified in the ABC cost hierarchy as a (an) A) output unit-level cost. B) batch-level cost. C) product-sustaining cost. D) facility-sustaining cost. E) period cost because it is not related to the cost hierarchy. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-3
41) Designing a new model of washing machine would be classified in the ABC cost hierarchy as a (an) A) output unit-level cost. B) batch-level cost. C) product-sustaining cost. D) facility-sustaining cost. E) period cost because it is not related to the cost hierarchy. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-3
42) Analyze the two costing systems below and determine which one is an ABC system, stating the reasons for your choice. System A Total indirect costs $3,250,000 Costs per unit $64.21 Total direct costs $4,565,000 # of Indirect cost pools 10 Direct cost categories 4 System B Total indirect costs Costs per unit Total direct costs # of Indirect cost pools Direct cost categories
$2,750,000 $47.25 $5,065,000 1 2
Answer: System A has the indications of a refined cost system using activity-based costing. Indications are; greater number of direct cost categories (direct-cost tracing), greater number of indirect-cost pools (homogeneous cost pools with allocation bases having a strong cause-and-effect relationship are easier to establish when the number of pools increases). The fact that more of the costs are categorized as direct also suggests that the cost system has been refined. Diff: 2 Type: ES CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-3
43) Bottleneck Company operates many bottling plants around the globe. At its Toronto plant, where nine different brands are bottled, the following costs were incurred in the current year to produce 15,000,000 cans of soft drink: 1. Development costs of adding the new product "Soda Plus" amounted to $614,000. 2. Material handling costs of inspecting and handling concentrate, bottles, packages, and so forth amounted to $433,500. These costs are allocated to each production run. 3. Incoming materials purchase costs that can be directly traced to individual products being canned and packaged. These costs are purely variable with output level and amounted to $2,213,000. 4. Executive salaries and other central administration overhead amounted to $423,000. 5. Plant overhead, including costs related to: supervision, safety, energy, and plant insurance, amounted to $623,000. 6. The cost of cleaning and calibrating equipment for each production run amounted to $171,500. Required: a. Classify each of the preceding costs as output unit-level, batch-level, product-sustaining, or facilitysustaining. b. Compute the cost per unit for the total manufacturing cost. Answer: a. Output unit-level: material purchase costs Batch-level: material handling, cleaning and calibrating equipment Product-sustaining: new product development and plant overhead Facility-sustaining: executive salaries and central administration overhead b. ($614,000 + $433,500 + $2,213,000 + $623,000 + $171,500)/15,000,000 = $0.27 per can Diff: 2 Type: SA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-3
44) Shampion Company operates many bottling plants around the globe. At its Montreal plant, where six different brands are bottled, the following costs were incurred in 2012 to produce 10,000,000 bottles of beer: 1. Development costs of adding the new product "Light Beer Plus" amounted to $307,000. 2. Material handling costs of inspecting and handling concentrate, bottles, packages, and so forth amounted to $216,750. These costs are allocated to each production run. 3. Incoming materials purchase costs can be directly traced to individual products being bottled and packaged. These costs are purely variable with output level and amounted to $1,106,500. 4. Executive salaries and other central administration overhead amounted to $396,000. 5. Plant overhead, including costs related to supervision, safety, energy, and plant insurance, amounted to $311,500. 6. The cost of cleaning and calibrating equipment for each production run amounted to $85,750. Required: a. Classify each of the preceding costs as output unit-level, batch-level, product-sustaining, or facilitysustaining. b. Compute the cost per unit for the total manufacturing cost. Answer: a. Output unit-level: material purchase costs Batch-level: material handling, cleaning and calibrating equipment Product-sustaining: new product development and plant overhead Facility-sustaining: executive salaries and central administration overhead b. ($307,000 + $216,750 + 1,106,500 + 311,500 + $85,750)/10,000,000 = $0.203 per bottle Diff: 2 Type: SA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-3
45) For each of the following activities identify an appropriate activity-cost driver. a. machine maintenance b. machine setup c. quality control d. material ordering e. production scheduling f. warehouse expense g. engineering design Answer: Any one of the listed cost drivers is correct. Activity Actual times for various A. Machine maintenances of various Maintenance # of machines Machine hours machines B. Machine Setup
Actual times for various setups for various machines Actual times for various inspections for various controls
# of setups
Setup hours
C. Quality Control
# of inspections
Inspection hours
D. Material Ordering
# of orders
Actual times for various Ordering hours orders for various material
E. Production Scheduling
# of runs
Scheduling hours
F. Warehousing
# of bins, aisles
Picking hours
G. Engineering Design
# of engineers Engineering # of designs hours
Actual times for various runs for various schedules Actual times for various parts for various warehousing activities Actual times for various engineering designs
Diff: 2 Type: SA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-3
46) The plant manager has come to you, as the new management accountant, for assistance. The plant manufactures sailboards, operating two shifts per day. During March through July, a third shift is added. The company has to train new machine operators each summer as the demands for its products is very seasonal. Training always occurs on the day shift, and the plant allocates the costs of training (e.g., extra supervision required), based on machine hours. This year, the three shift managers cannot agree on who should be charged for the training. The day shift manager is angry because she has discovered that machine hours are highest on the day shift. The other two managers argue that the hours are higher due to the training, so the day shift should be charged for those costs. Required: Provide a recommendation to the plant manager? Include in your recommendation two options as an allocation base for training costs. Answer: It is possible that the training costs should just be split evenly between the three shift manager's budgets, but some analysis is required to determine if a cause-and-effect relationship can be identified, or if the costs may be treated as facility-sustaining cost and simply deducted from income. Labour hours or machine hours could be used as an allocation base. There isn't enough information to make a strong case for one over the other. Diff: 2 Type: ES CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-3
47) Hans Sorensen, controller of Franklin Production, has the choice of allocating indirect manufacturing cost using either direct manufacturing labour hours or manufacturing machine hours. If he uses labour hours for the month of January, Product A receives $312,000 in manufacturing overhead charges and Product B receives $448,000. When machine hours are used Product A receives $352,000 in manufacturing overhead charges while Product B receives only $408,000. Required: You are the department manager in charge of Product A and are strongly in favour of using labour hours. Of course, your co-manager, who is in charge of Product B, is strongly in favour of machine hours. What are some arguments you may be able to give for the allocation base that favours your department's product? Answer: Arguments that may be favourable to your department include: 1. Direct manufacturing labour is a better measure of indirect manufacturing costs than is manufacturing machine hours. The machines often run when no products are being processed through them. 2. Labour hours reflect a stronger cause and effect relationship to what is being done to the products than do machine hours. The manufacturing process is labour intensive rather than machine-processing intensive. 3. Labour hours are easier to collect than machine hours because the information can be taken directly from the payroll information. 4. Most of the manufacturing overhead items relate to the labourers rather than to the machines; for example, lighting is for people—machines can work in the dark. Diff: 2 Type: ES CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-2; 5-3
48) How are cost drivers selected in activity-based costing systems? Answer: First, indirect costs are divided into homogeneous cost pools and classified as output unitlevel, batch-level, product-sustaining (service sustaining), or facility-sustaining costs. The cost pools correspond to activities. Costs are allocated to products, services, or customers using activity drivers (cost allocation bases) that have a cause-and-effect relationship with each cost pool. Choices about how to economize on the number of activity cost drivers, how to isolate events (because activities triggered by the same event often can use the same activity cost driver), and which cost drivers to select are influenced by the fact that the benefit of obtaining cost driver information needs to exceed implementation costs. Diff: 2 Type: ES CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-2; 5-3
49) The new manager of the insurance division does not understand how the company can have so many overhead rates for assigning costs to the activities of the company's life insurance underwriters. There is one rate schedule for average assignable costs when agents write standard policies. There is another rate schedule which the agents must complete when they write special policies, and these policies are costed out differently from those that are categorized as standard policies. Required: a. Why might the company have different costing systems with different overhead rates for the standard and specialized policies? b. Which rate (standard or specialized) would cross-subsidize the other if the company used only one set of overhead rates for costing its policies? Answer: a. Because the standard policies are written the same way each time, the company knows how long it takes to complete such a policy and the average effort expended by the agents in doing standard policy work. Special policies, on the other hand, are different and the amount of effort and time to complete such a policy is difficult to standardize. The agents are thus required to keep track of their time and expenses in completing such policies. b. The standard policy rates would probably cross-subsidize the special policy rates because the average assignable costs would probably be greater than the real cost of the standard policies. For example, if the actual cost to write a standard policy was $100 and the assignable rate was $125, the standard policies would be subsidizing the special policies by $25 every time a standard policy was written. Diff: 2 Type: ES CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-2; 5-3
50) ABC provides a cost-benefit analysis of the unequally shared benefits of a support activity. The technique also discloses the scope of business functions where cost control will have a positive effect. Required: Provide three benefits that the identification of the scope of cost control focused on different activity levels should lead to. Answer: Any three of: Increased reliability of the costs and benefits measures of various support activities. Deeper understanding of interdependencies among costs and activities throughout the value chain. Clearer diagnoses of costing problems and identification of more effective remedies. Refined, more reliable predicted (budgeted) future costs. Superior methods to predict (budget) future outcomes, particularly profitability. Diff: 3 Type: ES CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-3
51) Describe each of the four cost hierarchies used to define levels for activities in activity-based costing. Answer: The four parts of the cost hierarchy are output unit-level costs, batch-level costs, product (or service) sustaining costs, and facility-sustaining costs. Output unit-level costs are costs of activities performed on each individual unit of a product or service. Batch-level costs are the costs of activities related to a group of units of products or services rather than to each individual unit of product or service. Product (or service) sustaining costs are the costs of activities undertaken to support individual products or services regardless of the number of units or batches in which the products are produced. Facility-sustaining costs are the costs of activities that cannot be traced to individual products or services but support the organization as a whole. When compared to the fixed-variable dichotomy, which considers only units of output as a cost driver, the four part cost hierarchy provides opportunity to model many different cost drivers. For example, batch-level costs and product (or service) sustaining costs are driven by the number of batches of a product and the number of different products. Neither of these class of cost drivers are able to be considered in a simple fixed-variable dichotomy. Diff: 2 Type: ES CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-3
Match the cost driver in the right column below to the appropriate function in the left column. A) Number of desktop computers B) Number of shipments C) Number of customers D) Number of invoices E) Number of purchase orders F) Number of employees 52) Purchasing Diff: 1 Type: MA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-3
53) Billing Diff: 1 Type: MA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-3
54) Shipping Diff: 1 Type: MA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-3
55) Computer Support Diff: 1 Type: MA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-3
56) Personnel Diff: 1 Type: MA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-3
57) Customer Service Diff: 1 Type: MA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-3
Answers: 52) E 53) D 54) B 55) A 56) F 57) C
5.4 Assign costs using activity-based costing (ABC). 1) ABC systems seek a cost-allocation base that has a cause-and-effect relationship with costs in the cost pool. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-4
2) Homogeneous cost pools and the choice of cost-allocation bases are not tied to the cost hierarchy. Answer: FALSE Explanation: Homogeneous cost pools and the choice of cost-allocation bases are tied to the cost hierarchy. Diff: 2 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-4
3) The benefit of an ABC system is that it provides information to make better decisions at a lower costs than traditional (simple) cost systems. Answer: FALSE Explanation: The benefit of an ABC system is that it provides information to make better decisions. But this benefit must be weighed against the measurement and implementation costs of an ABC system. Diff: 1 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-4
4) Significant amounts of direct costs allocated using only one or two cost pools is evidence that a company may benefit from implementing ABC. Answer: FALSE Explanation: Significant amounts of indirect costs allocated using only one or two cost pools is evidence that a company may benefit from implementing ABC. Diff: 2 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-4
5) Which of the following does not characterize an ABC system, as compared to a traditional costing system? A) smaller cost pools B) more cost drivers C) more homogeneous cost pools D) focus on activities E) less expensive to set up and maintain Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-4
6) With simple costing systems, products manufactured in small batches and in small annual volumes may be ________ because batch-related and product-sustaining costs are assigned using unit-related drivers. A) overcosted B) fairly costed C) costed the same as in activity-based costing D) undercosted E) ignored Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-4
7) Which of the following is a sign that an ABC system may be useful? A) There are small amounts of indirect costs. B) Products make diverse demands on resources because of differences in volume, process steps, batch size, or complexity. C) Products that a company is well-suited to make and sell show large profits; whereas products that a company is less suited to produce and sell show small profits. D) Operations staff agrees with accountants about the costs of manufacturing and marketing products and services. E) Almost none of the indirect costs are identified as output unit-level costs. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-4
8) Which of the following is TRUE concerning selecting a cost-allocation base in an ABC system? A) Cost-allocation bases are not relevant in defining the number of activity pools. B) All costs can be directly identified with a specific activity. C) The allocation base chosen may be constrained by the availability of reliable data. D) Costs may need to be allocated to services first, before the costs of services can be allocated to activities. E) Output unit-level costs cannot be related to a cost-allocation base. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-4
9) Which of the following cost and cost allocation bases have a strong cause and effect relationship?
A) administration costs and cubic feet B) setup costs and square feet C) quality control costs and the number of inspections D) machine maintenance and setup hours Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-4
10) For a business that offers customers a store where products can be purchased and picked up, or a delivery service that can ship the product directly to the customer, which of the following would most likely be the best cost allocation base for distribution costs? A) number of customer service phone calls and emails per period B) number of pounds of product shipped or delivered C) electricity costs for the period D) number of products sold Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-4
11) For a manufacturing firm that produces multiple families of products requiring various combinations of different types of parts, what would be the best allocation base for human resource administration costs? A) direct labour hours B) electricity costs C) number of parts purchased D) machine hours Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-4
Use the information below to answer the following question(s). A transportation company provides bussing, limo and taxi service. The company charges: $350 per day for bussing service; $2.00 per kilometre for taxi service; and, $3.50 per kilometre for limo service. Two individual clients, the school board and the city government offices use the majority of the limo service on a contract agreement. Bussing services are used exclusively by the school board, and the taxi service is used almost exclusively by the general public, although the school board uses the taxi services when individual students have to be transported on occasion. Indirect costs are accumulated on internal records at $1.50 per kilometre for limo use and $1.00 per kilometre for taxi use, and $195 per day for each of the twenty buses. The company's costing system has tracked the following activities for the month:
Client School board City gov't
Limo Km 360 1,943
Taxi Km 90 125
Average Days/Bus 19 n/a
12) Compute the billing to each major client for the month. A) School Board, $134,440.00; City Gov't, $7,050.50 B) School Board, $8,090.00; City Gov't, $134,440.00 C) School Board, $134,440.00; City Gov't, $4,323.50 D) School Board, $7,050.50; City Gov't, $7,685.00 E) School Board, $8,090.00; City Gov't, $7,050.50 Answer: A Explanation: School board: [360 × $3.50] + [90 × $2.00] + [19 × 20 × $350] = $134,440.00 City gov't: [1,943 × $3.50] + [125 × $2.00] = $7,050.50 Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
13) What indirect costs were accumulated for each major client for the month? A) School Board, $74,730.00; City Gov't, $3,039.50 B) School Board, $7,050.50; City Gov't, $74,730.00 C) School Board, $74,730.00; City Gov't, $7,050.50 D) School Board, $7,050,50; City Gov't, $7,685.00 E) School Board, $6,925.50; City Gov't, $141,420.00 Answer: A Explanation: School board: [360 × $1.50] + [90 × $1.00] + [19 × 20 × $195] = $74,730.00 City gov't: [1,943 × $1.50] + [125 × $1.00] = $3,039.50 Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
14) The previous controller at the transportation company had always estimated the indirect costs at 25% of billings. What indirect costs were accumulated for each major client for the month under this assumption? A) School Board, $33,610.00; City Gov't, $1,080.88 B) School Board, $2,022.50; City Gov't, $33,610.00 C) School Board, $33,610.00; City Gov't, $1,762.63 D) School Board, $1,762.63; City Gov't, $1,921.25 E) School Board, $2,022.50; City Gov't, $1,762.63 Answer: C Explanation: School board: ([360 × $3.50] + [90 × $2.00] + [19 × 20 × $350]) × 25% = $33,610.00 City gov't: ([1,943 × $3.50] + [125 × $2.00]) × 25% = $1,762.63 Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
Use the information below to answer the following question(s). Fran Ferry Company had the following activities, pooled costs, and physical flow of driver units. The company uses activity-based costing.
Activities Account inquiry (hours) Account billing (lines) Account verification (accounts) Correspondence (letters)
Pooled Costs $200,000 $140,000 $5,000 $25,000
Physical Flow of Driver Units 4,000 hours 200,000 lines 25,000 accounts 5,000 letters
The above activities are used by departments A and B as follows:
Account inquiry (hours) Account billing (lines) Account verification (accounts) Correspondence (letters)
A 1,000 200,000 5,000 500
B 2,000 100,000 4,000 800
15) How much of the account inquiry cost will be assigned to Department A? A) $200,000 B) $80,000 C) $66,667 D) $133,334 E) $50,000 Answer: E Explanation: ($200,000/4,000) × 1,000 = $50,000 Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
16) How much of the account billing cost will be assigned to Department B? A) $70,000 B) $14,000 C) $46,667 D) $93,333 E) $140,000 Answer: A Explanation: ($140,000/200,000) × 100,000 = $70,000 Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
Use the information below to answer the following question(s). International Clothiers Corporation had the following activities, pooled costs, and physical flow of driver units. The company uses activity-based costing.
Activities Account inquiry (hours) Account billing (lines) Account verification (accounts) Correspondence (letters)
Pooled Physical Flow of Costs Driver Units $400,000 5,000 $280,000 2,000,000 $150,000 25,000 $50,000 20,000
The above activities are used by departments X and Y as follows:
Account inquiry (hours) Account billing (lines) Account verification (accounts) Correspondence (letters)
X 500 hours 250,000 lines 2,000 accounts 200 letters
Y 800 hours 200,000 lines 1,000 accounts 1,000 letters
17) How much of the correspondence cost will be assigned to Department X? A) $1,000 B) $8,333 C) $700 D) $500 E) $5,000 Answer: D Explanation: ($50,000/20,000) × 200 = $500 Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
18) How much of the account verification cost will be assigned to Department Y? A) $1,000 B) $6,000 C) $10,000 D) $11,000 E) $5,000 Answer: B Explanation: ($150,000/25,000) × 1,000 = $6,000 Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
19) Diamond Industries uses departmental overhead rates to allocate its manufacturing overhead to jobs. The company has two departments: Assembly and Sanding. The Assembly Department uses a departmental overhead rate of $20 per machine hour, while the Sanding Department uses a departmental overhead rate of $15 per direct labour hour. Job 396 used the following direct labour hours and machine hours in the two departments:
Actual results Direct labour hours used Machine hours used
Assembly Department 4 9
Sanding Department 3 5
The cost for direct labour is $25 per direct labour hour and the cost of the direct materials used by Job 396 is $1,200. What was the total cost of Job 396 if Babcock Industries used the departmental overhead rates to allocate manufacturing overhead? A) $1,375 B) $1,425 C) $1,500 D) $1,600 E) $1,630 Answer: D Explanation: Labour ($25 × 4 hrs) + ($25 × 3 hrs) = 175.00 Materials = 1,200.00 Overhead Assembly dept. $20 × 9 hrs = 180.00 Sanding dept. $15 × 3 hrs = 45.00 Total = 1,600.00 Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
20) Leonard Industries uses departmental overhead rates to allocate its manufacturing overhead to jobs. The company has two departments, Building and Inspection. The Building Department uses a departmental overhead rate of $18 per machine hour, while the Inspection Department uses a departmental overhead rate of $15 per direct labour hour. Job 611 used the following direct labour hours and machine hours in the two departments:
Actual results Direct labour hours used Machine hours used
Building Department 6 12
Inspection Department 3 0
The cost for direct labour is $25 per direct labour hour and the cost of the direct materials used by Job 611 is $1,500. What was the total cost of Job 611 if Leonard Industries used the departmental overhead rates to allocate manufacturing overhead? A) $1,700 B) $1,844 C) $1,880 D) $1,838 E) $1,986 Answer: E Explanation: Labour ($25 × 6 hrs) + ($25 × 3 hrs) = $ 225.00 Materials = 1,500.00 Overhead Bldg dept $18 × 12 hrs = 216.00 Inspect dep $15 × 3 hrs = 45.00 Total = $ 1,986.00 Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
21) International Clothiers Industries uses departmental overhead rates to allocate its manufacturing overhead to jobs. The company has two departments: Building and Inspection. The Building Department uses a departmental overhead rate of $18 per machine hour, while the Inspection Department uses a departmental overhead rate of $15 per direct labour hour. Job 611 used the following direct labour hours and machine hours in the two departments:
Actual results Direct labour hours used Machine hours used
Building Department 8 12
Inspection Department 3 1
The cost for direct labour is $23 per direct labour hour and the cost of the direct materials used by Job 611 is $1,300. What was the total cost of Job 611 if International Clothiers Industries used the departmental overhead rates to allocate manufacturing overhead? A) $1,814 B) $1,784 C) $1,745 D) $1,751 E) $1,910 Answer: A Explanation: Labour ($23 × 8 hrs) + ($23 × 3 hrs) = $ 253.00 Materials = 1,300.00 Overhead Bldg dept $18 × 12 hrs = 216.00 Inspect dep $15 × 3 hrs = 45.00 Total = $ 1,814.00 Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
Answer the following question(s) using the information below. Ernsting Printers has contracts to complete weekly supplements required by forty-six customers. For the year 2022, manufacturing overhead cost estimates total $420,000 for an annual production capacity of 1,200,000 pages. For 2022, Ernsting Printers has decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis: Manufacturing Cost pool overhead costs Activity level Design changes $60,000 300 design changes Setups 320,000 5,000 setups Inspections 40,000 8,000 inspections Total manufacturing overhead costs $420,000 During 2022, two customers, Wealth Managers and Health Systems, are expected to use the following printing services:
Activity Pages Design changes Setups Inspections
Wealth Managers 60,000 10 20 30
Health Systems 76,000 0 10 38
22) What is the cost driver rate if manufacturing overhead costs are considered one large cost pool and are assigned based on 1,200,000 pages of production capacity? A) $0.05 per page B) $0.35 per page C) $0.025 per page D) $0.045 per page Answer: B Explanation: $0.35 per page = ($420,000/1,200,000 pages) Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
23) Using pages printed as the only overhead cost driver, what is the manufacturing overhead cost estimate for Wealth Managers during 2022? A) $2,500 B) $23,000 C) $1,500 D) $2,700 E) $21,000 Answer: E Explanation: $21,000 = 60,000 × 0.35 Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
24) Assuming activity-cost pools are used, what are the activity-cost driver rates for design changes, setups, and inspections cost pools? A) $200 per change, $64 per setup, $5 per inspection B) $180 per change, $76 per setup, $4 per inspection C) $150 per change, $64 per setup, $4 per inspection D) $180 per change, $76 per setup, $5 per inspection E) $200 per change, $5 per setup, $64 per inspection Answer: A Explanation: Design changes: $200 per change = ($60,000/300 design changes) Setups: $64 per setup = ($320,000/5,000 setups) Inspections: $5 per inspection = ($40,000/8,000 inspections) Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
25) Using activity-based costing to allocate overhead costs, what is the total manufacturing overhead cost estimate for Wealth Managers during 2022? A) $6,850 B) $3,250 C) $4,020 D) $3,430 E) $5,096 Answer: D Explanation: $1,630 = (10 × $200 per change = $2,000) + (20 × $64 per setup = $1,280) + (30 × $5 per inspection = $150) Diff: 3 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
26) When selling price is cost plus 25% and costs are assigned using the single cost driver, number of pages printed, then A) Ernsting Printers will want to drop Wealth Managers as a customer. B) Wealth Managers will likely seek to do business with competitors. C) Wealth Managers is unfairly over billed for its use of printing resources. D) Wealth Managers is under billed for the job, while other jobs will be unfairly over billed. E) All customers will be under billed for their jobs. Answer: D Diff: 3 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-4
Answer the following question(s) using the information below. Wallace Printing has contracts to complete weekly supplements required by forty-six customers. For the year 2022, manufacturing overhead cost estimates total $420,000 for an annual production capacity of 10 million pages. For 2022, Wallace Printing decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:
Cost pool Design changes Setups Inspections Total manufacturing overhead costs
Manufacturing overhead costs $60,000 320,000 40,000 $420,000
Activity level 200 design changes 4,000 setups 16,000 inspections
During 2022, two customers, Wayward Insurance and Hapless Systems, are expected to use the following printing services:
Activity Pages Design changes Setups Inspections
Wayward Insurance 60,000 10 20 30
Hapless Systems 76,000 2 10 38
27) If manufacturing overhead costs are considered one large cost pool and are assigned based on 10 million pages of production capacity, what is the cost driver rate? A) $0.25 per page B) $0.05 per page C) $0.025 per page D) $0.042 per page E) $0.42 per page Answer: D Explanation: $0.042 per page = ($420,000/10,000,000 pages) Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
28) Using pages printed as the only overhead cost driver, what is the manufacturing overhead cost estimate for Hapless Systems during 2022? A) $19,000 B) $3,800 C) $1,900 D) $2,520 E) $3,192 Answer: E Explanation: $3,192 = 76,000 pages × ($420,000/10,000,000 pages) Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
29) Assuming activity-cost pools are used, what are the activity-cost driver rates for design changes, setups, and inspections cost pools? A) $300 per change, $80 per setup, $2.50 per inspection B) $250 per change, $80 per setup, $3.75 per inspection C) $210 per change, $2.50 per setup, $26.25 per inspection D) $300 per change, $125 per setup, $4.00 per inspection E) $300 per change, $2.50 per setup, $80 per inspection Answer: A Explanation: Design changes: $300 per change = ($60,000/200 design changes) Setups: $80 per setup = ($320,000/4,000 setups) Inspections: $2.50 per inspection = ($40,000/16,000 inspections) Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
30) Using activity-based costing to allocate overhead costs, what is the total manufacturing overhead cost estimate for Hapless Systems during 2022? A) $3,113.75 B) $1,495.00 C) $2,068.00 D) $3,412.50 E) $3,665.00 Answer: B Explanation: $1,495 = (2 × $300 per change) + (10 × $80 per setup) + (38 × $2.50 per inspection) Diff: 3 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
31) When selling prices are based on costs assigned using the single cost driver, number of pages printed, then Hapless Systems A) is fairly billed because resources are allocated uniformly to all jobs. B) is grossly under billed for the job, while other jobs will be unfairly over billed. C) will be pleased because all customers will be under billed for their jobs. D) will contribute too little to profits, and Wallace Printing will not want to accept additional work. from the company E) will likely seek to do business with competitors. Answer: E Diff: 3 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-4
Answer the following question(s) using the information below. Products S5 and CP8 each are assigned $50.00 in indirect costs by a traditional costing system. An activity analysis revealed that although production requirements are identical, S5 requires 45 minutes less setup time than CP8. 32) Compared to an activity-based cost system, CP8 is ________ under the traditional system. A) undercosted B) overcosted C) fairly costed D) accurately costed E) costed the same Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-4
33) According to an ABC system, S5 uses a disproportionately A) smaller amount of unit-level costs. B) larger amount of unit-level costs. C) smaller amount of product-sustaining costs. D) larger amount of batch-level costs. E) smaller amount of batch-level costs. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-4
Answer the following questions using the information below: Gregory Enterprises has identified three cost pools to allocate overhead costs. The following estimates are provided for the coming year: Cost Pool Overhead Costs Supervision of direct labour $320,000 Machine maintenance $120,000 Facility rent $200,000 Total overhead costs $640,000
Cost driver Activity level Direct labour hours 800,000 Machine hours 960,000 Square metres of area 100,000
The accounting records show the Mossman Job consumed the following resources: Cost driver Direct labour-hours Machine-hours Square metres of area
Actual level 200 1,600 50
34) If Gregory Enterprises uses a simple cost system based on direct labour hours then what amount of indirect costs will be allocated to the Mossman job? A) $60 B) $240 C) $100 D) $160 E) $80 Answer: D Explanation: OVR = $640,000/800,000 hrs. = $0.80 per DL hour 200 DL hrs. × $0.80 = $160 Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
35) If Gregory Enterprises uses an ABC system then what amount of indirect costs will be allocated to the Mossman job? A) $240 B) $420 C) $80 D) $160 E) $380 Answer: E Explanation: DL rate = $320,000/800,000 hrs. = $0.40 per DL hour 200 DL hrs. × $0.40 = $80 MH rate = $120,000/960,000 hrs. - $0.125 per MH 1,600 MH × $0.125 = $200 Rent rate = $200,000/100,000 sq. m. = $2 per metre 50 sq. m. × $2 = $100 Total = $80 + $200 + $100 = $380 Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
36) When selling prices are based on costs assigned using the single cost driver, direct labour hours, then the Mossman job A) is fairly billed because resources are allocated uniformly to all jobs. B) is grossly under billed for the job, while other jobs will be unfairly over billed. C) may increase overall sales as other jobs will be cross-subsidized. D) will contribute too little to profits, and Gregory Enterprises will not want to accept additional work from the company. E) will likely seek to do business with competitors. Answer: B Diff: 3 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-4
Answer the following questions using the information below: Marpole Enterprises has identified three cost pools to allocate overhead costs. The following estimates are provided for the coming year: Cost Pool Overhead Costs Supervision of direct labour $340,000 Machine maintenance $170,000 Facility rent $210,000 Total overhead costs $720,000
Cost driver Activity level Direct labour hours 600,000 Machine hours 1,440,000 Square metres of area 100,000
The accounting records show the Bossman Job consumed the following resources: Cost driver Direct labour-hours Machine-hours Square metres of area
Actual level 150 1,700 80
37) If Marpole Enterprises uses a simple cost system based on direct labour hours then what amount of indirect costs will be allocated to the Bossman job? A) $85 B) $240 C) $180 D) $160 E) $80 Answer: C Explanation: OVR = $720,000/600,000 hrs. = $1.20 per DL hour 150 DL hrs. × $1.20 = $180 Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
38) If Marpole Enterprises uses an ABC system then what amount of indirect costs will be allocated to the Bossman job? A) $240 B) $454 C) $502 D) $398 E) $380 Answer: B Explanation: DL rate = $340,000/600,000 hrs. = $0.567 per DL hour 150 DL hrs. × $0.567 = $85.05 MH rate = $170,000/1,440,000 hrs. = $0.118 per MH 1,700 MH × $0.118 = $200.60 Rent rate = $210,000/100,000 sq. m. = $2.10 per metre 80 sq. m. × $2.10 = $168.00 Total = $85.05 + $200.60 + $168.00 = $453.65 Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
39) When selling prices are based on costs assigned using the single cost driver, direct labour hours, then the Bossman job A) is fairly billed because resources are allocated uniformly to all jobs. B) is grossly under billed for the job, while other jobs will be unfairly over billed. C) may increase overall sales as other jobs will be cross-subsidized. D) will contribute too little to profits, and Gregory Enterprises will not want to accept additional work from the company. E) will likely seek to do business with competitors. Answer: B Diff: 3 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-4
40) Eastern Star Nursing Home has been using an indirect overhead job cost system for allocating general and nursing overhead charges to all patients. However, during the past few months the facility has been losing patients because a competing nursing home charges much less for some classes of patients. It seems that Eastern Star is keeping the well patients and losing those who require special attention. The facilities manager believes that a refined costing system can improve the allocation of charges to all patients. Hopefully this will reduce the charges to the more ill patients. The accounting staff provided information for September. The costs have traditionally been allocated to patients based on nursing days. However, the accounting staff can separate nursing days by nursing category. At the request of the facilities manager, the following information was furnished concerning nursing days.
Senior RN RN Senior PN PN Nurse's aide Total days
Critical Care Days 1,600 4,000 2,000 400 0 8,000
Overhead rate/day
$110
Special Care Days 1,000 2,600 1,400 1,000 0 6,000
General Care Days 1,600 2,000 5,200 4,400 1,800 15,000
$100
$90
Daily Pay Rate $150 135 120 100 80
Hazel Jones, a long-time patient, spent 5 days in Critical Care, 4 days in Special Care, and 21 days in General Care during September. Her monthly assignment of nursing days was: 2 for Senior RN, 6 for RN, 10 for PN, and 12 for Nurse's aide. Required: a. Determine the amount of cost to be covered by Hazel Jones if the daily pay rates presented in the table are used for staff services and overhead is added on a care area per day basis. b. For each patient care area determine the total cost per day to be charged to patients using the weighted average staff services cost for the daily pay rate portion of total costs. What is cost to be covered by Hazel Jones' charge for the month of September?
Answer: a. Hazel Jones: Critical care $110 × 5 days = Special care $100 × 4 days = General care $90 × 21 days = Sr. RN $150 × 2 day = RN $135 × 6 days = PN $100 × 10 days = Nurse's aide $80 × 12 days = Total charges
$550 400 1,890 300 810 1,000 960 $5,910
b. Total rate basis: Sr RN RN Sr PN PN Aide Totals Weighted avg. Overhead other Total rate
Critical care 1,600 × $150 = $240,000 4,000 × 135 = 540,000 2,000 × 120 = 240,000 400 × 100 = 40,000 0 × 80 = 0 $1,060,000
Special care 1,000 × $150 = $150,000 2,600 × 135 = 351,000 1,400 × 120 = 168,000 1,000 × 100 = 100,000 0 × 80 = 0 $769,000
$1,060,000/8,000 = $132.50 110.00 $242.50
$769,000/6,000 = $128.17 100.00 $228.17
General care Sr. RN 1,600 × $150 = $240,000 RN 2,000 × 135 = 270,000 Sr PN 5,200 × 120 = 624,000 PN 4,400 × 100 = 440,000 Aide 1,800 × 80 = 144,000 Total $1,718,000 Weighted avg. $1,718,000/15,000 = $114.53 Overhead other 90.00 Total rate $204.53 Hazel Jones: Critical care $242.50 × 5 days = Special care $228.17 × 4 days = General care $204.53 × 21 days = Total charges
$1,212.50 912.68 4,295.13 $6,420.31
Diff: 3 Type: SA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
41) The Marionettes Company is noted for an exceptionally impressive line of Mardi Gras masks. Marionettes has established the following selling and distribution support activity-cost pools and their corresponding activity drivers for the year 2012: Activity Marketing Customer service Order execution Warehousing
Cost $30,000 10,000 5,000 5,000
Cost driver $500,000 of sales 5,000 customer 100 orders 50 product lines
Required: a. Determine the activity cost driver rate for each of the four selling and distribution activities. b. Under what circumstances is it appropriate to use each of the activity cost drivers? c. Describe at least one possible negative behavioral consequence for each of the four activity cost drivers. Answer: a. Activity cost driver rate for Marketing = 6% of sales = $30,000/$500,000. Activity cost driver rate for Customer Service = $2 per customer = $10,000/5,000. Activity cost driver rate for Order Execution = $50 per order = $5,000/100. Activity cost driver rate for Warehousing = $100 per order = $5,000/50. b. For marketing, using 6% of stipulated sales is appropriate when management wants to limit marketing costs to a budgeted proportion to sales. Using the number of customers for customer service is appropriate when the customer service costs are similar enough to use the average for all customers. Using the number of orders for order execution is appropriate when all orders are sufficiently alike in terms of resources used that they can be averaged. Using the number of product lines for warehousing is appropriate when each product line requires similar proportions of the warehousing efforts. c. For marketing, using 6% of sales limits the marketing activities to an arbitrary amount without consideration for potential opportunities. Using the number of customers for customer service can lead to customer service initiatives to limit the amount of time servicing each customer to cause the number of customers serviced to increase. Using the number of orders for order execution can result in purchasers splitting orders to increase the numbers of orders executed. Using the number of product lines for warehousing can lead warehouse personnel to designate more product line differences in the warehouse. Diff: 3 Type: SA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-3; 5-4
42) At Deutschland Electronics, product lines are charged for call centre support costs based on sales revenue. Last year's summary of call centre operations revealed the following:
Number of calls for information Average call length for information Number of calls for warranties Average call length for warranties Sales revenue
Surveillance Products Specialty Products 1,000 4,000 3 minutes 8 minutes 300 1,200 7 minutes 15 minutes $8,000,000 $5,000,000
Deutschland Electronics currently allocates call centre support costs using a rate of 0.5% of sales revenue. Required: a. Compute the amount of call centre support costs allocated to each product line under the current system. b. Assume Deutschland decides to use the average call length for information to assign last year's support costs. Does this allocation method seem more appropriate than percentage of sales? Why or why not? c. Assume Deutschland decides to use the numbers of calls for information and for warranties to assign last year's support costs of $65,000. Compute the amount of call centre support costs assigned to each product line under this revised ABC system. d. Deutschland Electronics assigns bonuses based on departmental profits. How might the Specialty Products manager try to obtain higher profits for next year if support costs are assigned based on the average call length for information? e. Discuss the barriers for implementing ABC for this call centre.
Answer: a. Call centre support costs allocated to surveillance products is $40,000 = 0.005 × $8,000,000 and to specialty products is $25,000 = 0.005 × $5,000,000. b. Yes, average call length appears to be a more appropriate allocation method because it allocates more support costs to specialty products, which consume a greater portion of the call centre's resources. c. $65,000 of support costs/6,500 total calls (Surveillance 1,000 + 300 + Specialty 4,000 + 1,200) = $10 per call. Call centre support costs allocated to surveillance products is $13,000 = 1,300 calls × $10 per call, and to specialty products is $52,000 = 5,200 calls × $10 per call. d. To increase profits, Specialty Product managers would want less cost allocated to their departments. Therefore, if support cost allocation were based on length of call, Specialty Products management may emphasize keeping calls for their department short and to the point, rather than emphasizing understanding and helping the caller. e. Poor model design or poor analytical interpretation and accountability consequences may function as barriers to using ABC assignments for the call centre activities. It is also important to recognize that the call volumes from this year may be an anomaly so that in an average year, the current allocation rate on sales may not be as distortive as it appears for this year. Diff: 3 Type: SA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-3; 5-4
43) Asian Tools, a manufacturer of precision hand tools, is concerned with the apparent lack of controls over cost incurrence in its Hand Tool Division. The division has always used a plant-wide rate for allocating manufacturing overhead to its products. However, some products cost substantially more than competitors' retail prices while others are substantially less. The division manager believes that a better cost allocation method can be developed. With the assistance of a plant supervisor, the accounting department has been able to establish the following relationships between production activities and the indirect costs of the activities: Activity Material handling Machine stamping Finishing Time
Cost Driver Number of parts Machine hours Finishing minutes
Allocation Rate $2.60 per part $60.00 per hour $4.00 per minute
The traditional allocation method is based upon direct manufacturing labour hours, and if that method is used the rate is $28 per hour. Required: Compute the unit indirect manufacturing costs of a batch of 200 tools if the batch required 220 parts, 8 machine hours, 52 minutes of finishing time, and 46 direct labour hours: Answer: a. Traditional method: 46 hours × $28 = $1,288 per batch or $1,288/200 = 6.44 per unit b. Activity base method: Material handling ($2.60 × 220) $572 Machine stamping ($60 × 8) 480 Finishing ($4 × 52) 208 Batch total $1,260 Unit costs $1,260/200 = $6.30 per unit Diff: 2 Type: SA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
44) A company manufactures household items sold at trade shows. The items, classified as either Trinkets or Widgets, are manufactured on a common assembly line. Although different direct materials are used, the direct labour cost is the same for each product line. The plant-wide rate for allocating manufacturing overhead to its products is no longer acceptable. The production manager has heard about activity-based costing and has assembled some information for use in changing the cost system to a cost driver concept. With the help of the accounting department, the manager has been able to establish the following relationships between production costs and some of the indirect manufacturing activities for August, along with the production data for the two product lines: Activity Material handling Machining Assembly Inspection
Cost Driver Number of parts Machine hours Units began Number tested
Allocation Rate Trinkets Widgets $2.00 per part 2,000 1,300 $20.00 per hour 205 300 $3.00 per unit 1,000 1,300 $4.00 per unit 100 1,200
Direct costs: Labour Materials
Trinkets $12,000 $5,200
Widgets $12,000 $2,600
Required: Using activity-based costing, determine the total production cost of each of the two product lines for August and the cost per unit, assuming all units started were completed.
Answer: Direct manufacturing costs: Direct labour Direct materials Total direct costs
Trinkets
Widgets
$12,000 5,200 17,200
$12,000 2,600 14,600
Indirect manufacturing costs: Material handling ($2.00 × 2,000) = 4,000 Machining ($20.00 × 205) = 4,100 Assembly ($3.00 × 1,000) = 3,000 Inspection ($4.00 × 100) = 400 Total indirect costs 11,500 Total manufacturing costs $28,700 Unit manufacturing costs
$28,700 ÷ 1,000 $28.700
($2.00 × 1,300) = ($20.00 × 300) = ($3.00 × 1,300) = ($4.00 × 1,200) =
2,600 6,000 3,900 4,800 17,300 $24,538 $24,538 ÷ 1,300 24.538
Diff: 3 Type: SA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
45) Power Corporation manufactures two models of grooming stations, a standard and a deluxe model. The following activity and cost information has been compiled:
Product Standard Deluxe Indirect costs:
Number of Setups 3 7
Number of Components 30 50
$20,000
$60,000
Number of Direct labour Hours 650 150
Required: Assume a traditional (simple) costing system applies the $80,000 of overhead costs based on direct labour hours. a. What is the total amount of overhead costs assigned to the standard model? b. What is the total amount of overhead costs assigned to the deluxe model? Assume an activity-based costing system is used and the number of setups and the number of components are identified as the activity-cost drivers for overhead. c. What is the total amount of indirect costs assigned to the standard model? d. What is the total amount of indirect costs assigned to the deluxe model? e. Explain the difference between the costs obtained from the traditional costing system and the ABC system. Which system provides a better estimate of costs? Why? Answer: a. [$80,000/(650 + 150)] × 650 = $65,000 b.
[$80,000/(650 + 150)] × 150 = $15,000
c.
Setups: [$20,000/(3 + 7)] × 3 = Components: [$60,000/(30 + 50)] × 30 =
$6,000 22,500 $28,500
d. Setups: [$20,000/(3 + 7)] × 7 = Components: [$60,000/(30 + 50)] × 50 =
$14,000 37,500 $51,500
e. Because the products do not all require the same proportionate shares of the overhead resources of setup hours and components, the ABC system provides different results than the traditional system, which allocates overhead costs on the basis of direct labour hours. The ABC system considers some important differences in overhead resource requirements and provides a better picture of the costs from each grooming table style, provided that the activity measures are fairly estimated. Diff: 2 Type: SA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-2; 5-4
46) Choice Company manufactures and sells three styles of kitchen faucets: Brass, Chrome, and White. Production takes 25, 25, and 10 machine hours to manufacture 1,000-unit batches of brass, chrome and white faucets, respectively. The following additional data apply: Brass 30,000
Projected sales in units
Per Unit data: Selling price Direct materials Direct labour Overhead cost based on direct labour hours (traditional system) Hours per 1,000-unit batch: Direct labour hours Machine hours Setup hours Inspection hours
Chrome 50,000
White 40,000
$40 $8 $15
$20 $4 $3
$30 $8 $9
$12
$3
$9
40 25 1.0 30
10 25 0.5 20
30 10 1.0 20
Total overhead costs and activity levels for the year are estimated as follows: Activity Direct labour hours Machine hours Setups Inspections
Overhead costs
$465,500 $405,000 $870,500
Activity levels 2,900 hours 2,400 hours 95 setup hours 2,700 inspection hours
Required: a. Using the traditional (simple) costing system, determine the operating profit per unit for the brass style of faucet. b. Determine the activity cost driver rate for setup costs and inspection costs. c. Using the ABC system, for the brass style of faucet: 1. compute the estimated overhead costs per unit. 2. compute the estimated operating profit per unit. d. Explain the difference between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why?
Answer: a. Traditional system: Operating profit per unit for Brass faucets is $5 = $40 - ($8 + $15 + $12). b.
Set-up costs: $465,500/95 setup hours = $4,900 per setup hour Inspection costs: $405,000/2,700 inspection hours = $150 per inspection hour
c.
ABC system: Overhead costs per unit for Brass faucets are $9.40 per unit. 30,000 units in projected sales/1,000 units per batch = 30 batches; 30 batches × 1 setup hour per batch = 30 setup hours; 30 batches × 30 inspection hours per batch = 900 inspection hours 30 setup hours × $4,900 = $147,000/30,000 units = $4.90/unit 900 inspection hours × $150 = $135,000/30,000 units = $4.50/unit Overhead costs for Brass faucets ($4.90 + $4.50) = $9.40 per unit Operating profit per unit for Brass faucets is $7.60 = $40 - ($8 + $15 + $9.40).
d. Traditional system: Operating profit per unit for Brass faucets is $5.00. ABC system: Operating profit per unit for Brass faucets is $7.60. Because the products do not all require the same proportionate shares of the support resources of setup hours and inspection hours, the ABC system provides different results than the traditional system which allocates overhead costs on the basis of direct labour hours. The ABC system considers some important differences in overhead resource requirements and provides a better picture of the profitability from each faucet style, provided the activity measures are fairly estimated. Diff: 2 Type: SA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-2; 5-4
47) Home Cookie Company manufactures and sells three flavours of cookies: Macaroon, Sugar, and Buttercream. The batch size for the cookies is limited to 1,000 cookies because of the size of the ovens and cookie molds owned by the company. Based on budgetary projections, the information listed below is available: Macaroon Sugar Buttercream Projected sales in units 500,000 800,000 600,000 Per Unit data: Selling price Direct materials Direct labour Overhead cost based on direct labour hours (traditional system) Hours per 1,000-unit batch: Direct labour hours Oven hours Packaging hours
$0.80
$0.75
$0.60
$0.20 $0.04
$0.15 $0.02
$0.14 $0.02
$0.30
$0.15
$0.15
2 1 0.5
1 1 0.5
1 1 0.5
Total overhead costs and activity levels for the year are estimated as follows: Activity Direct labour Oven Packaging
Overhead costs $210,000 $150,000 $360,000
Activity levels 2,400 hours 1,900 oven hours 950 packaging hours
Required: a. Using the traditional (simple) costing system, determine the operating profit per unit for the sugar cookie. b. Determine the activity cost driver rate for oven costs and packaging costs. c. Using the ABC system, for the sugar cookie: 1. compute the estimated overhead costs per unit. 2. compute the estimated operating profit per unit. d. Explain the difference between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why?
Answer: a. Traditional system: Operating profit per unit for sugar cookies is $0.43 = $0.75- ($0.15 + $0.02+ $0.15). b. The activity cost driver rate for oven costs is $110.53 per oven hour = $210,000/1,900 oven hours; for packaging costs, it is $157.90 per inspection hour = $150,000/950 packaging hours. c.
ABC system: Overhead costs per unit for sugar cookies are $0.19 per unit. 800,000 units in projected sales/1,000 units per batch = 800 batches; 800 batches × 1 oven hour per batch = 800 oven hours; 800 batches × 0.5 packaging hours per batch = 400 packaging hours 800 oven hours × $110.53 = $88,424/800,000 units = $0.11/unit 400 packaging hours × $157.90 = $63,160/800,000 units = $0.08/unit Overhead costs for sugar cookies ($0.11 + $0.08) = $0.19 per unit Operating profit per unit for sugar cookies is $0.39 = $0.75 - ($0.15 + $0.02 + $0.19).
d. Traditional system: Operating profit per batch of sugar cookies is $430 ABC system: Operating profit per batch of sugar cookies is $390 Because the products do not all require the same proportionate shares of the direct labour resources, the allocation of the total overhead on that basis is not as accurate as using the ABC system. The ABC system allocates the overhead based on activity levels for the specific categories as well as activity usage by the product lines. Diff: 2 Type: SA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-2; 5-4
48) Come-On-In Manufacturing produces two types of entry doors: Deluxe and Standard. The assignment basis for support costs has been direct labour dollars. For 2021, Come-On-In compiled the following data for the two products: Deluxe Standard Sales units 50,000 400,000 Sales price per unit Direct material and labour costs per unit Manufacturing support costs per unit
$650.00 $180.00 $80.00
$475.00 $130.00 $120.00
Last year, Come-On-In Manufacturing purchased an expensive robotics system to allow for more decorative door products in the deluxe product line. The CFO suggested that an ABC analysis could be valuable to help evaluate a product mix and promotion strategy for the next sales campaign. She obtained the following ABC information: Activity Cost Driver Setups # of setups Machine related # of machine hours Packing # of shipments
Cost $500,000 $44,000,000 $5,000,000
Total 500 600,000 250,000
Deluxe 400 300,000 50,000
Standard 100 300,000 200,000
Required: a. Using the current traditional (simple) costing system, determine the estimated: 1. total cost of manufacturing one unit for each type of door 2. profit per unit for each type of door b. Using the current traditional cost system, estimated manufacturing overhead costs per unit are less for the deluxe door ($80 per unit) than the standard door ($120 per unit). What is a likely explanation for this? c. Review the machine related costs above. What is a likely explanation for machine related costs being so high? What might explain why total machining hours for the deluxe doors (300,000 hours) are the same as for the standard doors (300,000 hours)? d. Using the activity-based costing data presented above, 1. compute the cost driver rate for each overhead activity 2. compute the revised manufacturing overhead cost per unit for each type of entry door 3. compute the revised total cost to manufacture one unit of each type of entry door e. Is the deluxe door as profitable as the original data estimated? Why or why not?
Answer: a. Currently estimated deluxe door total cost per unit is $260 = $180 + $80. Currently estimated standard door total cost per unit is $250 = $130 + $120. Currently estimated deluxe door profit per unit is $390 = $650 - $260. Currently estimated standard door profit per unit is $225 = $475 - $250. b. Support manufacturing costs are currently allocated based on direct labour dollars. Because the deluxe doors are manufactured using the new robotics system, it appears that less direct labour is needed to manufacture each unit in the deluxe product line. c. The high machine related costs are probably a result of purchasing the new robotics equipment for the deluxe product line. Yes, the total number of machine hours is the same for each product line, but the deluxe line uses 6 machine hours per unit (300,000 mh/50,000 units), while the standard product line only uses 0.75 machine hours per unit (300,000 mh/400,000 units). By evaluating machine hours per unit rather than total machine hours, these numbers make more sense. d. 1. Manufacturing overhead cost driver rates: Setup activity is $1,000/setup = $500,000/500 setups. Machine-related activity is $73.33/machine hour = $44,000,000/600,000 machine hours. Packing activity is $20/shipment = $5,000,000/250,000 shipments. 2. Revised overhead costs per unit: Deluxe door is $467.98 per unit = [($1,000 × 400) + ($73.33 × 300,000) + ($20 × 50,000)]/50,000 units. Standard door is $65.25 per unit = [($1,000 × 100) + ($73.33 × 300,000) + ($20 × 200,000)]/400,000 units. 3. Revised total cost per unit for the deluxe door is $647.98 = $180.00 + $467.98. Revised total cost per unit for the standard door is $195.25 = $130.00 + $65.25. e. No, the deluxe door is not as profitable as originally estimated because the deluxe door requires a disproportionate share of the overhead activities (the robotics system), so more of the overhead costs are assigned to the deluxe door when using an ABC system. Diff: 3 Type: SA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-2; 5-4
49) Summer Time Corporation manufactures two products, Bocce Ball Sets and Croquet Sets. Croquet Sets were added as a product line two years ago. Croquet Sets are the more complex of the two products, requiring one hour of direct labour time per unit to manufacture, compared to one-half hour of direct labour time for Bocce Ball Set. Croquet Sets are produced on an automated production line. Indirect costs are currently allocated to the products on the basis of direct labour hours. The company estimated it would incur $332,500 in manufacturing overhead costs and produce 6,000 units of Croquet Sets and 20,000 units of Bocce Ball Sets during the current year. Unit costs for materials and direct labour are:
Direct labour Direct materials
Bocce Ball Set $9 $12
Croquet Set $18 $16
Indirect costs are: Estimated Indirect Costs Activity cost pools/drivers: Machine setups $153,000 Purchase orders 27,500 Machine hours 128,000 Maintenance requests 24,000 Total $332,500
Estimated Activity Estimated Bocce Ball Activity Sets Croquet Sets Total 700 300 5,000 200
1,000 200 11,000 300
1,700 500 16,000 500
Required: a. Determine the unit cost of a Bocce Ball Set using traditional (simple) costing with hours as the allocation base. b. Determine the unit cost of a Bocce Ball Set using activity-based costing.
Answer: a. Traditional Costing
Direct labour Direct materials Indirect cost Total
Bocce Ball Set Croquet Set $9.00 $18.00 12.00 16.00 12.79 12.79 $33.79 $46.79
b. Activity-Based Costing Estimated Estimated Activity Activity Indirect Cost Indirect Cost Bocce Ball Croquet Allocation Bocce Ball Croquet Sets Sets Rate Sets Sets A B C D=A×C E=B×C Activity cost pools: Machine setups 700 1,000 $90.00 $63,000 $90,000 Purchase orders 300 200 $55.00 $16,500 $11,000 Machine hours 5,000 11,000 $8.00 $40,000 $88,000 Maintenance requests 200 300 $48.00 $9,600 $14,400 Total $129,100 $203,400 # of units 6,000 20,000 Indirect $/unit $21.52 $10.17
Direct labour Direct materials Indirect cost Total
Bocce Ball Set $9.00 12.00 21.52 $42.52
Croquet Set $18.00 16.00 10.17 $44.17
Diff: 2 Type: SA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-2; 5-4
50) Whitman Printing has contracts to complete weekly supplements required by its' customers. For the current year, manufacturing overhead cost estimates total $336,000 for an annual production capacity of 12 million pages. Whitman Printing decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis: Manufacturing Cost pool overhead costs Design changes $ 60,000 Setups 96,000 Inspections 180,000 Total manufacturing overhead costs $336,000
Activity level 200 design changes 8,000 setups 12,000 inspections
Two customers, Money Managers and Hospital Systems, are expected to use the following printing services: Activity Pages Design changes Setups (one per job) Inspections Designs (one per job)
Money Managers 80,000 10 50 40 50
Hospital Systems 96,000 0 12 12 12
Pages are a direct cost at $0.03 per page. Design costs per job average $1,000 and $1,200 for Money Managers and Hospital Systems, respectively. Whitman Printing sets prices at $0.10 per page, plus 120% of design costs. Assume that all costs are variable. Required: Prepare income statements in contribution margin format for both customers using: a. Traditional (simple) costing with overhead applied on a page capacity basis b. Activity-based costing c. How much per page should Money Managers be charged if Whitman Printing wants to break even on this customer? Assume that manufacturing overhead costs are fixed, that they are allocated to customers based on pages sold as a percentage of production capacity, and that design costs are also fixed.
Answer: Traditional costing overhead rate = $336,000/12,000,000 pages = $0.028 per page Activity costs: Design changes = $60,000/200 = $300 per change Setups = $96,000/8,000 = $12 per setup Inspections = $180,000/12,000 = $15 per inspection a. Whitman Printing Income Statement Using Traditional Costing For the Current Year
Revenues Variable costs: Pages Designs Overhead Contribution margin
Money Managers
Hospital Systems
$ 68,000
$ 26,880
2,400 50,000 2,240 $ 13,360
2,880 14,400 2,688 $ 6,912
b. Whitman Printing Income Statement Using ABC For the Current Year
Revenues Variable costs: Pages Designs Design changes Setups Inspections Contribution margin
Money Managers $ 68,000
Hospital Systems $ 26,880
2,400 50,000 3,000 600 600 $ 11,400
2,880 14,400 0 144 180 $ 9,276
c. Fixed cost = ((80,000/12,000,000) × $336,000) + $50,000 = $52,240 Variable cost = $0.03 × 80,000 pages = $2,400 Breakeven in dollars = $52,240 + $2,400 = $54,640 Breakeven charge per page = $54,640/80,000 pages = $0.683 or $0.69 per page Diff: 3 Type: SA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 3-4; 5-4
51) Rogers Printing Ltd. has contracts to complete weekly supplements required by its' customers. For the
current year, manufacturing overhead cost estimates total $580,000 for an annual production capacity of 14,500,000 pages. Rogers Printing decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis: Manufacturing Cost pool overhead costs Design changes $ 125,000 Setups 180,000 Inspections 275,000 Total manufacturing overhead costs $580,000
Activity level 500 design changes 9,000 setups 11,000 inspections
Two customers, Jackson Sports and Beaufort Travel, are expected to use the following printing services: Activity Pages Design changes Setups (one per job) Inspections Designs (one per job)
Jackson Sports 450,000 10 50 40 50
Beaufort Travel 720,000 0 12 12 12
Pages are a direct cost at $0.02 per page. Design costs per job average $1,500 and $1,700 for Jackson Sports and Beaufort Travel, respectively. Rogers Printing sets prices at $0.11 per page plus 120% of design costs. Assume that all costs are variable. Required: Prepare income statements in contribution margin format for both customers using: a. Traditional (simple) costing with overhead applied on a page capacity basis b. Activity-based costing c. How much a page should Jackson Sports be charged if Rogers Printing wants to breakeven on this customer? Assume that manufacturing overhead costs are fixed and that they are allocated to customers based on pages sold as a percentage of production capacity; and, that design costs are also fixed.
Answer: Traditional costing overhead rate = $336,000/12,000,000 pages = $0.04 per page Activity costs: Design changes = $125,000/500 = $250 per change Setups = $180,000/9,000 = $20 per setup Inspections = $275,000/11,000 = $25 per inspection a. Rogers Printing Ltd. Income Statement Using Traditional Costing For the Current Year
Revenues Variable costs: Pages Designs Overhead Contribution margin
Jackson Sports
Beaufort Travel
$ 139,500
$ 103,680
9,000 75,000 18,000 $ 37,500
14,400 20,400 28,800 $ 40,080
b. Rogers Printing Ltd. Income Statement Using ABC For the Current Year
Revenues Variable costs: Pages Designs Design changes Setups Inspections Contribution margin
Jackson Sports $ 139,500
Beaufort Travel $ 103,680
9,000 75,000 2,500 1,000 1,000 $ 51,000
14,400 20,400 0 240 300 $ 68,340
c. Fixed cost = ((450,000/14,500,000) × $580,000) + $75,000 = $93,000 Variable cost = $0.02 × 450,000 pages = $ 9,000 Breakeven in dollars = $93,000 + $9,000 = $102,000 Breakeven charge per page = $102,000/450,000 pages = $0.227 or $0.23 per page Diff: 3 Type: SA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 3-4; 5-4
52) Norwegian Furniture Manufacturing makes two models of office chairs: regular and deluxe.
Summary data for the two products showed the following: Unit Costs Direct materials Direct labour ($20 per hour) Manufacturing overhead*
Regular $65.00 10.00 4.80
Deluxe $105.00 20.00 9.60
* Under the company's current costing, manufacturing overhead is allocated on the basis of direct labourhours. The overhead for the year follows: Materials handling Setups General factory overhead Total
$
300,000 400,000 500,000 $1,200,000
The following table presents the activity levels that relate to the overhead costs: Cost Driver Number of parts Number of setups Direct labour-hours
Regular 600,000 75 45,000
Deluxe 900,000 50 80,000
Total 1,500,000 125 125,000
The market price for the regular chairs is $ 104 with expected sales of 40,000 units. The company expects to sell 25,000 deluxe chairs at a selling price of $170 per unit. Required: Determine the unit gross profit for the regular chair using both traditional and activity-based costing methods.
Answer: Traditional costing: Selling price Direct materials Direct labour Manufacturing overhead* Gross profit
$ 104.00 65.00 10.00 4.80 $ 24.20
* ($1,200,000/125,000 DL hrs.) × 1/2 direct labour-hour = $4.80 per unit Activity-based costing: Allocation rates: Materials handling = $300,000/1,500,000 = $0.20 per part Setups = $400,000/125 = $3,200 per setup General factory overhead = $500,000/125,000 = $4.00 per direct labour-hour It takes 1/2 direct labour-hour for the regular chair, $10/$20 = 1/2 Selling price Direct materials Direct labour Material handling (600,000 × $0.20)/40,000 units Setups (75 × $3,200)/40,000 units General factory overhead (45,000 × $4)/40,000 units Gross profit
$ 104.00 65.00 10.00 3.00 6.00 4.50 $ 15.50
Diff: 3 Type: SA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
53) Findland Furniture Manufacturing makes two models of office chairs: regular and deluxe. Summary data for the two products showed the following: Unit Costs Direct materials Direct labour ($20 per hour) Manufacturing overhead*
Regular $65.00 10.00 4.80
Deluxe $105.00 20.00 9.60
* Under the company's current costing, manufacturing overhead is allocated on the basis of direct labourhours. The overhead for the year follows: Materials handling Setups General factory overhead Total
$
300,000 400,000 500,000 $1,200,000
The following table presents the activity levels that relate to the overhead costs: Cost Driver Number of parts Number of setups Direct labour-hours
Regular 600,000 75 45,000
Deluxe 900,000 50 80,000
Total 1,500,000 125 125,000
The market price for the regular chairs is $ 104 with expected sales of 40,000 units. The company expects to sell 25,000 deluxe chairs at a selling price of $170 per unit. Required: Determine the unit gross profit for the deluxe chair using both traditional and activity-based costing methods.
Answer: Traditional costing: Selling price Direct materials Direct labour Manufacturing overhead* Gross profit
$ 170.00 105.00 20.00 9.60 $ 35.40
* ($1,200,000/125,000 DL hrs.) × 1 direct labour-hour = 9.60 per unit Activity-based costing: Allocation rates: Materials handling = $300,000/1,500,000 = $0.20 per part Setups = $400,000/125 = $3,200 per setup General factory overhead = $500,000/125,000 = $4.00 per direct labour-hour It takes 1 direct labour-hour for the deluxe chair, $20/$20 = 1 Selling price Direct materials Direct labour Material handling (900,000 × $0.20/)25,000 units Setups (50 × $3,200)/25,000 units General factory overhead (80,000 × $4)/25,000 units Gross profit
$ 170.00 105.00 20.00 7.20 6.40 12.80 $ 18.60
Diff: 3 Type: SA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
54) First Prize Trophy Inc. manufactures trophies for sporting events and other contests. Its' manufacturing plant has the capacity to produce 7,000 trophies each month; current production and sales are 3,000 per month. The company normally charges $18 per trophy. Cost information for the current activity level is as follows: Variable costs (vary with units produced): Direct materials $ 24,000 Direct labour 9,000 Variable costs (vary with number of batches)*: Setups $ 1,500 Material handling 750 Quality control 750 3,000 Fixed costs: Fixed manufacturing costs 6,000 Fixed marketing costs 5,000 Total costs $ 47,000 * Costs of $3,000 are based on 150 batches. The company has received an out of province special order for 1,500 trophies for $12 per trophy. Required: Determine the incremental change in profit from accepting this order if the production batch size for the order is 30 units. Assume that current sales will not be affected. Answer: Sales (1,500 × $12) $ 18,000 Direct materials ($24,000/3,000) × 1,500 12,000 Direct labour ($9,000/3,000) × 1,500 4,500 Setups ($1,500/150) × (1,500/30) 500 Material handling ($750/150) × (1,500/30) 250 Quality control ($750/150) × (1,500/30) 250 Incremental change in profit $ 500 Diff: 2 Type: SA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4
55) In the monthly management meeting, each manager was asked to come up with suggestions for controlling costs. Some managers favoured a simple across-the-board cut in expenditures, with every department accepting the same percentage reduction in their budget. This was supported by several managers as the fairest means to save costs. Your assistant attended the meeting in your absence and suggested that the company consider switching to activity-based costing. Unfortunately, the more he explained, the less support he received, particularly when he mentioned that more information would have to be collected, there would be implementation costs, and that what really mattered were nonfinancial variables, called activities. The meeting ended with everyone wondering how such an idea could lead to cost savings. Required: Explain how an ABC system should be able to save money, even though it focuses on activities, rather than just costs. Compare your assistant's suggestion to an across-the-board cut as a means to save money. Answer: An across the board cut is a temporary savings at best, and does nothing to address any costs that may be excessive. It provides neither information nor analysis as to the root causes of costs, which is the best means of cost reduction. Simply cutting all costs will very likely have a negative impact on all of the functional areas of the company, purchasing, administration, production, marketing and so on. An ABC system will enable the company to identify activities which can be controlled, and areas where miscosting has occurred due to a lack of information. An ABC system should accomplish more than just reducing costs. Identifying activities provides more flexibility in that the company can control costs by controlling activities than simply limiting expenditures without any reasoning, and support activitybased management, which uses activity-based costing information to improve operations, provide better customer service, and generate profits. Lastly, while there are costs to implementing an ABC system, it should only be done on a cost and benefit basis. Diff: 2 Type: ES CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-4
56) Explain how activity-based costing systems can provide more accurate product costs than traditional (simple) cost systems. Answer: A key reason for assigning indirect costs using an ABC system rather than a traditional system is that ABC cost systems reflect differences required by different processes. Activity-based costing systems provide better product costs when they identify and cost more indirect cost differences among products. Activity-based costing seeks to distinguish batch-level, product-sustaining, and facilitysustaining costs especially when they are not proportionate to one another. Unit-level drivers in traditional cost systems distort product costs because, effectively, these systems assume that all indirect activities affect all products. Thus, these systems assign each unit of product an average cost that fails to recognize the specific activities that are required to produce that product. Activity-based costing differs from traditional costing systems in that products are not cross-subsidized by support costs being shared by everyone. Activity-based costing is more likely to result in major differences from traditional costing systems if the firm manufactures multiple products rather than only one product. Diff: 2 Type: ES CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-4
57) Do activity-based costing systems always provide more accurate product costs than conventional cost systems? Why or why not? Answer: No. Traditional systems contain smaller and fewer cost distortions when the traditional systems' unit-level assignments and the alternative activity-cost drivers are relatively similar in proportion to each other. Still, the use of unit-level measures to assign indirect costs is more likely to undercost low-volume products and more complex products. Both traditional product costing systems and ABC product costing systems seek to assign all manufacturing costs to products. Cost distortions occur when a mismatch (incorrect association) occurs between the way support costs are incurred and the basis for their assignment to individual products. Diff: 2 Type: ES CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-4
Select the Implementing Activity-Based Costing sub-element from the right column that most closely relates to the main implementation step in the left column. A) Create a steering committee B) Organize elements of costs as material costs or activity costs C) Consider people issues like performance measures D) Create cross-functional teams E) Provide training F) Develop conversion strategy 58) Convince the organization to change Diff: 2 Type: MA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-4
59) Formalize project plan Diff: 2 Type: MA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-4
60) Design the ABC System Diff: 2 Type: MA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-4
Answers: 58) C 59) F 60) B
5.5 Explain the benefits of activity-based costing (ABC) systems for activity-based management (ABM). 1) Management can identify and evaluate new designs to improve performance by evaluating how product and process designs affect activities and costs. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-5
2) Activity-based costing is not adaptable to merchandising organizations. Answer: FALSE Explanation: ABC has many applications in service and merchandising companies. Diff: 1 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-5
3) One of the aspects of ABM is eliminating activities that do not add value. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-5
4) Activity-based costing can "unlock" savings, not apparent when traditional costing is used, because the system requires a closer examination of operations. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-5
5) A well-designed activity-based cost system helps managers make better decisions because information derived from an ABC analysis ________. A) can be used to eliminate nonvalue-added activities B) is easy to analyze and interpret C) takes the choices and judgment challenges away from the managers D) emphasizes how managers can achieve higher sales Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-5
6) Activity-based management describes management decisions that use activity-based costing information to A) improve product pricing, cost reduction and design. B) identify potential customers. C) smooth indirect costs. D) eliminate activities that add value but are not cost drivers. E) anticipate changes in the market. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-5
7) A primary reason for assigning selling and distribution costs to products for analytical purposes is A) to justify a varied product mix. B) that controllers are required to assign all costs when valuing inventories. C) that selling and distribution costs are also primary costs. D) that all indirect costs must be assigned. E) that different processes, products, and customers require different quantities of selling and distribution activities. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-5
8) An ABC system is one building block of activity-based management (ABM). The second building block is A) that senior management support is crucial. B) understanding the components of indirect cost pools. C) knowing the limitations of allocating indirect costs. D) the ability for managers to understand that the demand for output is central to profitability. E) automating the costing system. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-5
9) Determining what activities add customer value is an example of what facet of activity-based management? A) increase effective coordination among business function activities B) reduce costs of non-value-added activities C) improve selection of process activities to enhance profit D) match the company's use of resources to customer demand E) achieve planned growth Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-5
10) Outsourcing the accounting function is an example of what facet of activity-based management? A) increase effective coordination among business function activities B) reduce costs of non-value-added activities C) improve selection of process activities to enhance profit D) match the company's use of resources to customer demand E) achieve planned growth Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-5
11) Activity-based costing information A) should be used when services place similar demands on resources. B) usually results in peanut butter costing. C) will yield inaccurate cost numbers when products are similar. D) helps management reduce costs along the value chain. E) is best used when overhead costs are minimal. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-5
12) Which of the following is NOT a decision within the framework of Activity-based management (ABM)? A) pricing and product mix B) smoothing costs C) reducing costs D) manufacturing design E) changing processes Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-5
13) Traditional cost systems can be used to A) reveal activities that can be eliminated. B) help control nonfinancial items such as number of setup hours. C) help identify new designs to reduce costs. D) can be used to enhance budgeting. E) accurately assign direct costs. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-5
14) Companies use activity-based management to A) allocate the cost of activities to cost objects. B) forecast customer demand. C) develop systems for direct cost tracing and indirect cost allocation. D) plan and organize the implementation of activity-based costing. E) eliminate non-value added activities. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-5
15) The benefits of adopting ABC/ABM are higher for companies in competitive markets because A) accurate product cost information is essential to be competitive, regardless of the cost. B) ABM can pinpoint opportunities for cost savings, which increase the company's profit or are passed on to customers through lower prices. C) ABM allows managers to ignore competition when making pricing decisions thus making more accurate decisions. D) the more competitive the market, the more likely the competition is using ABC. E) ABC/ABM should not be used in a competitive market because traditional costing is less expensive allowing for lower prices. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-5
16) ABC and traditional systems are quite similar in ________. A) the treatment of direct costs B) the allocation of overheads C) evaluating performance D) the identification of cost pools Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-5
17) A well designed, activity-based cost system helps managers make better decisions because information derived from an ABC analysis A) can be used to improve the efficiency of activities. B) is easy to analyze and interpret. C) takes the choices and judgement challenges away from managers. D) emphasizes how managers can achieve higher sales. E) helps identify trends in the market place. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-5
18) The Guy Fawkes Company is noted for an exceptionally impressive line of Mardi Gras masks. Guy Fawkes has established the following selling and distribution support activity-cost pools and their corresponding activity drivers for the current year: Activity Marketing Customer service Order execution Warehousing
Cost $60,000 20,000 10,000 10,000
Cost driver $500,000 of sales 5,000 customer 100 orders 50 product lines
Required: a. Determine the activity-cost-driver rate for each of the four selling and distribution activities. b. Under what circumstances is it appropriate to use each of the activity-cost drivers? c. Describe at least one possible negative behavioral consequence for each of the four activity-cost drivers.
Answer: a. Activity-cost driver rate for Marketing = 12% of sales = $60,000/$500,000. Activity-cost driver rate for Customer Service = $4 per customer = $20,000/5,000. Activity-cost driver rate for Order Execution = $100 per order = $10,000/100. Activity-cost driver rate for Warehousing = $200 per order = $10,000/50. b. For marketing, using 12% of stipulated sales is appropriate when management wants to limit marketing costs to a budgeted proportion to sales. Using the number of customers for customer service is appropriate when the customer service costs are similar enough to use the average for all customers. Using the number of orders for order execution is appropriate when all orders are sufficiently alike in terms of resources used that they can be averaged. Using the number of product lines for warehousing is appropriate when each product line requires similar proportions of the warehousing efforts. c. For marketing, using 12% of sales limits the marketing activities to an arbitrary amount without consideration for potential opportunities. Using the number of customers for customer service can lead to customer service initiatives to limit the amount of time servicing each customer to cause the number of customers serviced to increase. Using the number of orders for order execution can result in purchasers splitting orders to increase the numbers of orders executed. Using the number of product lines for warehousing can lead warehouse personnel to designate more product line differences in the warehouse. Diff: 3 Type: SA CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-5
19) What is activity-based management and how can it be used to improve the profitability of a company? Answer: Activity-based management is a method of management decision making that uses activitybased costing information to improve customer satisfaction and profitability. Some of the typical issues that require a refined costing system (such as ABC) are pricing and product mix decisions, cost reduction initiatives, streamlining of processes, and decisions that can lead to improved product design based on knowledge of detailed costs of the existing product lines. The gathering of timely and accurate information is one of the crucial steps in the decision-making process. A properly designed ABC system will be likely to efficiently provide detailed costing information to managers in companies that manufacture and distribute diverse product lines. Diff: 2 Type: ES CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 5-5
20) List four ways that activity-based management can be effective. Answer: 1. Reduce costs and improve processes 2. Improve selection of process activities in price and product mix decisions 3. Assist in making design decisions 4. Achieve planned growth. Diff: 2 Type: ES CPA Competencies: Chapter 5 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 5-5
Cost Accounting: A Managerial Emphasis - Cdn. Ed., 9e (Datar) Chapter 6 Master Budget and Responsibility Accounting 6.1 Distinguish the long-term from the short-term benefits of budgets (pro forma financial statements). 1) A budget is a quantitative expression for a set time period of a proposed future plan of action by management. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-1
2) The master budget summarizes all the financial and nonfinancial plans into a single document. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-1
3) The master budget embraces the impact of both operating decisions and financing decisions as related to acquisitions and uses of scarce resources. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 6-1
4) The budget constraint describes only financial limitations that are within the company's control. Answer: FALSE Explanation: The budget constraints describe the combination of limitations on nonfinancial and financial resources within a company's management control. Diff: 1 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-1
5) Budgeting is done in place of "strategic analysis." Answer: FALSE Diff: 1 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 6-1
6) Management at all levels should understand and support the budget and all aspects of the management control system. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 6-1
7) Budgeted financial statements are also referred to as pro forma statements. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-1
8) Budgets can play both planning and control roles for management. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-1
9) Benchmarks encourage the setting of stretch goals. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 6-1
10) It is best to compare this year's performance with last year's actual performance rather than this year's budget. Answer: FALSE Explanation: It is best to compare this year's performance with this year's budget because inefficiencies and different conditions may be reflected in last year's actual performance amounts. Diff: 2 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 6-1
11) The priority approach to budgeting is an incremental approach. Answer: FALSE Explanation: In priority-based budgeting, the organization uses its strategic plan to establish the priorities for allocating new resources or areas that need to be protected if resources have to be cut. Diff: 1 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-1
12) The actual data resulting from a strategy should be compared to budgeted results. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-1
13) Which of the following is TRUE of a budget? A) Budgets are used to express only the operational plans and not the strategic plans of a company. B) Budgets do not account for nonfinancial aspects of the upcoming period. C) Budgets are most useful when they are planned independently of the company's strategic plans. D) Budgets help managers to revise their plans and strategies. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-1
14) Which of the following is a financial budget? A) budgeted balance sheet B) cash receivables budget C) production budget D) cost of goods sold budget Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-1
15) Planning the performance of the organization, providing a frame of reference, and investigating variances are part of the A) budgetary cycle. B) cash budget. C) financing budget. D) master budget. E) production budget. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-1
16) The master budget embraces the impact of A) operating and managerial decisions. B) operating and financing decisions. C) financing and managerial decisions. D) operating, managerial, and financing decisions. E) the differences between the budget and the actual costs, for a given cycle. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-1
17) A master budget A) includes only financial aspects of a plan and excludes nonfinancial aspects. B) is an aid to coordinating what needs to be done to implement a plan. C) includes broad expectations and visionary results. D) should not be altered after it has been agreed upon. E) is based upon budget constraints outside of management control. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-1
18) Budgets are advantageous because they A) compel planning that includes the implementation of plans, provide performance criteria, and promote goodwill. B) provide performance criteria, promote goodwill, and save money. C) compel planning that includes the implementation of plans, provide performance criteria, and promote communication and coordination within the organization. D) compel planning that includes the implementation of plans, require organizing, and ensure controlling. E) ensure that the organization meets its goals. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-1
19) The process of getting a company's objectives understood and accepted by all departments and functions is known as A) communication. B) compilation. C) continuity. D) coordination. E) administration. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-1
20) Long-run planning (strategic plans) involves the preparation of the A) operating budget. B) cash budget. C) budget standards. D) profit plan. E) capital budget. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-1
21) A limitation of comparing a company's performance against actual results of last year is that A) it includes adjustments for future conditions. B) feedback is no longer a possibility. C) the benchmark may be unrealistic. D) past results can contain inefficiencies of the past year. E) the budgeting time period is set at one year. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 6-1
22) Stretch goals in budgeting tend to A) decrease line-management participation in attaining corporate goals. B) increase failure. C) increase anxiety without motivation. D) motivate improved performance beyond the status quo. E) improve communication and coordination. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 6-1
23) Winnie and Pooh have just purchased a small honey manufacturing company that was having financial difficulties. After a brief operating period, they decided that the company's main problem was lack of any financial planning. The company made a good product and market potential was great. Required: Explain why a company needs a good budgeting plan. Specifically address the need for a master budget. Answer: The master budget is a series of interrelated budgets that quantify management's expectations about a company's revenues, expenses, net income, cash flows, and financial position. As the culmination of the planning process, it provides the basis for: 1. 2. 3. 4.
reassessing the company's objectives, coordinating the activities of various segments of the organization, communicating management's plans throughout the organization, and evaluating employee performance.
Diff: 1 Type: ES CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 6-1
24) List and describe the four approaches to budgeting. Answer: 1. Traditional (historic) incremental/decremental approach. While an incremental approach is easier to implement than other, more effective approaches to budgeting, it is fundamentally flawed because it starts from the basic assumptions that the organization is currently healthy and resources are allocated effectively. 2. Priority approach. In priority-based budgeting, the organization uses its strategic plan to establish the priorities for allocating new resources or areas that need to be protected if resources have to be cut. While this approach may require some difficult decisions to be made (it may result in entire activities/products/regions being cut), it is considered to be much more effective in helping the organization reach its strategic goals. 3. Zero-based budgeting. Zero-based budgeting involves all areas of the organization building their budgets from the "ground up" or from a starting point of zero. Essentially, every expense and revenue has to be justified as essential to the organization's operations. Frequently this type of budgeting exercise can identify significant cost savings and/or opportunities to reallocate existing resources. Unfortunately, zero based budgeting is very time consuming, anxiety provoking, and process intensive. 4. Activity-based budgeting. Activity-based budgeting (ABB) develops budgets based on the level of the various activities needed to fulfill the organizational goals. Instead of the number of units of product or hours of service being the basis for the budget, activity costs are calculated based on the level of activity needed to meet forecasted demand. This approach helps management to focus on the activities and costs needed to achieve the organization's goals. Diff: 2 Type: ES CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-1
25) Describe the benefits to an organization of preparing an operating budget. Answer: A well-prepared operating budget should serve as a guide for a company to follow during the budgeted period. It is not "set in stone." If new information or opportunities arise, the budget should be adjusted. A well-prepared operating budget assists management with the allocation of scarce resources. It can help management see trouble spots in advance, and then management can decide where to allocate its limited resources. A well-prepared operating budget fosters communication and coordination among various segments of the company. The process of preparing a budget requires managers from different functional areas to work together and communicate performance levels they both want and can attain. A well-prepared operating budget can become the performance standard against which firms can compare the actual results. Diff: 3 Type: ES CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 6-1
26) Listed below are elements of the master budget. Determine whether each budget is an operating budget or a financial budget. Place an O for operating budget or F for a financial budget. 1. Capital expenditures budget 2. Cost of goods sold budget 3. Revenues budget 4. Budgeted statement of cash flows 5. Distribution costs budget 6. Marketing costs budget 7. Cash budget 8. Direct materials cost budget 9. Budgeted balance sheet 10. Budgeted income statement Answer: 1. F, 2. O, 3. O, 4. F, 5. O, 6. O, 7. F, 8. O, 9. F, 10. O Diff: 2 Type: ES CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-1
27) Describe operating and financial budgets and give at least two examples of each discussed in the textbook. Answer: Operating budgets specify the expected outcomes of any selling, manufacturing, purchasing, labour management, R&D, marketing, distribution, customer service, and administrative activities during the planning period. Operations personnel use these plans to guide and coordinate activities during the planning period. Examples of operating budgets include the revenues budget, production budget, direct materials costs budget, direct manufacturing labour costs budget, manufacturing overhead budget, and budgets for R&D, marketing, distribution, customer service, and administrative activities. Financial budgets are used to evaluate the financial consequences of a proposed decision. Examples of financial budgets include the capital expenditures budget, cash budget, budgeted balance sheet, and the budgeted statement of cash flows. Diff: 3 Type: ES CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-1
6.2 Prepare a master operating budget and all supporting budgets or schedules. 1) Budgets that change (rolling or continuous) motivate managers to look forward. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-2
2) The financial budget is that part of the master budget that comprises the capital budget, cash budget, operating budget, and budgeted balance sheet. Answer: FALSE Explanation: capital budget, cash budget, budgeted balance sheet, cash flow budget Diff: 2 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-2
3) The production budget of a manufacturing company is prepared after the revenue budget. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-2
4) Budgetary slack is automatically included in the revenue budget. Answer: FALSE Explanation: Padding the budget or introducing budgetary slack refers to underestimating budgeted revenue (or overestimating budgeted costs) to make budgeted targets easier to achieve. Diff: 2 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-2
5) A rolling budget encourages management to be thinking about the next 12 months. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-2
6) The revenue budget and the budgeted income statement are used to prepare the budgeted balance sheet and the budgeted statement of cash flows. Answer: FALSE Explanation: The cash budget and the budgeted income statement are necessary to prepare the budgeted balance sheet and budgeted statement of cash flows. Diff: 2 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 6-2
7) The usual starting point in budgeting is to forecast net income. Answer: FALSE Explanation: The usual starting point in budgeting is to forecast sales demand and revenues. Diff: 2 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-2
8) The master budget reports a large amount of nonfinancial data from various value chain functions. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-2
9) The operating budget process generally concludes with the preparation of the ________. A) production budget B) cash flow statement C) balance sheet D) budgeted income statement Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-2
10) Clare's Bears manufactures stuffed bears. The company updates it annual budget every month in order to force management to think about the forthcoming 12 months and not just the current budget. This is an example of a A) master budget. B) moving budget. C) target budget. D) timing budget. E) rolling budget. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-2
11) The financial budget is that part of the master budget that comprises A) the capital budget and the cash budget. B) the capital budget and the budgeted balance sheet. C) the cash budget, operating budget and budgeted balance sheet. D) the cash budget, the budgeted statement of cash flows, and the retained earnings budget. E) the capital budget, the cash budget, budgeted balance sheet, and the budgeted statement of cash flows. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-2
12) The first three schedules to complete when preparing the master operating budget are the A) revenue budget, production budget, and direct materials purchases and usage budget. B) costs of goods sold budget, production budget, and cash budget. C) revenue budget, overhead budget, and production budget. D) revenue budget, cash inflows, and production expenditures. E) revenue budget, costs of goods sold budget, and production budget. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 6-2
13) A production budget expressed in units is equal to A) budgeted sales plus beginning finished goods inventory plus targeted ending finished goods inventory. B) budgeted sales less beginning finished goods inventory less targeted ending finished goods inventory. C) budgeted sales less beginning finished goods inventory plus targeted ending finished goods inventory. D) budgeted sales plus beginning finished goods inventory less targeted ending finished goods inventory. E) last year's sales plus beginning finished goods inventory plus targeted ending finished goods inventory. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-2
14) Unit sales of Product 1 are currently 20,000, while unit sales of Product 2 are currently double those of Product 1. What will the company's sales forecast be assuming sales of Product 1 increase by 10 percent and those of Product 2 go up by 8,000 units from the current level? A) 20,000 and 40,000 units, respectively B) 22,000 and 44,000 units, respectively C) 22,000 and 46,000 units, respectively D) 76,000 units E) 22,000 and 48,000 units, respectively Answer: E Explanation: 20,000 × 110% = 22,000 units; and 40,000 + 8,000 = 48,000 units Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
15) For next year Flexsteel Company has budgeted sales of 40,000 units, target ending finished goods inventory of 2,000 units, and a beginning finished goods inventory of 1,200 units. All other inventories are zero. How many units should be produced? A) 39,200 units B) 40,000 units C) 41,800 units D) 42,800 units E) 40,800 units Answer: E Explanation: 40,000 + 2,000 - 1,200 = 40,800 units Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
16) Randy Company has budgeted sales of 12,000 units, target ending finished good inventory of 2,000 units, and a beginning finished goods inventory of 600 units. How many units should be produced? A) 14,600 units B) 13,400 units C) 10,600 units D) 9,400 units E) 7,250 units Answer: B Explanation: 12,000 + 2,000 - 600 = 13,400 units Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
17) Cooper Company has a production schedule of 18,000 units and a budgeted sales volume of 20,000 units for the current year. In addition, 4,000 units are in beginning finished goods inventory. How many units are targeted for ending finished goods inventory? A) 20,000 units B) 14,000 units C) 6,000 units D) 2,000 units E) 1,900 units Answer: D Explanation: 18,000 = 20,000 + X - 4,000; 18,000 + 4,000 - 20,000 = X; 2,000 = X Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
18) ABC Company expects to sell 30,000 computer chairs in 2021 for $500 each. There are 5,000 chairs in the beginning finished goods inventory with target ending inventory of 7,000 chairs. What are the total chairs needed for year 2021? A) 28,000 B) 37,000 C) 30,000 D) 42,000 Answer: B Explanation: Total chairs needed = 30,000 chairs + 7,000 = 37,000 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 6-2
19) The direct materials usage budget is based on A) the units to be produced during a period. B) budgeted sales dollars. C) the predetermined factory overhead rate. D) the amount of labour hours worked. E) direct materials purchases. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-2
20) Direct material purchases equal A) usage plus production needs. B) production needs plus target ending inventories. C) beginning inventories plus production needs. D) usage plus target ending inventories less beginning inventories. E) the number of units to be produced times the amount of direct material in each unit. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-2
21) ABC Inc. has a targeted ending finished goods inventory 2,500 units, budgeted production of 21,500 units, and a targeted beginning finished goods inventory of 750 units. What are the budgeted sales? A) 19,100 units B) 20,000 units C) 19,750 units D) 22,400 units Answer: C Explanation: Budgeted sales? + 2,500 units ending inventory - 750 beginning inventory = 21,500 units production budgeted sales = 19,750 units Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 6-2
22) Manufacturing overhead costs for the budget include
A) factory utility costs. B) direct materials and supervision. C) direct labour and direct materials. D) sales supervisors' salaries. E) direct labour and indirect labour. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-2
Use the information below to answer the following question(s). Strong Boxes manufactures boxes. It expects to sell 20,000 boxes in 2022. The company had enough beginning inventory of direct materials to produce 24,000 units. Beginning inventory of finished units totalled 2,000, with a target ending inventory of 2,500 units. The boxes sell for $3.00, and the company keeps no work-in-process inventory. Direct materials costs for each box total $1.00 while direct labour is $0.50. Factory overhead is $0.20 per box. 23) What will be Strong Boxes budgeted revenue? A) $54,000 B) $60,000 C) $78,000 D) $79,500 E) $72,000 Answer: B Explanation: 20,000 × $3 = $60,000 Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
24) How many boxes should Strong Boxes produce in 2022? A) 24,000 boxes B) 20,000 boxes C) 19,500 boxes D) 20,500 boxes E) 22,500 boxes Answer: D Explanation: 20,000 + 2,500 - 2,000 = 20,500 Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
25) What will Strong Boxes cost of goods sold in 2022 be? A) $42,000 B) $24,000 C) $38,000 D) $30,000 E) $34,000 Answer: E Explanation: ($1.00 + $0.50 + $0.20) × 20,000 boxes = $34,000 Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
26) What will Strong Boxes production costs incurred for direct materials, direct manufacturing labour, and manufacturing overhead, respectively, be for 2022? A) $20,500; $10,250; $4,100 B) $19,500; $9,750; $3,900 C) $10,000; $5,000; $4,000 D) $22,500; 11,250; $4,500 E) $12,000; $6,000; $4,800 Answer: A Explanation: DM = 20,500 × $1.00 = $20,500 DL = 20,500 × $0.50 = $10,250 MO = 20,500 × $0.20 = $4,100 Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
Use the information below to answer the following question(s). The Fahmys manufactures flowerpots. It expects to sell 40,000 flowerpots in 2022. The company had enough beginning inventory of direct materials to produce 48,000 units. Beginning inventory of finished units totalled 4,000, with a target ending inventory of 5,000 units. The flowerpots sell for $6.00, and the company keeps no work-in-process inventory. Direct materials costs for each flowerpot total $2.00, while direct labour is $1.00. Factory overhead is $0.40 per flowerpot. 27) What will be The Fahmys budgeted revenue? A) $216,000 B) $240,000 C) $312,000 D) $318,000 E) $300,500 Answer: B Explanation: 40,000 × $6 = $240,000 Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
28) How many flowerpots should The Fahmys produce in 2022? A) 48,000 flowerpots B) 44,000 flowerpots C) 41,000 flowerpots D) 39,000 flowerpots E) 18,000 flowerpots Answer: C Explanation: 40,000 + 5,000 - 4,000 = 41,000 flowerpots Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
29) What will The Fahmys cost of goods sold be? A) $122,400 B) $136,000 C) $139,400 D) $149,600 E) $101,500 Answer: B Explanation: 40,000 × ($2.00 + $1.00 + $0.40) = $136,000 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
30) What will The Fahmys total costs incurred for direct materials, direct manufacturing labour, and manufacturing overhead, respectively, be for 2022? A) $0; $40,000; $16,000 B) $0; $41,000; $16,000 C) $80,000; $40,000; $16,000 D) $82,000; $41,000; $16,400 E) $84,000; $40,000; $16,400 Answer: D Explanation: 41,000 × $2.00 = $82,000 41,000 × $1.00 = $41,000 41,000 × $0.40 = $16,400 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
Use the information below to answer the following question(s). Fair Score Company manufactures scoreboards for athletic events. It expects to sell 15,000 scoreboards in 2022. The company has enough beginning inventory of direct materials to produce 8,000 units. Beginning work-in-process inventory totals 2,000 units and is 100 percent complete as to material and 50 percent complete as to labour and overhead. Beginning finished units total 4,000 with a target ending finished inventory of 2,500 units. The scoreboards sell for $700. There is no ending work-in-process inventory. Direct materials costs for each scoreboard total $200, while direct labour is $80. Manufacturing overhead is $100 per scoreboard. 31) What will Fair Score Company's budgeted total sales for 2022 be? A) $18,400,000 B) $17,600,000 C) $10,500,000 D) $15,200,000 E) $12,300,000 Answer: C Explanation: 15,000 × $700 = $10,500,000 Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
32) How many scoreboards should Fair Score Company produce in 2022? A) 23,000 B) 21,000 C) 20,000 D) 13,500 E) 16,000 Answer: D Explanation: 15,000 + 2,500 - 4,000 = 13,500 scoreboards Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
33) What will Fair Score Company's budgeted total cost of direct materials used in 2022 be? A) $2,300,000 B) $3,800,000 C) $3,600,000 D) $3,200,000 E) $3,155,000 Answer: A Explanation: 13,500 units - 2,000 WIP = 11,500 11,500 × $200 = $2,300,000 direct materials Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
34) What will the Fair Score Company budgeted amount of cost of goods sold be? A) $8,160,000 B) $5,700,000 C) $6,460,000 D) $6,120,000 E) $5,975,000 Answer: B Explanation: (15,000 × ($200 + $80 + $100)) = $5,700,000 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
Use the information below to answer the following question(s).
Layne Cedar manufactures cedar chests. The estimated number of chests for the first three months of 2022 is as follows: Month January February March
Sales 11,000 14,000 13,000
Finished goods inventory at the end of December is 3,000 units. Ending finished goods are equal to 30 percent of next month's sales. April 2022 sales are expected to total 16,000 units. 35) What should the budgeted number of chests produced in January 2022 be? A) 8,800 chests B) 12,200 chests C) 13,000 chests D) 14,200 chests E) 14,700 chests Answer: B Explanation: 11,000 + (14,000 × 0.30) - 3,000 = 12,200 chests Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
36) How many chests should Layne budget to be produced in the first quarter of 2022? A) 37,000 chests B) 44,800 chests C) 41,800 chests D) 39,800 chests E) 48,400 chests Answer: D Explanation: 11,000 + 14,000 + 13,000 + (16,000 × 0.30) - 3,000 = 39,800 chests Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
Use the information below to answer the following question(s). High Futon manufactures futons. The estimated number of sales for the last quarter of 2022 is as follows: Month October November December
Sales # 20,000 25,000 30,000
Beginning finished goods inventory should be equal to 30 percent of that month's budgeted sales, plus 10 percent of the following month's budgeted sales. January and February 2023 sales are anticipated to be 15,000 futons in each month. The cost to produce a futon is $125. 37) How many futons should High Futon budget to be produced in November? A) 34,000 futons B) 32,500 futons C) 26,200 futons D) 25,000 futons E) 23,000 futons Answer: D Explanation: 25,000 + [(30,000 × 0.3) + (15,000 × 0.1)] - [(25,000 × 0.3) + (30,000 × 0.1)] = 25,000 futons Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
38) How many futons will High Futon budget to be produced in the three months? A) 72,500 futons B) 75,000 futons C) 82,500 futons D) 90,000 futons E) 98,650 futons Answer: A Explanation: [20,000 + 25,000 + 30,000] + [(0.3 × 15,000) + (0.1 × 15,000)] - [(0.3 × 20,000 ) + (0.1 × 25,000)] = 72,500 futons Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
39) What will High Futon's cost of goods manufactured for December be? A) $3,937,500 B) $3,750,000 C) $2,812,500 D) $2,625,000 E) $3,187,500 Answer: E Explanation: [30,000 + [(0.30 × 15,000) + (0.1 × 15,000)] - [(0.3 × 30,000) + (0.1 × 15,000)] × $125 = $3,187,500 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
Answer the following question(s) using the information below. Furniture Inc. estimates the following number of mattress sales for the first four months of 2022: Month January February March April
Sales 5,000 7,000 6,500 8,000
Finished goods inventory at the end of December 2021 is 1,500 units. Target ending finished goods inventory is 30% of the next month's sales. 40) How many mattresses need to be produced in January 2022? A) 4,400 mattresses B) 5,000 mattresses C) 6,500 mattresses D) 7,100 mattresses E) 5,600 mattresses Answer: E Explanation: 5,000 + (7,000 × 0.30) - 1,500 = 5,600 mattresses Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
41) How many mattresses need to be produced in the first quarter (January, February, March) of 2022? A) 18,500 mattresses B) 19,400 mattresses C) 20,900 mattresses D) 22,400 mattresses E) 18,000 mattresses Answer: B Explanation: 5,000 + 7,000 + 6,500 + (8,000 × 0.30) -1,500 = 19,400 mattresses Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
42) In going from the sales budget to the production budget, adjustments need to be made for A) finished goods inventories. B) overhead charges. C) direct materials inventories. D) sales returns and allowances. E) changing from revenue to costs. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-2
43) The budgeting process generally concludes with the preparation of the A) cash budget. B) selling expense budget. C) budgeted financial statements. D) research and development budget. E) production budget. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-2
Use the information below to answer the following question(s). Boone Hobbies, a wholesaler, has a sales budget for next month of $600,000. Cost of units sold is expected to be 40 percent of sales. All units are paid for in the month following purchase. The beginning inventory of units is $20,000, and an ending amount of $24,000 is desired. Beginning accounts payable is $152,000. 44) Boone Hobbies gross margin for next month is expected to be A) $280,000. B) $336,000. C) $356,000. D) $360,000. E) $240,000. Answer: D Explanation: $600,000 - ($600,000 × 0.40) = $360,000 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
45) Boone Hobbies budgeted purchases for next month is expected to be A) $240,000. B) $264,000. C) $225,000. D) $360,000. E) $244,000. Answer: E Explanation: $240,000 + $24,000 - $20,000 = $244,000 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
46) A rolling budget is a budget or plan that A) rolls several budgets together for forecasting purposes. B) has one budget category roll into the next category. C) rolls all budget categories together into a master budget. D) is always available for a specified future period by replacing time periods as the lapse. E) is not used to guide operations. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-2
47) The operating budget includes the A) capital budget. B) cash budget. C) budgeted balance sheet. D) budgeted cash flow statement. E) production budget. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-2
Use the information below to answer the following question(s). Konrade Inc. expects to sell 30,000 athletic uniforms for $80 each in 2022. Direct materials costs are $20, direct manufacturing labour is $8, and manufacturing overhead is $6 for each uniform. Each uniform requires 2.0 square metres (sq. m.) of material, which is all added at the start of production. The following inventory levels are expected to apply to 2022:
Direct materials Work-in-process inventory Finished goods inventory
Beginning inventory 12,000 units 0 units 6,000 units
Ending inventory 9,000 units 0 units 5,000 units
48) What is the amount budgeted for the cost of goods manufactured in 2022? A) $1,020,000 B) $986,000 C) $1,156,000 D) $1,190,000 E) $1,054,000 Answer: B Explanation: (30,000 + 5,000 - 6,000) × ($20 + $8 + $6) = $986,000 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
49) What is the amount budgeted for the cost of goods sold in 2022? A) $1,156,000 B) $986,000 C) $840,000 D) $2,400,000 E) $1,020,000 Answer: E Explanation: 30,000 × ($20 + $8 + $6) = $1,020,000 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
Use the information below to answer the following question(s). Target Inc. expects to sell 35,000 athletic uniforms for $80 each in 2022. Direct materials costs are $20, direct manufacturing labour is $8, and manufacturing overhead is $6 for each uniform. Each uniform requires 2.0 square metres (sq. m.) of material, which is all added at the start of production. The following inventory levels are expected to apply to 2022:
Direct materials Work-in-process inventory Finished goods inventory
Beginning inventory 14,000 units 0 units 4,000 units
Ending inventory 11,000 units 0 units 1,000 units
50) What is the amount budgeted for the cost of goods manufactured in 2022? A) $1,020,000 B) $986,000 C) $1,292,000 D) $1,088,000 E) $1,054,000 Answer: D Explanation: (35,000 + 1,000 - 4,000) × ($20 + $8 + $6) = $1,088,000 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
51) What is the amount budgeted for the cost of goods sold in 2022? A) $1,190,000 B) $980,000 C) $840,000 D) $1,020,000 E) $1,156,000 Answer: A Explanation: 35,000 × ($20 + $8 + $6) = $1,190,000 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
Use the information below to answer the following question(s). Daniel Inc. expects to sell 5,000 ceramic vases for $30 each in 2022. Direct materials costs are $2, direct manufacturing labour is $10, and manufacturing overhead is $3 per vase. Each vase requires 0.5 kilograms (kg) of material, which is all added at the start of production. The units in work-in-process beginning and ending inventory were half complete as to direct labour and manufacturing overhead costs; the units in beginning inventory are completed before new units are started. Each vase requires one hour of direct labour, and manufacturing overhead is allocated based on direct labour hours. The following inventory levels are expected to apply to 2022:
Direct materials Work-in-process inventory Finished goods inventory
Beginning inventory 1,000 kg 100 units 400 units
Ending inventory 800 kg 300 units 500 units
52) On the 2022 budgeted income statement, what amount will be reported for gross margin? A) $122,000 B) $90,000 C) $48,000 D) $75,000 E) $120,000 Answer: D Explanation: 5,000 × ($30 - ($2 + $10 + $3)) = $75,000 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
53) How many ceramic vases need to be produced in 2022? A) 5,900 vases B) 5,100 vases C) 7,000 vases D) 6,000 vases E) 6,300 vases Answer: B Explanation: 5,000 + 500 - 400 = 5,100 vases Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
54) How many kilograms of material will need to be purchased for 2022 production and inventory requirements? A) 3,100 kg B) 2,900 kg C) 2,750 kg D) 3,150 kg E) 2,450 kg Answer: E Explanation: [(5,100 -100 + 300) × 0.5 kg] + 800 kg - 1,000 kg = 2,450 kg Diff: 3 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
55) On the 2022 budgeted income statement, what amount will be reported for cost of goods sold? A) $91,500 B) $105,000 C) $75,000 D) $88,500 E) $72,000 Answer: C Explanation: 5,000 × ($2 + $10 + $3) = $75,000 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
56) What are the 2022 budgeted costs for direct manufacturing labour? A) $52,000 B) $60,000 C) $61,000 D) $59,000 E) $63,000 Answer: A Explanation: [5,100 units + (300 units x ½) - (100 units × 1/2)] × $10.00 = $52,000 Diff: 3 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
Use the information below to answer the following question(s).
Marguerite Inc. expects to sell 20,000 pool cues for $20.00 each. Direct materials costs are $2.00, direct manufacturing labour is $12.00, and manufacturing overhead is $0.80 per pool cue. Each pool cue requires 0.5 kilograms (kg) of material, which is all added at the start of production. The units in work-inprocess beginning and ending inventory were half complete as to direct labour and manufacturing overhead costs; the units in beginning inventory are completed before new units are started. Each pool cue requires one hour of direct labour, and manufacturing overhead is allocated based on direct labour hours. The following inventory levels are expected to apply to 2022:
Direct materials Work-in-process inventory Finished goods inventory
Beginning inventory 800 kg 200 units 2,000 units
Ending inventory 1,000 kg 300 units 2,500 units
57) On the 2022 budgeted income statement, what amount will be reported for gross margin? A) $124,000 B) $104,000 C) $312,000 D) $160,000 E) $400,000 Answer: B Explanation: 20,000 × ($20 - ($2.00 + $12.00 + $0.80)) = $104,000 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
58) How many pool cues need to be produced in 2022? A) 22,500 cues B) 18,000 cues C) 20,000 cues D) 19,500 cues E) 20,500 cues Answer: E Explanation: 20,000 + 2,500 - 2,000 = 20,500 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
59) How many kilograms of material will need to be purchased for 2022 production and inventory requirements? A) 11,500 kg B) 10,700 kg C) 10,300 kg D) 10,500 kg E) 10,000 kg Answer: D Explanation: [(20,500 -200 + 300) × 0.5 kg] + 1,000 kg - 800 kg = 10,500 kg Diff: 3 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
60) On the 2022 budgeted income statement, what amount will be reported for the cost of goods sold? A) $296,000 B) $280,000 C) $276,000 D) $290,000 E) $292,000 Answer: A Explanation: 20,000 × ($2.00 + $12.00 + $0.80) = $296,000 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
61) What are the 2022 budgeted costs for direct manufacturing labour? A) $248,000 B) $247,200 C) $249,000 D) $246,600 E) $246,000 Answer: D Explanation: [20,500 units + (300 units × 1/2) - (200 units × 1/2)] × $12.00 = $246,600 Diff: 3 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
Use the information below to answer the following question(s).
Samson Inc. expects to sell 10,000 barbells for $18.00 each. Direct materials costs are $5.00, direct manufacturing labour is $6.00, and manufacturing overhead is $2.50 per barbell. Each barbell requires 6 kilograms (kg) of material, which is all added at the start of production. The units in work-in-process beginning and ending inventory were half complete as to direct labour and manufacturing overhead costs; the units in beginning inventory are completed before new units are started. Each barbell requires one-quarter hour of direct labour, and manufacturing overhead is allocated based on direct labour hours. Marketing costs are $2.00 per barbell. The following inventory levels are expected to apply to 2022:
Direct materials Work-in-process inventory Finished goods inventory
Beginning inventory 500 kg 100 units 200 units
Ending inventory 800 kg 200 units 150 units
62) On the 2022 budgeted income statement, what amount will be reported for gross margin? A) $45,000 B) $70,000 C) $25,000 D) $40,000 E) $35,000 Answer: A Explanation: 10,000 × ($18 - ($5.00 + $6.00 + $2.50)) = $45,000 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
63) How many barbells need to be produced in 2022? A) 11,050 B) 9,850 C) 10,000 D) 10,050 E) 9,950 Answer: E Explanation: 10,000 + 150 - 200 = 9,950 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
64) How many kilograms of material will need to be purchased for 2022 production and inventory requirements? A) 60,900 kg. B) 60,600 kg. C) 60,300 kg. D) 60,000 kg. E) 62,100 kg. Answer: B Explanation: [(9,950 + 200 - 100) × 6 kg] + 800 kg - 500 kg = 60,600 kg Diff: 3 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
65) On the 2022 budgeted income statement, what amount will be reported for the cost of goods sold? A) $132,975 B) $135,675 C) $134,325 D) $135,000 E) $155,000 Answer: D Explanation: [9,950 units + (200 units × 1/2) - (100 units × 1/2)] × $6.00 = $60,000 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
66) What are the 2022 budgeted costs for direct manufacturing labour? A) $59,700 B) $60,300 C) $60,700 D) $240,000 E) $60,000 Answer: E Explanation: [(100 units × 1/2) + (9,850 units) + (200 units × 1/2)] × $6.00 = $60,000 Diff: 3 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
67) Shamokin Manufacturing produces two products, Big and Bigger. Shamokin expects to sell 10,000 units of product Bigger and to have an inventory of 2,000 units of Bigger on hand at the end of the period. Currently, Shamokin has 800 units of Bigger on hand. Bigger requires two labour operations, molding and polishing. Each unit of Bigger requires one hour of molding and two hours of polishing. The direct labour rate for molding is $20 per molding hour and the direct labour rate for polishing is $25 per polishing hour. The expected number of hours of direct labour for Bigger is A) 8,800 hours of molding; 17,600 hours of polishing. B) 11,200 hours of molding; 22,400 hours of polishing. C) 17,600 hours of molding; 8,800 hours of polishing. D) 22,400 hours of molding; 11,200 hours of polishing. E) 10,000 hours of molding; 20,000 hours of polishing. Answer: B Explanation: 10,000 + 2,000 - 800 = 11,200 (11,200 × 1) = 11,200 hours of molding; (11,200 × 2) = 22,400 hours of polishing Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
68) Tripp Company sells three products with the following seasonal sales pattern:
Quarter 1 2 3 4
X 40% 30% 20% 10%
Products Y 30% 20% 20% 30%
Z 10% 40% 40% 10%
The annual sales budget shows forecasts for the different products and their expected selling price per unit as follows: Product X Y Z
Units 40,000 100,000 50,000
Selling Price $3 $12 $5
Required: Prepare a revenue budget in dollars for each quarter. Present each quarter in a separate column and add a column to show total year sales. Answer: First Second Third Fourth Year Quarter Quarter Quarter Quarter Total Product X: Sales (units) 16,000 12,000 8,000 4,000 40,000 Price × $3 × $3 × $3 × $3 × $3 Sales ($) 48,000 $36,000 24,000 $12,000 $120,000 Product Y: Sales (units) Price Sales ($)
30,000 × $12 $360,000
20,000 × $12 $240,000
20,000 × $12 $240,000
30,000 100,000 × $12 × $12 $360,000 $1,200,000
Product Z: Sales (units) Price Sales ($)
5,000 × $5 $25,000
20,000 × $5 $100,000
20,000 × $5 $100,000
5,000 × $5 $25,000
Total dollars
$433,000
$376,000
$364,000
$397,000 $1,570,000
50,000 × $5 $250,000
Diff: 2 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
69) Spirit Company sells three products with the following seasonal sales pattern:
Quarter 1 2 3 4
A 40% 30% 20% 10%
Products B 30% 20% 20% 30%
C 10% 40% 40% 10%
The annual sales budget shows forecasts for the different products and their expected selling price per unit as follows: Product A B C
Units 60,000 120,000 70,000
Selling Price $4 10 6
Required: Prepare a sales budget, in units and dollars, by quarters for the company for the coming year. Answer: First Second Third Fourth Quarter Quarter Quarter Quarter Total Product A: Sales (units) 24,000 18,000 12,000 6,000 60,000 Price × $4 × $4 × $4 × $4 × $4 Sales $96,000 $72,000 $48,000 $24,000 $240,000 Product B: Sales (units) 36,000 Price × $10 Sales $360,000
24,000 × $10 $240,000
24,000 × $10 $240,000
36,000 120,000 × $10 × $10 $360,000 $1,200,000
Product C: Sales (units) Price Sales
7,000 × $6 $42,000
28,000 × $6 $168,000
28,000 × $6 $168,000
7,000 × $6 $42,000
70,000 × $6 $420,000
$498,000
$480,000
$456,000
$426,000
$1,860,000
Total
Diff: 2 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
70) Nittany Company sells three products with the following seasonal sales pattern:
Quarter 1 2 3 4
A 40% 30% 20% 10%
Products B 30% 20% 20% 30%
C 10% 40% 40% 10%
The annual sales budget shows forecasts for the different products and their expected selling price per unit as follows: Product A B C
Units 50,000 125,000 62,500
Selling Price $8 20 12
Required: Prepare a sales budget, in units and dollars, by quarters for the company for the coming year. Answer: First Second Third Fourth Quarter Quarter Quarter Quarter Total Product A: Sales (units) Price Sales Product B: Sales (units) Price Sales Product C: Sales (units) Price Sales Total
20,000 × $8
15,000 × $8
10,000 × $8
5,000 × $8
50,000 × $8
$160,000
$120,000
$80,000
$40,000
$400,000
37,500 × $20
25,000 × $20
25,000 × $20
37,500 × $20
125,000 × $20
$750,000
$500,000
$500,000
$750,000
$2,500,000
6,250 × $12
25,000 × $12
25,000 × $12
6,250 × $12
62,500 × $12
$75,000 $985,000
$300,000 $920,000
$300,000 $880,000
$75,000 $865,000
$750,000 $3,650,000
Diff: 2 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
71) Frame Antique manufactures picture frames. Sales for May are expected to be 20,000 units of various
sizes. Historically, the average frame requires three metres of framing, one square metre of glass, and two square metres of backing. Beginning inventory includes 3,000 metres of framing, 1,000 square metres of glass, and 1,000 square metres of backing. Current prices are $0.20 per metre of framing, $4.00 per square metre of glass, and $1.50 per square metre of backing. Ending inventory should be 150 percent of beginning inventory. Purchases are paid for in the month acquired. Required: a. Determine the quantity of framing, glass, and backing that is to be purchased during May. b. Determine the total costs of direct materials for May purchases. Answer: a. Framing Glass Backing Desired ending inventory 4,500 1,500 1,500 Production needs (20,000 units) 60,000 20,000 40,000 Total needs 64,500 21,500 41,500 Less: beginning inventory 3,000 1,000 1,000 Purchases planned 61,500 20,500 40,500 b. Cost of direct materials: Framing (61,500 × $0.20) Glass (20,500 × $4.00) Backing (40,500 × $1.50) Total
$12,300 82,000 60,750 $155,050
Diff: 2 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
72) Picture Pretty manufactures picture frames. Sales for August are expected to be 10,000 units of various sizes. Historically, the average frame requires four metres of framing, one square metre of glass, and two square metres of backing. Beginning inventory includes 1,500 metre of framing, 500 square metres of glass, and 500 square metres of backing. Current prices are $0.30 per metre of framing, $6.00 per square metre of glass, and $2.25 per square metre of backing. Ending inventory should be 150% of beginning inventory. Purchases are paid for in the month acquired. Required: a. Determine the quantity of framing, glass, and backing that is to be purchased during August. b. Determine the total costs of direct materials for August purchases. Answer: a. Framing Glass Backing Desired ending inventory* 2,250 750 750 Production needs (10,000 units)** 40,000 10,000 20,000 Total needs 42,250 10,750 20,750 Less: Beginning inventory 1,500 500 500 Purchases planned 40,750 10,250 20,250 b. Cost of direct materials: Framing (40,750 × $0.30) Glass (10,250 × $6.00) Backing (20,250 × $2.25)
$12,225.00 61,500.00 45,562.50 Total
$119,287.50
*1,500 × 1.5 = 2,250 framing 500 × 1.5 = 750 glass 500 × 1.5 = 750 backing **10,000 × 4 = 40,000 framing 10,000 × 1 = 10,000 glass 10,000 × 2 = 20,000 backing Diff: 2 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
73) Budget Corporation has the following budgeted sales for the next six-month period: Month September October November December January February
Unit Sales 60,000 80,000 140,000 100,000 120,000 80,000
There were 30,000 units of finished goods in inventory at the beginning of September. Plans are to have an inventory of finished products that equal 20 percent of the unit sales for the next month. Five kilograms of materials are required for each unit produced. Each kilogram of material costs $10. Inventory levels for materials are equal to 30 percent of the needs for the next month. Materials inventory on September 1 was 10,000 kilograms. Required: a. Prepare production budgets in units for October, November, and December. b. Prepare a purchases budget in kilograms for October, November, and December, and give total purchases in both kilograms and dollars for each month.
Answer: a. October Budgeted sales 80,000 Add: required ending inventory 28,000 Total inventory requirements 108,000 Less: beginning inventory 16,000 Budgeted production 92,000
November 140,000 20,000 160,000 28,000 132,000
December 100,000 24,000 124,000 20,000 104,000
b. Production in units
November 132,000
December 104,000
Targeted ending inventory* Production needs*** Total requirements Less: beginning inventory Purchases needed in kg Cost ($10 per kg) Total material purchases
October 92,000 198,000 460,000 658,000 138,000 520,000 × $10 $5,200,000
156,000 660,000 816,000 198,000 618,000 × $10 $6,180,000
168,000 ** 520,000 688,000 156,000 532,000 × $10 $5,320,000
*0.3 times next month's needs **(120,000 + 16,000 - 24,000) times 5 kg × 0.3 ***5 kg times units to be produced Diff: 3 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
74) Lubriderm Corporation has the following budgeted sales for the next six-month period: Month June July August September October November
Unit Sales 90,000 120,000 210,000 150,000 180,000 120,000
There were 30,000 units of finished goods in inventory at the beginning of June. Plans are to have an inventory of finished products that equal 20 percent of the unit sales for the next month. Five kilograms of materials are required for each unit produced. Each kilogram of material costs $8. Inventory levels for materials are equal to 30 percent of the needs for the next month. Materials inventory on June 1 was 15,000 kilograms. Required: a. Prepare production budgets in units for July, August, and September. b. Prepare a purchases budget in kilograms for July, August, and September, and give total purchases in both kilograms and dollars for each month.
Answer: a. Budgeted sales Add: Required ending inventory
July 120,000 42,000
August 210,000 30,000
September 150,000 36,000
Total inventory requirements Less: Beginning inventory
162,000 24,000
240,000 42,000
186,000 30,000
Budgeted production
138,000
198,000
156,000
b. Production in units
July 138,000
August 198,000
September 156,000
Targeted ending inventory in kgs.* Production needs in kgs.***
297,000
234,000
**252,000
690,000
990,000
780,000
987,000 **** 207,000 Less: Beginning inventory in kgs.
1,224,000
1,032,000
297,000
234,000
Total requirements in kgs.
Purchases needed in kgs. Cost ($8 per kg.)
780,000 × $8
927,000 × $8
798,000 × $8
Total material purchases
$6,240,000
$7,416,000
$6,384,000
*
0.3 times next month's needs
**
(180,000 + 24,000 - 36,000) times 5 kgs. × 0.3 *** 5 kgs. times units to be produced, across row **** (690,000 × .3) = 207,000 kgs., etc. row across Diff: 3 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
75) Gerdie Company has the following information: Month March April May June July
Budgeted Sales $40,000 43,000 41,000 44,500 42,500
In addition, the gross profit rate is 40%, and the desired ending inventory level is 30% of next month's cost of sales. Required: Prepare a purchases budget for April through June. Answer: April May Desired ending inventory $7,380 $8,010 Plus COGS 25,800 24,600 Total less beginning inventory 7,740 7,380 Total purchases $25,440 $25,230
June $7,650 26,700 8,010 $26,340
Total $7,650 77,100 7,740 $77,010
Diff: 3 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
76) The Doran Company prepared the following revenue budget: Month March April May June July
Budgeted Sales $250,000 265,000 255,000 272,500 262,500
In addition, the gross profit rate is 40 percent and the desired inventory level is 30 percent of next month's cost of goods sold. Required: Prepare a purchases budget for April through June. Answer: April May Desired ending inventory $45,900 $49,050 Plus COGS 159,000 153,000 Total needed $204,900 $202,050 Less beginning inventory 47,700 45,900 Total purchases $157,200 $156,150
June $47,250 163,500 $210,750 49,050 $161,700
Diff: 2 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
77) Perry Company has the following information: Month March April May June July
Budgeted Sales $90,000 96,000 92,000 99,000 95,000
In addition, the gross profit rate is 40%, and the desired inventory level is 30% of next month's cost of sales. Required: Prepare a purchases budget for April through June. Answer: April May Desired ending inventory $ 16,560 $ 17,820 Plus COGS 57,600 55,200 Total needed 74,160 73,020 Less beginning inventory 17,280 16,560 Total purchases $56,880 $56,460
June $ 17,100 59,400 76,500 17,820 $58,680
Total $ 17,100 172,200 189,300 17,280 $ 172,020
Diff: 2 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
78) Favata Company has the following information: Month June July August September October
Budgeted Sales $60,000 51,000 40,000 70,000 72,000
In addition, the cost of goods sold rate is 70% and the desired inventory level is 30% of next month's cost of sales. Required: Prepare a purchases budget for July through September. Answer: July Aug Sept Desired ending inventory $8,400 $14,700 $15,120 Plus COGS 5,700 28,000 49,000 Total needed 4,100 42,700 64,120 Less beginning inventory 10,710 8,400 14,700 Total purchases $33,390 $34,300 $49,420
Total $15,120 112,700 127,820 10,710 $117,110
Diff: 2 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
79) Fashion Company has the following projected account balances for April 30, 2022: Accounts payable Accounts receivable Amortization, factory Inventories (3/31 & 4/30) Direct materials used Office salaries Insurance, factory Plant wages Bonds payable
$20,000 50,000 12,000 90,000 100,000 40,000 2,000 70,000 80,000
Sales $400,000 Capital shares 200,000 Retained earnings ? Cash 28,000 Equipment, net 120,000 Buildings, net 200,000 Utilities, factory 8,000 Selling expenses 30,000 Maintenance, factory 14,000
Required: a. Prepare a budgeted income statement for April 2022. b. Prepare a budgeted balance sheet as of April 30, 2022.
Answer: a. Fashion Company Income Statement For the Month of April 2022 Sales Cost of goods sold: Materials used Wages Amortization Insurance Maintenance Utilities Gross profit Operating expenses: Selling expenses Office salaries Net income b.
$400,000 $100,000 70,000 12,000 2,000 14,000 8,000
$30,000 40,000
206,000 194,000
70,000 $124,000
Fashion Company Balance Sheet As of April 30, 2022
Assets: Cash $28,000 Accounts receivable 50,000 Inventories 90,000 Equipment, net 120,000 Buildings, net 200,000 Total $488,000
Liab. and Owner's Equity: Accounts payable $20,000 Bonds payable 80,000 Capital shares 200,000 Retained earnings 188,000 Total
$488,000
Diff: 2 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
80) Edwards Company has the following projected account balances for June 30, 2022: Accounts payable Accounts receivable Depreciation, factory Inventories (5/31 & 6/30) Direct materials used Office salaries Insurance, factory Plant wages Bonds payable
$40,000 100,000 24,000 180,000 200,000 80,000 4,000 140,000 160,000
Sales Capital shares Retained earnings Cash Equipment, net Buildings, net Utilities, factory Selling expenses Maintenance, factory
Required: a. Prepare a budgeted income statement for June 2022. b. Prepare a budgeted balance sheet as of June 30, 2022.
$800,000 400,000 ? 56,000 240,000 300,000 16,000 60,000 28,000
Answer: a. Edwards Company Income Statement For the Month of June 2022 Sales Cost of goods sold: Materials used Wages Depreciation Insurance Maintenance Utilities Gross profit Operating expenses: Selling expenses Office salaries Net income
$800,000 $200,000 140,000 24,000 4,000 28,000 16,000
$60,000 80,000
412,000 388,000
140,000 $248,000
b. Edwards Company Balance Sheet June 30, 2022 Assets: Cash Accounts receivable Inventories Equipment, net Buildings, net Total
$56,000 100,000 180,000 240,000 300,000 $876,000
Liabilities and Owners' Equity: Accounts payable $40,000 Bonds payable 160,000 Capital shares 400,000 Retained earnings* 276,000 Total
$876,000
*$876,000 - ($40,000 + $160,000 + $400,000) = $276,000 Diff: 2 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
81) Russell Company has the following projected account balances for June 30, 2022: Accounts payable Accounts receivable Depreciation, factory Inventories (5/31 & 6/30) Direct materials used Office salaries Insurance, factory Plant wages Bonds payable
$80,000 200,000 48,000 360,000 400,000 160,000 8,000 280,000 320,000
Sales $1,600,000 Capital shares 800,000 Retained earnings ? Cash 112,000 Equipment, net 480,000 Buildings, net 800,000 Utilities, factory 32,000 Selling expenses 120,000 Maintenance, factory 56,000
Required: a. Prepare a budgeted income statement for June 2022. b. Prepare a budgeted balance sheet as of June 30, 2022.
Answer: a.
Russell Company Budgeted Income Statement For the Month of June 2022
Sales Cost of goods sold: Materials used Wages Depreciation Insurance Maintenance Utilities Gross profit Operating expenses: Selling expenses Office salaries Net income b.
Assets: Cash Accounts receivable Inventories Equipment, net Buildings, net Total
$1,600,000 $400,000 280,000 48,000 8,000 56,000 32,000
$120,000 160,000
824,000 776,000
280,000 $496,000
Russell Company Budgeted Balance Sheet June 30, 2022
$ 112,000 200,000 360,000 480,000 800,000 $1,952,000
Liabilities and Owners' Equity: Accounts payable $ 80,000 Bonds payable 320,000 Capital shares 800,000 Retained earnings* 752,000 Total
$1,952,000
*$1,952,000 - ($80,000 + $320,000 + $800,000) = $752,000 Diff: 2 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
82) Barrieland Merchandising Firm is developing its budgets for 2022. The 2021 income statement is as follows: Sales (100,000 units) Less: Cost of goods sold Gross profit Operating expenses (includes $10,000 of depreciation) Net income
$250,000 150,000 $100,000 60,000 $40,000
Selling prices will increase by 10 percent and sales volume in units will decrease by 5 percent. The cost of goods sold as a percent of sales will increase to 62 percent. Other than amortization, all operating costs are variable. Required: Prepare a budgeted income statement for 2022. Answer: Barrieland Merchandising Firm Income Statement For the Year 2022 Sales (95,000 × $2.75) Cost of goods sold Gross profit Less: operating expenses (($0.50 × 95,000) + $10,000) Net income
$261,250 161,975 $99,275 57,500 $41,775
Diff: 1 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
83) Christy Enterprises reports the year-end information from 2021 as follows: Sales (100,000 units) Less: Cost of goods sold Gross profit Operating expenses (includes $20,000 of depreciation) Net income
$500,000 300,000 200,000 120,000 $ 80,000
Christy is developing the 2022 budget. In 2022, the company would like to increase selling prices by 10%, and, as a result, expects a decrease in sales volume of 5%. The cost of goods sold as a percentage of sales is expected to increase to 62%. Other than depreciation, all operating costs are variable. Required: Prepare a budgeted income statement for 2022. Answer: Christy Enterprises Budgeted Income Statement For the Year 2022 Sales (95,000 × $5.50) Cost of goods sold (2022 sales × 62%) Gross profit Less: Operating expenses [($1.00 × 95,000] + $20,000) Net income
$522,500 323,950 198,550 115,000 $ 83,550
Diff: 2 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
84) Shamokin Manufacturing produces two products, Big and Bigger. Shamokin expects to sell 20,000 units of Big and 10,000 units of Bigger. Shamokin plans on having an ending inventory of 4,000 units of Big and 2,000 units of Bigger. Currently, Shamokin has 1,000 units of Big in its inventory and 800 units of Bigger. Each product requires two labour operations: molding and polishing. Product Big requires one hour of molding time and one hour of polishing time. Product Bigger requires one hour of molding time and two hours of polishing time. The direct labour rate for molders is $20 per molding hour, and the direct labour rate for polishers is $25 per polishing hour. Required: Prepare a direct labour budget in hours and dollars for each product. Answer: Desired Production: Big Bigger Total Expected sales 20,000 10,000 Desired ending inventory 4,000 2,000 Production needs 24,000 12,000 Less: beginning inventory 1,000 800 Desired production 23,000 11,200 Direct Labour Budget for Big: Molding Desired Production of Big 23,000 Hours of Labour Required per unit 1 Total Hours of Labour Required 23,000 Direct Labour Rate $20 Cost of Direct Labour for Big $460,000
Polishing 23,000 1 23,000 $25 $575,000
$1,035,000
Direct Labour Budget for Bigger: Molding Desired Production of Bigger 11,200 Hours of Labour Required per unit 1 Total Hours of Labour Required 11,200 Direct Labour Rate $20 Cost of Direct Labour for Bigger $224,000
Polishing 11,200 2 22,400 $25 $560,000
$784,000
Total Direct Labour Costs
$1,135,000
$1,819,000
$684,000
Diff: 3 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-2
85) Discuss the importance of the sales forecast and items that influence its accuracy. Answer: All other budgets are based on information from the sales forecast. The sales forecast is a challenge to predict because its accuracy depends on the ability to forecast the state of the general economy, changes in the industry, actions of the competition, and developments in technology. Each of these items affects individual products or product lines and are quantified and aggregated to obtain the sales forecast. Diff: 2 Type: ES CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 6-2
86) What is budgetary slack? What are the pros and cons of building slack into the budget from the point of view of (a) an employee and (b) a senior manager? Answer: Budgetary slack refers to the practice of underestimating budgeted revenues (or overestimating budgeted costs) to make budgeted targets more easily achievable. Employees' point of view: There are two benefits from this point of view. First, the employee may be able to obtain excess resources to achieve desired goals. This may take a lot of pressure off the employee and reduce job anxiety. Second, the employee may be able to convince senior management to lower their work expectations of him or her. This may also lead to lower pressure on the employee to perform. Both of these types of slack building are designed to reduce job stress for the employee. However, if incentives are graduated in such a way that achieving higher and higher goals provides the employee with more and more compensation in the form of bonuses, then the employee may lose income by selecting lower goals. Senior management's point of view: When employees build in slack, they are either using unnecessary resources to achieve a goal that they should have been able to achieve with fewer resources, or they are understating their performance capabilities. Thus, the organization is either not running as efficiently as it can, or is losing potential productivity from employees who are not working as hard as they can. In some cases, senior management may believe that employees build in slack to relieve job pressure. If burnout of employees has been happening in the organization, then perhaps senior management may be more forgiving and view some slack building as necessary to keep their employees from quitting. Diff: 3 Type: ES CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 6-2
6.3 Prepare a cash budget. 1) Beginning with the cash budget, each budget supporting the master budget follows step by step in logical fashion. Answer: FALSE Explanation: Beginning with the sales budget... Diff: 1 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-3
2) The cash budget helps avoid unnecessary idle cash and at the same time maintain minimum cash balances. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-3
3) Cash receipts depend on collections of accounts payable, cash sales, and miscellaneous sources, such as rental income. Answer: FALSE Explanation: ...collections of accounts receivable... Diff: 1 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-3
4) The budgeted balance sheet must be prepared prior to the cash budget so that the required cash balance can be determined. Answer: FALSE Explanation: The reverse is true. Diff: 2 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-3
5) The cash cycle describes the movement of cash from producing inventories to receivables from sales and back to cash from collections. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-3
6) Accrual accounting in compliance with ASPE/IFRS results in these timing differences between when a benefit or obligation must be reported for financial accounting purposes and when the cash inflow or outflow actually occurs. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 6-3
7) Boone Hobbies, a wholesaler, has a sales budget for next month of $600,000. Cost of units sold is expected to be 40 percent of sales. All units are paid for in the month following purchase. The beginning inventory of units is $20,000, and an ending amount of $24,000 is desired. Beginning accounts payable is $152,000. Boone Hobbies should budget cash used to pay accounts payable for the month totalling A) $244,000. B) $240,000. C) $156,000. D) $152,000. E) $148,600. Answer: D Explanation: $152,000 as given Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-3
Use the information below to answer the following question(s). Copper Corporation has the following sales budget for the last six months of 2022: July August September
$200,000 160,000 220,000
October November December
$180,000 200,000 188,000
Historically, the cash collection of sales has been as follows: 65 percent of sales collected in month of sale, 25 percent of sales collected in month following sale, 8 percent of sales collected in second month following sale, and 2 percent of sales is uncollectible. 8) Cash collections for September are A) $143,000. B) $161,400. C) $199,000. D) $204,000. E) $240,000. Answer: C Explanation: ($220,000 × 0.65) + ($160,000 × 0.25) + ($200,000 × 0.08) = $199,000 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-3
9) What is the ending balance of accounts receivable at the end of September assuming uncollectible balance is written off in the third month after the sale? A) $199,000 B) $93,000 C) $89,800 D) $97,000 E) $88,000 Answer: D Explanation: ($220,000 × 0.35) + ($160,000 × 0.10) + ($200,000 × 0.02) = $97,000 Diff: 3 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-3
10) Cash collections for October are A) $117,000. B) $184,800. C) $199,000. D) $176,400. E) $174,000. Answer: B Explanation: ($180,000 × 0.65) + ($220,000 × 0.25) + ($160,000 × 0.08) = $184,800 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-3
Use the information below to answer the following question(s). Gold Corporation has the following sales budget for the last six months of 2022: July August September
$200,000 160,000 220,000
October November December
$180,000 200,000 188,000
Historically, the cash collection of sales has been as follows: 60 percent of sales collected in month of sale, 30 percent of sales collected in month following sale, 8 percent of sales collected in second month following sale, and 2 percent of sales is uncollectible. 11) Cash collections for September are A) $196,000. B) $161,400. C) $199,000. D) $202,000. E) $206,000. Answer: A Explanation: ($220,000 × 0.60) + ($160,000 × 0.30) + ($200,000 × 0.08) = $196,000 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-3
12) What is the ending balance of accounts receivable at the end of September assuming uncollectible balance is written off in the third month after the sale? A) $199,000 B) $108,000 C) $104,000 D) $93,000 E) $88,000 Answer: B Explanation: ($220,000 × 0.4) + ($160,000 × 0.10) + ($200,000 × 0.02) = $108,000 Diff: 3 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-3
13) Cash collections for October are A) $108,000. B) $184,800. C) $199,000. D) $176,400. E) $186,800. Answer: E Explanation: ($180,000 × 0.60) + ($220,000 × 0.3) + ($160,000 × 0.08) = $186,800 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-3
14) The cash budget is a schedule of expected cash receipts and disbursements that A) requires an aging of accounts receivable and accounts payable. B) is a self-liquidating cycle. C) is prepared immediately after the sales forecast. D) predicts the effect on the cash position at given levels of operations. E) is prepared by the organization's bank. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-3
Use the information below to answer the following question(s).
Grinnell Manufacturing Company has the following information for 2022: Month January February March April
Budgeted Sales $76,000 85,000 92,000 79,000
Budget Expenses per Month Wages $15,000 Advertising 12,000 Depreciation 3,000 Other 4 percent of sales Note: All cash expenses are paid as incurred; Collections from sales are 50% in the month of sale and 50% in the month following the sale; December 2021 sales were $110,000. 15) What are the expected total cash disbursements for expenses in February? A) $33,400 B) $30,000 C) $30,200 D) $30,400 E) $27,000 Answer: D Explanation: ($85,000 × 0.04) + $15,000 + $12,000 = $30,400 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-3
16) What are the expected total cash receipts for February? A) $118,500 B) $89,000 C) $88,500 D) $85,000 E) $80,500 Answer: E Explanation: ($76,000 × 0.5) + ($85,000 × 0.5) = $80,500 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-3
17) What is the budgeted net operating income for the first quarter of 2022? A) $152,880 B) $135,280 C) $172,160 D) $123,640 E) $140,560 Answer: A Explanation: ($76,000 + $85,000 + $92,000) — [3 × ($15,000 + $12,000 + $3,000)] — [($76,000 + $85,000 + $92,000) × .04] = $152,880 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-3
Answer the following question(s) using the information below. The following information pertains to Tiffany Company: Month January February March
Sales $36,000 $48,000 $56,000
Purchases $26,000 $28,000 $32,000
Cash is collected from customers in the following manner: - Month of sale 30% - Month following the sale 70% 40% of purchases are paid for in cash in the month of purchase, and the balance is paid the following month. Labour costs are 20% of sales. Other operating costs are $15,000 per month (including $4,000 of depreciation). Both of these are paid in the month incurred. The cash balance on March 1 is $4,000. A minimum cash balance of $3,000 is required at the end of the month. Money can be borrowed in multiples of $1,000. 18) How much cash will be collected from customers in March? A) $47,000 B) $45,000 C) $50,000 D) $33,000 E) $50,400 Answer: E Explanation: ($48,000 × 70%) + ($56,000 × 30%) = $50,400 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-3
19) How much cash will be paid to suppliers in March? A) $29,600 B) $28,000 C) $44,000 D) $24,800 E) $17,600 Answer: A Explanation: ($28,000 × 60%) + ($32,000 × 40%) = $29,600 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-3
20) How much cash will be disbursed in total in March? A) $21,000 B) $34,200 C) $48,200 D) $51,800 E) $45,800 Answer: D Explanation: ($28,000 × 60%) + ($32,000 × 40%) + ($56,000 × 20%) + ($15,000 - $4,000) = $51,800 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-3
21) What is the ending cash balance for March after borrowing, if required? A) $4,000 B) $3,600 C) $3,200 D) $2,800 E) $3,000 Answer: B Explanation: $4,000 + $50,400 - $51,800 + $1,000 = $3,600 Diff: 3 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-3
Answer the following question(s) using the information below.
The following information pertains to Hepburn Company: Month January February March
Sales $60,000 $80,000 $100,000
Purchases $32,000 $40,000 $56,000
Cash is collected from customers in the following manner: - Month of sale 30% - Month following the sale 70% 40% of purchases are paid for in cash in the month of purchase, and the balance is paid the following month. Labour costs are 20% of sales. Other operating costs are $30,000 per month (including $8,000 of depreciation). Both of these are paid in the month incurred. The cash balance on March 1 is $8,000. A minimum cash balance of $6,000 is required at the end of the month. Money can be borrowed in multiples of $1,000. 22) How much cash will be collected from customers in March? A) $92,000 B) $90,000 C) $100,000 D) $86,000 E) $66,000 Answer: D Explanation: ($80,000 × 70%) + ($1000,000 × 30%) = $86,000 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-3
23) How much cash will be paid to suppliers in March? A) $56,000 B) $46,400 C) $88,000 D) $49,600 E) $35,200 Answer: B Explanation: ($40,000 × 60%) + ($56,000 × 40%) = $46,400 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-3
24) How much cash will be disbursed in total in March? A) $88,400 B) $42,000 C) $68,400 D) $96,400 E) $91,600 Answer: A Explanation: ($40,000 × 60%) + ($56,000 × 40%) + ($100,000 × 20%) + ($30,000 - $8,000) = $88,400 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-3
25) What is the ending cash balance for March after borrowing, if required? A) $8,000 B) $6,400 C) $5,600 D) $6,000 E) $6,600 Answer: E Explanation: $8,000 + $86,000 - $88,400 + $1,000 = $6,600 Diff: 3 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-3
Answer the following question(s) using the information below.
Fiscal Company has the following sales budget for the last six months of 2022: July August September
$100,000 80,000 110,000
October November December
$90,000 100,000 94,000
Historically, the cash collection of sales has been as follows: 65% of sales collected in the month of sale, 25% of sales collected in the month following the sale, 8% of sales collected in the second month following the sale, and 2% of sales are uncollectible. 26) Cash collections for September are A) $71,500 B) $86,700 C) $110,000 D) $102,000 E) $99,500 Answer: E Explanation: ($110,000 × 0.65) + ($80,000 × 0.25) + ($100,000 × 0.08) = $99,500 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-3
27) What is the ending balance of accounts receivable for September, assuming uncollectible balances are written off during the third month following the sale? A) $99,500 B) $48,500 C) $44,900 D) $46,500 E) $54,500 Answer: B Explanation: ($110,000 × 0.35) + ($80,000 × 0.10) + ($100,000 × 0.02) = $48,500 Diff: 3 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-3
28) Perry Company has gathered the following information: April 30, cash balance Dividends paid in May Cash expenditures in May for operating expenses Amortization expense in May Cash collections in May Merchandise purchases paid in cash in May Purchased equipment for cash in May
$90,000 $24,000 $73,600 $9,000 $178,000 $112,400 $35,000
Perry desires to keep a minimum cash balance of $20,000. Required: Prepare a cash budget for May, and indicate whether or not Perry meets minimum cash requirements. Answer: Cash Budget for May Beginning cash balance Cash collections Total cash available Cash disbursements: Merchandise purchases Operating expenses Equipment purchase Payment of dividends Ending cash balance
$90,000 178,000 $268,000
$112,400 73,600 35,000 24,000
245,000 $23,000
The ending cash of $23,000 exceeds the minimum cash requirement of $20,000. Diff: 2 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-3
29) Berry Company has gathered the following information: April 30, cash balance Dividends paid in May Cash expenditures in May for operating expenses Amortization expense in May Cash collections in May Merchandise purchases paid in cash in May Purchased equipment for cash in May
$65,000 $12,000 $76,600 $13,000 $152,300 $121,900 $56,000
Berry desires to keep a minimum cash balance of $15,000. Required: Prepare a cash budget for May, and indicate whether or not Berry meets minimum cash requirements. Answer: Cash Budget for May Beginning cash balance Cash collections Total cash available
$65,000 152,300 $217,300
Cash disbursements: Merchandise purchases $121,900 Operating expenses 76,600 Equipment purchase 56,000 Payment of dividends 12,000 Cash balance before borrowing Borrow Ending cash balance
266,500 $(49,200) 64,200 $15,000
Diff: 2 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-3
30) Ferry Company has gathered the following information: April 30, cash balance Dividends paid in May Cash expenditures in May for operating expenses Amortization expense in May Cash collections in May Merchandise purchases paid in cash in May Purchased equipment for cash in May
$25,000 $9,000 $49,000 $20,000 $132,000 $121,000 $55,000
Ferry desires to keep a minimum cash balance of $15,000. Required: Prepare a cash budget for May, and indicate whether or not Ferry meets minimum cash requirements. Answer: Cash Budget for May Beginning cash balance Cash collections Total cash available
$25,000 132,000 $157,000
Cash disbursements: Merchandise purchases $121,000 Operating expenses 49,000 Equipment purchase 55,000 Payment of dividends 9,000 Cash balance before borrowing Borrow Ending cash balance
234,000 $(77,000) 92,000 $15,000
Diff: 2 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-3
31) Gerry Company has gathered the following information: April 30, cash balance Dividends paid in May Cash expenditures in May for operating expenses Amortization expense in May Cash collections in May Merchandise purchases paid in cash in May Purchased equipment for cash in May
$105,000 $25,000 $69,600 $19,000 $182,000 $111,600 $47,000
Gerry desires to keep a minimum cash balance of $20,000. Required: Prepare a cash budget for May, and indicate whether or not Gerry meets minimum cash requirements. Answer: Cash Budget for May Beginning cash balance Cash collections Total cash available Cash disbursements: Merchandise purchases Operating expenses Equipment purchase Payment of dividends Ending cash balance
$105,000 182,000 $287,000
$111,600 69,600 47,000 25,000
253,200 $33,800
The ending cash of $23,000 exceeds the minimum cash requirement of $20,000. Diff: 2 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-3
32) Duffy Corporation has prepared the following sales budget: Month May June July August September
Cash Sales $16,000 20,000 18,000 24,000 22,000
Credit Sales $68,000 80,000 74,000 92,000 76,000
Collections are 40% in the month of sale, 45% in the month following the sale, and 10% two months following the sale. The remaining 5% is expected to be uncollectible. Required: Prepare a schedule of cash collections for July through September. Answer: July August September Total Cash sales $18,000 $24,000 $22,000 $64,000 Collections of credit sales from: Current month Previous month Two months ago
29,600 36,000 6,800
36,800 33,300 8,000
30,400 41,400 7,400
96,800 110,700 22,200
Total collections
$90,400
$102,100
$101,200
$293,700
Diff: 3 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-3
33) The following information pertains to Amigo Corporation: Month July August September October November December
Sales $30,000 34,000 38,000 42,000 48,000 60,000
Purchases $10,000 12,000 14,000 16,000 18,000 20,000
Cash is collected from customers in the following manner: Month of sale* 30% Month following sale 50% Two months following sale 15% Amount uncollectible 5% * Customers paying in the month of sale receive a 2% cash discount. 40% of purchases are paid for in cash in the month of purchase, and the balance is paid the following month. Required: a. Prepare a summary of cash collections for the 4th quarter. b. Prepare a summary of cash disbursements for the 4th quarter. Answer: a. Cash collections Oct $36,448 + Nov $40,812 + Dec $47,940 = $125,200
August September October November December
October $5,100 19,000 12,348 0 0 $36,448
November 0 5,700 21,000 14,112 0 $40,812
December 0 0 6,300 24,000 17,640 $47,940
b. Cash disbursements Oct $14,800 + Nov $16,800 + Dec $18,800 = $50,400
September October November December
October 8,400 6,400 0 0 $14,800
November 0 9,600 7,200 0 $16,800
December 0 0 10,800 8,000 $18,800
Diff: 3 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-3
6.4 Contrast responsibility and controllability.
1) Responsibility accounting is a budgeting system that measures the plans and objectives of managers. Answer: FALSE Explanation: Responsibility accounting is a system that measures the plans (by budgets) and actions (by actual results) of each responsibility centre. Diff: 2 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-4
2) Performance reports for responsibility centres may include uncontrollable costs if they are segregated from controllable costs. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-4
3) A controllable cost is a cost that is not subject to the influence of a given manager of a given responsibility centre for a given time span. Answer: FALSE Explanation: A controllable cost is any cost that is primarily subject to the authorization of a specific manager of a specific responsibility centre for a specific time span. Diff: 1 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-4
4) Few costs are clearly under the sole influence of one manager. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-4
5) Responsibility accounting focuses on information and knowledge, not control. Answer: TRUE
Diff: 1 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-4
6) In a profit centre the manager is responsible for investments, revenues and expenses. Answer: FALSE Explanation: A profit centre includes revenue and costs Diff: 1 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-4
7) Variances sometimes signal to managers that their strategies are ineffective. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-4
8) The major types of responsibility centres are A) profit, non-profit, and governmental. B) profit, sales, and direct cost. C) revenue, profit, income, and cost. D) revenue, profit, cost, and investment. E) profit, indirect cost, and investment. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-4
9) The reason for tracing a cost in responsibility accounting is to determine which of the following? A) whether it is fixed or variable B) who has the best knowledge about why the costs arose C) what activity caused the costs to be incurred D) either who has the best knowledge about why the costs arose or, what activity caused the costs to be incurred E) whether it is production or administration Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-4
10) Responsibility accounting is a system that A) deals mainly with revenues. B) requires subdividing all management levels. C) is most appropriate at the top levels of the organization. D) is closely tied to the master budget. E) measures the plans and actions of responsibility centres. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-4
11) Which of the following statements is TRUE concerning controllability of costs? A) Fixed costs are controllable costs. B) Controllable costs are easy to identify with much accuracy. C) Senior managers rarely differ in their reliance on controllable costs for performance measurement. D) All costs are controllable, given a sufficiently long time period. E) Most costs are under the sole influence of any one manager. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 6-4
12) A criticism of traditional budgeting is "Excessive reliance on extrapolating past trends." Which of the following is a proposal for change to address this criticism? A) Use activity-based budgeting. B) Balance financial aspects with nonfinancial. C) Signal to all employees the need for continuous improvement. D) Adopt a cross-functional approach. E) Link budgeting explicitly to strategy. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-4
13) One of the criticisms of traditional budgeting is not using budgets to evaluate performance until the end of the budget period. Which of the following proposals for change would address this criticism? A) Link budgeting explicitly to strategy. B) Use Kaizen budgeting to guide areas for cost reduction before the end of the budget period. C) Inform employees of the need for continuous improvement in performance within the budget period. D) Balance financial aspects with non-financial aspects (such as quality and time). E) Rely strictly on extrapolation of past performance. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-4
14) Mannock Company budgeted $400,000 for employee training, but actually spent only $300,000. Which of the following statements is the best course of action for management to take in this instance? A) Because this $100,000 variance is favourable, management does not need to investigate further. B) Management will investigate this $100,000 favourable variance to ensure that the cost savings do not reflect a reduction in programming. C) Management will investigate this $100,000 favourable variance to try to identify and correct the problem with the budgeting system. D) Management should not investigate every variance, especially the favourable ones. E) Management should hold a meeting with the budget department and the training department to ensure that next year's budget is more realistic. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 6-4
15) Disk Company was very profitable for the first ten years of its existence, but the company has fallen on hard times with the growth of compact disks. In 2017 Jean Adams was appointed head of the Product Research Department. She began a number of product development projects. Although the department has developed several good ideas that led to the introduction of several promising products, Ms. Adams was criticized for poor cost control. The financial performance reports of the department under Ms. Adams leadership were consistently unfavourable. Management was quite concerned about cost control because profits for the company were low and the cash budget indicated that additional borrowing would be required during the next year. Because of her inability to control costs, Ms. Adams was relieved of her responsibilities in 2018 and Fran Jones became head of the department. Ms. Jones promised to improve performance of Product Research and scaled back the developmental activities to obtain favourable financial performance. By the end of 2018 Ms. Jones was showing a favourable financial variance. Required: If the Product Research Department is classified as a responsibility centre, what unique problems are associated with evaluating its financial performance? Answer: Because there does not appear to be any clearly defined relationship between effort and accomplishment, the department should be classified as a cost centre. Because of the absence of a relationship between effort and accomplishment, the financial performance of a discretionary cost centre cannot be evaluated with the aid of flexible budgeting. It is even difficult to evaluate the financial performance of such a centre by any means. The best monetary evaluation is based on a comparison of the actual and budgeted costs for each given period and with other prior periods. Diff: 2 Type: ES CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 6-4
16) Rick Christensen is the new division manager of Fastfood Sales. His division is considered a
responsibility centre, and he has control over all costs and revenue of the division. His predecessor had been dismissed from the company because he could not keep the revenues and costs with acceptable variances on a quarterly basis. However, the former manager had relatively good annual reports. Christensen is very concerned about the situation because Fastfood has a somewhat seasonal business and it is very difficult to keep sales up during the winter months. He is considering changing jobs after only a few months but wants some advice as to the likelihood that he will be able to keep revenue and costs under control throughout the year. Required: Distinguish between controllable and uncontrollable aspects of revenue and costs. Can a manager totally control all revenue and costs? Why or why not? Answer: Although no revenue or cost can be totally controlled, a cost or revenue is a controllable item when a manager has significant influence over the amount of a cost or revenue, for a given time span. It is uncontrollable if this is not the case. A manager's ability to influence costs and revenues depends on two factors: (1) the manager's level of authority and (2) the time period involved. Costs and revenue contracts, the economic costs of disposing of fixed assets, and the economy are three conditions that are likely to affect the period of time during which an item is not controllable. In the case of Mr. Christensen, another factor, different seasons, can have some influence. He should encourage the company not to give much weight to quarterly reports but concentrate on what he has done for an entire accounting period. Short-run evaluations can often be unfair to the person being evaluated. Diff: 2 Type: ES CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 6-4
17) Describe some of the drawbacks of using the operating budget as a control device. Answer: When the operating budget is used as a control device it can lead to behaviour that is actually detrimental to the organization. The major problem with the budget performance report is not the report itself, but rather the way it is used. In general, managers are rewarded for favourable variances, and disciplined for unfavourable variances. This encourages managers to set lax standards for both sales and costs so favourable variances result. It can also lead to "budget games." Another drawback is that once the budget is established, if there is any variance between budget and actual, it is assumed to be because of actual. However, as we know, the budget will never be totally accurate due to the uncertainties of predicting the future. If used properly, however, the operating budget can be a tremendous benefit to any company. Diff: 2 Type: ES CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 6-4
18) How is budgeting for a multinational corporation different than budgeting for a corporation that is strictly domestic? Answer: Budgeting for a multinational corporation is made far more complex than budgeting for a domestic corporation because the multinational corporation often has subunits operating in many different countries, resulting in less familiar business environments and many different currencies. Multinational corporations need to understand many different business environments with significant political, legal, and economic environments. Multinational companies earn their revenues and incur their expenses in many different currencies, and must report their results a single currency. Additionally, management accountants in different countries need to budget for foreign exchange rates and anticipate changes that might take place during the year in the face of constantly fluctuating exchange rates. Diff: 2 Type: ES CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 6-4
19) Describe the four types of responsibility centres. Give a specific example of each of the four types of responsibility centres. Answer: 1. Cost centre: In a cost centre, managers are accountable for costs only. 2. Revenue centre: In a revenue centre, managers are accountable primarily for revenues. Many times, revenue centres are sales territories. 3. Profit centre: In a profit centre, managers are accountable for both revenues and costs and, therefore, profits. 4. Investment centre: In an investment centre, managers are accountable for investments, revenues, and costs. Investment centres are generally large divisions of a corporation. Student examples will vary. Diff: 2 Type: ES CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 6-4
20) When applied to budgets, responsibility accounting provides feedback to top management about the performance of different responsibility-centre managers relative to the budget. Name and briefly describe the three ways, presented in the textbook, that properly used variances can be helpful. Answer: 1. Early Warning. Variances alert managers early to events neither easily nor immediately evident. Managers can take corrective actions or exploit the available opportunities. 2. Performance evaluation. Variances inform managers about how well the company has performed in implementing its' strategies. 3. Evaluating strategy. Variances sometimes signal to managers that their strategies are ineffective. Diff: 2 Type: ES CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-4
6.5 (Appendix A) Distinguish among sensitivity analysis, Kaizen budgeting, and activity-based budgeting. 1) Sensitivity analysis helps to evaluate outcomes from changes in data or assumptions. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-5
2) Kaizen budgeting is a budgetary approach that explicitly incorporates continuous improvement during the budget period into the resultant budget numbers. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-5
3) The objective of activity-based budgeting is to refine the budgeting process by partitioning indirect costs into different homogeneous activity cost pools. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-5
4) The improvements gained through Kaizen budgeting arise from large changes made during the budget period as a result of executive leadership. Answer: FALSE Explanation: The improvements gained through Kaizen budgeting arise from many small changes made during the budget period as a result of employees' suggestions. Diff: 2 Type: TF CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-5
5) The value of budgets to managers in their strategic analysis and planning is enhanced by
A) value based budgeting. B) conducting sensitivity analysis. C) the lines of responsibility in the value chain. D) the current organizational structure. E) the operating plan. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-5
6) Kaizen budgeting, adapted from the Japanese, provides that A) activity costs are budgeted based on current practices, methods, and costs. B) continuous budgeting methods are employed. C) target pricing is key to budget preparation. D) continuous improvements are incorporated into the budget. E) a rolling budget is employed to keep a handle on management. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-5
7) The objective of activity-based budgeting is A) to allow multiple activities to be used as cost drivers rather than just one item such as direct labour hours. B) to compute the cost of performing activities. C) to refine the budgeting process by assigning indirect costs into activity cost pools. D) to classify costs by functional area and assign them to related activities. E) to classify costs as to whether they are value added or non-value added. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 6-5
8) Activity-based budgeting is a strategy A) used to determine production targets. B) that requires budgeting each functional organizational unit. C) that requires determining the budgetary slack for the activity being measured. D) that does not require an understanding of value added activities. E) that focuses on the cost of activities necessary to produce and sell products and services. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 6-5
Answer the following question(s) using the information below. Sherry and John Enterprises are using the Kaizen approach to budgeting for 2022. The budgeted income statement for January 2022 is as follows: Sales (168,000 units) Less: Cost of goods sold Gross margin Operating expenses (includes $50,000 of fixed costs) Operating income
$1,000,000 600,000 $ 400,000 300,000 $ 100,000
Under the Kaizen approach, cost of goods sold and variable operating expenses are budgeted to decline by 1% per month. 9) What is budgeted gross margin for March 2022? A) $392,040 B) $396,000 C) $408,040 D) $411,940 E) $412,000 Answer: D Explanation: $1,000,000 - ($600,000 × .99 × .99) = $411,940 Diff: 2 Type: MC CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-5
10) Stark Company is developing its budgets for 2022 and, for the first time, will use the Kaizen approach. The initial 2022 income statement, based on static data from 2021, is as follows: Sales (360,000 units) Less: cost of goods sold Gross margin Operating expenses (includes $40,000 of amortization) Net income
$540,000 360,000 $180,000 120,000 $60,000
Selling prices for 2022 are expected to increase by 6 percent, and sales volume in units will decrease by 10 percent. The cost of goods sold, as estimated by the Kaizen approach, will decline by 10 percent per unit. Other than amortization, all other operating costs are expected to decline by 5 percent. Required: Prepare a Kaizen-based budgeted income statement for 2022. Answer: Sales (324,000 × $1.59) $515,160 Less: COGS (324,000 × $0.90) 291,600 Gross margin $223,560 Operating expenses ($40,000 + $76,000) 116,000 Net income $107,560 Diff: 3 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-5
11) Jermaine Company is developing its budgets for 2022 and, for the first time, will use the Kaizen approach. The initial 2022 income statement, based on static data from 2021, is as follows: Sales (200,000 units) Less: cost of goods sold Gross margin Operating expenses (includes $20,000 of amortization) Net income
$300,000 200,000 $100,000 80,000 $20,000
Selling prices for 2022 are expected to increase by 8 percent, and sales volume in units will decrease by 10 percent. The cost of goods sold, as estimated by the Kaizen approach, will decline by 10 percent per unit. Other than amortization, all other operating costs are expected to decline by 5 percent. Required: Prepare a Kaizen-based budgeted income statement for 2022. Answer: Sales (180,000 × $1.62) $291,600 Less: COGS (180,000 × $0.90) 162,000 Gross margin $129,600 Operating expenses ($20,000 + $57,000) 77,000 Net income $52,600 Diff: 3 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-5
12) Allscott Company is developing its budgets for 2022 and, for the first time, will use the Kaizen approach. The initial 2022 income statement, based on static data from 2021, is as follows: Sales (140,000 units) $420,000 Less: Cost of goods sold 280,000 Gross margin $140,000 Operating expenses (includes $28,000 of depreciation) 112,000 Net income $28,000 Selling prices for 2022 are expected to increase by 8%, and sales volume in units will decrease by 10%. The cost of goods sold, as estimated by the Kaizen approach, will decline by 10% per unit. Other than depreciation, all other operating costs are expected to decline by 5%. Required: Prepare a Kaizen-based budgeted income statement for 2022. Answer: Sales (126,000 × $3.24) $408,240 Less: COGS (126,000 × $1.80) 226,800 Gross margin $181,440 Operating expenses ($28,000 + $79,800) 107,800 Net income $73,640 Diff: 3 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-5
13) Brad Corporation is developing its budgets for 2022 and, for the first time, will use the Kaizen approach. The initial 2022 income statement, based on static data from 2021, is as follows: Sales (240,000 units) Less: Cost of goods sold Gross margin Operating expenses (includes $64,000 of fixed costs) Net income
$720,000 480,000 $240,000 192,000 $48,000
Under the Kaizen approach, cost of goods sold and variable operating expenses are budgeted to decline by 12%. Required: Prepare a Kaizen-based budgeted income statement for March of 2022. Answer: Sales $720,000 Less: Cost of goods sold ($480,000 × 0.88) 422,400 Gross margin $297,600 Operating expenses [($128,000 × 0.88) + $64,000] 176,640 Net income $120,960 Diff: 2 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-5
14) Gimble Corporation is developing its budgets for 2022 and, for the first time, will use the Kaizen approach. The initial 2022 income statement, based on static data from 2021, is as follows: Sales (320,000 units) Less: Cost of goods sold Gross margin Operating expenses (includes $49,000 of fixed costs) Net income
$960,000 672,000 $288,000 202,000 $86,000
Under the Kaizen approach, cost of goods sold and variable operating expenses are budgeted to decline by 9%. Required: Prepare a Kaizen-based budgeted income statement for March of 2022. Answer: Sales $960,000 Less: Cost of goods sold ($672,000 × 0.91) 611,520 Gross margin $348,480 Operating expenses [($153,000 × 0.91) + $49,000] 188,230 Net income
$160,250
Diff: 2 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-5
15) The Regina location of Catch Fish Inc. (CFI), a chain of stores that cater to fishing enthusiasts, is preparing its activity-based budget for 2022. CFI has three product categories: tackle, rods & reels, and general merchandise like clothing and accessories. The following table shows the four activities that consume indirect resources at the Regina store, the cost drivers, cost driver rates, and the cost driver quantity budgeted to be consumed in each activity in 2022.
Activity Ordering Delivery Stocking Customer Support
Cost driver # of orders # of deliveries hours of time # of items sold
Rate $32.00 $16.00 $17.00 $0.05
Tackle 1,200 1,400 500 18,750
Rods & Reels General 150 1,700 170 2,000 50 400 1,700 6,200
Required: 1. For each product category, calculate the activity-cost per unit sold for each of the four activities. 2. Based on the result in "Required 1," which product category is the most out of line with regard to the others in terms of activity cost per unit of sales? Comment on a possible cause for this difference. Answer: 1. Total activity cost for each product category (interim calculation): Rods & Activity Cost driver Rate Tackle Reels General Ordering # of orders $32.00 $38,400 $4,800 $54,400 Delivery # of deliveries $16.00 22,400 2,720 32,000 Stocking hours of time $17.00 8,500 850 6,800 Customer Support # of items sold $0.05 938 85 310 Total $70,238 $8,455 $93,510 Activity cost per unit for each product category: Rods & Activity Tackle Reels Ordering $2.05 $2.82 Delivery $1.19 $1.60 Stocking $0.45 $0.50 Customer Support $0.05 $0.05
General $8.77 $5.16 $1.10 $0.05
2. The general product category is out of line with the others in the first three activities. This is most likely due to the extra costs associated with the broader array of product types that are in this category. Diff: 3 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-5
16) The Saskatoon location of Catch Fish Inc. (CFI), a chain of stores that cater to fishing enthusiasts, is preparing its activity-based budget for 2022. CFI has three product categories: tackle, rods & reels, and general merchandise like clothing and accessories. The following table shows the four activities that consume indirect resources at the Regina store, the cost drivers, cost driver rates, and the cost driver quantity budgeted to be consumed in each activity in 2022.
Activity Ordering Delivery Stocking Customer Support
Cost driver # of orders # of deliveries hours of time # of items sold
Rate $32.00 $16.00 $17.00 $0.05
Tackle 1,500 1,700 600 21,500
Rods & Reels General 140 1,900 150 2,500 60 500 1,500 6,700
Required: 1. For each product category, calculate the activity-cost per unit sold for each of the four activities. 2. Based on the result in "Required 1," which product category is most out of line with regard to the others in terms of activity cost per unit of sales? Comment on a possible cause for this difference. Answer: 1. Total activity cost for each product category (interim calculation): Rods & Activity Cost driver Rate Tackle Reels General Ordering # of orders $32.00 $48,000 $4,480 $60,800 Delivery # of deliveries $16.00 27,200 2,400 40,000 Stocking hours of time $17.00 10,200 1,020 8,500 Customer Support # of items sold $0.05 1,075 75 335 Total $86,475 $7,975 $109,635 Activity cost per unit for each product category: Rods & Activity Tackle Reels Ordering $2.23 $2.99 Delivery $1.27 $1.60 Stocking $0.47 $0.68 Customer Support $0.05 $0.05
General $9.07 $5.97 $1.27 $0.05
2. The general product category is out of line with the others in the first three activities. This is most likely due to the extra costs associated with the broader array of product types that are in this category. Diff: 3 Type: SA CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 6-5
17) Describe the concept of kaizen budgeting. Answer: Kaizen budgeting explicitly incorporates continuous improvement in cost reduction anticipated during the budget period. Much of the cost reduction arises from many small improvements rather than large one time improvements. Most of the improvements come from employee suggestions. Companies that employ kaizen budgeting create a culture where employee suggestions are valued, recognized, and rewarded. Diff: 2 Type: ES CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 6-5
18) Explain what is meant by sensitivity analysis in budgeting, and discuss how managers might use sensitivity analysis in practice. Answer: Sensitivity analysis is a "what-if" technique that examines how results will change if the original predicted data are not achieved or if an underlying assumption changes. Managers often use financial planning models, which are mathematical representations of relationships among the factors that influence the master budget. It is possible, using these models, to examine the financial impact of one or more parameters that influence a master budget, for example selling price and material cost. Management could consider three levels of each of these two parameters, resulting in nine scenarios of different selling prices and material costs. The financial model could then present a master budget based on each of these changes, and demonstrate the financial impact on the original data given changes in selling prices and/or material costs. Management could use these predictions to make contingency plans, change their strategies, or simply update the budgets as environmental conditions change. Diff: 2 Type: ES CPA Competencies: Chapter 6 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 6-5
Cost Accounting: A Managerial Emphasis - Cdn. Ed., 9e (Datar) Chapter 7 Flexible Budgets, Variances, and Management Control: I 7.1 Distinguish between a static budget and a flexible budget. 1) A variance is the difference between the actual result and a budgeted amount. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-1
2) Variances and flexible budgets help managers gain insights into why actual results differ from planned performance. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-1
3) A static budget is a budget that can be changed or altered after it is developed. Answer: FALSE Explanation: A flexible budget is a budget that can be changed or altered after it is developed. Diff: 1 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-1
4) A flexible budget is a budget that is developed using budgeted revenue or cost amounts and is not adjusted at the end of the budgeted period. Answer: FALSE Explanation: After each time period, the budgeted variable costs and budgeted revenue amounts will be adjusted according to the actual quantity produced and sold. Diff: 2 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-1
5) A variance is the difference between the actual cost for the current and previous year. Answer: FALSE Explanation: A variance is the difference between actual results and expected (or budgeted) performance. Diff: 2 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-1
6) The only difference between the static budget and flexible budget is that the static budget is prepared using planned output. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-1
7) Management by exception is the practice of focusing management attention on areas where performance meets expectations. Answer: FALSE Explanation: Management by exception is the practice of focusing management attention on areas where performance fails to meet expectations. Diff: 1 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-1
8) A variance is considered to be A) the gap between an actual result and a benchmark amount. B) the required number of inputs for one standard output. C) the difference between an actual result and a budget amount. D) the difference between a budgeted amount and a standard amount. E) a standard. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-1
9) A favourable variance indicates that ________. A) the actual costs are less than the budgeted costs B) the actual revenues are less than the budgeted revenues C) the actual units sold are less than the budgeted units D) the budgeted contribution margin is more than the actual amount Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-1
10) The type of budget that is based on one level of output, without adjustment for any operational or financial changes is called A) a balanced budget. B) a cost budget. C) a flexible budget. D) a static budget. E) a standard budget. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-1
11) A budget that is adjusted in accordance with changes in actual output is called A) a balanced budget. B) a cost budget. C) a flexible budget. D) a trial balance budget. E) a static budget. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-1
12) Some financial variances show increases in operating income relative to a budgeted or allocated amount, and others show decreases in operating income. Respectively, these variances are A) budgeted, standard. B) favourable, unfavourable. C) standard, budgeted. D) unfavourable, favourable. E) fixed, variable. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-1
13) Management by exception is the practice of concentrating on A) the master budget variances. B) on areas where performance fails to meet expectations. C) favourable variances. D) unfavourable variances. E) exceptional results. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-1
14) General Insurance Company had a static budgeted operating income of $4.6 million; however, actual income was $3.0 million. What is the static budget variance of operating income? A) $1,000,000 favourable
B) $1,000,000 unfavourable C) $1,600,000 favourable D) $3,000,000 favourable E) $1,600,000 unfavourable Answer: E Explanation: ($3,000,000) - ($4,600,000) = $1,600,000 unfavourable Diff: 1 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-1
Use the information below to answer the following question(s). Golf & Country Company used the following data to evaluate their current operating system. The company sells 1 pack of golf balls for $10 per pack. The $10 selling price is also the budgeted selling price.
Units Sold Variable Costs Fixed Costs
Budgeted 1,000,000 $3,000,000 $1,800,000
Actual 990,000 $2,500,000 $1,850,000
15) What is the actual operating income for Golf & Country Company using the actual results? A) <$3,360,000> B) $4,750,000 C) $5,200,000 D) $5,550,000 E) $5,970,000 Answer: D Explanation: Actual Results Units Sold 990,000 Revenues $9,900,000 Variable Costs 2,500,000 Contribution Margin $7,400,000 Fixed Costs 1,850,000 Operating Income $5,550,000 Diff: 1 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-1
16) What is the budgeted operating income for Golf & Country Company? A) $7,000,000 B) $5,970,000 C) $5,550,000 D) $5,200,000 E) $4,750,000 Answer: D Explanation: Static Budget Units Sold 1,000,000 Revenues $10,000,000 Variable Costs 3,000,000 Contribution Margin $7,000,000 Fixed Costs 1,800,000 Operating Income $5,200,000 Diff: 1 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-1
17) What is the total static budget variance for Golf & Country Company? A) $650,000 favourable B) $450,000 unfavourable C) $400,000 favourable D) $390,000 unfavourable E) $350,000 favourable Answer: E Explanation: Revenues $(100,000)U Variable Costs 500,000 F Contribution Margin $400,000 F Fixed Costs (50,000) U Operating Income $350,000 F Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-1
18) A company uses a static budget approach and the previous management accountant calculated the following information: Fixed costs variance $10,000 U; revenues variance $400,000 F; contribution margin variance $60,000 F. What is the total static-budget variance? A) $50,000 F B) $50,000 U C) $230,000 F D) $230,000 U E) $390,000 F Answer: A Explanation: $60,000 F - $10,000 U = $50,000 F Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-1
Answer the following question(s) using the information below. North Haven Corporation used the following data to evaluate their current operating system. The company sells items for $10 each and used a budgeted selling price of $10 per unit.
Units sold Variable costs Fixed costs
Actual 92,000 units $450,800 $95,000
Budgeted 90,000 units $432,000 $100,000
19) What is the static-budget variance of revenues? A) $20,000 favourable B) $20,000 unfavourable C) $2,000 favourable D) $2,000 unfavourable E) $25,000 unfavourable Answer: A Explanation: (92,000 units × $10) - (90,000 units × $10) = $20,000 F Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-1
20) What is the static-budget variance of variable costs? A) $1,200 favourable B) $18,800 favourable C) $20,000 favourable D) $1,200 unfavourable E) $18,800 unfavourable Answer: E Explanation: $450,800 - $432,000 = $18,800 U Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-1
21) What is the static-budget variance of operating income? A) $3,800 favourable B) $1,200 unfavourable C) $6,200 favourable D) $6,200 unfavourable E) $1,200 favourable Answer: C Explanation: Actual Static Static-budget Results Budget Variance Units sold 92,000 90,000 Revenues Variable costs Contribution margin Fixed costs Operating income
$920,000 450,800 $469,200 95,000 $374,200
$900,000 432,000 $468,000 100,000 $368,000
$20,000 F 18,800 U 1,200 F 5,000 F $6,200 F
Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-1
Use the information below to answer the following question(s). Beetles Corporation used the following data to evaluate their current operating system. The company sells items for $10 each and used a budgeted selling price of $10 per unit.
Units sold Variable costs Fixed costs
Actual 495,000 units $1,250,000 $925,000
Budgeted 500,000 units $1,500,000 $900,000
22) What is the static-budget variance of revenues? A) $50,000 favourable B) $50,000 unfavourable C) $5,000 favourable D) $5,000 unfavourable E) $25,000 unfavourable Answer: B Explanation: (495,000 units × $10) - (500,000 units × $10) = $50,000 U Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-1
23) What is the static-budget variance of variable costs? A) $200,000 favourable B) $50,000 unfavourable C) $50,000 favourable D) $250,000 unfavourable E) $250,000 favourable Answer: E Explanation: $1,250,000 - $1,500,000 = $250,000 F Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-1
24) What is the static-budget variance of operating income? A) $175,000 favourable B) $195,000 unfavourable C) $225,000 favourable D) $200,000 unfavourable E) $200,000 favourable Answer: A Explanation: Actual Static Static-budget Results Budget Variance Units sold 495,000 500,000 Revenues Variable costs Contribution margin Fixed costs Operating income
$4,950,000 1,250,000 $3,700,000 925,000 $2,775,000
$5,000,000 1,500,000 $3,500,000 900,000 $2,600,000
$(50,000)U 250,000 F 200,000 F (25,000)U $175,000 F
Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-1
Use the information below to answer the following question(s). Flying Beetles Corporation used the following data to evaluate their current operating system. The company sells items for $10 each and had used a budgeted selling price of $11 per unit.
Units sold Variable costs Fixed costs
Actual 306,000 units $965,000 $ 53,000
Budgeted 300,000 units $950,000 $ 50,000
25) What is the static-budget variance of revenues? A) $60,000 favourable B) $240,000 favourable C) $240,000 unfavourable D) $6,000 favourable E) $6,000 unfavourable Answer: C Explanation: (306,000 units × $10) - (300,000 units × $11) = $240,000 U Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-1
26) What is the static-budget variance of variable costs? A) $13,000 favourable B) $13,000 unfavourable C) $15,000 favourable D) $15,000 unfavourable E) $3,000 unfavourable Answer: D Explanation: $965,000 - $950,000 = $15,000 U Diff: 1 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-1
27) What is the static-budget variance of operating income? A) $258,000 unfavourable B) $258,000 favourable C) $222,000 favourable D) $222,000 unfavourable E) $3,000 unfavourable Answer: A Explanation: Actual Static Static-budget Results Budget Variance Units sold 306,000 300,000 Revenues $3,060,000 Variable costs 965,000 Contribution margin $2,095,000 Fixed costs 53,000 Operating income $2,042,000
$3,300,000 950,000 $2,350,000 50,000 $2,300,000
$240,000 15,000 255,000 3,000 $258,000
U U U U F
Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-1
28) Yellowknife Corporation used the following data to evaluate their current operating system. The company sells items for $20 each and used a budgeted selling price of $20 per unit.
Units sold Variable costs Fixed costs
Actual 200,000 units $1,250,000 $ 925,000
Budgeted 203,000 units $1,500,000 $ 900,000
Required: Prepare a Level 1 static-budget variance analysis using an income statement in contribution margin format. Use the following three column headings: Actual Results, Static Budget, Static-budget Variance. Answer:
Actual Results 200,000
Static Budget 203,000
Static-budget Variance
Revenues $4,000,000 Variable costs 1,250,000 Contribution margin $2,750,000 Fixed costs 925,000 Operating income $1,825,000
$4,060,000 1,500,000 $2,560,000 900,000 $1,660,000
$60,000 250,000 190,000 25,000 $165,000
Units sold
U F F U F
Diff: 2 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-1
29) Saan Corporation used the following data to evaluate their current operating system. The company sells items for $20 each and used a budgeted selling price of $20 per unit.
Units sold Variable costs Fixed costs
Actual 315,000 units $4,095,000 $ 490,000
Budgeted 300,000 units $700,000 $ 520,000
Required: Prepare a Level 1 static-budget variance analysis using a income statement in contribution margin format. Use the following three column headings: Actual Results, Static Budget, Static-budget Variance. Answer:
Actual Results 315,000
Static Budget 300,000
Static-budget Variance
Revenues $6,300,000 Variable costs 4,095,000 Contribution margin $2,205,000 Fixed costs 490,000 Operating income $1,715,000
$6,000,000 4,500,000 $1,500,000 520,000 $980,000
$300,000 405,000 705,000 30,000 $735,000
Units sold
F F F F F
Diff: 2 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-1
7.2 Develop Level 2 flexible budgets, and calculate flexible-budget and sales-volume variances. 1) Variances can be expected to vary within some normal limits, so not all variances require further investigation. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-2
2) The static-budget variance can be subdivided into the flexible-budget variance and the sales-volume variance. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-2
3) A flexible budget enables managers to compute a richer set of variances than a static budget does. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-2
4) Determining the actual quantity of the revenue driver is one step in the development of a flexible budget. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-2
5) The sales-volume variance is the difference between the flexible-budget amount and the static-budget amount; unit selling prices, unit variable costs, and fixed costs are held constant. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-2
6) The flexible-budget variance is the difference between the actual results and the flexible-budget amount for the actual levels of the revenue and cost drivers. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-2
7) The flexible-budget variance pertaining to revenues is also called the variance of operating income. Answer: FALSE Explanation: Revenue and operating income are not the same. Diff: 2 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-2
8) The sales-volume variance of operating income is a measure of efficiency. Answer: FALSE Explanation: Sales-volume measures the differences caused by using different budgeted amounts. Diff: 2 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-2
9) The flexible-budget variance may be the result of inaccurate forecasting of units sold. Answer: FALSE Explanation: The sales-volume variance is the result of inaccurate forecasting of units sold. Diff: 3 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-2
10) Decreasing demand for a product may create a favourable sales-volume variance. Answer: FALSE Explanation: Decreasing demand for a product may create an unfavourable sales-volume variance. Diff: 2 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-2
11) An unfavourable variance is conclusive evidence of poor performance. Answer: FALSE Explanation: An unfavourable variance suggests further investigation, not conclusive evidence of poor performance. Diff: 2 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-2
12) The flexible budget contains A) budgeted amounts for alternative levels of output. B) actual amounts for budgeted output. C) revenue based on budgeted quantity and actual unit price. D) actual costs for planned output. E) the difference between flexible and static budget fixed costs. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-2
13) Which of the following items will be same for a flexible budget and a master budget? A) total variable cost B) total expected fixed costs C) total contribution margin D) total expected revenues Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-2
14) A packaging company produces a variety of cardboard boxes in an automated process. Expected production per month is 160,000 units. The required direct materials costs $0.30 per unit. Variable manufacturing overhead costs are $24,000 per month and are allocated based on units of production. Direct labour is budgeted to be $6,400. The company only produces based on customer orders, so all production is considered sold as it is produced. Revenue for the month will be $240,000. What is the budgeted contribution margin per unit? A) $1.50 per unit B) $1.31 per unit C) $1.16 per unit D) $1.05 per unit E) $1.01 per unit Answer: E Explanation: ($240,000/160,000 units) = $1.50 per unit ($24,000/160,000 units) = $0.15 per unit ($6,400/160,000 units) = $0.04 per unit $1.50 - [0.15 + 0.04 + 0.30] = $1.01 Diff: 1 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-2
15) A packaging company produces cardboard boxes in an automated process. The required direct materials costs $0.30 per unit. Fixed manufacturing overhead costs are budgeted at $24,000 per month and are allocated based on units of production. The budgeted contribution margin per unit is $0.85, and administration fixed costs are budgeted at $7,500 per month.What is the flexible-budget amount for operating income for 40,000 and 20,000 units, respectively? A) $26,000; $20,000 B) $36,000; $30,000 C) $40,000; $34,000 D) $44,000; $38,000 E) $2,500; <$14,500> Answer: E Explanation: CM.85(40,000 units) = $34,000 M. OVH 24,000 $10,000 Admin 7,500 $2,500 CM 85(20,000 units) = M. OVH Admin
$17,000 24,000 <$7,000> 7,500 <$14,500>
Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-2
16) The flexible-budget variance measures A) what the costs and revenues should have been for the budgeted number of outputs. B) the difference between budgeted expenditures and actual expenditures for the budgeted number of outputs. C) the difference between budgeted and actual variable costs. D) [expected expenditures for the actual number of outputs] + [the actual expenditures for the actual number of outputs]. E) [actual cost for the actual level of the revenue or cost driver] - [budget unit amount × the actual level of the revenue or cost driver]. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-2
17) Use the following data to prepare a flexible budget for possible sales/production levels of 10,000; 11,000; and, 12,000 units. Show the contribution margin at each activity level. Sales price
$24.00 per unit
Variable costs: Manufacturing Administrative Selling
$12.00 per unit $3.00 per unit $1.00 per unit
Fixed costs: Manufacturing $60,000 Administrative $20,000 Answer: Flexible Budget for Various Levels of Sales/Production Activity Units Sales Variable costs: Manufacturing Administrative Selling Total variable costs Contribution margin Fixed costs: Manufacturing Administrative Operating income/(loss)
10,000
11,000
12,000
$240,000
$264,000
$288,000
120,000 30,000 10,000 $160,000 $80,000
132,000 33,000 11,000 $176,000 $88,000
144,000 36,000 12,000 $192,000 $96,000
60,000 20,000 $-0-
60,000 20,000 $8,000
60,000 20,000 $16,000
Diff: 2 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-2
18) Use the following data to prepare a flexible budget for possible sales/production levels of 6,000; 7,000; and, 8,000 units. Show the contribution margin at each activity level. Sales price
$24.00 per unit
Variable costs: Manufacturing Administrative Selling
$12.00 per unit $3.00 per unit $1.00 per unit
Fixed costs: Manufacturing $22,000 Administrative $36,000 Answer: Flexible Budget for Various Levels of Sales/Production Activity Units Sales Variable costs: Manufacturing Administrative Selling Total variable costs Contribution margin Fixed costs: Manufacturing Administrative Operating income/(loss)
6,000
7,000
8,000
$144,000
$168,000
$192,000
72,000 18,000 6,000 $96,000 $48,000
84,000 21,000 7,000 $112,000 $56,000
96,000 24,000 8,000 $128,000 $64,000
22,000 36,000 $(10,000)
22,000 36,000 $(2,000)
22,000 36,000 $6,000
Diff: 2 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-2
19) Anthony Company manufactures TVs. Some of the company's data was misplaced. Use the following information to replace the lost data:
Analysis Units Sold Revenues Variable Costs Fixed Costs Operating Income
Actual Flexible Flexible Results Variances Budget 112,500 112,500 $42,080 $1,000 F (A) (C) $200 U $15,860 $8,280 $860 F $9,140 $17,740
(D)
$16,080
SalesVolume Variances $1,400 U $2,340 F
(E)
Static Budget 103,125 (B) $18,200 $9,140 $15,140
Required: a. What are the respective flexible-budget revenues (A)? b. What are the static-budget revenues (B)? c. What are the actual variable costs (C)? d. What is the total flexible-budget variance (D)? e. What is the total sales-volume variance (E)? f. What is the total static-budget variance? Answer: a. $42,080 - $1,000 = $41,080 b. $41,080 + $1,400 = $42,480 c. $15,860 + $200 = $16,060 d. $17,740 - $16,080 = $1,660 favourable e. $2,340 favourable + $1,400 unfavourable = $940 favourable f. $17,740 - $15,140 = $2,600 favourable Diff: 2 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-2
20) Classroom Table Company manufactures tables for schools. The current year operating budget is based on sales of 20,000 units at $100 per table. Operating income is anticipated to be $120,000. Budgeted variable costs are $64 per unit, while fixed costs total $600,000. Actual income for the year was $2,184,000 on actual sales of 21,000 units. Actual variable costs were $60 per unit and fixed costs totaled $570,000. Required: Prepare a Level 2 variance analysis report with both flexible-budget and sales-volume variances. Answer: Classroom Table Company Variance Analysis Sales Actual Flexible Flexible Volume Static Results Variances Budget Variances Budget Units sold 21,000 21,000 20,000 Sales $2,184,000 $84,000F $2,100,000 $100,000F $2,000,000 Var.costs 1,260,000 84,000F 1,344,000 64,000U 1,280,000 Cont. margin $924,000 $168,000F $756,000 $36,000F $720,000 Fixed costs 570,000 30,000F 600,000 600,000 Oper. Income $354,000 $198,000F $156,000 $36,000F $120,000 Total flexible budget variance = $198,000 favourable. Total sales-volume variance = $36,000 favourable. Diff: 2 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-2
21) Interior Table Company manufactures tables for schools. The current year operating budget is based on sales of 40,000 units at $50 per table. Operating income is anticipated to be $300,000. Budgeted variable costs are $30 per unit, while fixed costs total $500,000. Actual income for the year was a surprising $2,268,000 on actual sales of 42,000 units. Actual variable costs were $33 per unit and fixed costs totaled $550,000. Required: Prepare a Level 2 variance analysis report with both flexible-budget and sales-volume variances. Answer: Interior Table Company Variance Analysis
Actual Results Units sold
42,000
Sales $2,268,000 Variable costs 1,386,000 Contribution margin $882,000 Fixed costs 550,000 Operating income
Flexible Variances
$332,000
SalesFlexible Volume Budget Variances 42,000
Static Budget 40,000
$168,000 F $2,100,000 $100,000 F $2,000,000 126,000 U 1,260,000 60,000 U 1,200,000 $42,000 F $840,000 $40,000 F $800,000 50,000 U 500,000 0 500,000 $ 8,000 U
$340,000
$40,000 F
$300,000
Total flexible-budget variance = $8,000 unfavourable. Total sales-volume variance = $40,000 favourable. Diff: 2 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-2
22) Explain the difference between a static budget and a flexible budget. Explain what is meant by a static budget variance and a flexible budget variance. Answer: A static budget is one based on the level of output planned at the start of the budget period. A flexible budget calculates budgeted revenue and budgeted costs based on the actual output in the budget period. The only difference between the static budget and the flexible budget is that the static budget is prepared for the planned output, whereas the flexible budget is prepared based on the actual output. A static budget variance is the difference between the actual results and the corresponding budgeted amounts in the static budget. A flexible-budget variance is the difference between an actual result and the corresponding flexible-budget amount based on the actual output in the budget period. Diff: 2 Type: ES CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-2
23) Describe the purpose of variance analysis. Answer: Variance analysis should help the company learn about what happened and how to perform better and should not be a tool in playing the "blame game." Diff: 1 Type: ES CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-2
7.3 Develop Level 3 rate and efficiency variances for direct manufacturing costs. 1) An input-price variance is the difference between actual quantity of input used and the budgeted quantity of input that should have been used, multiplied by the budgeted price. Answer: FALSE Explanation: An input-price (rate variance) is the difference between the actual rate and the budgeted rate multiplied by the actual quantity of input in question. Diff: 2 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-3
2) Rate variances are considered to be the difference between the actual price and the budgeted price multiplied by the actual quantity of input goods or services. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-3
3) Rate variances are the difference between actual inputs used and budgeted inputs that should have been used, multiplied by the budgeted price. Answer: FALSE Explanation: An input-price (rate variance) is the difference between the actual rate and the budgeted rate multiplied by the actual quantity of input in question. Diff: 2 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-3
4) The terms, usage variances and efficiency variances mean the same thing. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-3
5) If a company has a favourable efficiency variance, it uses less inputs than were budgeted for the output units achieved. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-3
6) A flexible-budget variance can be decomposed into an efficiency variance and a rate variance. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-3
7) The term efficiency variance is the direct cost portion of the flexible-budget variance. Answer: FALSE Explanation: The flexible-budget variance for direct-cost inputs is subdivided into two detailed variances, the efficiency variance and the rate variance. Diff: 2 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-3
8) For any actual level of output, the efficiency variance is the difference between actual quantity of input used and the budgeted quantity of input allowed to produce actual output, multiplied by the budgeted price. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-3
9) An efficiency variance reflects the difference between ________. A) actual input quantities used in the last period and current period B) an actual input quantity and a budgeted input quantity C) an actual input quantity used in a company and its main competitors D) a standard input quantity in a company and its main competitors Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-3
10) The flexible-budget variance for direct cost inputs can be further subdivided into a ________. A) static-budget variance and a sales-volume variance B) sales-volume variance and an efficiency variance C) price variance and an efficiency variance D) static-budget variance and a price variance Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-3
Use the information below to answer the following question(s). The following data for a pottery company pertain to the production of 2,000 clay pots during July. Direct Materials (all materials purchased were used): Standard cost: $6.00 per kilogram of clay Total actual cost: $11,200 Standard cost allowed for units produced was $12,000 Materials efficiency variance was $240 unfavourable Direct Manufacturing Labour: Standard cost is 2 pots per hour at $24.00 per hour Actual cost per hour was $24.50 Actual labour was 972 hours 11) What is the standard direct material amount per pot? A) 1.00 kilogram B) 1.88 kilograms C) 2.12 kilograms D) 3.00 kilograms E) 4.00 kilograms Answer: A Explanation: Standard cost per pot = $12,000/$6 = 2,000 kg. allowed Standard number of kilograms per pot = 2,000 kg./2,000 pots = 1.0 kilogram per pot Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
12) What is the direct manufacturing labour efficiency variance? A) $672 unfavourable B) $500 favourable C) $672 favourable D) $500 unfavourable E) $28 favourable Answer: C Explanation: [(2,000 hrs./2) - 972] × $24 = $672 F Diff: 3 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
13) What is the direct manufacturing labour rate variance? A) $186 favourable B) $486 unfavourable C) $486 favourable D) $672 unfavourable E) $672 favourable Answer: B Explanation: Labour rate variance = ($24.00 - $24.50) × 972 hrs. = $486 unfavourable Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
14) What is the direct materials rate variance for the clay pots? A) $560 unfavourable B) $560 favourable C) $800 unfavourable D) $800 favourable E) $1,040 favourable Answer: E Explanation: Materials rate variance = Total variance - efficiency variance = ($11,200 - 12,000) - $240 unfavourable = $1,040 favourable Diff: 3 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
Use the information below to answer the following question(s). Overseas Tractor Corporation produces toy tractors. The company uses the following direct cost categories:
Category Direct Materials Direct Labour Direct Marketing
Standard Inputs for 1 output 4.00 1.40 0.54
Std. Cost per input $12.50 9.50 5.50
Actual performance for the company is shown below: Actual output: 5,000 units Direct Materials: Materials costs Input purchased and used Actual price per input
$299,000 23,000 $13.00
Direct Manufacturing Labour: Labour costs Labour-hours of input Actual price per hour
$95,000 9,500 $10.00
Direct Marketing Labour: Labour costs Labour-hours of input Actual price per hour
$40,000 5,000 $8.00
15) What is the combined total of the flexible budget variances? A) $102,650 unfavourable B) $99,000 unfavourable C) $78,500 unfavourable D) $75,150 favourable E) $75,150 unfavourable Answer: A Explanation: Actual Results Flex. Bud. Variances Direct Materials $299,000 $250,000 $49,000 U Direct Mfg. Labour 95,000 66,500 28,500 U Direct Marketing Labour 40,000 14,850 25,150 U $102,650 U Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-2; 7-3
16) What is the rate variance of the direct materials? A) $10,000 favourable B) $11,500 unfavourable C) $11,500 favourable D) $10,000 unfavourable E) $11,000 favourable Answer: B Explanation: ($13.00 - $12.50) × (23,000) = $11,500 unfavourable Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
17) What is the efficiency variance for direct materials? A) $47,350 favourable B) $36,000 unfavourable C) $36,000 favourable D) $37,500 unfavourable E) $23,750 unfavourable Answer: D Explanation: [23,000 - (5,000 units × 4.00)] × $12.50 = $37,500 unfavourable Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
18) What is the rate variance of the direct manufacturing labour and the direct marketing labour, respectively? A) $4,750 favourable; $12,500 favourable B) $8,000 favourable; $10,000 favourable C) $3,500 unfavourable; $6,750 unfavourable D) 3,500 favourable; $6,750 favourable E) $4,750 unfavourable; $12,500 unfavourable Answer: E Explanation: Mfg. Labour ($10.00 - $9.50) × 9,500 = $4,750 unfavourable Mkt. Labour ($8.00 - $5.50) × 5,000 = $12,500 unfavourable Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
19) What are the efficiency variances for direct manufacturing labour and direct marketing labour, respectively? A) $25,000 favourable; $18,400 favourable B) $23,750 favourable; $12,650 unfavourable C) $25,000 unfavourable; $18,400 unfavourable D) $23,750 unfavourable; $12,650 unfavourable E) $23,750 favourable; $12,650 favourable Answer: D Explanation: Mfg. Labour = [9,500 hours - (5,000 × 1.40 hours)] × $9.50 = $23,750 unfavourable Mkt. Labour = [5,000 hours - (5,000 × 0.54 hours)] × $5.50 = $12,650 unfavourable Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
Use the information below to answer the following question(s). A company makes table lamps, for which the following standards have been developed:
Direct materials Direct labour
Standard Inputs Expected for Each Unit of Output 20 kilograms 6 hours
Standard Price Expected per Unit of Output $2 per kilogram $8 per hour
During January, production of 100 lamps was expected, but 110 lamps were actually completed. Direct materials purchased and used were 2,100 kilograms at an actual price of $2.20 per kilogram. Direct labour cost for the month was $5,310, and the actual pay per hour was $9.00. 20) The direct-material rate variance for January is A) $420 unfavourable. B) $420 favourable. C) $400 favourable. D) $400 unfavourable. E) $20 favourable. Answer: A Explanation: ($2.20 - $2.00) × 2,100 = $420 unfavourable Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
21) The direct-labour efficiency variance for the month of January is A) $630 unfavourable. B) $560 unfavourable. C) $630 favourable. D) $560 favourable. E) $70 favourable. Answer: D Explanation: [$5,310/9 - 110(6)] × $8 = $560 favourable Diff: 3 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
22) For any actual level of output, the difference between the input that was actually used and the input should have been used is A) an effectiveness variance. B) a purchase cost variance. C) the variance rate. D) a rate variance. E) an efficiency variance. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-3
Use the information below to answer the following question(s). Best-4-U Things Ltd. planned on producing 600 units for the year. However, actual production was 400 units. Information concerning the direct labour cost for Best-4-U Things Ltd. is as follows: actual results, 1,000 hours at $25 per hour; static budget amounts, 1,200 hours at $21 per hour. 23) What is the Best-4-U Things Ltd. static-budget variance? A) $400 F B) $400 U C) $600 F D) $200 F E) $200 U Answer: D Explanation: $25,000 - $25,200 = $200 F Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-2; 7-3
24) What is the Best-4-U Things Ltd. flexible-budget variance? A) $8,400 F B) $8,400 U C) $8,200 U D) $8,200 F E) $200 U Answer: C Explanation: Actual results = $25 × 1,000 = $25,000 Static budget = $21 × 800 = 16,800 Variance = $8,200 U Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-2; 7-3
25) What is the Best-4-U Things Ltd. sales-volume variance? A) $8,400 F B) $8,400 U C) $8,200 U D) $8,200 F E) $200 F Answer: A Explanation: Static budget = $21 × 1,200 hrs. = $25,200 Flexible budget - $21 × 800 hrs. = 16,800 Variance = $8,400 F Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
26) What is the Best-4-U Things Ltd. direct labour rate variance? A) $4,200 U B) $4,200 F C) $200 F D) $4,000 F E) $4,000 U Answer: E Explanation: ($25 - $21) × 1,000 = $4,000 U Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
27) What is the Best-4-U Things Ltd. direct labour input-efficiency variance? A) $4,200 U B) $4,200 F C) $5,000 U D) $5,000 F E) $200 U Answer: A Explanation: (1,000 - 800) × $21 = $4,200 U Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
Use the information below to answer the following question(s). Robb Industries Inc. (RII), developed standard costs for direct material and direct labour. In 2019, RII estimated the following standard costs for one of their major products, the 10-litre plastic container.
Direct materials Direct labour
Budgeted quantity Budgeted price 0.10 kilograms $30 per kilogram 0.05 hours $15 per hour
During June 2020, RII produced and sold 5,000 containers using 490 kilograms of direct materials at an average actual cost per kilogram of $32 and 250 direct manufacturing labour-hours at an average actual wage of $15.25 per hour. 28) June's direct material flexible-budget variance is A) $980 unfavourable. B) $300 favourable. C) $680 favourable. D) $980 favourable. E) $680 unfavourable. Answer: E Explanation: (490 × $32) - (5,000 × 0.10 × $30) = $680 U Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-2; 7-3
29) June's direct material rate variance is A) $980 unfavourable. B) $1,000 favourable. C) $680 favourable. D) $980 favourable. E) $1,000 unfavourable. Answer: A Explanation: 490 × ($32 - $30) = $980 U Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
30) June's direct material efficiency variance is A) $320 unfavourable. B) $300 favourable. C) $680 favourable. D) $300 unfavourable. E) $320 favourable. Answer: B Explanation: $30 × (490 - 500) = $300 F Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
31) June's direct manufacturing labour rate variance is A) neither favourable or unfavourable. B) $62.50 favourable. C) $128.00 unfavourable. D) $62.50 unfavourable. E) $128.00 favourable. Answer: D Explanation: 250 dlh × ($15.25 - $15.00) = $62.50 U Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
32) June's direct manufacturing labour efficiency variance is A) $62.50 unfavourable. B) $62.50 favourable. C) $128.00 unfavourable. D) $128.00 favourable. E) neither favourable nor unfavourable. Answer: E Explanation: [250 dlh - (5,000 × 0.05)] × $15 = Zero Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
Use the information below to answer the following question(s).
Sawyer Industries Inc. (SII) developed standard costs for direct material and direct labour. In 2019, SII estimated the following standard costs for one of their major products, the 30-litre heavy-duty plastic container.
Direct materials Direct labour
Budgeted quantity Budgeted price 0.20 kilograms $27 per kilogram 0.10 hours $16 per hour
During July 2020, SII produced and sold 10,000 containers using 2,200 kilograms of direct materials at an average actual cost per kilogram of $25 and 1,050 direct manufacturing labour hours at an average actual wage of $15 per hour. 33) July's direct material flexible-budget variance is ________. A) $1,000 unfavourable B) $2,200 favourable C) $5,000 unfavourable D) $2,200 unfavourable E) $2,800 favourable Answer: A Explanation: (2,200 × $25) - (10,000 × 0.20 × $27) = $1,000 U Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-2; 7-3
34) July's direct material rate variance is ________. A) $2,800 favourable B) $4,400 favourable C) $5,000 unfavourable D) $2,200 unfavourable E) $2,000 favourable Answer: B Explanation: 2,200 × ($25 - $27) = $4,400 F Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
35) July's direct material efficiency variance is ________. A) $4,800 favourable B) $2,200 favourable C) $5,400 unfavourable D) $5,000 favourable E) $4,800 unfavourable Answer: C Explanation: $27 × [2,200 - (10,000 × 0.20)] = $5,400 U Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
36) July's direct manufacturing labour flexible-budget variance is ________. A) $750.00 unfavourable B) $262.50 favourable C) $262.50 unfavourable D) $487.50 favourable E) $250.00 favourable Answer: E Explanation: (1,050 × $15.00) - (10,000 × 0.10 × $16) = $250.00 F Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-2; 7-3
37) July's direct manufacturing labour rate variance is ________. A) $250.00 favourable B) $1050.00 favourable C) $487.50 favourable D) $262.50 unfavourable E) $250.00 unfavourable Answer: B Explanation: 1,050 dlh × ($15.00 - $16.00) = $1050.00 F Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
38) July's direct manufacturing labour efficiency variance is ________.
A) $800.00 unfavourable B) $262.50 favourable. C) $487.50 favourable D) $800.00 favourable E) neither favourable or unfavourable Answer: A Explanation: [1,050 dlh - (10,000 × 0.10)] × $16 = $800 U Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
Answer the following question(s) using the information below. Apple Valley Orchards, Inc. (AVO) developed standard costs for direct material and direct labour. In 2019, AVO estimated the following standard costs for one of their most well-loved products, the AVO classic Grandma's large apple pie which had a brown sugar coating on the top of the crust as well as including cranberry and mince ingredients in addition to the apples.
Direct materials Direct labour
Budgeted quantity Budgeted price 1.5 kilograms $7.50 per kilogram 0.25 hours $13.50 per hour
During September 2020, AVO produced and sold 1,200 pies using 1,875 kilograms of direct materials at an average cost per kilogram of $7.00 and 280 direct labour hours at an average wage of $14.25 per hour. 39) September's direct material flexible-budget variance is ________. A) $100.00 unfavourable B) $100.00 favourable C) $375.00 favourable D) $75.00 favourable E) $125.00 unfavourable Answer: C Explanation: (1,875 × $7.00) - (1,200 × 1.5 × $7.50) = $375.00 F Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-2; 7-3
40) September's direct material rate variance is ________. A) $937.50 favourable B) $300.00 favourable C) $468.75 unfavourable D) $450.00 favourable E) $300.00 unfavourable Answer: A Explanation: 1,875 × ($7.00 - $7.50) = $937.50 F Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
41) September's direct material efficiency variance is ________. A) $468.75 unfavourable B) $525.00 favourable C) $525.00 unfavourable D) $543.75 favourable E) $562.50 unfavourable Answer: E Explanation: $7.50 × [1,875 - (1,200 × 1.5)] = $562.50 U Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
42) September's direct labour flexible-budget variance is ________. A) $525.00 unfavourable B) $60.00 favourable C) $210.00 unfavourable D) $280.00 favourable E) $280.00 unfavourable Answer: B Explanation: (280 × $14.25) - (1,200 × 0.25 × $13.50) = $60.00 F Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-2; 7-3
43) September's direct labour rate variance is ________.
A) $75.00 unfavourable B) $75.00 favourable C) $210.00 unfavourable D) $70.00 favourable E) $90.00 unfavourable Answer: C Explanation: 280 dlh × ($14.25 - $13.50) = $210 U Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
44) September's direct labour efficiency variance is ________. A) $285.00 unfavourable B) $285.00 favourable C) $290.00 unfavourable D) $280.00 unfavourable E) $270.00 favourable Answer: E Explanation: [280 dlh - (1,200 × 0.25)] × $13.50 = $270 F Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
45) Littrell Company produces chairs and has determined the following direct cost categories and budgeted amounts: Standard Inputs Standard Cost Category for 1 output per input Direct Materials 1.00 $7.50 Direct Labour 0.30 9.00 Direct Marketing 0.50 3.00 Actual performance for the company is shown below: Actual output: (in units) Direct Materials: Materials costs Input purchased and used Actual price per input Direct Manufacturing Labour: Labour costs Labour-hours of input Actual price per hour Direct Marketing Labour: Labour costs Labour-hours of input Actual price per hour
4,000 $30,225 3,900 $7.75 $11,470 1,240 $9.25 $5,880 2,100 $2.80
Required: a. What is the combined total of the flexible-budget variances? b. What is the rate variance of the direct materials? c. What is the rate variance of the direct manufacturing labour and the direct marketing labour, respectively? d. What is the efficiency variance for direct materials? e. What are the efficiency variances for direct manufacturing labour and direct marketing labour, respectively?
Answer: a. Direct materials Direct manufacturing labour Direct marketing labour
Actual Result Flexible Budget $30,225 $30,000 11,470 10,800 5,880 6,000 $47,575 $46,800
Variances $225U 670 U 120 F $775 U
b.
($7.75 - $7.50) × (3,900) = $975 unfavourable
c.
Manufacturing Labour ($9.25 - $9.00) × 1,240 = $310 unfavourable Marketing Labour ($2.80 - $3.00) × 2,100 = $420 favourable
d.
[3,900 - (4,000 units × 1.00)] × $7.50 = $750 favourable
e.
Manufacturing Labour = [1,240 hours - (4,000 × 0.30 hours)] × $9.00 = $360 U Marketing Labour = [2,100 hours - (4,000 × 0.50 hours)] × $3.00 = $300.00 U
Diff: 2 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-2; 7-3
46) Mittrell Company produces chairs and has determined the following direct cost categories and budgeted amounts: Standard Inputs Standard Cost Category for 1 output per input Direct Materials 1.00 $9.50 Direct Labour 0.60 12.00 Direct Marketing 0.20 2.50 Actual performance for the company is shown below: Actual output: (in units) Direct Materials: Materials costs Input purchased and used Actual price per input Direct Manufacturing Labour: Labour costs Labour-hours of input Actual price per hour Direct Marketing Labour: Labour costs Labour-hours of input Actual price per hour
5,000 $41,625 4,500 $9.25 $35,125 2,810 $12.50 $3,080 1,100 $2.80
Required: a. What is the combined total of the flexible-budget variances? b. What is the rate variance of the direct materials? c. What is the rate variance of the direct manufacturing labour and the direct marketing labour, respectively? d. What is the efficiency variance for direct materials? e. What are the efficiency variances for direct manufacturing labour and direct marketing labour, respectively?
Answer: a. Direct materials Direct manufacturing labour Direct marketing labour
Actual Result Flexible Budget $41,625 $47,500 35,125 36,000 3,080 2,500 $47,575 $46,800
Variances $5,875 F 875 F 580U $6,170 F
b.
($9.25 - $9.50) × (4,500) = $1,125 F
c.
Manufacturing Labour ($12.50 - $12.00) × 2,810 = $1,405 U Marketing Labour ($2.80 - $2.50) × 1,100 = $330 U
d.
[4,500 - (5,000 units × 1.00)] × $9.50 = $4,750 F
e.
Manufacturing Labour = [2,810 hours - (5,000 × 0.6 hours)] × $12.00 = $2,280 F Marketing Labour = [1,100 hours - (5,000 × 0.20 hours)] × $2.50 = $250 U
Diff: 2 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-2; 7-3
47) Wilson's Winter Woolens manufactures jackets and other wool clothing. A certain designed ski parka requires the following: Direct materials standard Direct manufacturing labour standard
2 square metres at $13.50 per metre 1.5 hours at $20.00 per hour
During the third quarter, the company made 1,500 parkas and used 3,150 square metres of fabric costing $39,375. Direct labour totaled 2,100 hours for $45,150. Required: a. Compute the direct materials price and efficiency variances for the quarter. b. Compute the direct manufacturing labour rate and efficiency variances for the quarter. Answer: a. Direct materials variances: Actual unit cost
= $39,375/3,150 square metres = $12.50 per square metre
Rate variance
= 3,150 × ($13.50 - $12.50) = $3,150 favourable
Efficiency variance = $13.50 × [3,150 - (1,500 × 2)] = $2,025 unfavourable b.
Direct manufacturing labour variances: Actual labour rate = $45,150/2,100 = $21.50 per hour Rate variance
= 2,100 × ($21.50 - $20.00) = $3,150 unfavourable
Efficiency variance = $20.00 × (2,100 - (1,500 × 1.5) = $3,000 favourable Diff: 2 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
48) Wilson's Summer Cottons manufactures shirts and other cotton clothing. A certain designed t-shirt requires the following: Direct materials standard Direct manufacturing labour standard
0.9 square metres at $1.50 per metre 0.25 hours at $14.00 per hour
During the third quarter, the company made 7,500 t-shirts and used 8,250 square metres of fabric costing $11,550. Direct labour totaled 1,650 hours for $23,265. Required: a. Compute the direct materials price and efficiency variances for the quarter. b. Compute the direct manufacturing labour rate and efficiency variances for the quarter. Answer: a. Direct materials variances: Actual unit cost
= $11,550/8,250 square metres = $1.40 per square metre
Rate variance
= 8,250 × ($1.50 - $1.40) = $825 favourable
Efficiency variance = $1.50 × [(0.9 × 7,500) - 8,250] = $2,250 unfavourable b.
Direct manufacturing labour variances: Actual labour rate = $23,265/1,650 = $14.10 per hour Rate variance
= 1,650 × ($14.00 - 14.10) = $165 unfavourable
Efficiency variance = $14.00 × (7,500 × 0.25) - 1,650] = $3,150 favourable Diff: 2 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
49) Al's Boxes manufactures corrugated boxes. The standard materials allowed for each box is 0.5 kilograms of paper, which has a standard cost of $5.40 per kilogram. During April, 10,000 kilograms were used to manufacture 19,500 boxes. The actual materials cost was $5.25 per kilogram. Required: a. Determine the materials rate variance. b. Determine the materials efficiency variance. Answer: a. Rate variance = ($5.4 - $5.25) × 10,000 = $1,500 favourable b. Efficiency variance = (10,000 - (19,500 × 0.5)) × $5.4 = $1,350 unfavourable Diff: 1 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
50) Jan's Boxes manufactures corrugated boxes. The standard materials allowed for each box is 0.3 kilograms of paper, which has a standard cost of $4.50 per kilogram. During April 6,300 kilograms were used to manufacture 18,000 boxes. The actual materials cost was $4.55 per kilogram. Required: a. Determine the materials rate variance. b. Determine the materials efficiency variance. Answer: a. Rate variance = ($4.50 - $4.55) × 6,300 = $315 unfavourable b. Efficiency variance = [(18,000 × 0.3) - 6,300 × $4.50 = $4,050 unfavourable Diff: 1 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
51) Glenn's Draperies manufactures curtains. A certain window requires the following: Direct materials standard is 10 square metres at $5 per metre Direct manufacturing labour standard is 5 hours at $10 During the second quarter the company made 1,500 curtains and used 14,000 square metres of fabric costing $68,600. Direct labour totaled 7,600 hours for $79,800. Required: a. Compute the direct materials price and efficiency variances for the quarter. b. Compute the direct manufacturing labour rate and efficiency variances for the quarter. Answer: a. Direct materials variances: Actual unit cost = $68,600/14,000 square metre = $4.90 per square metre Rate variance = 14,000 × ($5.00 - $4.90) = $1,400 favourable Efficiency variance = $5.00 × (14,000 - (1,500 × 10)) = $5,000 favourable b. Direct manufacturing labour variances: Actual labour rate = $79,800/7,600 = $10.50 per hour Rate variance = 7,600 × ($10.50 - $10.00) = $3,800 unfavourable Efficiency variance = $10.00 × (7,600 - 7,500) = $1,000 unfavourable Diff: 2 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
52) Video Producers manufactures two types of videos: regular and CD. The regular tapes require 5 units of direct material X at a standard price of $2 per unit. The CDs require 2 units of direct material Y at a standard price of $3. During January the company purchased 9,000 units of X for $2.10 each and 3,600 units of Y at $3.20 each. January production used 8,800 units of X and 3,400 units of Y. Outputs of finished tapes was 1,750 of each type. Required: Compute the price and efficiency variances for each material. For the rate variances use two different responsibility assumptions. First assume that rate variances are isolated at the time of purchase; second assume that the rate variances are isolated as materials are placed into production. The efficiency variances for each material are determined during production.
Answer: Rate variances based on units purchased. Material × rate variance = (9,000 × $2.10) - (9,000 × $2) = $18,900 - $18,000 = $900 unfavourable Material Y rate variance = (3,600 × $3) - (3,600 × $3.20) = $10,800 - $11,520 = $720 unfavourable Rate variances based on units used in production. Material × rate variance = (8,800 × $2.10) - (8,800 × $2) = $18,480 - $17,600 = $880 unfavourable Material Y rate variance = (3,400 × $3) - (3,400 × $3.20) = $10,200 - $10,880 = $680 unfavourable Efficiency variances (same for both rate variance methods). Material × efficiency variance = (1,750 × 5 × $2) - (8,800 × $2) = $17,500 - $17,600 = $100 unfavourable Material Y efficiency variance = (1,750 × 2 × $3) - (3,400 × $3) = $10,500 - $10,200 = $300 favourable Diff: 3 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
53) Vienna Chocolate Company produces fudge in large batches. One batch of fudge has the following standard costs and amounts: Standard kilograms of sugar Standard cost per kilogram of sugar Standard direct labour hours Standard direct labour cost per hour
100 $1.90 2.0 $18.00
Vienna Chocolate Company produced 400 batches of fudge in the most recent month. Actual input costs and per batch usage levels were as follows: Actual kilograms of sugar used Actual cost per kilogram of sugar Actual direct labour hours Actual direct labour cost per hour
102 $2.10 1.8 $17.50
Required: a. Calculate the total material input rate variance. b. Calculate the total material efficiency variance. c. Calculate the total labour rate variance. d. Calculate the total labour efficiency variance. Answer: a. Material input rate variance (($1.90 - $2.10) × 102 kg.) × 400 batches = $8,160 unfavourable b. Material efficiency variance ((100 kg. - 102 kg.) × $1.90) × 400 batches = $1,520 unfavourable c.
Labour rate variance (($18.00 - $17.50) × 1.8 hours) × 400 batches = $360 favourable
d. Labour efficiency variance ((2 hours - 1.8 hours) × $18.00) × 400 batches = $1,440 favourable Diff: 2 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
54) Brussels Chocolate Company produces chocolates in large batches. One batch of chocolate has the following standard costs and amounts: Standard kilograms of sugar Standard cost per kilogram of sugar Standard direct labour hours Standard direct labour cost per hour
125 $1.60 0.75 $21.00
Brussels Chocolate Company produced 600 batches of chocolates in the most recent month. Actual input costs and per batch usage levels were as follows: Actual kilograms of sugar used Actual cost per kilogram of sugar Actual direct labour hours Actual direct labour cost per hour
126 $1.65 0.80 $20.75
Required: a. Calculate the total material input rate variance. b. Calculate the total material efficiency variance. c. Calculate the total labour rate variance. d. Calculate the total labour efficiency variance. Answer: a. Material input rate variance (($1.60 - $1.65) × 126 kg.) × 600 batches = $3,780 unfavourable b. Material efficiency variance ((125 kg. - 126 kg.) × $1.60) × 600 batches = $960 unfavourable c.
Labour rate variance (($21.00 - $20.75) × 0.8 hours) × 600 batches = $120 favourable
d. Labour efficiency variance ((0.75 hours - 0.8 hours) × $21.00) × 600 batches = 630 unfavourable Diff: 2 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
55) Cayman Designs makes chair cushions. The standard direct materials quantity is 1 kilogram per cushion at a cost of $2.50 per kilogram. The actual results for the production of 20,000 cushions was 1.25 kilograms per cushion, at a cost of $2.40 per kilogram. Calculate the direct materials input rate variance and the direct materials efficiency variance. Answer: a. Material input rate variance ($2.50 - $2.40) × (20,000 × 1.25 kg) = $2,500 favourable b.
Material efficiency variance ((20,000 kg. - (20,000 × 1.25 kg)) × $2.50) = $12,500 unfavourable
Diff: 2 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
56) Maldive Designs makes chair cushions. The standard direct materials quantity is 0.8 kilogram per cushion at a cost of $2.70 per kilogram. The actual results for the production of 15,000 cushions was 0.75 kilograms per cushion, at a cost of $2.65 per kilogram. Calculate the direct materials input rate variance and the direct materials efficiency variance. Answer: a. Material input rate variance (($2.70 - $2.65) × (15,000 × 0.75 kg) = $562.50 favourable b.
Material efficiency variance ((0.80 - 0.75) × 15,000) × $2.70 = $2,025 favourable
Diff: 2 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
57) The following data for the Alma Company pertain to the production of 1,000 urns during August. Direct Materials (all materials purchased were used): Standard cost: $6.00 per kilogram. Total actual cost: $5,600. Standard cost allowed for units produced was $6,000. Materials efficiency variance was $120 unfavourable. Direct Manufacturing Labour: Standard cost is 2 urns per hour at $24.00 per hour. Actual cost per hour was $24.50. Labour efficiency variance was $336 favourable. Required: a. What is standard direct material cost and quantity per urn? b. What is the direct material rate variance? c. What is the total actual cost of direct manufacturing labour? d. What is the labour rate variance for direct manufacturing labour? Answer: a. Standard cost per urn = $6,000/1,000 = $6.00 per urn Standard number of kilograms per urn
b. Materials rate variance
= $6.00/$6.00 = 1.0 kilogram per urn
= Total variance - efficiency variance = ($5,600 - $6,000) - $120U = $520 favourable
c. Total standard labour cost of actual hours = ((1,000/2) × $24) - $336 F = $11,664 Actual hours = $11,664/24 = 486 hours Total actual costs = 486 × $24.50 = $11,907 d. Labour rate variance
= $11,907 - $11,664 = $243 U
Diff: 3 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
58) The following data for the Garden Supplies Company pertains to the production of 2,500 garden spades during March. The spade consists of a wooden handle and a metal forged tool that comes in contact with the ground. Direct Materials (all materials purchased were used): Standard cost: $1.00 per handle and $3.50 per metal tool. Total actual cost: $11,350. Materials flexible-budget efficiency variance was $650 unfavourable. Direct Manufacturing Labour: Standard cost is 5 garden spades per hour at $20.00 per hour. Actual cost per hour was $21.00. Labour efficiency variance was $400 favourable. Required: a. What is the standard direct material amount per garden spade? b. What is the standard cost allowed for all units produced? c. What is the total direct materials flexible-budget variance? d. What is the direct material flexible-budget rate variance? e. What is the total actual cost of direct manufacturing labour? f. What is the labour rate variance for direct manufacturing labour?
Answer: a. Standard cost per garden spade
b. Standard cost allowed for all units
c. Total materials variance
d. Materials rate variance
= $1.00 (handle) + $3.50 (tool) = $4.50 per garden spade
= 2500 × $4.50 = $11,250 per garden spade
= $11,250 - $11,350 = $100 unfavourable
= Total variance - efficiency variance = ($11,350 - $11,250) - $650 unfavourable = $550 favourable
e. Total standard labour cost of actual hours = ((2500/5) × $20) - $400 favourable = $9,600 Actual hours = $9600/20 = 480 hours Total actual costs = 480 × $21 = $10,080 f. Labour rate variance
= $9,600 - $10,080 = $480 unfavourable
Diff: 3 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-3
59) The following data for the Telephone Company pertain to the production of 450 rolls of telephone wire during June. Selected items are omitted because the costing records were lost in a windstorm. Direct Materials (all materials purchased were used.) Standard cost per roll: a kilograms at $4.00 per kilogram. Total actual cost: b kilograms costing $9,600. Standard cost allowed for units produced was $9,000. Materials rate variance: c . Materials efficiency variance was $80 unfavourable. Direct Manufacturing Labour Standard cost is 3 hours per roll at $8.00 per hour. Actual cost per hour was $8.25. Total actual cost: d . Labour rate variance: e . Labour efficiency variance was $400 unfavourable. Required: Compute the missing elements in the report represented by the lettered items. Answer: a. Standard cost per roll = $9,000/450 = $20.00 Standard number of kilograms per roll = $20/$4 = 5 kilograms per roll b. Actual kilograms c. Materials rate variance
= ($9,000 + $80)/$4 = 2,270 kilograms
= $9,600 - ($9,000 + $80) = $520 unfavourable
d. Total standard labour cost of actual hours = (450 × 3 × $8) + $400 = $11,200 Actual hours = $11,200/$8 = 1,400 Total actual cost = 1,400 × $8.25 = $11,550 e. Labour rate variance
= $11,550 - $11,200 = $350 unfavourable
Diff: 3 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 7-3
60) Give at least three good reasons why a favourable rate variance for direct materials might be reported.
Answer: Any three of the following: a. The purchasing manager skillfully negotiated a better purchase price. b. The purchasing manager changed to a lower-priced supplier. c. The purchasing manager purchased in larger quantities resulting in quantity discounts. d. The purchasing manager changed to lower-quality materials. e. An unexpected industry oversupply resulted in decreased prices for materials. f. Budgeted purchase prices were not carefully set. Diff: 2 Type: ES CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-3
61) Give at least three good reasons why an unfavourable efficiency variance for direct manufacturing labour might be reported. Answer: Any three of the following: a. More lower-skilled workers were scheduled than planned. b. Work was inefficiently scheduled. c. Machines were not properly maintained. d. Budgeted time standards were too tight. Diff: 2 Type: ES CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-3
7.4 Undertake variance analysis in activity-based costing systems. 1) Flexible budget quantity computations should be focused at the appropriate level of the cost hierarchy. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-4
2) Rate variances can be calculated for batch-level costs as well as for output unit-level costs. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-4
3) Performance variance analysis can be used in activity-based costing systems. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-4
4) Mo Salah Hardware, a retailing company with several locations, anticipated that it would have 96,000 sales units for 664 customer shipments. Average storage bin usage for various inventories was estimated to be 200 storage bins per day. The costs and cost drivers were determined to be as follows: Cost Item Product handling Storage Utilities Shipping clerks Supplies
Fixed Portion $10,000 1,000 1,000
Variable Cost/Driver $1.25 per 100 units 3.00 per storage bin 1.50 per 100 units 1.00 per shipment 0.50 per shipment
During the year, the warehouse processed 90,000 units for 600 customer shipments. The workers used 225 storage bins on average each day to sort, store, and process goods for shipment. The actual costs were: Cost Item Product handling Storage Utilities Shipping clerks Supplies
Actual costs $10,900 465 2,020 1,400 340
Required: a. Prepare a static budget and show the static-budget variances for each cost item and the total staticbudget variance. b. Prepare a flexible budget and show the flexible-budget variances for each cost item and the total flexible-budget variance.
Answer: a. Static Budget with Variances
Product handling Storage Utilities Shipping clerks Supplies Total
Actual $10,900 465 2,020 1,400 340 $15,125
Budget $11,200 600 2,440 1,664 332 $16,236
Variances $300F 135F 420F 264F 8U $1,111F
Budget $11,125 675 2,350 1,600 300 $16,050
Variances $225F 210F 330F 200F 40U $925F
b. Flexible Budget with Variances
Product handling Storage Utilities Shipping clerks Supplies Total
Actual $10,900 465 2,020 1,400 340 15,125
Diff: 2 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-4
5) The Jacksons company delivers automobile repair parts to service garages. The following information is for three of the company's activities in 2021: Rate per Output unit/Batch Static Actual Activity Activity Level Cost Driver Budget Cost Receivables Output unit Sales invoices $0.70 $0.75 Payables Batch Purchase invoices $25.00 $23.00 Travel expenses Batch Travel claims $55.00 $52.50 The output measure is the number of deliveries.
Number of deliveries Number of sales invoices Batch size in terms of deliveries: Purchase invoices Travel expense claims
Static Budget 20,000 4,000 10 20
Actual Amount 22,200 3,700 8 25
Required: a. Calculate the flexible-budget variance for each activity in 2021. b. Calculate the price and efficiency variances for each activity in 2021.
Answer: a. Flexible-budget variances Receivables: [(22,200 × (4,000/20,000)) × $0.70] - (3,700 invoices × $0.75) = $333 F Payables: ((22,200/10) × $25.00) - ((22,200/8) × $23.00) = $8,325 U Travel: ((22,200/20) × $55.00) - ((22,200/25) × $52.50) = $14,430 F b. Price and efficiency variances Receivables: Price: ($0.70 - $0.75) × 3,700 = $185.00 U Efficiency: ((22,200/(20,000/4,000)) - 3,700) × $0.70 = $518.00 F Payables: Price: ($25.00 - $23.00) × (22,200/8) = $5,550 F Efficiency: ((22,200/10) - (22,200/8)) × $25.00 = $13,875 U Travel: Price: ($55.00 - $52.50) × (22,200/25) = $2,220 F Efficiency: ((22,200/20) - (22,200/25)) × $55.00 = $12,210 F Diff: 3 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-4
6) Simpson Equipment Ltd. is a company that manufactures an abdominal exerciser called The Ab Rippler. The following information is for three of the company's activities in 2022:
Activity Manufacturing Inspecting Packaging
Rate per Output unit/Batch Static Actual Activity Level Cost Driver Budget Cost Output unit Machine hours $0.90 $1.05 Batch Inspection hours $15.00 12.50 Batch Packaging hours $5.50 $5.25
The output measure is the number of units produced.
Number of units produced Number of machine hours Batch size in terms of units produced: Inspection Packaging
Static Budget 40,000 16,000
Actual Amount 44,400 14,800
5 20
4 25
Required: a. Calculate the flexible-budget variance for each activity in 2022. b. Calculate the price and efficiency variances for each activity in 2022.
Answer: a. Flexible-budget variances Manufacturing: [(44,400 × (16,000/40,000)) × $0.90] - (14,800 × 1.05) = $444 F Inspecting: ((44,400/5) × $15.00) - ((44,400/4) × $12.50) = $5,550 U Packaging: ((44,400/20) × $5.50) - ((44,400/25) × $5.25) = $2,886 F b. Price and efficiency variances Manufacturing: Price: ($0.90 - $1.05) × 14,800 = $2,220 U Efficiency: ((44,400/(40,000/16,000)) - 14,800) × $0.90 = $2,664 F Inspecting: Price: ($15.00 - $12.50) × (44,400/4) = $27,750 F Efficiency: ((44,400/5) - (44,400/4)) × $15.00 = 33,300 U Packaging: Price: ($5.50 - $5.25) × (44,400/25) = $444 F Efficiency: ((44,400/20) - (44,400/25)) × $5.50 = $2,442F Diff: 3 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-4
7) Delila Equipment Ltd. is a company that manufactures an abdominal exerciser called The Tummy Toner. The following information is for three of the company's activities in 2022:
Activity Manufacturing Inspecting Packaging
Rate per Output unit/Batch Static Actual Activity Level Cost Driver Budget Cost Output unit Machine hours $1.10 $1.20 Batch Inspection hours $14.00 12.50 Batch Packaging hours $5.75 $5.40
The output measure is the number of units produced.
Number of units produced Number of machine hours Batch size in terms of units produced: Inspection Packaging
Static Budget 48,000 12,000
Actual Amount 49,200 12,300
4 15
3 16
Required: a. Calculate the flexible-budget variance for each activity in 2022. b. Calculate the price and efficiency variances for each activity in 2022.
Answer: a. Flexible-budget variances Manufacturing: [(49,200 × (12,000/48,000)) × $1.10] - (12,300 × $1.20) = 1,230 U Inspecting: ((49,200/4) × $14.00) - ((49,200/3) × $12.50) = $32,800 U Packaging: ((49,200/15) × $5.75) - ((49,200/16) × $5.40) = $2,255 F b. Price and efficiency variances Manufacturing: Price: ($1.10 - $1.20) × 12,300 = $1,230 U Efficiency: ((49,200 × (12,000/48,000)) -12,300) × $1.10 = $0 (no variance) Inspecting: Price: ($14.00 - $12.50) × (49,200/3) = $24,600 F Efficiency: ((49,200/4) - (49,200/3)) × $14.00 = $57,400 U Packaging: Price: ($5.75 - $5.40) × (49,200/16) = $1,076.25 F Efficiency: ((49,200/15) - (49,200/16)) × $5.75 = $1,178.75 F Diff: 3 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-4
8) Universal Dive Products Ltd. makes high quality gear for scuba diving. Their top quality mask is called Super Mask and is produced in batches. The two batch activities are setup (cost driver = setup hours) and quality inspection (cost driver = inspection hours). The company budgeted to produce 40,000 masks; however, actual production was 50,000. The pertinent ABC data for the upcoming period is as follows:
Setup
Quality Inspection
Static Budget: Batch size (units per batch) Cost driver (hours per batch) Cost per hour
500 6 $18
100 2 $25
Actual Result: Batch size (units per batch) Cost driver (hours per batch) Cost per hour
400 5 $16
80 3 $30
Required: Calculate the flexible-budget rate and efficiency variances for the setup activity. Answer: Static budget batches = 40,000 units/500 units per batch = 80 batches Actual batches = 50,000 units/400 units per batch = 125 batches Flexible budget batches = 50,000 units/500 units per batch = 100 batches Rate variance = [(125 batches × 5 hours) × $18] - [(125 batches × 5 hours) × $16] = $1,250 F Efficiency variance = [(100 batches × 6 hours) × $18] - [(125 batches × 5 hours) × $18] = $450 U Diff: 3 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-4
9) Universal Dive Products Ltd. makes high quality gear for scuba diving. Their top quality mask is called Super Mask and is produced in batches. The two batch activities are setup (cost driver = setup hours) and quality inspection (cost driver = inspection hours). The company budgeted to produce 40,000 masks; however, actual production was 50,000. The pertinent ABC data for the upcoming period is as follows:
Setup
Quality Inspection
Static Budget: Batch size (units per batch) Cost driver (hours per batch) Cost per hour
500 6 $18
100 2 $25
Actual Result: Batch size (units per batch) Cost driver (hours per batch) Cost per hour
400 5 $16
80 3 $30
Required: Calculate the flexible-budget rate and efficiency variances for the quality inspection activity. Answer: Static budget batches = 40,000 units/100 units per batch = 400 batches Actual batches = 50,000 units/80 units per batch = 625 batches Flexible budget batches = 50,000 units/100 units per batch = 500 batches Rate variance = [(625 batches × 3 hours) × $25] - [(625 batches × 3 hours) × $30] = 9,375 U Efficiency variance = [(500 batches × 2 hours) × $25] - [(625 batches × 3 hours) × $25] = $21,875 U Diff: 3 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-4
10) Explain how variance analysis is used in conjunction with activity-based costing. Answer: Activity-based costing systems focus on individual activities as the fundamental cost objects. As a result, the cost hierarchy of output unit-level costs, batch-level costs, product-sustaining costs, and facility-sustaining costs can benefit from variance analysis. When an ABC costing system is in place and there is a focus on the detailed level of cost hierarchy, obtaining flexible budgeting information to compare the actual to the flexible budgeted amount can provide information to assist in the decisionmaking process. Diff: 2 Type: ES CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-4
7.5 Describe how managers use variance analysis.
1) The most important task in variance analysis is to understand why variances occur, and then to use that knowledge to promote learning and continual improvement. Answer: TRUE Diff: 3 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-5
2) A cost of a given activity decreases over continuous time periods. This is considered to be a continuous improvement variable cost. Answer: FALSE Explanation: Continuous improvement is a budgeted cost that is successively reduced over succeeding time periods. Diff: 2 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-5
3) A favourable variance can be automatically interpreted as "good news." Answer: FALSE Explanation: A favourable variance in one value chain function may lead to an unfavourable variance in another. Diff: 2 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-5
4) Managers generally have more control over efficiency variances than rate variances. Answer: TRUE Explanation: Efficiency variances are primarily affected by internal factors, whereas price changes may be influenced by market factors. Diff: 3 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-5
5) To prepare budgets based on actual data from past periods is preferred since past inefficiencies are excluded. Answer: FALSE Explanation: A deficiency of using budgeted input quantity information based on actual quantity data from past periods is that past inefficiencies are included. Diff: 2 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-5
6) The use of high-quality raw materials is likely to result in a favourable efficiency variance and an unfavourable rate variance. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-5
7) The direct manufacturing labour rate variance is likely to be favourable if higher-skilled workers are put on a job. Answer: FALSE Explanation: The direct manufacturing labour variance is likely to be unfavourable if higher-skilled workers are put on a job since they are usually also higher paid. Diff: 2 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-5
8) If variance analysis is used for performance evaluation, managers are encouraged to meet targets using creativity and resourcefulness. Answer: FALSE Explanation: The most common outcome when variance analysis is used for performance evaluation is that managers seek targets that are easily attainable and avoid targets that require creativity and resourcefulness. Diff: 2 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-5
9) Depending on the level of the cost hierarchy of an activity, cutting a volume of input to the benefit of one business function may increase costs throughout the entire value chain. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-5
10) Which of the following is likely to be related to an unfavourable direct materials rate variance? A) Standard costs were determined correctly. B) the negotiating skills of the marketing manager C) unexpected price decreases in direct materials D) Actual direct material purchases were in larger quantities than normal, resulting in receiving volume discounts. E) Materials were purchased based on a competitive bid. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-5
11) If a purchasing agent is able to negotiate a price lower than that set by the current budget by purchasing direct materials of similar quality A) a reduction in customer service costs will result. B) the effect on the direct materials efficiency variance will be favourable. C) the effect on the direct labour efficiency variance will be favourable. D) the effect on the purchase rate variance will be favourable. E) the effect on the direct materials efficiency variance will be unfavourable. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-5
12) Which of the following reasons is unlikely to be related to an unfavourable variance for labour costs? A) Labour used was less skilled than usual. B) poor work scheduling C) excessive equipment downtime D) inappropriate standards E) rate variance in direct materials purchased at the standard quality Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-5
13) In a manufacturing area of an organization; poor product design, problems with the quality of materials, and scheduling conflicts could result in A) a favourable materials efficiency variance. B) a favourable labour efficiency variance. C) a favourable materials effectiveness variance. D) an unfavourable materials effectiveness variance. E) an unfavourable materials efficiency variance. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-5
14) If a company only reached 85% of their production goal, the 85% may be called the company's A) effectiveness rate. B) efficiency rate. C) goal achievement rate. D) standard production rate. E) variance rate. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-5
15) The relative amount of inputs used to reach a given level output is a measure of which of the following? A) effectiveness B) selling price C) purchase price D) marketing efforts E) efficiency Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-5
16) Which of the following statements is TRUE? A) A favourable variance always benefits a company. B) Managers attempt to maintain unfavourable variances. C) Favourable variances are typically not preferred by management. D) Only a flexible budget can be used to determine a variance. E) A favourable variance is not always beneficial for an organization. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-5
17) Cost variances should be investigated when A) the results are favourable but within acceptable limits. B) costs incurred must be reduced. C) expected costs of investigation exceed expected benefits. D) the results are unfavourable but within acceptable limits. E) the amounts are immaterial. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-5
18) A continuous improvement budgeted cost, in terms of variances and standard costs A) is held constant regardless of external factors, thus enabling management to isolate internal variance factors. B) is successively reduced over succeeding time periods. C) ensures that managers will avoid unfavourable materials (or labour) variances that are due to external factors. D) is easier to achieve for older, more established production runs, than for new products. E) is achieved as easily for older, more established production runs, as for for new products. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-5
19) During February the Lungren Manufacturing Company's costing system reported several variances that the production manager was surprised to see. The following information is for the manufacture of garden gates, its only product: 1. 2. 3. 4.
Direct materials rate variance, $800 unfavourable. Direct materials efficiency variance, $1,800 favourable. Direct manufacturing labour rate variance, $4,000 favourable. Direct manufacturing labour efficiency variance, $600 unfavourable.
Required: a. Provide the manager with some ideas as to what may have caused the rate variances. b. What may have caused the efficiency variances? Answer: Direct materials unfavourable rate variance may have been caused by: (1) paying a higher price than the standard for the period, (2) changing to a new vendor, or (3) buying higher-quality materials. a. Direct manufacturing labour favourable rate variance may have been caused by: (1) changing the work force by hiring lower-paid employees, (2) changing the mix of skilled and unskilled workers, or (3) not giving pay raises as high as anticipated when the standards were set for the year. b. Direct materials favourable efficiency variance may have been caused by: (1) employees/machinery working more efficiency and having less scrap and waste materials, (2) buying better-quality materials, or (3) changing the production process. Direct manufacturing labour unfavourable efficiency variance may have been caused by: (1) poor working conditions, (2) changes in the production process (learning something new initially takes longer), (3) different types of direct materials to work with, or (4) poor attitudes on behalf of the workers. Diff: 2 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-5
20) Your company hired a summer student as an accounting intern to prepare variance analysis for the plant manager (the student's father), so that the entire organization could become more effective and efficient. Up to this time, the company used a budget but only one that specified sales and production in units, and each department gauged and reported on its own performance based on historical rules of thumb developed over the years. The plant manager instructed every department manager to assist the new accountant as achieving favourable results would ensure he got a good bonus. For the month of May, the student met with the department heads of each functional area, obtaining from them the data and estimates to come up with: standard costs and prices; and, standard direct material usage and standard direct labour usage. Then in June, July and August the student collected; and, analyzed the variance results, and prepared a report for the plant manager. The report indicated favourable variances in virtually every functional area, allowing the plant manager to receive a larger bonus than usual. Required: Comment on the above process, in terms of variance analysis. Answer: This may a case of "garbage-in, garbage-out." First of all, the department heads were told up front that a favourable variance was expected, secondly, they provided the standards in conjunction with an inexperienced accountant. Standards require objective data, such as engineering time-motion studies. If historical data is going to be used, then you must decide at the outset if you want to budget for continuous improvement, or if just meeting the past results will be sufficient. One has to assume that these standards were padded, so that the resulting targets would be easily attained. In short, it appears that these variances were developed not for cost management, but to support a predetermined result, linked to financial reward not linked to performance. Diff: 2 Type: ES CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-5
21) You have been promoted to management accountant at a hospital. One of the things you noted from reviewing past internal reports is that the quality of the data is poor at times, and there is no objective standard for evaluating performance. When you asked about this at a board of directors meeting, the consensus reply was that the hospital's operations were too subjective and service orientated, and that it was a non-profit organization, so setting profit goals was of no value. Required: Comment on a possible approach that could be taken to provide objective criteria for performance evaluation in this situation. Answer: The lack of revenue or profit does not mean that management cannot evaluate its performance or the performance of subunits of the organization. The obvious place to start is the focus on cost control, but there are other areas as well. Analysis requires reliable data. The lack of reliable data in this case is likely due to the low priority placed on using the data. In any event, the organization should implement an accounting system that collects sufficient and reliable data for management purposes. In addition, poor data indicates that there will not be sufficient historical information to use in building a cost control system, therefore, the organization should seek external benchmarks. In this particular industry, the types of services are likely to be very comparable among other hospitals of comparable size, if unusual factors such as whether it is a teaching hospital, are controlled for. After obtaining external benchmarks, the organization can begin to see how it compares on various criteria, such as cost for each type of service, eg cost to treat a stroke patient, cost of specific types of emergency procedures etc), and also on non-financial criteria, such as perceived satisfaction of patients, hours of service, staff morale and any other factor felt to be part of the organization's mission. Diff: 2 Type: ES CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-5
22) Coffey Company maintains a very large direct materials inventory because of critical demands placed upon it for rush orders from large hospitals. Item A contains hard-to-get material Y. Currently, the standard cost of material Y is $2.00 per gram. During February, 22,000 grams were purchased for $2.10 per gram, while only 20,000 grams were used in production. There was no beginning inventory of material Y. Required: a. Determine the direct materials rate variance, assuming that all materials costs are the responsibility of the materials purchasing manager so rate variances are based on purchase quantities. b. Determine the direct materials rate variance, assuming that all materials costs are the responsibility of the production manager so rate variances are determined as quantities are placed into production. c. Discuss the issues involved in determining the rate variance at the point of purchase versus the point of consumption. Answer: a. Material rate variance = 22,000 × ($2.10 - $2.00) = $2,200 unfavourable b.
Material rate variance = $2,000 unfavourable
= 20,000 × ($2.10 - $2.00)
c. Measuring the rate variance at the time of materials purchased is desirable in situations where the amount of materials purchased varies substantially from the amount used during the period. Failure to measure the rate variance based on materials purchased could result in a substantial delay in determining that a price change occurred. Also, if the purchasing manager is to be held accountable for his/her purchasing activities, it is appropriate to have the materials rate variances computed at the time of purchase so the manager can include the variances on his/her monthly report. This encourages the purchasing manager to be more responsible for the activities under his/her control. It provides a closer relationship between responsibility and authority and becomes a relevant performance measure. Diff: 3 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-5
Match the department that is most likely responsible for the listed variance. A) Personnel department B) Production department C) Purchasing department D) Marketing department 23) Direct material rate variance Diff: 1 Type: MA CPA Competencies: Chapter 7 - 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-5
24) Direct labour rate variance Diff: 1 Type: MA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-5
25) Direct labour efficiency variance Diff: 1 Type: MA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-5
26) Sales volume variance Diff: 1 Type: MA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-5
27) Direct material efficiency variance Diff: 1 Type: MA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-5
Answers: 23) C 24) A 25) B 26) D 27) B
7.6 Appendix 7A: Distinguish among standards, budgets, benchmarks. 1) Benchmarking is the continuous process of measuring products, services, and activities against the best possible levels of performance. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-6
2) When benchmarking, the best levels of performance are typically found in companies that are totally different. Answer: FALSE Diff: 1 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-6
3) Benchmarking key activities can be even more important in not-for-profit/non-profit (NFP) organizations than it is for businesses seeking to make a profit. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-6
4) A standard is usually expressed on a per-unit basis and communicates an average amount indicating what should be achieved by any similar process each time period that performance measures are taken. Answer: TRUE Explanation: A standard is usually expressed on a per-unit basis and communicates an average amount indicating what should be achieved by any similar process each time period that performance measures are taken. Diff: 1 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-6
5) Standards differ from budget amounts because standards change from onetime period to the next. Answer: FALSE Explanation: Standards differ from budget amounts because budget amounts change from onetime period to the next. Diff: 2 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-6
6) When benchmarking A) the best levels of performance are usually found in companies that are within different industries. B) finding appropriate benchmarks is a minor issue. C) it is important to set standards at industry averages. D) comparisons can highlight areas for improved cost management. E) a broader scope allows for easier comparison. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-6
7) Which of the following is part of the benchmarking process? A) standard setting against industry averages B) assess external and internal conditions and match with those of the benchmarked company C) sharing information with other companies D) obtaining a benchmarking license E) setting up bench mark variances Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-6
8) The process in which a company's products or services are measured relative to the best possible levels of performance is known as A) benchmarking. B) measuring the performance gap. C) standard measurement. D) variance measurement. E) budgeting. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-6
9) Which of the following statements about benchmarks is TRUE? A) They may be financial or nonfinancial. B) They are used to compute variances. C) Broad benchmarks have more relevance. D) Obtaining benchmarks has no legal or ethical issues. E) Benchmarks are the main driver of strategic planning. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-6
10) In a journal entry for a standard costing system that records favourable variances, to increase the relevant variance account A) causes a credit to Cost of Goods Sold. B) decreases the Operating Income Account. C) the variance account must be debited. D) the variance account must be credited. E) reduces the contra account. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-6
11) When a journal entry is made in a standard cost system to record the liability for direct manufacturing labour costs, the difference between the debit to the work-in-process control account and the credit to the payroll payables is A) only the efficiency variance. B) only the rate variance. C) the difference between the actual wage rate and the budgeted rate, times the actual hours. D) the difference between the actual wage rate and the budgeted rate, times the budget hours. E) the total of the price and efficiency labour variances. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-6
12) When a journal entry is made to record the direct materials used, a debit to the Direct Materials Efficiency Variance A) indicates the variance is unfavourable. B) indicates the variance is favourable. C) is the difference between the actual Costs of Goods Sold and the budgeted Materials Control accounts. D) is the difference between the debits and credits of all materials related entries. E) also requires a debit to the materials control account. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-6
13) The input standard cost per completed unit may be calculated by A) multiplying the budgeted number of outputs for one input by the budgeted price per output unit. B) multiplying the budgeted price per input by the budgeted number of inputs for one unit of output. C) dividing the variable price per input by the budgeted number of inputs for one unit of output. D) dividing the budgeted number of outputs for one input by the budgeted price per output unit. E) dividing the budgeted price per input by the budgeted number of inputs for one unit of output. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-6
14) Compute the total standard cost per book for Publisher's Company using the following information: 1. Direct Materials: 1 ream of paper allowed per output unit manufactured, at $5.00 per ream. 2. Direct Mfg. Labour: 0.35 labour-hours of input allowed per output unit finished, at $17.50 standard cost per hour. 3. Variable Manufacturing Overhead: assigned on the basis of 0.25 per hour at $25 standard cost per hour per output unit finished. A) $11.13 per output unit B) $14.63 per output unit C) $17.38 per output unit. D) $47.50 per output unit E) $48.60 per output unit Answer: C Explanation: Materials: 1 unit × $5.00 = $5.00 Labour: 0.35 unit × $17.50 = 6.13 Overhead: 0.25 unit × $25.00 = 6.25 17.38 Diff: 1 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-6
15) A standard is A) usually expressed on a per unit basis. B) consistently calculated in manufacturing companies. C) always the same as a budgeted amount. D) only set within the company. E) never expressed on a per unit basis. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-6
16) ________ is a carefully predetermined amount usually expressed on a per-unit basis. A) Variable marketing overhead B) A flexible budget C) A standard D) Fixed factory overhead E) A static budget Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-6
17) A standard cost method is based on A) variable costs only. B) a predetermined average cost per input. C) a predetermined average total input cost per unit of output. D) either a predetermined average cost per input or a predetermined average total input cost per unit of output. E) historical costs. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-6
18) It's year-end and you have the task of clearing up the final accounting entries for management accounting. There is an unfavourable direct materials rate variance of $25,000 which needs to be closed. The company uses the proration approach in this situation, and it has been determined that half of the variance should be charged to finished goods and half to cost of goods sold. Required: Prepare the necessary entry for the end of period adjustment. Answer: Cost of Goods Sold 12,500 Finished Goods Inventory 12,500 Direct Materials Rate Variance 25,000 Diff: 2 Type: ES CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-6
19) Waddell Productions uses a standard cost system for all manufacturing transactions. For the month of June the following activities have taken place: Direct manufacturing materials purchased Direct manufacturing materials used Direct materials rate variance Direct materials efficiency variance Direct manufacturing labour rate variance Direct manufacturing labour efficiency variance Direct manufacturing labour payable
$310,000 $250,000 $10,000 unfavourable $15,000 favourable $6,000 favourable $4,000 favourable $170,000
Required: Record the necessary journal entries to: 1. Record the materials purchases assuming that materials rate variances are recorded at the time of purchase. 2. Record the materials placed into production. 3. Record the direct labour used in production. Answer: Materials Control 300,000 Direct Manufacturing Materials Rate Variance 10,000 Accounts Payable Control 310,000 Work-in-Process Control Direct Materials Efficiency Variance Materials Control
265,000
Work-in-Process Control Direct Manufacturing Labour Rate Variance Direct Manufacturing Labour Efficiency Variance Wages Payable Control
180,000
15,000 250,000
6,000 4,000 170,000
Diff: 3 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-6
20) Signet Engineering uses a standard cost system for all manufacturing transactions. For the month of April the following activities have taken place: Direct manufacturing materials purchased Direct manufacturing materials used Direct materials rate variance Direct materials efficiency variance Direct manufacturing labour rate variance Direct manufacturing labour efficiency variance Direct manufacturing labour payable
$270,000 $360,000 $3,000 unfavourable $4,000 favourable $5,000 favourable $7,000 favourable $280,000
Required: Record the necessary journal entries to: 1. Record the materials purchases assuming that materials rate variances are recorded at the time of purchase. 2. Record the materials placed into production. 3. Record the direct labour used in production. Answer: Materials Control 267,000 Direct Manufacturing Materials Rate Variance 3,000 Accounts Payable Control 270,000 Work-in-Process Control Direct Materials Efficiency Variance Materials Control
364,000
Work-in-Process Control 292,000 Direct Manufacturing Labour Rate Variance Direct Manufacturing Labour Efficiency Variance Wages Payable Control
4,000 360,000
5,000 7,000 280,000
Diff: 3 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-6
21) Mayberry Company had the following journal entries recorded for the end of June. Unfortunately, the company's only accountant quit on July 10 and the president is at a loss as to the company's performance for the month of June. Materials Control Direct Materials Rate Variance Accounts Payable Control
150,000
Work-in-Process Control Direct Materials Efficiency Variance Materials Control
60,000 4,000
5,000 145,000
Work-in-Process Control 425,000 Direct Manufacturing Labour rate Variance 7,500 Direct Manufacturing Labour Efficiency Variance Wages Payable Control
64,000
9,000 423,500
Required: a. What kind of performance did the company have for June? Explain each variance. b. Why is Direct Materials given in two entries? Answer: a. The first entry is for materials purchases. The credit entry indicates a favourable variance. This could be an indicator that the purchasing agent did a good job or he/she bought inferior goods. Production was not as lucky in June. The debit entry for materials efficiency indicates that more materials were used than should have been under the operating plans for the month. For labour, the price was unfavourable, while the efficiency was favourable. This could have been caused by using higher-priced workers who were, in fact, better workers. Of course, there are many other possible causes. b. Recording variances for direct materials is completed with two separate entries since the rate variance is isolated at the point of purchase, while the efficiency variance is isolated at the point of use. Diff: 2 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-6
22) What is benchmarking, and how is it useful to a company? Answer: Benchmarking is the continuous process of comparing the levels of performance in producing products and services and executing activities against the best levels of performance in competing companies or in companies having similar processes. Companies can examine aspects of their own operations in comparison to similar operations and see if they are operating at a disadvantage. Benchmarking might provide targets and opportunities to cut costs, and might even show where they have a competitive advantage over similar companies. Diff: 2 Type: ES CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-6
7.7 Appendix 7B: Distinguish between Levels 3 and 4 variance analysis for substitute inputs, and calculate Level 4 direct material mix and yield variances. 1) The direct materials yield variance is the difference between: 1) the budgeted cost for the actual mix of the total quantity of direct materials used, and 2) the budgeted cost of the budgeted mix of the actual total quantity of direct materials used. Answer: FALSE Explanation: The total direct materials mix variance is the difference between two amounts: (1) the budgeted cost for the actual mix of the total quantity of direct materials used, and (2) the budgeted cost of the budgeted mix of the actual total quantity of direct materials used. Diff: 2 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-7
2) The direct materials mix variance is the difference between: 1) the actual cost of direct materials based on the actual total quantity of all direct material inputs used, and 2) the flexible-budget cost of direct materials based on the budgeted total quantity of direct material inputs for the actual output. Answer: FALSE Explanation: should be "the difference between: the budgeted cost..." Diff: 2 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-7
3) An unfavourable direct materials mix variance results when cheaper direct materials are substituted for more expensive direct materials. Answer: FALSE Explanation: A favourable direct materials mix variance results when cheaper direct materials are substituted for more expensive direct materials. Diff: 2 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-7
4) A favourable direct materials yield variance results when less direct materials are used than planned. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-7
5) More insight into the efficiency variance for direct materials can be gained by subdividing it into the direct materials A) mix and volume variances. B) market-share and market-size variances. C) rate and usage variances. D) price and efficiency variances. E) mix and yield variances. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-7
6) The direct materials mix variance will be favourable when A) the flexible-budget contribution margin is greater than the actual contribution margin. B) the actual direct materials input mix is less expensive than the budgeted direct materials input mix. C) the actual quantity of total inputs used is greater than the flexible budget for total inputs. D) actual unit sales are less than budgeted unit sales. E) the input-efficiency variance is favourable. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-7
7) The materials yield variance will be unfavourable when A) the flexible-budget contribution margin is greater than the actual contribution margin. B) the actual direct materials input mix is less expensive than the budgeted direct materials input mix. C) the input-efficiency variance is favourable. D) the actual quantity of total inputs used is greater than the flexible budget for total inputs. E) actual unit sales are less than budgeted unit sales. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 7-7
8) The direct materials mix variance is the A) average of the direct materials mix variances for each input. B) sum of the direct materials mix variances for each input. C) difference between the direct materials mix variances for each input. D) multiple of the direct materials mix variances for each input. E) lesser of the direct materials yield variance and the direct materials efficiency variance. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-7
Use the information below to answer the following question(s). Jenny's Condiments makes a specialty mustard for street vendors that is composed of wet ingredients and dry ingredients. Two parts of wet ingredients at a standard cost of $12, and three parts of dry ingredients at a standard cost of $9, are required for every batch. In the first week of July, Jenny produced two hundred thirty batches of mustard using 450 units of wet ingredients and 750 units of dry ingredients. 9) What are the direct materials quantity variances for the wet and dry ingredients respectively? A) $120 favourable/$540 unfavourable B) $90 favourable/$720 unfavourable C) $2,880 favourable/$2,610 unfavourable D) $120 unfavourable/$540 favourable E) $90 unfavourable/$720 favourable Answer: A Explanation: Wet ingredients: ((230 batches × 2 units/batch) × $12) - (450 units × $12) = $120 favourable Dry ingredients: ((230 batches × 3 units/batch) × $9) - (750 units × $9) = $540 unfavourable Diff: 3 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-7
10) For the wet ingredients what are the material mix and yield variances respectively? A) $270 favourable/$180 unfavourable B) $240 unfavourable/$360 favourable C) $240 favourable/$360 unfavourable D) $360 favourable/$240 unfavourable E) $360 unfavourable/$240 favourable Answer: D Explanation: Wet ingredients mix variance: ((450 + 750) × 0.40 × $12) - (((450 + 750) × (450/1,200)) × $12) = $360 favourable Wet ingredients yield variance: ((460 + 690) × 0.40 × $12) - ((450 + 750) × 0.40 × $12) = $240 unfavourable Diff: 3 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-7
11) For the dry ingredients what are the material mix and yield variances respectively?
A) $270 favourable/$270 unfavourable B) $360 unfavourable/$360 unfavourable C) $360 favourable/$360 unfavourable D) $360 favourable/$360 favourable E) $270 unfavourable/$270 unfavourable Answer: E Explanation: Dry ingredients mix variance: ((450 + 750) × 0.60 × $9) - (((450 + 750) × (750/1,200)) × $9) = $270 unfavourable Wet ingredients yield variance: ((460 + 690) × 0.60 × $9) - ((450 + 750) × 0.60 × $9) = $270 unfavourable Diff: 3 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-7
Use the information below to answer the following question(s). Best Jam Inc. manufactures jam products. It makes a mixed fruit and berry jam by blending strawberries, peaches, and apricots. Budgeted costs to produce 100,000 kilograms of jam in September were: Ingredient Strawberry Peach Apricot
Kilograms Cost per Kg. 80,000 kg. $1.25 100,000 kg. $1.80 220,000 kg. $2.25
Total Cost $100,000 $180,000 $450,000
Actual costs to produce 100,000 kilograms of jam in September were: Ingredient Strawberry Peach Apricot
Kilograms Cost per Kg. 105,000 kg. $1.15 105,000 kg. $1.80 210,000 kg. $2.10
Total Cost $120,750 $189,000 $441,000
12) What is the direct material mix variance for Strawberry Jam.? (3 marks) A) $26,250 U B) $26,250 F C) $21,000 F D) $47,250 U E) $47,250 F Answer: A Explanation: Direct materials mix variance: (budget mix % - actual mix %) × actual quantity × budget price Strawberry (20% - 25%) × 420,000 kg. × $1.25 = $ 26,250 U Peach (25% - 25%) × 420,000 kg. × $1.80 = nil Apricot (55% - 50%) × 420,000 kg. × $2.25 = 47,250 F $ 21,000 F Diff: 3 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-7
13) What is the direct material yield variance for Strawberry Jam? (3 marks) A) $9,000 F B) $9,000 U C) $38,750 F D) $5,000 F E) $5,000 U Answer: E Explanation: Direct materials yield variance: (budget qty. - actual qty.) × budget mix % × budget price Strawberry (400,000 kg. - 420,000 kg.) × 20% × $1.25 = $ 5,000 U Peach (400,000 kg. - $420,000 kg.) × 25% × $1.80 = 9,000 U Apricot (400,000 kg. - 420,000 kg.) × 55% × $2.25 = 24,750 U $ 38,750 F Diff: 3 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-7
Answer the following question(s) using the information below. Eco Furniture Ltd. makes wooden furniture. One of their products is a wooden desk. The exterior is made of walnut, a high quality wood, but the interior drawers are made of pine, a less expensive wood. The budgeted direct materials quantities and prices for one desk are:
Walnut Pine
Rate per Cost for Quantity Input Unit One Desk 9 square metres $62/square metre $558 3 square metres $19/square metre $57
During the month of November 600 desks were produced. The actual material volume and costs were:
Walnut Pine
Total Quantity 5,250 square metres 2,250 square metres
Total Cost $336,000 $123,750
14) What is the direct materials efficiency variance for walnut? A) $10,200 U B) $9,300 F C) $9,900 F D) $10,400 F E) $8,800 U Answer: B Explanation: Total input for output achieved = 600 desks × (9 sq. m. + 3 sq. m.) = 7,200 sq. m. Standard mix = 9 sq. m./(9 sq. m. + 3 sq. m.) = 75% Total actual quantity = 5,250 sq. m. + 2,250 sq. m. = 7,500 sq. m. Actual mix = 5,250 sq. m./ 7,500 sq. m. = 70% Flexible budget = 7,200 sq. m. × 75% × $62 = $334,800 Intermediate calc. = 7,500 sq. m. × 70% × $62 = $325,500 Direct materials efficiency variance = $334,800 - $325,500 = $9,300 F Diff: 3 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-7
15) What is the direct materials mix variance for walnut? A) $15,900 U B) $21,300 F C) $19,500 U D) $23,250 F E) $24,750 U Answer: D Explanation: Total input for output achieved = 600 desks × (9 sq. m. + 3 sq. m.) = 7,200 sq. m. Standard mix = 9 sq. m./(9 sq. m. + 3 sq. m.) = 75% Total actual quantity = 5,250 sq. m. + 2,250 sq. m. = 7,500 sq. m. Actual mix = 5,250 sq. m./ 7,500 sq. m. = 70% Flexible budget = 7,200 sq. m. × 75% × $62 = $334,800 Intermediate calc. #1 = 7,500 sq. m. × 70% × $62 = $325,500 Intermediate calc. #2 = 7,500 sq. m. × 75% × $62 = $348,750 Direct materials mix variance = $348,750 - $325,500 = $23,250 F Diff: 3 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-7
16) What is the direct materials yield variance for walnut? A) $28,750 U B) $16,500 U C) $19,500 F D) $16,500 F E) $13,950 U Answer: E Explanation: Total input for output achieved = 600 desks × (9 sq. m. + 3 sq. m.) = 7,200 sq. m. Standard mix = 9 sq. m./(9 sq. m. + 3 sq. m.) = 75% Total actual quantity = 5,250 sq. m. + 2,250 sq. m. = 7,500 sq. m. Actual mix = 5,250 sq. m./ 7,500 sq. m. = 70% Flexible budget = 7,200 sq. m. × 75% × $62 = $334,800 Intermediate calc. #1 = 7,500 sq. m. × 70% × $62 = $325,500 Intermediate calc. #2 = 7,500 sq. m. × 75% × $62 = $348,750 Direct materials yield variance = $334,800 - $348,750 = $13,950 U Diff: 3 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-7
17) What is the direct materials efficiency variance for pine? A) $8,550 U B) $7,650 F C) $8,700 F D) $9,250 U E) $8,150 U Answer: A Explanation: Total input for output achieved = 600 desks × (9 sq. m. + 3 sq. m.) = 7,200 sq. m. Standard mix = 3 sq. m./(9 sq. m. + 3 sq. m.) = 25% Total actual quantity = 5,250 sq. m. + 2,250 sq. m. = 7,500 sq. m. Actual mix = 2,250 sq. m./ 7,500 sq. m. = 30% Flexible budget = 7,200 sq. m. × 25% × $19 = $34,200 Intermediate calc. #1 = 7,500 sq. m. × 30% × $19 = $42,750 Intermediate calc. #2 = 7,500 sq. m. × 25% × $19 = $35,625 Direct materials efficiency variance = $34,200 - $42,750 = $8,550 U Diff: 3 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-7
18) What is the direct materials mix variance for pine? A) $9,250 F B) $6,500 U C) $7,125 U D) $8,650 F E) $5,750 U Answer: C Explanation: Total input for output achieved = 600 desks × (9 sq. m. + 3 sq. m.) = 7,200 sq. m. Standard mix = 3 sq. m./(9 sq. m. + 3 sq. m.) = 25% Total actual quantity = 5,250 sq. m. + 2,250 sq. m. = 7,500 sq. m. Actual mix = 2,250 sq. m./ 7,500 sq. m. = 30% Flexible budget = 7,200 sq. m. × 25% × $19 = $34,200 Intermediate calc. #1 = 7,500 sq. m. × 30% × $19 = $42,750 Intermediate calc. #2 = 7,500 sq. m. × 25% × $19 = $35,625 Direct materials mix variance =$35,625 - $42,750 = $7,125 U Diff: 3 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-7
19) What is the direct materials yield variance for pine? A) $3,125 U B) $3,125 F C) $2,500 F D) $1,075 U E) $1,425 U Answer: E Explanation: Total input for output achieved = 600 desks × (9 sq. m. + 3 sq. m.) = 7,200 sq. m. Standard mix = 3 sq. m./(9 sq. m. + 3 sq. m.) = 25% Total actual quantity = 5,250 sq. m. + 2,250 sq. m. = 7,500 sq. m. Actual mix = 2,250 sq. m./ 7,500 sq. m. = 30% Flexible budget = 7,200 sq. m. × 25% × $19 = $34,200 Intermediate calc. #1 = 7,500 sq. m. × 30% × $19 = $42,750 Intermediate calc. #2 = 7,500 sq. m. × 25% × $19 = $35,625 Direct materials yield variance = $34,200 - $35,625 = $1,425 U Diff: 3 Type: MC CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-7
20) Best Jam Inc. manufactures jam products. It makes a mixed fruit and berry jam by blending strawberries, peaches, and apricots. Budgeted costs to produce 100,000 kilograms of jam in September were: Ingredient Strawberry Peach Apricot
Kilograms Cost per Kg. 80,000 kg. $1.25 100,000 kg. $1.80 220,000 kg. $2.25
Total Cost $100,000 $180,000 $450,000
Actual costs to produce 100,000 kilograms of jam in September were: Ingredient Strawberry Peach Apricot
Kilograms Cost per Kg. 105,000 kg. $1.15 105,000 kg. $1.80 210,000 kg. $2.10
Total Cost $120,750 $189,000 $441,000
Required: 1. Calculate the total direct materials rate and efficiency variances. 2. Calculate the total direct materials mix and yield variances. 3. Jam Life's largest competitor sells a 500 gram jar of mixed fruit and berry jam for $4.50. If Best Jam's management wants to meet this price and cover monthly fixed costs of $180,000, then what will be the company's margin of safety? (Assume that Jam Life will continue to use the budgeted mix of ingredients.)
Answer: 1. Direct materials rate variances: Strawberry ($1.25 - $1.15) × 105,000 kg. = Peach ($1.80 - $1.80) × 105,000 kg. = Apricot ($2.25 - $2.10) × 210,000 kg. =
$ 10,500 F 0 31,500 F $ 42,000 F
Direct materials efficiency variances: Strawberry (80,000 kg. - $105,000 kg.) × $1.25 Peach (100,000 kg. - 105,000 kg.) × $1.80 = Apricot (220,000 kg. - 210,000 kg.) × $2.25 =
$ 31,250 U 9,000 U 22,500 F $ 17,750 U
2. Direct materials mix variance: (budget mix % - actual mix %) × actual quantity × budget price Strawberry (20% - 25%) × 420,000 kg. × $1.25 = Peach (25% - 25%) × 420,000 kg. × $1.80 = Apricot (55% - 50%) × 420,000 kg. × $2.25 = $ Direct materials yield variance: (budget qty. - actual qty.) × budget mix % × budget price Strawberry (400,000 kg. - 420,000 kg.) × 20% × $1.25 = Peach (400,000 kg. - $420,000 kg.) × 25% × $1.80 = Apricot (400,000 kg. - 420,000 kg.) × 55% × $2.25 = 3.
$
$ 26,250 U nil 47,250 F 21,000 F
5,000 U 9,000 U 24,750 U $ 38,750 F
Margin of safety = Revenue - Break-even Revenue Revenue = $4.50 × 200,000 jars = BE point = $180,000/($2.35/$6.00) = Margin of safety
$900,000 459,574 $440,426
Diff: 3 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-7
21) Shiny Furniture Ltd. makes wooden furniture. One of their products is a wooden desk. The exterior is made of walnut, a high-quality wood, but the interior drawers are made of pine, a less expensive wood. The budgeted direct material quantities and prices for one desk are:
Walnut Pine
Rate per Cost for Quantity Input Unit One Desk 6 square metres $58/square metre $348 2 square metres $20/square metre $40
During the month of September 440 desks were produced. The actual material volume and costs were:
Walnut Pine
Total Quantity 2,552 square metres 638 square metres
Total Cost $153,120 $ 11,484
Required: Calculate the direct materials mix and yield variances for the walnut. Answer: Total flexible budget quantity = (6 + 2) × 440 desks = 3,520 square metres Total actual quantity = 2,552 + 638 = 3,190 square metres Budgeted mix = 6 sq. m./(6 sq. m. + 2 sq. m.) = 75% Actual mix = 2,552 sq. m./3,190 sq. m. = 80% Mix variance: (3,190 × 75% × $58) - (3,190 × 80% × $58) = $9,251 U Yield variance: (3,520 × 75% × $58) - (3,190 × 75% × $58) = $14,355 F Diff: 3 Type: SA CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 7-7
22) The textbook discusses five levels of variances: Level 0, Level 1, Level 2, Level 3, and Level 4. Briefly explain the meaning of each of those levels and provide an example of a variance at each of those levels. Answer: A Level 0 variance is simply the difference between actual operating income and planned operating income in the static budget. A Level 1 variance would be any of the differences between the static budget and the actual results that make up operating income. Examples of such differences could include the following items: Units sold (Static budget - actual) Revenues (Static budget - actual) Material costs (Static budget - actual) Direct manufacturing labour (Static budget - actual) Variable manufacturing overhead (Static budget - actual) Contribution margin (Static budget - actual) Fixed costs (Static budget - actual) A Level 2 variance subdivides the level 0 variance (which is the total of the Level 1 variances) into a sales volume variance and a flexible-budget variance. The sales volume variance is the difference between the flexible budget amount and the corresponding static budget amount. The flexible budget variance is an actual result and the corresponding flexible budget amount based on the actual output level in the budget period. Specific examples of Level 2 variances could include any of the items shown in the list of Level 1 variances. A Level 3 variance would include rate variances that reflect the difference between the actual input price and a budgeted input price, such as the direct material rate variance, the direct labour rate variance, and the variable overhead rate variance. Level 3 variances would also include efficiency variances that reflect the difference between an actual input quantity and a budgeted input quantity. Examples would include material quantity variances, labour efficiency variances, and variable overhead efficiency variances. A Level 4 variance separates the Level 3 efficiency variance into yield and mix variances. A mix variance measures the variance of actual from expected input mix. The yield variance measures the variance of the actual from expected yield of outputs obtained from expected quantity of inputs. Diff: 3 Type: ES CPA Competencies: Chapter 7 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 7-7
Cost Accounting: A Managerial Emphasis - Cdn. Ed., 9e (Datar) Chapter 8 Flexible Budgets, Variances, and Management Control: II 8.1 Assign manufacturing overhead (MOH) fixed costs, then calculate and analyze flexiblebudget variances. 1) Capacity refers to the quantity of outputs that can be produced from long-term resources available to the company. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1
2) Capacity cost is a variable overhead cost. Answer: FALSE Explanation: Capacity refers to the quantity of outputs that can be produced from long-term resources available to the company, and is acquired through the purchase or lease of long-term assets. Diff: 1 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1
3) Capacity decisions are considered operating decisions because they involve the long-term acquisition of assets by purchase or lease. Answer: FALSE Explanation: ...decisions about capacity are strategic decisions. Diff: 2 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1
4) Fixed overhead costs are a lump sum that does not change in total despite changes in the cost driver. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1
5) The budgeted fixed overhead rate per output unit is computed by dividing budgeted fixed overhead costs by the level of input units. Answer: FALSE Explanation: Denominator is the budgeted quantity of allocation base units. Diff: 2 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1
6) The (production) denominator level is the quantity of the allocation base used to allocate fixed overhead costs to a cost object in developing a budgeted fixed overhead rate. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1
7) The fixed overhead flexible budget variance is the same as the fixed overhead static budget variance. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-1
8) The difference between budgeted fixed overhead and fixed overhead allocated for actual output units achieved, is the production-volume variance. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1
9) The production -volume overhead variance is favourable when actual outputs exceed the denominator level. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-1
10) The production-volume variance arises because the actual output level differs from the output level used as the denominator to calculate the budgeted fixed overhead rate. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1
11) The fixed manufacturing overhead efficiency variance is used to analyze overhead costs. Answer: FALSE Explanation: Production-volume and rate variances are used to analyze fixed overhead costs. Diff: 1 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1
12) An unfavourable fixed setup overhead rate variance could be due to higher lease costs of new setup equipment or higher salaries paid to engineers and supervisors. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-1
13) A favourable production-volume variance arises when manufacturing capacity planned for is not used. Answer: FALSE Explanation: An unfavourable production-volume variance arises when manufacturing capacity planned for is not used. Diff: 2 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-1
14) In the journal entry that records overhead variances, the manufacturing overhead allocated accounts are closed. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1
15) Managers should use unitized fixed manufacturing overhead costs for planning and control. Answer: FALSE Explanation: Managers should not use unitized fixed manufacturing overhead costs for planning and control, but only for inventory costing purposes. Diff: 3 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-1
16) Fixed Manufacturing Overhead Variances that are not material should only be written off to Cost of Goods Sold. Answer: FALSE Explanation: If it is immaterial, it may be either written off to Cost of Goods Sold or prorated among the Work-In-Process Control, Finished Goods Control, and Cost of Goods Sold accounts on the basis of the fixed overhead allocated to these accounts. Diff: 3 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1
17) Human capital refers to the intangible skills provided by people and is an inventoriable cost under ASPE/IFRS. Answer: FALSE Explanation: ASPE/IFRS prohibits accounting for costs of this type in inventory. Diff: 3 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1
18) An unfavourable production volume variance (a result of lower-than-budgeted output) should be expensed (to COGS) in the period it arises rather than be allocated to inventory. Answer: TRUE Diff: 3 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1
19) A favourable production volume variance, if it is the result of an unusual fluctuation in production output, should be credited to COGS in the period that it arises. Answer: FALSE Explanation: A favourable production volume variance, if it is the result of a usual fluctuation in production output, should be credited to COGS in the period that it arises. Diff: 2 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1
20) Effective planning of fixed overhead costs includes ________. A) planning day-to-day operational decisions B) eliminating value-added costs C) determining which products are to be produced D) choosing the appropriate level of investment in productive assets Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1
21) Effective planning of variable overhead costs includes ________. A) choosing the appropriate level of investment B) eliminating value-added costs C) redesigning products or processes to use fewer resources D) reorganizing management structure Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1
22) Which decisions are most likely to have been made by the start of the accounting period? A) decisions affecting value-added costs B) decisions affecting non-value-added costs C) decisions affecting variable overhead costs D) decisions affecting both fixed and variable overhead costs E) decisions affecting fixed overhead costs Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-1
23) Decisions about capacity are considered to be A) operating decisions. B) best done by plant supervisors. C) best done during production. D) more relevant for variable costs. E) strategic decisions. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1
24) In flexible budgets, costs that remain the same regardless of the output levels within the relevant range are A) allocated costs. B) budgeted costs. C) fixed costs. D) variable costs. E) estimated costs. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1
25) Which of the following statements is TRUE? A) The fixed manufacturing sales-volume variance is rarely zero. B) The difference between the allocated and the budgeted overhead is the production-volume variance. C) The production-volume variance arises for both fixed and variable costs. D) The fixed manufacturing overhead sales-volume variance can be written-off to cost of goods sold. E) The production-volume variance arises only for variable costs. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1
26) In variance analysis, fixed manufacturing overhead will have A) an efficiency variance. B) a flexible-budget variance. C) a rate variance. D) a static-budget variance. E) no variance, because it is fixed. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-1
27) The difference between budgeted fixed manufacturing overhead and the fixed manufacturing overhead allocated to actual output units achieved is called A) an efficiency variance. B) a flexible-budget variance. C) a manufacturing overhead flexible-budget variance. D) a production-volume overhead variance. E) an unallocated variable cost. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1
28) The production-volume variance A) only pertains to variable overhead costs. B) only pertains to fixed overhead costs. C) is not applicable in analysis of inventory costs. D) pertains to both fixed and variable overhead costs. E) equals the rate variance minus the efficiency variance. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1
29) Capacity cost is A) only an inventoriable cost. B) only a period cost. C) never amortized. D) a variable manufacturing overhead cost. E) a fixed manufacturing overhead cost. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1
30) The production-volume variance may also be referred to as the A) flexible-budget variance. B) static-budget variance. C) rate variance. D) efficiency variance. E) denominator-level variance. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1
31) A favourable production-volume variance indicates that the company A) has good management. B) produced more than it has sold. C) has a total economic gain from using excess capacity. D) should increase capacity. E) has allocated more fixed overhead costs than budgeted. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-1
32) When machine-hours are used as a cost allocation base, the item MOST likely to contribute to a favourable production-volume variance is A) an increase in the selling price of the product. B) the purchase of a new manufacturing machine costing considerably less than expected. C) a decline in the cost of energy. D) strengthened demand for the product. E) a competitor lowering the price of a similar product. Answer: D Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-1
33) When machine-hours are used as a cost allocation base, the item MOST likely to contribute to an unfavourable production-volume variance is A) a new competitor gaining market share. B) a new manufacturing machine costing considerably more than expected. C) an increase in the cost of energy. D) strengthened demand for the product. E) an increase in the number of direct-labour hours. Answer: A Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-1
34) When the actual output is more than expected and the volume is unusually high then the production volume variance is A) unfavourable and should be prorated to work-in-process inventory, finished goods inventory, and cost of goods sold. B) unfavourable and should be charged to cost of goods sold. C) favourable and should be offset against cost of goods sold. D) unfavourable and should be applied to inventory. E) favourable and should be applied to inventory. Answer: E Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1
35) Randy's Production Company uses a single cost pool for fixed manufacturing overhead. The amount for May 2018 was budgeted at $250,000; however, the actual amount was $350,000. Actual production for May was 12,500 units, and actual machine hours were 10,000. Budgeted production included 17,750 units and 12,375 machine hours. What is the budgeted fixed overhead rate per input unit? A) $25.00 per unit B) $35.00 per unit C) $20.00 per unit D) $14.09 per unit E) $14.08 per unit Answer: D Explanation: $250,000/17,750 = $14.09/Input Diff: 1 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-1
36) Actual overhead is $700,000, while budgeted overhead is $598,000. What is the fixed overhead staticbudget variance if 250,000 units are produced and 225,000 are budgeted? A) $80,000 favourable B) $100,000 unfavourable C) $100,000 favourable D) $102,000 unfavourable E) $102,000 favourable Answer: D Explanation: $700,000 - $598,000 = $102,000 unfavourable Diff: 1 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-1
37) David Company produced 20,000 cases of beer. Machinery usage is 1.5 hours per case. Budget outputs are 22,000 cases. What are the required static budget machine hour inputs and flexible budget machine hour inputs, respectively? A) 30,000 machine hours, 33,000 machine hours B) 33,000 machine hours, 30,000 machine hours C) 39,000 machine hours, 34,000 machine hours D) 34,000 machine hours, 39,000 machine hours E) 39,000 machine hours, 33,000 machine hours Answer: B Explanation: SB = 22,000 × 1.50/CASE = 33,000 MH FB = 20,000 × 1.50/CASE = 30,000 MH Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-1
Use the information below to answer the following question(s). Royal Company uses a single cost pool for fixed manufacturing overhead. The amount for June 2019 was budgeted at $500,000; however, the actual amount was $700,000. Actual production for June was 12,500 units, and actual machine hours were 10,000. Budgeted production included 17,750 units and 12,375 machine hours. 38) What is Regal Company's budgeted fixed overhead rate per output unit? A) $28.17 per unit B) $39.44 per unit C) $40.40 per unit D) $56.56 per unit E) $65.17 per unit Answer: A Explanation: $500,000/17,750 = $28.17/Output unit Diff: 1 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-1
39) What is Regal Company's budgeted fixed overhead rate per machine hour? A) $28.17 per machine hour B) $39.44 per machine hour C) $40.40 per machine hour D) $56.56 per machine hour E) $65.17 per machine hour Answer: C Explanation: $500,000/12,375 = $40.40/machine hour Diff: 1 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-1
40) Big Lake Company predicted that the fixed overhead would be $200,000 in April 2018. Production amounted to 60,000 actual and 50,000 budgeted decks of cards. Each deck takes approximately 0.20 machine hours to produce. The actual overhead costs per machine hour are $25. What is the productionvolume variance? A) $40,000 unfavourable B) $40,000 favourable C) $150,000 unfavourable D) $150,000 favourable E) $0 Answer: B Explanation: $200,000 - (60,000 × ($200,000/50,000)) = $40,000 favourable Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-1
41) Budgeted output for DuCane Small Engines Inc. was 20,000 engines during February 2022. Budgeted fixed overhead per output unit was $2.50, and 30,000 engines were actually produced. Actual fixed overhead was allocated at $3.00 per engine. What is the production-volume variance? A) $33,500 favourable B) $25,000 unfavourable C) $30,000 favourable D) $30,000 unfavourable E) $25,000 favourable Answer: E Explanation: (20,000 - 30,000) × $2.50 = 25,000 favourable Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-1
42) In order to properly record a fixed manufacturing overhead rate variance of $30,000 unfavourable and a production-volume overhead variance of $20,000 favourable, what would the appropriate journal entry be if actual fixed overhead is $500,000? A) Fixed Overhead Allocated 500,000 Various Payable Accounts 500,000 B) Work-in-Process Control Fixed Overhead Production-Vol Variance Fixed Overhead Rate Variance Fixed Overhead Allocated C) Fixed Overhead Allocated Fixed Overhead Production-Vol Variance Fixed Overhead Rate Variance Fixed Overhead Control
500,000 20,000 30,000 490,000
500,000 20,000 30,000 490,000
D) Fixed Overhead Allocated 490,000 Fixed Overhead Rate Variance 30,000 Fixed Overhead Production-Volume Variance Fixed Overhead Control
20,000 500,000
E) Fixed Overhead Rate Variance 30,000 Fixed Overhead Production-Volume Variance Various Payable Accounts
20,000 10,000
Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-1
Answer the following question(s) using the information below. Fahmy's Corporation manufactured 25,000 grooming kits for horses during March. The fixed-overhead cost allocation rate is $20.00 per machine-hour. The following fixed overhead data pertain to March:
Production Machine-hours Fixed overhead costs for March
Actual Static Budget 25,000 units 24,000 units 7,100 hours 6,900 hours $123,000 $138,000
43) What is the flexible-budget amount for fixed-overhead? A) $138,000 B) $122,000 C) $123,000 D) $125,000 E) $120,983 Answer: A Explanation: $138,000, the same lump sum as the static budget Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-1
44) What is the amount of fixed overhead allocated to production? A) $120,000 B) $122,000 C) $123,000 D) $143,750 E) $130,000 Answer: D Explanation: 25,000 × (6,900/24,000) × $20.00 = $143,750 Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-1
45) What is the fixed overhead rate variance? A) $1,000 unfavourable B) $2,000 favourable C) $5,164 unfavourable D) $5,000 favourable E) $983 unfavourable Answer: C Explanation: $143,164 actual costs - $138,000 budgeted cost = $5,164 unfavourable Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-1
46) What is the production-volume variance? A) $2,000 unfavourable B) $3,000 favourable C) $4,000 unfavourable D) $5,750 favourable E) $10,000 favourable Answer: D Explanation: $138,000 - [25,000 × (6,900/24,000) × $20.00] = $5,750 favourable Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-1
Answer the following question(s) using the information below. All-4-1 Corporation manufactured 54,000 door jambs during September. The fixed-overhead cost allocation rate is $50.00 per machine-hour. The following fixed overhead data pertain to September:
Production Machine-hours Fixed overhead costs for March
Actual Static Budget 54,000 units 60,000 units 1,000 hours 1,150 hours $63,600 $64,055
47) What is the flexible-budget amount for fixed overhead? A) $63,888 B) $53,400 C) $49,250 D) $51,750 E) $64,055 Answer: E Explanation: $64,055, the same lump sum as the static budget Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-1
48) What is the amount of fixed overhead allocated to production? A) $57,469.50 B) $100,000.00 C) $53,400.50 D) $57,500.00 E) $49,250.00 Answer: A Explanation: Rate for applying budgeted overhead = $64,055/1,150 = $55.70/hr 54,000 × (1,150/60,000) × $55.70 = $57,469.50 Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-1
49) What is the fixed overhead rate variance? A) $455 unfavourable B) $5,750 favourable C) $455 favourable D) $4,100 unfavourable E) $1,650 unfavourable Answer: C Explanation: $63,600 actual costs - $64,055 budgeted cost = $ 455 favourable Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-1
50) What is the production-volume variance? A) $4,100.00 unfavourable B) $4,100.50 favourable C) $1,650.00 unfavourable D) $6,405.50 unfavourable E) $5,750.00 favourable Answer: D Explanation: $64,055 - [54,000 × (1,150/60,000) × $55.70] = $6,405.50 unfavourable Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-1
51) A company had the following information pertaining to two different cases:
Budgeted fixed overhead Standard direct-labour hours Flexible-budget variance Production-volume variance
Case A $130,000 1,000 $10,000 F $6,000 U
Case B $230,000 6,000 $20,000 U $8,000 F
The total fixed overhead variance in Case B was ________. A) $4,000 unfavourable B) $4,000 favourable C) $10,000 unfavourable D) $12,000 favourable E) $12,000 unfavourable Answer: E Explanation: $20,000 unfavourable + $8,000 favourable = $12,000 unfavourable Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-1
52) All Clean of Toronto manufactures individual shampoos for hotel/motel clientele. The fixed manufacturing overhead costs for 2022 will total $576,000. The company uses good units finished for fixed overhead allocation and anticipates 300,000 units of production. Good units finished average 92 percent of total units produced. During January, 20,000 units were produced. Actual fixed overhead cost per good unit averaged $2.82 in January. Required: a. Determine the fixed overhead rate for 2022. b. Determine the fixed overhead static-budget variance for January. c. Determine the fixed overhead production-volume variance for January. d. Determine the fixed overhead rate variance for January. Answer: a. Fixed overhead rate = $576,000/(300,000 × 0.92) = $2.087 per finished unit b.
Fixed overhead for January = 20,000 × 0.92 × $2.82 = $51,888 Fixed overhead static-budget variance = $51,888 - $576,000/12 $51,888 - $48,000 = $3,888 U
c.
Fixed overhead production-volume variance = $48,000 - (20,000 × 0.92 × $2.087) = $9,600 U
d. Fixed overhead rate variance = $51,888 - $48,000 = $3,888 U Diff: 2 Type: SA CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-1
53) Johnston Equipment develops food processing equipment. The budgeted fixed overhead costs for 2022 total $768,000. The company uses direct labour-hours for fixed overhead allocation and anticipates 480,000 hours during the year for 960,000 units. An equal number of units are budgeted for each month. During April, 84,000 packages (units) were produced, and $66,000 was spent on fixed overhead. Required: a. Determine the fixed overhead rate for 2022 based on direct labour-hours. b. Determine the fixed overhead static-budget variance for April. c. Determine the production-volume overhead variance for April. Answer: a. Fixed overhead rate = $768,000/480,000 = $1.60 per hour b.
Fixed overhead static budget variance = $66,000 - $768,000/12 $66,000 - $64,000 = $2,000 unfavourable
c.
Budgeted fixed overhead rate per output unit = $768,000/960,000 = $0.80 Denominator level in output units = (80,000 - 84,000) × $0.80 = $3,200 favourable
Diff: 2 Type: SA CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-1
54) Everjoice Company makes clocks. The budgeted fixed overhead costs for 2022 total $720,000. The company uses direct labour-hours for fixed overhead allocation and anticipates 240,000 hours during the year for 480,000 units. An equal number of units are budgeted for each month. During June, 42,000 clocks were produced and $63,000 was spent on fixed overhead. Required: a. Determine the fixed overhead rate for 2022 based on units of input. b. Determine the fixed overhead static-budget variance for June. c. Determine the production-volume overhead variance for June. Answer: a. Fixed overhead rate = $720,000/240,000 = $3.00 per hour b.
Fixed overhead static-budget variance = $63,000 - ($720,000/12) = $3,000 unfavourable
c.
Budgeted fixed overhead rate per output unit = $720,000/480,000 = $1.50 Denominator level in output units = (40,000 - 42,000) × $1.50 = $3,000 favourable
Diff: 2 Type: SA CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-1
55) Calculate the fixed manufacturing overhead rate variance based on the following data: Fixed manufacturing overhead allocated $65,000 debit Fixed manufacturing production-volume variance $20,000 debit Variable manufacturing overhead rate variance $4,000 Unfavourable Fixed manufacturing overhead control $135,000 credit Answer: $135,000 - 65,000 - 20,000 = $50,000 Unfavourable. Diff: 2 Type: SA CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-1
56) Brown Company makes watches. The budgeted fixed overhead costs for 2022 total $324,000. The company uses direct labour-hours for fixed overhead allocation and anticipates 10,800 hours during the year for 540,000 units. An equal number of units are budgeted for each month. During October, 48,000 watches were produced and $28,000 was spent on fixed overhead. Required: a. Determine the fixed overhead rate for 2022 based on the units of input. b. Determine the fixed overhead static-budget variance for October. c. Determine the production-volume overhead variance for October. Answer: a. Fixed overhead rate = $324,000/10,800 = $30.00 per hour b.
Fixed overhead static-budget variance = $28,000 - ($324,000/12) = $1,000 unfavourable
c.
Budgeted fixed overhead rate per output unit = $324,000/540,000 = $0.60 Denominator level in output units = (45,000 - 48,000) × $0.60 = $1,800 favourable
Diff: 2 Type: SA CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-1
57) The Saskatchewan division of a Canadian farm machinery company uses a standard cost system for its machine-based production of grain drying equipment. Data regarding production for April are as follows: Variable manufacturing overhead costs incurred Variable manufacturing overhead costs allocation rate Fixed manufacturing overhead costs incurred Fixed manufacturing overhead budgeted Denominator level machine hours Standard machine hours allowed per unit of output Units produced Actual machine-hours used Ending work-in-process inventory
$ 549,600 $750 per machine hour $86,500 $90,000 800 hours 40 hours 22 units 820 hours nil
Required: 1. Prepare the necessary journal entries to account for the fixed manufacturing overhead incurred and allocated to production. 2. Prepare the journal entry to close the fixed overhead variance accounts assuming that the fluctuation in denominator level is considered to be normal. Answer: 1. Fixed manufacturing overhead journal entries
2.
Dr. Fixed Manufacturing Overhead Control Cr. Accounts Payable, etc.
86,500
Dr. WIP Control Cr. Fixed Overhead Allocated 22 units × ($90,000/20 units) = $99,000
99,000
Dr. Fixed Manufacturing Overhead Allocated Cr. Fixed Overhead Rate Variance Cr. Production-volume Variance Cr. Fixed Manufact. Overhead Control
99,000
86,500
99,000
3,500 9,000 86,500
Close variance accounts Dr. Fixed Overhead Rate Variance Dr. Production-volume Variance Cr. Cost of Goods Sold
3,500 9,000 12,500
Diff: 2 Type: SA CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-1
58) Mostly Miniatures has just implemented a new cost accounting system that provides two variances for fixed manufacturing overhead. While the company's managers are familiar with the concept of staticbudget variance, they are unclear as to how to interpret the production-volume overhead variances. Currently the company has a production capacity of 54,000 miniatures a month although it generally produces only 46,000 cases. However, in any given month the actual production is probably something other than 46,000. Required: a. Does the production-volume overhead variance measure the difference between the 54,000 and 46,000, or the difference between the 46,000 and the actual monthly production? Explain. b. What advice can you provide the managers that will help them interpret the production-volume overhead variances? Answer: a. It is the difference between the 46,000 and the actual production level for the period. The difference between the 54,000 and the 46,000 is the unused capacity that was planned for the period. The difference between the 46,000 and the actual level was not planned. b. When actual outputs are less than the denominator level, the production-volume variance is unfavourable. This is opposite the label given other variances that have a favourable label when costs are less than the budgeted amount; therefore, caution is needed. The production-volume variance is favourable when actual production exceeds what was planned for the period. This actually provides for a cost per unit amount that was less than budgeted using the planned denominator. Diff: 2 Type: ES CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-1
59) What are the arguments for prorating a production-volume variance that has been deemed to be material among work-in-process, finished goods, and cost of goods sold, as opposed to writing it all off to cost of goods sold? Answer: If variances are always written off to cost of goods sold, a company could set its standards to either increase (for financial reporting purposes) or decrease (for tax purposes) operating incomes. The proration method has the effect of approximating the allocation of fixed costs based on actual costs and actual output so it is not susceptible to the manipulation of operating income based on the choice of the denominator level. Diff: 2 Type: ES CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-1
60) Explain two concerns when interpreting the production-volume variance as a measure of the
economic cost of unused capacity. Answer: The first concern would be the fact that management might have maintained some extra capacity to meet uncertain demand surges that are important to satisfy. If these surges are not occurring in a given year an unfavourable production-volume variance might occur. The second concern would be to note that this variance only focuses on fixed overhead costs, and ignores the possibility that price decreases might have been necessary to spur the extra demand to make use of any idle capacity. Diff: 2 Type: ES CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-1
61) Explain why there is no efficiency variance for fixed manufacturing overhead costs. Answer: There is no efficiency variance for fixed overhead costs because a given lump sum of fixed costs will be unaffected by how efficiently machine-hours are used to produce output in a given budget period. Diff: 2 Type: ES CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-1
62) How is a budgeted fixed overhead cost rate calculated? Answer: The budgeted fixed overhead cost rate is calculated by dividing the budgeted fixed overhead costs by the denominator level of the cost allocation base. Diff: 2 Type: ES CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1
63) Explain the meaning of a favourable production-volume variance. Answer: The production-volume variance is favourable when actual production exceeds that which is planned for the period. When this happens, it results in a fixed cost per unit that is less than budgeted amount using the planned production. Diff: 3 Type: ES CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1
64) Describe if the production-volume variance is favourable or unfavourable for each of the following situations; and, provide the ASPE/IFRS treatment for the disposition of the variance. 1. actual output is less than expected 2. actual output is more than expected but still considered a usual fluctuation 3. actual output is more than expected and is abnormally high Answer: 1. unfavourable; expense to cost of goods sold 2. favourable; offset to cost of goods sold 3. favourable; apply to inventories Diff: 3 Type: ES CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1
8.2 Establish variable overhead cost allocation rates; calculate and analyze flexible-budget variances. 1) Using a standard costing system makes it possible to use a simple recording system. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-2
2) Variable overhead rate variance is the difference between the actual amount of variable overhead incurred and the budgeted amount allowed for the actual quantity of the variable overhead allocation base used for the actual output units achieved. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-2
3) When separate variable and fixed manufacturing overhead control accounts are used for job costing, it is not necessary to have separate overhead allocated accounts. Answer: FALSE Explanation: Control accounts need to balance with their subsidiary ledgers so separate allocation accounts are required. A single overhead account that is not a control account could have both actual and allocated costs. Diff: 2 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1; 8-2
4) If a manager views the proration approach as not being cost-effective, then adjusting cost of goods sold is acceptable provide the amount is material. Answer: FALSE Explanation: Proration should be used when the amount is material. Diff: 2 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-1; 8-2
5) An unfavourable variable overhead rate variance can be the result of paying lower prices than budgeted for variable overhead items such as energy. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-2
6) The variable overhead efficiency variance is computed in a different way than the efficiency variance for direct-cost items. Answer: FALSE Explanation: The variable overhead efficiency variance is computed the same way as the efficiency variance for direct-cost items. Diff: 1 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-2
7) The variable overhead flexible-budget variance measures the difference between standard variable overhead costs and flexible-budget variable overhead costs. Answer: FALSE Explanation: The variable overhead flexible-budget variance measures the difference between the actual variable overhead costs and the flexible-budget variable overhead costs. Diff: 1 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-2
8) The variable overhead efficiency variance measures the efficiency with which the cost-allocation base is used. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-2
9) The variable overhead efficiency variance can be interpreted the same way as the efficiency variance for direct-cost items. Answer: FALSE Explanation: The interpretations are different. The variable overhead efficiency variance focuses on the quantity of allocation-base used, while the efficiency variance for direct-cost items focuses on the quantity of materials and labour-hours used. Diff: 2 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-2
10) There is causal relationship between the variable overhead allocation base and the variable overhead cost pool. Answer: FALSE Explanation: The relationship is not causal but rather one of cost and benefit. Diff: 2 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-2
11) Effective planning of variable overhead costs means that a company performs those variable overhead costs that primarily add value A) for the current shareholders. B) for the customer using the products or services. C) for plant employees. D) for major suppliers of component parts. E) for management. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-2
12) Two of the primary ways to manage variable overhead costs include A) eliminating non-value-added costs and reducing the consumption of cost drivers. B) eliminating non-value-added costs and increasing fixed overhead expenses. C) reducing the consumption of cost drivers and increasing variable costs. D) using more energy-efficient equipment and planning for appropriate capacity levels. E) increasing variable costs and eliminating non-value added costs. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-2
13) If budgeted machine-hours allowed per actual output unit equals 1.0 hour, and budgeted variable manufacturing overhead per machine-hour is $200, what is the budgeted variable manufacturing overhead rate per output unit? A) $100 B) $200 C) $300 D) $400 E) $500 Answer: B Explanation: 1.00 MH × $200 = $200 Diff: 1 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-2
14) What is the variable manufacturing overhead static-budget variance given the following information? Actual output units produced Actual machine-hours used Actual variable manufacturing overhead costs Budgeted variable manufacturing overhead costs Budgeted output units
28,000 units 10,000 hours $300,000 $250,000 25,000 units
A) $20,000 favourable B) $20,000 unfavourable C) $50,000 unfavourable D) $50,000 favourable E) $55,000 favourable Answer: C Explanation: $300,000 - $250,000 = $50,000 unfavourable Diff: 1 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-2
Use the information below to answer the following question(s). Moeller Electric manufactures light fixtures. The following information pertains to the company's manufacturing overhead data. Budgeted output units Budgeted machine-hours Budgeted variable manufacturing overhead costs for 30,000 fixtures
34,000 fixtures 10,000 hours
Actual output units produced Actual machine-hours used Actual variable manufacturing overhead costs
44,000 fixtures 10,000 hours
$80,625
$131,000
15) What is Moeller Electric's variable manufacturing overhead static-budget variance? A) $2,750 favourable B) $2,750 unfavourable C) $40,375 favourable D) $50,375 unfavourable E) $44,000 unfavourable Answer: D Explanation: $131,000 - $80,625 = $50,375 unfavourable Diff: 1 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-2
16) What is Moeller Electric's variable manufacturing overhead sales-volume variance? A) $2,750.00 favourable B) $37,625.00 favourable C) $23,713.20 unfavourable D) $40,375.80 favourable E) $40,375.00 unfavourable Answer: C Explanation: (44,000 - 34,000) × ($80,625/34,000) = $23,713.20 unfavourable Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-2
17) What is the variable manufacturing overhead flexible-budget variance? A) $387.00 favourable B) $2,363.00 unfavourable C) $2,363.80 favourable D) $2,750.00 favourable E) $26,661.80 unfavourable Answer: E Explanation: $131,000 - [44,000 × ($80,625/34,000)] = $26,661.80 unfavourable Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-2
18) Assume that variable manufacturing overhead is allocated according to machine-hours. Aladdin Company expects to produce 400 cases of Product A using 400 machine-hours. Each machine hour is expected to take 10 KWH of electricity, which costs $6 per KWH. What is the maximum amount the company would be willing to pay for the new machine based solely on rate and efficiency variances if a new energy-efficient machine only used 8 KWH per machine-hour? A) $120 B) $4,680 C) $4,920 D) $4,800 E) $4,120 Answer: D Explanation: BVOHR = 10 KWH/MH × $6/KWH = $60 per MH AVOHR = 8 KWH/MH × $6/KWH = $48 per MH VOH Flexible Variance = ($60 - $48) × 400 MH = $4,800 favourable Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-2
19) Candy Machine Shop used 15,000 machine hours during January. It takes 0.90 machine-hours to produce one unit; 15,000 units were produced during the month. Budgeted production included 12,000 units, using 10,800 machine hours. Budgeted variable manufacturing overhead costs per machine-hour is $22.50. What is the variable overhead efficiency variance for Candy? A) $67,500 unfavourable B) $67,500 favourable C) $37,000 favourable D) $33,750 favourable E) $33,750 unfavourable Answer: E Explanation: VOHEF = [15,000 MH - (15,000 × 0.90)] × ($22.50) = $33,750 unfavourable Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-2
20) A favourable variable manufacturing overhead efficiency variance may be interpreted as meaning which of the following if machine hours are the cost allocation base? A) Employees used too much electricity during production. B) Improved quality of materials resulting in less downtime to clean the machines of debris. C) Excess supplies were used. D) Too much of the cost driver was used. E) The cost driver is inappropriate. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-2
21) If Ferg Company has a $12,000 unfavourable variable overhead efficiency variance, which of the following statements would be TRUE? A) Ferg would credit the Cost of Goods Sold account to write-off the variance. B) Ferg used the variable overhead components more effectively than expected. C) Ferg made efficient use of the cost driver. D) Ferg used the variable overhead components and cost driver as expected. E) Ferg did not use the cost driver efficiently. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-2
22) A leased factory building has a fixed monthly rental payment, and a variable overhead cost of energy and indirect labour. Which of the following is TRUE, assuming that all activity levels are within the relevant range? A) Variable OVH costs will increase as production increases, but Fixed OVH costs will decrease. B) Variable OVH costs will decrease as production increases, but Fixed OVH costs will increase. C) Variable OVH costs will increase as production increases, and Fixed OVH costs will increase. D) Variable OVH costs will increase as production increases, but Fixed OVH costs will remain constant. E) Both will increase with production, but at different rates. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-1; 8-2
23) During October Foxmore Inc. used $250,000 in manufacturing overhead costs, of which $66,500 was variable. Budgeted manufacturing overhead was $229,500, of which $75,000 was variable. Which of the following entries for manufacturing overhead could have been recorded? A) Variable Manufacturing Overhead Allocated 75,000 Work -in-Process Control 75,000 B) Variable Manufacturing Overhead Allocated Accounts Payable and other accounts
75,000
C) Work-in-Process Control Accounts Payable and other accounts
66,500
D) Variable Manufacturing Overhead Control Accounts Payable and other accounts
66,500
75,000
66,500
E) Work-in-Process Control 66,500 Variable Manufacturing Overhead Allocated
66,500
66,500
Answer: D Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-2
24) If Pope Inc. uses standard costing, the overhead allocated to work-in-process is recorded as a A) debit to Manufacturing Overhead Allocated and a credit to Work-in-Process. B) debit to Work-in-Process and credit to Manufacturing Overhead Control. C) debit to Manufacturing Overhead Allocated and a credit to Manufacturing Overhead Control. D) debit to Manufacturing Overhead Control and a credit to Manufacturing Overhead Allocated. E) debit to Work-in-Process and a credits to Manufacturing Overhead Allocated. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-2
25) If Kennedy Company makes the following journal entry:
Variable Overhead Allocated Variable Overhead Efficiency Variance Variable Overhead Control Variable Overhead Rate Variance
50,000 15,000 62,500 2,500
It may be inferred that ________. A) Kennedy over-allocated variable manufacturing overhead B) the net variance is a $12,500 favourable rate variance C) actual variable manufacturing overhead costs were $62,500 D) the journal entry accounts are incorrect E) the net variance is $12,500 unfavourable Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-2
26) Which option(s) would be consistent with the proration approach for end-of-period adjustments when the underallocated or overallocated variable overhead costs are significant? A) prorate based on the allocated overhead amount in the ending balance of work-in-process inventory and cost of goods sold B) immediate write-off to cost of goods sold C) prorate based on the total ending balance of variable overhead allocated and variable overhead control D) prorate based on the allocated overhead amount in the ending balance of work-in-process inventory, finished goods inventory, and cost of goods sold E) prorate based on the total ending balance of cost of goods sold and variable overhead control Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-2
27) The variable overhead flexible-budget variance can be further subdivided into the A) price variance and the efficiency variance. B) static-budget variance and sales-volume variance. C) rate variance and production-volume variance. D) sales-volume variance and the rate variance. E) rate variance and the efficiency variance. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-2
28) A $5,000 unfavorable flexible-budget variance indicates that ________. A) the flexible-budget amount exceeded actual variable manufacturing overhead by $5,000 B) the actual variable manufacturing overhead exceeded the flexible-budget amount by $5,000 C) the flexible-budget amount exceeded standard variable manufacturing overhead by $5,000 D) the standard variable manufacturing overhead exceeded the flexible-budget amount by $5,000 Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-2
29) An unfavourable variable overhead rate variance indicates that A) variable overhead items were used efficiently. B) the price and/or use of variable overhead items was more than budgeted. C) the variable overhead cost-allocation base was not used efficiently. D) the denominator level was not accurately determined. E) the denominator level was used more than planned. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-2
30) When machine-hours are used as an overhead cost-allocation base, the LEAST likely cause of a unfavourable variable overhead rate variance is A) excessive machine breakdowns. B) the production scheduler inefficiently scheduled jobs. C) poor coordination between sales and production resulting in displacement of normal batches by. rush orders and excessive setup times. D) strengthened demand for the product. E) a decrease in the cost of energy. Answer: E Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-2
Answer the following question(s) using the information below. Carlos Corporation manufactured 1,500 chairs during June. The following variable overhead data pertain to June: Budgeted variable overhead cost per unit Actual variable manufacturing overhead cost Flexible-budget amount for variable manufacturing overhead Variable manufacturing overhead efficiency variance
$12.00 $16,800 $18,000 $360 unfavourable
31) What is the variable overhead flexible-budget variance? A) $1,200 favourable B) $360 unfavourable C) $840 favourable D) $1,200 unfavourable E) $1,560 unfavourable Answer: A Explanation: $16,800 - $18,000 = $1,200 (F) Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-2
32) What is the variable overhead rate variance? A) $840 unfavourable B) $1,200 favourable C) $1,200 unfavourable D) $1,560 favourable E) $1,560 unfavourable Answer: D Explanation: $1,200 (F) - $360 (U) = $1,560 (F) Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-2
Answer the following question(s) using the information below. Bruce Corporation manufactures industrial-sized gas furnaces and uses budgeted machine-hours to allocate variable manufacturing overhead. The following information pertains to the company's manufacturing overhead data: Budgeted output Budgeted machine-hours Budgeted variable manufacturing overhead costs for 30,000 units Actual output produced Actual machine-hours used Actual variable manufacturing overhead costs
30,000 units 10,000 hours $322,500 44,000 units 14,400 hours $484,000
33) What is the flexible-budget amount for variable manufacturing overhead? A) $330,000 B) $473,000 C) $484,000 D) $322,500 E) $464,400 Answer: B Explanation: 44,000 × ($322,500/30,000) = $473,000 Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-2
34) What is the flexible-budget variance for variable manufacturing overhead? A) $54,000 unfavourable B) $19,600 unfavourable C) $11,000 favourable D) $11,000 unfavourable E) $161,500 unfavourable Answer: D Explanation: $473,000 - $484,000 = $11,000 U Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-2
35) What is the variable overhead rate variance? A) $11,000 favourable B) $13,611 unfavourable C) $13,611 favourable D) $19,600 favourable E) $19,600 unfavourable Answer: E Explanation: [($322,500/10,000 hrs.) - ($484,000/14,400 hrs.)] × 14,400 hrs. = $19,600 U Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-2
36) What is the variable overhead efficiency variance? A) $8,600 favourable B) $8,600 unfavourable C) $141,900 favourable D) $141,900 unfavourable E) $11,000 unfavourable Answer: A Explanation: (((44,000 units × (10,000 units/30,000 hrs.)) - 14,400 hrs.) × ($322,500/10,000 hrs.) = $8,600 F Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-2
37) Arnold's Weathervane Company manufactures weathervanes. The current year operating budget is based on the production of 10,000 weathervanes with 1.25 machine-hour allowed per weathervane. Variable manufacturing overhead is anticipated to be $300,000. Actual production was 11,000 weathervanes using 12,100 machine-hours. Actual variable costs were $23.75 per machine-hour. Required: Calculate the variable overhead rate and the efficiency variances. Answer: Budgeted variable overhead per hour = $300,000/(10,000 × 1.25) machine-hours = $24 Rate variance = ($24 - $23.75) × 12,100 = $3,025 favourable Efficiency variance = [12,100 - (11,000 × 1.25)] × $24 = $39,600 favourable Diff: 3 Type: SA CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-2
38) Terillium Windows manufactures windows. The current year operating budget is based on production of 56,000 windows with 1.0 machine hours allowed per window. Variable manufacturing overhead is anticipated to be $896,000. Actual production for the year was 58,000 windows using 60,000 machine hours. Actual variable costs were $15 per machine hour. Required: Determine the variable overhead rate and efficiency variances. Answer: Budgeted variable overhead per hour = $896,000/56,000 machine hours = $16 Rate variance = ($16 - $15) × 60,000 = $60,000 favourable Efficiency variance = (60,000 - (58,000 × 1.0)) × $16 = $32,000 unfavourable Diff: 2 Type: SA CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-2
39) Heather's Pillow Company manufactures pillows. The current year operating budget is based on production of 20,000 pillows with 0.5 machine-hour allowed per pillow. Variable manufacturing overhead is anticipated to be $220,000. Actual production was 18,000 pillows using 9,500 machine-hours. Actual variable costs were $20 per machine-hour. Required: Calculate the variable overhead rate and efficiency variances. Answer: Budgeted variable overhead per hour = $220,000/(20,000 × 0.5) machine-hours = $22 Rate variance = ($22 - $20) × 9,500 = $19,000 favourable Efficiency variance = [9,500 - (18,000 × 0.5)] × $22 = $11,000 unfavourable Diff: 2 Type: SA CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-2
40) Soft Pillow Company manufactures pillows. The current year operating budget is based on production of 40,000 pillows with 0.5 machine-hour allowed per pillow. Variable manufacturing overhead is anticipated to be $440,000. Actual production was 36,000 pillows using 19,000 machine-hours. Actual variable costs were $20 per machine-hour. Required: Calculate the variable overhead rate and efficiency variances. Answer: Budgeted variable overhead per hour = $440,000/(40,000 × 0.5) machine-hours = $22 Rate variance = ($22 - $20) × 19,000 = $38,000 favourable Efficiency variance = [19,000 - (36,000 × 0.5)] × $22 = $22,000 unfavourable Diff: 2 Type: SA CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-2
41) Round Inc. manufactures parachutes. Fixed and variable manufacturing cost pools are allocated to each parachute using budgeted assembly hours. Budgeted assembly time is 4 hours per unit. The following table presents the amounts for July.
Number of parachutes produced Hours of assembly time Variable overhead cost per hour Variable overhead cost Fixed manufacturing overhead cost
Actual Results 260 988
Static Budget 240 $28
$34,580 $19,800
$20,160
Required: a. Calculate the efficiency variance for variable overhead costs. b. Calculate the rate variance for variable overhead costs. c. Calculate the rate variance for fixed overhead costs. d. Calculate the production-volume variance for fixed overhead costs. Answer: Static budget production hours = 240 units × 4 hours/unit = 960 hours Flexible budget production hours = 260 units × 4 hours/unit = 1,040 hours Actual variable overhead rate = $34,580/988 = $35 a. Variable overhead efficiency variance = (1,040 hrs. × $28) - (988 hrs. × $28) = $1,456 F b. Variable overhead rate variance = (988 hrs. × $28) - (988 hours × $35) = $6,916 U c. Fixed overhead rate variance = $20,160 - $19,800 = $360 F d. Fixed overhead production-volume variance: Fixed overhead allocation rate = $20,160/960 hrs. = $21/hr. PV variance = (1,040 hrs. × $21) - $20,160 = $1,680 F Diff: 3 Type: SA CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-2
42) Blue Elephant Jewellers planned to produce 1,800 necklaces during March with a total overhead budget of $49,600. However, while manufacturing the 2,000th necklace, the microcomputer that contained the month's cost information broke down. With the computer out of commission, the accountant has been unable to complete the variance analysis report. The missing information of the report is lettered in the following set of data: Variable overhead: Standard cost per necklace: 0.4 labour hour at $8 per hour Actual costs: $8,400 for 752 hours Flexible budget: a Total flexible-budget variance: b Variable overhead rate variance: c Variable overhead efficiency variance: d Fixed overhead: Budgeted costs: Actual costs: Flexible-budget variance: $2,000 favourable
e f
Required: Compute the missing elements in the report represented by the lettered items. Answer: a. 2,000 × 0.40 × $8 = $6,400 b.
$8,400 - $6,400 = $2,000 unfavourable
c.
$8,400 - (752 × $8) = $2,384 unfavourable
d.
$6,016 - $6,400 = $384 favourable
e.
$49,600 - (1,800 × 0.4 × $8) = $43,840
f.
$43,840 - $2,000 favourable = $41,840
Diff: 3 Type: SA CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-1; 8-2
43) McCartney Company planned to produce 900 units during April with a total overhead budget of $12,400. However, while manufacturing the 1,000th unit, the microcomputer that contained the month's cost information broke down. With the computer out of commission, the accountant has been unable to complete the variance analysis report. The information missing from the report is lettered in the following set of data: Variable overhead: Standard cost per unit: 0.4 labour hour at $4 per hour Actual costs: $2,100 for 376 hours Flexible budget: a Total flexible-budget variance: b Variable overhead rate variance: c Variable overhead efficiency variance: d Fixed overhead: Budgeted costs: Actual costs: Flexible-budget variance: $500 favourable
e f
Required: Compute the missing elements in the report represented by the lettered items. Answer: a. 1,000 × 0.40 × $4 = $1,600 b.
$2,100 - $1,600 = $500 unfavourable
c.
$2,100 - (376 × $4) = $596 unfavourable
d. $1,504 - $1,600 = $96 favourable e.
$12,400 - (900 × 0.4 × $4) = $10,960
f.
$10,960 - $500 favourable = $10,460
Diff: 3 Type: SA CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-1; 8-2
44) Teri's Furniture uses variance analysis to evaluate manufacturing overhead in its' table factory. The information for the May overhead expenditures is as follows: Budgeted output units Budgeted fixed manufacturing overhead Budgeted variable manufacturing overhead Budgeted direct manufacturing labour hours Fixed manufacturing costs incurred Direct manufacturing labour hours used Variable manufacturing costs incurred Actual units manufactured
14,000 tables $22,400 $3.00 per direct labour hour 0.2 hour per table $24,000 4,000 hours $11,000 15,000 tables
Required: a. Calculate the variable manufacturing overhead rate and efficiency variances; and, the fixed manufacturing overhead rate and production-volume variances. b. Prepare all necessary journal entries to record the actual costs, allocated costs, and variances. Keep variable and fixed entries separate. Answer: a. Variance analysis Variable overhead rate variance = $11,000 - (4,000 × $3) = $1,000 favourable Variable overhead efficiency variance = $3 × (4,000 - 3,000) = $3,000 unfavourable 15,000 units × 0.2 hours = 3,000 Fixed overhead rate variance = $24,000 - $22,400 = $1,600 unfavourable Fixed OH production-volume variance = $22,400 - (15,000 × 0.2 × $8) = $1,600 favourable $22,400/(14,000 units × 0.2 hours) = $8
b. Journal entries Variable Overhead Control Account Payable and other accounts To record actual variable construction overhead.
11,000
Fixed Overhead Control Accumulated Amortization, etc. To record actual fixed construction overhead.
24,000
Work-in-Process Control Variable Overhead Allocated
9,000
11,000
24,000
9,000
To record allocation of variable manufacturing overhead costs; 3,000 × $3 Work-in-Process Control 24,000 Fixed Overhead Allocated To record allocation of fixed manufacturing overhead costs: 15,000 × 0.2 × $8 Variable Overhead Allocated Variable Overhead Efficiency Variance Variable Overhead Rate Variance Variable Overhead Control To record variances for the period.
24,000
9,000 3,000
Fixed Overhead Allocated 24,000 Fixed Overhead Rate Variance 1,600 Fixed Overhead Production Volume Overhead Variance Fixed Overhead Control To record variances for the period.
1,000 11,000
1,600 24,000
Diff: 3 Type: SA CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-1; 8-2
45) Sam's Furniture uses variance analysis to evaluate manufacturing overhead in its' factory. The information for the June overhead expenditures is as follows: Budgeted output units Budgeted fixed manufacturing overhead Budgeted variable manufacturing overhead Budgeted direct manufacturing labour hours Fixed manufacturing costs incurred Direct manufacturing labour hours used Variable manufacturing costs incurred Actual units manufactured
22,000 chairs $26,400 $2.50 per direct labour hour 0.3 hour per chair $25,300 7,600 hours $17,100 19,000 chairs
Required: a. Calculate the variable manufacturing overhead rate and efficiency variances; and, the fixed manufacturing overhead rate and production-volume variances. b. Prepare all necessary journal entries to record the actual costs, allocated costs, and variances. Keep variable and fixed entries separate. Answer: a. Variance analysis Variable overhead rate variance = $17,100 - (7,600 × $2.50) = $1,900 favourable Variable overhead efficiency variance = $2.50 × (5,700 - 7,600) = $4,750 unfavourable 19,000 units × 0.3 hours = 5,700 budgeted hrs. allowed per unit Fixed overhead rate variance = $26,400 - $25,300 = $1,100 favourable Fixed OH production-volume variance = $26,400 - (19,000 × 0.3 × $4) = $3,600 unfavourable $26,400/(22,000 units × 0.3 hours) = $4
b. Journal entries Variable Overhead Control Account Payable and other accounts To record actual variable construction overhead.
17,100
Fixed Overhead Control Accumulated Amortization, etc. To record actual fixed construction overhead.
25,300
17,100
25,300
Work-in-Process Control 14,250 Variable Overhead Allocated To record allocation of variable manufacturing overhead costs
14,250
Work-in-Process Control 22,800 Fixed Overhead Allocated To record allocation of fixed manufacturing overhead costs
22,800
Variable Overhead Allocated Variable Overhead Efficiency Variance Variable Overhead Rate Variance Variable Overhead Control To record variances for the period.
14,250 4,750
Fixed Overhead Allocated Fixed Overhead Production Volume Overhead Variance Fixed Overhead Rate Variance Fixed Overhead Control To record variances for the period.
22,800 3,600
1,900 17,100
1,100 25,300
Diff: 3 Type: SA CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-1; 8-2
46) Lungren has allocated budgeted construction overhead for August of $260,000 for variable costs and $440,000 for fixed costs. Actual costs for the month totalled $275,000 for variable and $445,000 for fixed. Allocated fixed overhead totalled $440,000. The company tracks each item in an overhead control account before allocations are made to individual jobs. Rate variances for August were $10,000 unfavourable for variable and $10,000 unfavourable for fixed. The production-volume overhead variance was $5,000 favourable. Required: a. Prepare journal entries for the actual costs incurred. b. Prepare journal entries to record the variances for August. Answer: a. Variable Overhead Control $275,000 Account Payable and other accounts To record actual variable construction overhead. Fixed Overhead Control Accumulated Amortization, etc. To record actual fixed construction overhead. b. Variable Overhead Allocated Variable Overhead Rate Variance Variable Overhead Efficiency Variance* Variable Overhead Control To record variances for the period.
$275,000
$445,000 $445,000
$260,000 10,000 5,000 $275,000
*arrived at this number by default Fixed Overhead Allocated Fixed Overhead Rate Variance Fixed Overhead Production-Volume Variance Fixed Overhead Control To record variances for the period.
$440,000 10,000 $5,000 445,000
Diff: 3 Type: SA CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-1; 8-2
47) The Saskatchewan division of a Canadian farm machinery company uses a standard cost system for its machine-based production of grain drying equipment. Data regarding production for April are as follows: Variable manufacturing overhead costs incurred Variable manufacturing overhead costs allocation rate Fixed manufacturing overhead costs incurred Fixed manufacturing overhead budgeted Denominator level machine hours Standard machine hours allowed per unit of output Units produced Actual machine-hours used Ending work-in-process inventory
$ 549,600 $750 per machine hour $86,500 $90,000 800 hours 40 hours 22 units 820 hours nil
Required: 1. Prepare the necessary journal entries to account for the variable manufacturing overhead incurred and allocated to production. 2. Prepare the journal entry to close the variable overhead variance accounts under the assumption that the amount is immaterial. Answer: 1. Fixed manufacturing overhead journal entries Dr. Variable Manufacturing Overhead Control Cr. Accounts Payable
549,600 549,600
Dr. WIP Control 660,000 Cr. Variable Manufact. Overhead Allocated 22 units × ($750 × 40 hours) = $660,000 Dr. Variable Manufacturing Overhead Allocated Cr. Variable Overhead Efficiency Variance Cr. Variable Overhead Rate Variance Cr. Variable Manufact. Overhead Control 2.
660,000
660,000 45,000 65,400 549,600
Close variance accounts Dr. Variable Overhead Rate Variance Dr. Variable Overhead Efficiency Variance Cr. Cost of Goods Sold
65,400 15,000 80,400
Diff: 3 Type: SA CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-2
48) The Ontario division of a Canadian farm machinery company uses a standard cost system for its machine-based production of grain drying equipment. Data regarding production for April are as follows: Variable manufacturing overhead costs incurred Variable manufacturing overhead costs allocation rate Fixed manufacturing overhead costs incurred Fixed manufacturing overhead budgeted Denominator level machine hours Standard machine hours allowed per unit of output Units produced Actual machine-hours used Ending work-in-process inventory
$ 559,650 $600 per machine hour $86,500 $90,000 500 hours 15 hours 65 units 910 hours nil
Required: 1. Prepare the necessary journal entries to account for the variable manufacturing overhead incurred and allocated to production. 2. Prepare the journal entry to close the variable overhead variance accounts under the assumption that the amount is immaterial. Answer: 1. Fixed manufacturing overhead journal entries Dr. Variable Manufacturing Overhead Control Cr. Accounts Payable
559,650 559,650
Dr. WIP Control 585,000 Cr. Variable Manufact. Overhead Allocated 65 units × ($600 × 15 hours) = $585,000
585,000
Dr. Variable Manufacturing Overhead Allocated 585,000 Cr. Variable Overhead Rate Variance 13,650 Cr. Variable Overhead Efficiency Variance Cr. Variable Manufact. Overhead Control rate variance = (910 × $600) - $559,650 = $13,650 U efficiency variance = (65 units × 15 hrs. × $600) - (910 hrs. × $600) = 39,000 F
39,000 559,650
2.
Close variance accounts Dr. Variable Overhead Efficiency Variance Cr. Variable Overhead Rate Variance Cr. Cost of Goods Sold
39,000 13,650 25,350
Diff: 3 Type: SA CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-2
49) Can the variable overhead efficiency variance a. be computed the same way as the efficiency variance for direct-cost items? b. be interpreted the same way as the efficiency variance for direct-cost items? Explain. Answer: a. Yes, the variable overhead efficiency variance can be computed the same way as the efficiency variance for direct-cost items. b. No, the interpretations are different. The variable overhead efficiency variance focuses on the quantity of allocation-base used, while the efficiency variance for direct-cost items focuses on the quantity of materials and labour-hours used. Diff: 2 Type: ES CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-2
50) Briefly explain the meaning of the variable overhead efficiency variance and the variable overhead rate variance. Answer: The variable overhead efficiency variance is the difference between actual quantity of the costallocation base used and the budgeted amount of the cost allocation base that should have been used to produce the actual output, multiplied by budgeted variable overhead cost per unit of the cost-allocation base. The efficiency variance for variable overhead cost is based on the efficiency with which the cost allocation base was used to make the actual output. The variable overhead rate variance is the difference between the actual variable overhead cost per unit of the cost-allocation base and the budgeted variable overhead cost per unit of the cost-allocation base, multiplied by actual quantity of the variable overhead cost-allocation base used for actual output. The meaning of this variance hinges on an explanation of why the per unit cost of the allocation base is lower or higher than the amount budgeted. Some explanations might include different-than-budgeted prices for the individual inputs to variable overhead or perhaps more efficient usage of some of the variable overhead items. Diff: 2 Type: ES CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-2
51) Briefly explain why a favourable variable overhead rate variance may not always be desireable. Answer: The variable overhead rate variance is the difference between the actual variable overhead cost per unit of the cost-allocation base and the budgeted variable overhead cost per unit of the cost-allocation base, multiplied by the actual quantity of the variable overhead cost-allocation base used for the actual output. If a favourable variable overhead rate variance had been obtained by the managers of the company purchasing low-priced, poor-quality indirect materials, hired less talented supervisors, or performed less machine maintenance there could be negative future consequences. The long-run prospects for the business may suffer as the company ends up putting out a lower quality product, or it may end up having very large equipment repairs as a result of cutting corners in the short term. Diff: 2 Type: ES CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-2
52) How can a standard costing system be useful in negotiating new sales? Answer: Standard costs, with the resulting variance analysis, assist companies in identifying problems, and thus in reducing actual costs. Lower costs in turn, give a company more leeway in negotiations of prices that must be charged for a sale to be profitable and in meeting competitive pressures. Where a company has customers that vary greatly in terms of sizes of orders, the related costs of manufacturing can likewise vary considerably. The company obviously needs information on costs for each of the various situations in order to be able to determine the prices it must charge Diff: 2 Type: ES CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-1; 8-2
8.3 Calculate activity-based cost (ABC) overhead variances. 1) Batch-level costs are resources sacrificed on activities that are related to individual units of product(s) or service(s). Answer: FALSE Explanation: Batch-level costs are resources sacrificed on activities that are related to a group of units of product(s) or service(s) rather than to each individual unit of product or service. Diff: 1 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-3
2) One possible reason for unfavorable variable overhead efficiency variance for materials handling is ________. A) inefficient layout of product distribution channels B) loosely budgeted standard hours C) very low wait time at work centers D) very tight standards for materials-handling time Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-3
Answer the following question(s) using the information below. Munoz Inc. produces a special line of plastic toy race cars in batches. To manufacture a batch of the cars, Munoz Inc. must setup the machines and molds. Setup costs are batch-level costs because they are associated with batches rather than individual units of products. A separate Setup Department is responsible for setting up machines and molds for different styles of car. Setup overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of setup hours. The following information pertains to June 2022:
Units produced and sold Batch size (number of units per batch) Setup hours per batch Variable overhead cost per setup hour Total fixed setup overhead costs
Actual Amounts 15,000 250 5 $40 $14,400
Static-budget Amounts 11,250 225 5.25 $38 $14,000
3) Calculate the efficiency variance for variable setup overhead costs. A) $1,900 unfavourable B) $600 favourable C) $1,900 favourable D) $600 unfavourable E) $400 unfavourable Answer: C Explanation: {[(15,000/250) × 5] - [(15,000/225) × 5.25] } × $38 = $1,900 (F) Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-3
4) Calculate the rate variance for variable setup overhead costs. A) $1,900 unfavourable B) $1,900 favourable C) $400 unfavourable D) $600 favourable E) $600 unfavourable Answer: E Explanation: (15,000/250) × 5 × ($38 - $40) = $600 (U) Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-3
5) Calculate the flexible-budget variance for variable setup overhead costs. A) $600 unfavourable B) $1,300 favourable C) $600 favourable D) $1,300 unfavourable E) $400 unfavourable Answer: B Explanation: $1,900 (F) - $600 (U) = $1,300 (F) Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-3
6) Calculate the rate variance for fixed setup overhead costs. A) $1,600 unfavourable B) $400 unfavourable C) $600 unfavourable D) $400 favourable E) $600 favourable Answer: B Explanation: $14,000 - $14,400 = $400 (U) Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-3
7) Calculate the production-volume variance for fixed setup overhead costs.
A) $4,666.67 unfavourable B) $400 unfavourable C) $1,600 unfavourable D) $4,666.67 favourable E) $400 favourable Answer: D Explanation: Normal setup hours = (11,250/225) × 5.25 = 262.5 hours OH rate = $14,000/262.5 = $53.33 per setup hour [(15,000/225) × 5.25 × $53.33] - $14,000 = $4,666.67 favourable Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-3
Answer the following question(s) using the information below. Lukehart Industries Inc. produces air purifiers in batches. To manufacture a batch of the purifiers, Lukehart Inc. must set up the machines and assembly line tooling. Setup costs are batch-level costs because they are associated with batches rather than individual units of products. A separate Setup Department is responsible for setting up machines and tooling for different models of the air purifiers. Setup overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of setup hours. The following information pertains to June 2022:
Units produced and sold Batch size (number of units per batch) Setup hours per batch Variable overhead cost per setup hour Total fixed setup overhead costs
Budget Amounts 10,000 400 6 $50 $18,250
Actual Amounts 9,500 375 5.5 $52 $17,750
8) Calculate the efficiency variance for variable setup overhead costs. A) $158.30 favourable B) $114.00 favourable C) $264.30 unfavourable D) $264.00 favourable E) $250.00 favourable Answer: A Explanation: {[(9,500/375) × 5.5] - [(9,500/400) × 6] } × $50 = $158.30 (F) Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-3
9) Calculate the rate variance for variable setup overhead costs. A) $150.30 unfavourable B) $150.70 favourable C) $278.70 unfavourable D) $264.00 favourable E) $114.00 favourable Answer: C Explanation: (9,500/375) × 5.5 × ($50 - $52) = $278.7 (U) Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-3
10) Calculate the flexible-budget variance for variable setup overhead costs. A) $114.00 favourable B) $264.00 favourable C) $264.30 unfavourable D) $120.40 unfavourable E) $150.00 unfavourable Answer: D Explanation: $158.30 - $278.70 = $120.40 (U) Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-3
11) Calculate the rate variance for fixed setup overhead costs. A) $114 unfavourable B) $150 unfavourable C) $250 unfavourable D) $150 favourable E) $500 favourable Answer: E Explanation: $18,250 - $17,750 = $500 (F) Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-3
12) Calculate the production-volume variance for fixed setup overhead costs. A) $1,800.00 favourable B) $912.50 unfavourable C) $250.50 unfavourable D) $250.00 favourable E) $114.00 unfavourable Answer: B Explanation: Normal setup hours = (10,000/400) × 6 = 150 hours OH rate = $18,250/150 = $121.67 per setup hour [(9,500/400) × 6 × $121.67] - $18,250 = $912.50 (U) Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-3
13) Fixed and variable cost variances can ________ be applied to activity-based costing systems. A) occasionally B) always C) seldom D) most times E) never Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-3
Answer the following question(s) using the information below. Your Foot Ltd. delivers shoes in batches. The following information pertains to shipping dance shoes in June: Static-budget Amounts Pairs of shoes shipped 100,000 Batch size (number of pairs per pallet) 400 Packing hours per pallet 0.50 Variable overhead cost per packing hour $16 Total shipping fixed overhead costs $4,500
Actual Amounts 120,000 500 0.40 $15 $5,300
14) What is the Your Foot Ltd. efficiency variance for variable shipping overhead costs? A) $864 F B) $464 F C) $560 F D) $864 U E) $464 U Answer: A Explanation: ((120,000/400) × 0.50 × $16) - ((120,000/500) × 0.40 × $16 ) = $864 (F) Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-3
15) What is the Your Foot Ltd. rate variance for variable shipping overhead costs? A) $150 U B) $150 F C) $560 F D) $96 F E) $96 U Answer: D Explanation: ((120,000/500) × 0.40) × ($16 - $15) = $96 (F) Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-3
16) What is the Your Foot Ltd. rate variance for fixed shipping overhead costs? A) $900 U B) $600 F C) $800 U D) $800 F E) $600 U Answer: C Explanation: $4,500 - $5,300 = $800 U Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-3
17) What is the Your Foot Ltd. production-volume variance for fixed shipping overhead costs? A) $700 U B) $900 F C) $600 U D) $800 F E) $1,000 F Answer: B Explanation: Static budget packing hours = (100,000/400) × 0.50 =125 hours Budget OH rate = $4,500/125 hours = $36 per pallet $4,500 - ((120,000/400) × 0.50 × $36) = 900 (F) Diff: 3 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-3
18) Brown Dental Equipment uses a flexible budget for its indirect manufacturing costs. For 2022, the company anticipated that it would produce 36,000 components with 7,000 machine hours and 14,400 employee days. The costs and cost drivers were to be as follows:
Product handling Inspection Utilities Maintenance Supplies
Fixed $30,000 8,000 400 1,000
Variable $0.20 4.00 2.00 0.10 2.50
Cost driver per unit per 100-unit batch per 100-unit batch per machine hour per employee day
During the year, the company processed 40,000 units, worked 15,000 employee days, and had 8,000 machine hours. The actual costs for 2022 were:
Product handling Inspection Utilities Maintenance Supplies
Actual costs $38,400 10,000 1,420 1,400 36,800
Required: a. Prepare an overhead static budget for 2022 with variances. b. Prepare an overhead flexible budget for 2022 with variances.
Answer: a. Brown Dental Equipment Overhead Static Budget with Variances Static Actual Budget Product handling $38,400 $37,200 Inspection 10,000 9,440 Utilities 1,420 1,120 Maintenance 1,400 1,700 Supplies 36,800 36,000 Total $88,020 $85,460
Variances $1,200 U 560 U 300 U 300 F 800 U $2,560 U
b. Brown Dental Equipment Overhead Flexible Budget with Variances Flexible Actual Budget Product handling $38,400 $38,000 Inspection 10,000 9,600 Utilities 1,420 1,200 Maintenance 1,400 1,800 Supplies 36,800 37,500 Total $88,020 $88,100
Variances $400 U 400 U 220 U 400 F 700 F $80 F
Diff: 2 Type: SA CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-3
19) Jael Equipment uses a flexible budget for its indirect manufacturing costs. For 2022, the company anticipated that it would produce 18,000 units with 3,500 machine-hours and 7,200 employee days. The costs and cost drivers were to be as follows:
Product handling Inspection Utilities Maintenance Supplies
Fixed $30,000 8,000 400 1,000
Variable $0.40 8.00 4.00 0.20 5.00
Cost Driver per unit per 100-unit batch per 100-unit batch per machine-hour per employee day
During the year, the company processed 20,000 units, worked 7,500 employee days, and had 4,000 machine hours. The actual costs for 2022 were:
Product handling Inspection Utilities Maintenance Supplies
Actual $36,000 9,000 1,600 1,200 37,500
Required: a. Prepare the static-budget using the overhead items above and then compute the static-budget variances. b. Prepare the flexible-budget using the overhead items above and then compute the flexible-budget variances.
Answer: a. Jael Equipment Overhead Static Budget with Variances
Product handling Inspection Utilities Maintenance Supplies Total
Actual $36,000 9,000 1,600 1,200 37,500 $85,300
Static Budget $37,200 9,440 1,120 1,700 36,000 $85,460
Variances $1,200 F 440 F 480U 500 F 1,500U $160 F
b. Jael Equipment Overhead Flexible Budget with Variances
Product handling Inspection Utilities Maintenance Supplies Total
Actual $36,000 9,000 1,600 1,200 37,500 $85,300
Flexible Budget $38,000 9,600 1,200 1,800 37,500 $88,100
Variances $2,000 F 600 F 400U 600 F 0 $2,800 F
Diff: 2 Type: SA CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-3
20) Cool Corporation produces a special line of basketball hoops in batches. To manufacture a batch of the basketball hoops, Cool Corporation must set up the machines and moulds. Setup costs are batch-level costs because they are associated with batches rather than individual units of products. A separate Setup Department is responsible for setting up machines and moulds for different styles of basketball hoops. Setup overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of setup hours. The following information pertains to January.
Basketball hoops produced and sold Batch size (number of units per batch) Setup hours per batch Variable overhead cost per setup hour Total fixed setup overhead costs
Static-budget Amounts 30,000 200 5 $10 $22,500
Actual Amounts 28,000 250 4 $9 $21,000
Required: a. Calculate the efficiency variance for variable setup overhead costs. b. Calculate the rate variance for variable setup overhead costs. c. Calculate the flexible-budget variance for variable setup overhead costs. d. Calculate the rate variance for fixed setup overhead costs. e. Calculate the production-volume variance for fixed setup overhead costs. Answer: a. ((28,000/250) × 4 × $10) - ((28,000/200) × 5 × $10) = $2,520 (F) b.
(28,000/250) × 4 × ($9 - $10) = $448 (F)
c.
$2,520 (F) + $448 (F) = $2,968 (F)
d. $22,500 - $21,000 = $1,500 (F) e.
Normal setup-hours = (30,000/200) × 5 = 750 hours OH rate = $22,500/750 = $30 per setup-hour $22,500 - ((28,000/200) × 5 × $30) = $1,500 (U)
Diff: 3 Type: SA CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-3
21) Shampion Corporation produces a special line of hockey sticks in batches. To manufacture a batch of the hockey sticks, Shampion Corporation must set up the machines and moulds. Setup costs are batchlevel costs because they are associated with batches rather than individual units of products. A separate Setup Department is responsible for setting up machines and moulds for different styles of hockey sticks. Setup overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of setup hours. The following information pertains to January.
Hockey sticks produced and sold Batch size (number of units per batch) Setup hours per batch Variable overhead cost per setup hour Total fixed setup overhead costs
Static-budget Amounts 20,000 200 3 $12 $15,000
Actual Amounts 24,000 250 2 $11 $17,000
Required: a. Calculate the efficiency variance for variable setup overhead costs. b. Calculate the rate variance for variable setup overhead costs. c. Calculate the flexible-budget variance for variable setup overhead costs. d. Calculate the rate variance for fixed setup overhead costs. e. Calculate the production-volume variance for fixed setup overhead costs. Answer: a. ((24,000/200) × 3 × $12) - ((24,000/250) × 2 × $12) = $2,016 (F) b.
((24,000/250) × 2) × ($12 - $11) = $192 (F)
c.
$2,016 (F) + $192 (F) = $2,208 (F)
d. $15,000 - $17,000 = 2,000 (U) e.
Normal setup-hours = (20,000/200) × 3 = 300 hours OH rate = $15,000/300 = $50 per setup-hour $15,000 - ((24,000/200) × 3 × $50) = 3,000 (F)
Diff: 3 Type: SA CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-3
22) Luxury Ltd. delivers shoes in batches. The following information pertains to shipping soccer shoes in May: Static-budget Amounts Pairs of shoes shipped 200,000 Batch size (number of pairs per pallet) 400 Packing hours per pallet 0.25 Variable overhead cost per packing hour $15 Total shipping fixed overhead costs $1,500
Actual Amounts 240,000 500 0.30 $17 $2,500
Required: a. Calculate the efficiency variance for variable shipping overhead costs. b. Calculate the rate variance for variable shipping overhead costs. c. Calculate the rate variance for fixed shipping overhead costs. d. Calculate the production-volume variance for fixed shipping overhead costs. Answer: a. ((240,000/400) × 0.25 × $15) - ((240,000/500) × 0.30 × $15 ) = $90 (F) b.
((240,000/500) × 0.30) × ($15 - $17) = $288 (U)
c.
$1,500 - $2,500 = 1,000 (U)
d. Static budget packing hours = (200,000/400) × 0.25 =125 hours Budget OH rate = $1,500/125 hours = $12 per pallet $1,500 - ((240,000/400) × 0.25 × $12) = 300 (F) Diff: 3 Type: SA CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-3
23) Speedwalk Ltd. delivers shoes in batches. The following information pertains to shipping dance shoes in June: Static-budget Amounts Pairs of shoes shipped 100,000 Batch size (number of pairs per pallet) 400 Packing hours per pallet 0.50 Variable overhead cost per packing hour $18 Total shipping fixed overhead costs $2,500
Actual Amounts 120,000 500 0.40 $21 $2,300
Required: a. Calculate the efficiency variance for variable shipping overhead costs. b. Calculate the rate variance for variable shipping overhead costs. c. Calculate the rate variance for fixed shipping overhead costs. d. Calculate the production-volume variance for fixed shipping overhead costs. Answer: a. ((120,000/400) × 0.50 × $18) - ((120,000/500) × 0.40 × $18) = $972 (F) b.
((120,000/500) × 0.40) × ($18 - $21) = $288 (U)
c.
$2,500 - $2,300 = 200 (F)
d. Static budget packing hours = (100,000/400) × 0.50 =125 hours Budget OH rate = $2,500/125 hours = $20 per pallet $2,500 - ((120,000/400) × 0.50 × $20) = 500 (F) Diff: 3 Type: SA CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-3
8.4 Integrate the fixed and variable overhead cost variance analyses to reconcile the actual overhead incurred with overhead allocated. 1) Identifying the reasons for variances is important because it helps managers plan for corrective action. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-4
2) A fixed manufacturing overhead cost pool can never incur an efficiency variance. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-4
Use the information below to answer the following question(s). Michelle Inc. uses a level 4 variance analysis of its manufacturing overhead costs and has the following results for April. A. Budgeted direct labour-hours per unit is used to allocate variable manufacturing overhead. Fixed overhead is allocated on a per unit basis. B. Budgeted amounts for April are: Direct labour-hours Variable labour-hour overhead rate Fixed manufacturing overhead Budgeted output (denominator level output)
0.30/unit $20.00/DLH $630,000 30,000 units
C. Actual amounts for April are: Variable manufacturing overhead Fixed manufacturing overhead Direct labour-hours Actual output
$340,000 $590,000 16,000 hours 40,000 units
3) What is the Michelle Inc. variable production-volume variance? A) $13,500 unfavourable B) $6,000 unfavourable C) $6,000 favourable D) $0 E) There is never a variable production-volume variance. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-4
4) What is the Michelle Inc. fixed manufacturing overhead rate variance? A) $40,000 favourable B) $10,000 unfavourable C) $13,500 unfavourable D) $13,500 favourable E) $14,625 favourable Answer: A Explanation: $590,000 - $630,000 = $40,000 favourable Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-4
5) What are the fixed manufacturing overhead efficiency and production-volume variances, respectively? A) 0; $200,000 favourable B) 0; $200,000 unfavourable C) $50,500 favourable; $199,998 unfavourable D) $50,500 unfavourable; $199,998 favourable E) There is no efficiency variance; $210,000 favourable. Answer: E Explanation: (30,000 - 40,000) × 21 = $210,000 favourable Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-4
6) What is the Michelle Inc. variable manufacturing overhead rate variance? A) $30,000 unfavourable B) $28,500 favourable C) $4,000 unfavourable D) $16,000 favourable E) $16,000 unfavourable Answer: C Explanation: ($21.25 - $21.00) × 16,000 DLH = $4,000 unfavourable Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-4
7) What is the variable manufacturing overhead efficiency variance?
A) $80,000 favourable B) $84,000 unfavourable C) $101,200 favourable D) $101,200 unfavourable E) $181,200 favourable Answer: B Explanation: (16,000 DLH - (40,000 units × 0.3 DLH/unit)) × $21 = $84,000 unfavourable Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-4
8) If Michelle Inc. uses a two-variance analysis format, what will be the reported variances? A) flexible-budget variance $100,000 U; production-volume variance $200,000 U B) efficiency variance $80,000 U; production-volume variance $200,000 F C) rate variance $10,000 U; efficiency variance $120,000 F D) rate variance $10,000 U; efficiency variance $80,000 U E) flexible-budget variance $48,000 U; production-volume variance $210,000 F Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-4
9) Ever-Sharp Lawnmowers Ltd. controls variable manufacturing overhead costs with assembly-line hours as the denominator. Fixed manufacturing overhead costs are applied on a unit-of-output basis. Each lawnmower is allowed 10 assembly-line hours and standard variable manufacturing overhead totals $650 per unit. Budgeted fixed manufacturing overhead totals $29,400 for 420 lawnmowers. During July 4,200 assembly-line hours were incurred and 400 lawnmowers were produced. Actual manufacturing overhead costs for July were $260,400 for variable expenses and $32,300 for fixed expenses. Required: a. Compute a 4-variance analysis for the month of July. b. Compute a 3-variance analysis for the month of July. c. Compute a 2-variance analysis for the month of July. Answer: a. 4-variance analysis Variable overhead rate variance = $260,400 - (4,200 × $65) = $12,600 favourable $650/10 hours = $65 Variable overhead efficiency variance = $65 × (4,200 - (400 × 10)) = $13,000 unfavourable Fixed overhead rate variance = $32,300 - $29,400 = $2,900 unfavourable Fixed overhead production-volume variance = $29,400 - (400 × 10 × $7) = $1,400 unfavourable $29,400/(420 units × 10 hours) = $7 b. 3-variance analysis Rate variance = $12,600 favourable + $2,900 unfavourable = $9,700 favourable Efficiency variance = $13,000 unfavourable Production volume variance = $1,400 unfavourable c.
2-variance analysis Flexible budget variance = $12,600 F + $2,900 U + $13,000 U = $3,300 unfavourable Production volume variance = $1,400 unfavourable
Diff: 3 Type: SA CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-4
10) Different management levels in Bates Inc. require varying degrees of managerial accounting information. Because of the need to comply with the managers' requests, four different variances for manufacturing overhead are computed each month. The information for the September overhead expenditures is as follows: Budgeted output units Budgeted fixed manufacturing overhead Budgeted variable manufacturing overhead Budgeted direct manufacturing labour hours Fixed manufacturing costs incurred Direct manufacturing labour hours used Variable manufacturing costs incurred Actual units manufactured
3,200 units $20,000 $5.00 per direct labour hour 2 hours per unit $26,000 7,200 $35,600 3,400
Required: a. Compute a 4-variance analysis for the plant controller. b. Compute a 3-variance analysis for the plant manager. c. Compute a 2-variance analysis for the corporate controller. d. Compute the flexible-budget variance for the manufacturing vice-president.
Answer: a. 4-variance analysis: Variable overhead rate variance = $35,600 - (7,200 × $5) = $400 favourable Variable overhead efficiency variance = $5 × (7,200 - 6,800) = $2,000 unfavourable 3,400 units × 2 hours Fixed overhead rate variance = $26,000 - $20,000 = $6,000 unfavourable Fixed overhead production-volume variance = $20,000 - (3,400 × 2 × $3.125) = $1,250 favourable $20,000/(3,200 units × 2 hours) = $3.125 b.
3-variance analysis: Rate variance = $400 favourable + $6,000 unfavourable = $5,600 unfavourable Efficiency variance = $2,000 unfavourable Production volume variance = $1,250 favourable
c.
2-variance analysis: Flexible budget variance = $400 F + $2,000 U + $6,000 U = $7,600 unfavourable Production volume variance = $1,250 favourable
d. 1-variance analysis:
Fixed overhead Variable overhead Flexible budget variance
Actual $26,000 35,600
Flexible Budget $21,250 34,000
Variances $4,750 U 1,600 U $6,350 U
$3.125 × 3,400 × 2 = $21,250 3,400 × 2 × $5 = $34,000 Diff: 3 Type: SA CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 8-4
11) The chapter shows that variance analysis of overhead costs can be presented in 4-, 3-, 2-, and 1variance analysis. Explain what each of the variances presented under each method shows about overhead costs. Answer: Under the 4-variance analysis, there is a rate variance shown for the variable manufacturing overhead, a rate variance for the fixed overhead component, an efficiency variance for the variable overhead, and a production-volume variance for the fixed overhead. When the firm uses a 3-variance approach, the fixed and variable rate variances are combined into a single variance, while the variable overhead efficiency is still shown separately and the fixed overhead production-volume variance is singled out. In the 2-variance method, the fixed and variable rate variances are combined into one amount along with the variable efficiency, and then the fixed production-volume is shown as a separate variance. The 1-variance method shows the difference between the actual costs incurred and the flexiblebudget amount for the output level achieved. Diff: 3 Type: ES CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-4
12) Explain why sales-volume variance could be helpful to managers. Answer: The sales-volume variance is useful because it helps managers understand the significant changes in contribution margin, which will occur as a result of selling fewer (or more) units than called for by the budgeted level. It assumes that the fixed costs remain at the budgeted level and can be helpful to managers as they perform sensitivity analysis to see the effects of potential changes in sales volume (up or down). Based on this type of information, they could potentially make more informed decisions on pricing and other strategies. Diff: 3 Type: ES CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-4
8.5 Analyze non-manufacturing variances. 1) Variance analysis of variable nonmanufacturing as well as variable manufacturing costs is used for pricing decisions and for decisions about which products to emphasize. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-5
2) For planning and control purposes, actual energy usage per machine hour compared with budgeted energy usage per machine hour, is a valid financial performance measure. Answer: FALSE Diff: 2 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-5
3) Managers have found that non-financial measures provide useful information for their planning and control decisions. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-5
4) Both financial and nonfinancial performance measures are key inputs when evaluating the performance of managers. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-5
5) Non-financial performance measures A) vary from industry to industry. B) include variable cost but not fixed cost variances. C) include both variable and fixed cost variances. D) are used for performance evaluation, but not for planning and control. E) deal with personnel matters. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-5
6) Financial measures of performance include A) operating income. B) market share. C) on-time delivery performance. D) customer acquisition rate. E) order time to completion. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 8-5
7) Delivering value to the customer requires executing activities important to the value proposition. Many of the activities cannot be evaluated by financial measures of performance. List five non-financial measures of performance applicable to the hospitality industry. Answer: customer satisfaction with regard to hotel location; room availability and reservations; checkin; room security; quietness; cleanliness; amenities; restaurant and bar services; spa services; entertainment; concierge services and so forth. Diff: 2 Type: ES CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-5
8) Look-Green Company has traditionally used only financial accounting for its decision making purposes. The president recently attended a seminar for small-business executives where the importance of managerial accounting was stressed as a way to improve operating decisions. The president was very interested in the use of managerial accounting as a way of planning the company's manufacturing overhead. It seems that the managers have always been at odds over how to best control the overhead accounts. Required: Explain how the planning of variable and fixed manufacturing overhead can improve the company's decision making process. Answer: Effective planning of variable overhead costs involves the undertaking of only those variable activities that add value to the process. It also includes the planning of the cost drivers of the activities so they can be utilized most efficiently. Planning of fixed overhead costs likewise includes only those activities that add value. A critical aspect of fixed cost planning is selecting the appropriate level of operations. The selection of the denominator is important for determining the fixed rates that will be charged during the year. Diff: 2 Type: ES CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-1; 8-2; 8-4; 8-5
9) Medo International is a manufacturing firm that has many assembly lines, numerous heavy-duty machines, and highly skilled machine operators. It has used very complex variance analysis in planning and controlling its operations during the last few years. Everything always appeared to be satisfactory until an economic recession tightened the competition and cost control became critical to the company's success. The operating managers believe that the traditional managerial accounting variance measures do not provide all the information they need during times of economic difficulties. Required: Discuss what additional information could be provided to the managers. Answer: Non-financial performance measures could be added to the analysis. Examples of information which could be provided to the managers include: 1) rates of labour hours to machine hours; 2) assembly line hours per unit of output, 3) percentage of scrap to finished units, and 4) units needing rework. Diff: 2 Type: ES CPA Competencies: Chapter 8 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 8-5
Cost Accounting: A Managerial Emphasis - Cdn. Ed., 9e (Datar) Chapter 9 Income Effects of Denominator Level on Inventory Valuation 9.1 Identify the factors important to choosing the denominator level used to calculate fixed overhead allocation rates. 1) Using either the theoretical capacity or practical capacity as the denominator-level concept will result in the same production-volume variance. Answer: FALSE Explanation: Theoretical capacity will result in a larger variance. Diff: 2 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-1
2) Determining the "right" level of capacity is an important strategic decision. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-1
3) Both theoretical and practical capacity measure capacity in terms of demand for the output. Answer: FALSE Explanation: Both theoretical and practical capacity measure capacity in terms of what a plant can supply—available capacity. Diff: 2 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-1
4) Normal capacity utilization is the expected level of capacity utilization for the current budget period, which is typically one year. Answer: FALSE Explanation: Master-budget capacity utilization is the expected level of capacity utilization for the current budget period, which is typically one year. Diff: 1 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-1
5) Normal capacity utilization is not the same as master-budget capacity utilization. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-1
6) Off-limits idle capacity refers to the unused capacity in facilities that are not located on the company's primary location. Answer: FALSE Explanation: Off-limits capacity refers to unavoidable operating interruptions. Diff: 2 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-1
7) The Canada Revenue Agency requires companies to use practical capacity as the denominator-level concept. Answer: FALSE Diff: 1 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-1
8) Both ASPE/IFRS and the CRA accept practical capacity for external reporting purposes. Answer: FALSE Explanation: The drawback of practical capacity is that neither ASPE/IFRS nor CRA accept this denominator for external reporting purposes. Diff: 2 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-1
9) ________ is the level of capacity based on producing at full capacity all the time. A) Practical capacity B) Theoretical capacity C) Normal capacity D) Demand capacity E) Master-budget capacity Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-1
10) Theoretical capacity is based on which of the following assumptions? A) that absorption costing is used B) that variable costing is used C) production will occur at peak capacity all the time D) production will occur at peak capacity where feasible (e.g., except for maintenance downtime) E) production can never occur at peak capacity Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-1
11) Practical capacity is based on which of the following assumptions? A) that absorption costing is used B) that variable costing is used C) Production will occur at peak efficiency all the time. D) Production will occur at peak capacity where feasible (e.g., except for maintenance downtime, repairs, holidays, etc.). E) Production can never occur at peak capacity. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-1
12) The denominator-level concept based on capacity utilization that satisfies average customer demand that includes seasonal and cyclical factors is called A) theoretical capacity. B) practical capacity. C) normal capacity. D) master-budget capacity. E) supply capacity. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-1
13) The denominator-level concept based on capacity utilization for the anticipated level of output that will satisfy customer demand for a single operating cycle is the A) theoretical budget capacity. B) practical budget capacity. C) normal capacity. D) master-budget capacity. E) supply capacity. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-1
14) A major reason for choosing ________ utilization over ________, is the difficulty in forecasting. A) theoretical capacity; master-budget B) practical capacity; master-budget C) normal capacity utilization; master-budget D) master-budget; theoretical capacity E) master-budget; normal capacity utilization Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-1
Answer the following question(s) using the information below. A manufacturing firm is able to produce 1,800 pairs of shoes per hour at maximum efficiency. There are three eight-hour shifts each day. Production is actually 1,500 pairs of shoes per hour due to unavoidable operating interruptions. The plant is expected to run every day but was only able to operate for 27 days in September. 15) What is the theoretical capacity for the month of September? A) 1,488,000 shoes B) 1,296,000 shoes C) 1,036,800 shoes D) 1,152,000 shoes Answer: B Explanation: 1,800 units × 24 hours × 30 days = 1,296,000 pairs of shoes Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-1
16) What is the practical capacity for the month of September? A) 1,488,000 pairs of shoes B) 1,440,000 pairs of shoes C) 1,036,800 pairs of shoes D) 1,296,000 pairs of shoes E) 1,080,000 pairs of shoes Answer: E Explanation: 1,500 units × 24 hours × 30 days = 1,080,000 pairs of shoes Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-1
17) The budgeted fixed manufacturing cost rate is the lowest for A) practical capacity. B) supply capacity. C) master-budget capacity utilization. D) normal capacity utilization. E) theoretical capacity. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-1
18) ________ provides the denominator-level capacity based on demand for more than one budget cycle. A) Practical capacity B) Theoretical capacity C) Master-budget capacity utilization D) Normal capacity utilization E) Supply capacity Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-1
Answer the following question(s) using the information below. A manufacturing firm is able to produce 1,000 pairs of shoes per hour, at maximum efficiency. There are three eight-hour shifts each day. Due to unavoidable operating interruptions, production averages 800 units per hour. In the month of June the plant actually operated only 25 days due to avoidable shut downs. 19) What is the theoretical capacity for the month of April? A) 600,000 units B) 720,000 units C) 744,400 units D) 576,000 units E) 480,000 units Answer: B Explanation: 1,000 units × 24 hours × 30 days = 720,000 units Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-1
20) What is the practical capacity for the month of April? A) 600,000 units B) 720,000 units C) 744,400 units D) 576,000 units E) 480,000 units Answer: D Explanation: 800 units × 24 hours × 30 days = 576,000 units Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-1
21) From the perspective of long-run product costing it is best to use A) master-budget capacity utilization to highlight unused capacity. B) normal capacity utilization for benchmarking purposes. C) practical capacity for pricing decisions. D) theoretical capacity for performance evaluation. E) supply capacity to satisfy customer demand. Answer: C Diff: 3 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-1
22) External reporting requires the use of ________ capacity in the denominator, taking into account offlimits idle capacity. A) theoretical B) practical C) budget D) normal E) practical or normal Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-1
23) The Canada Revenue Agency effectively eliminates the use of certain denominator-level concepts through its income tax rulings. The accepted concept(s) for tax purpose is (are) A) theoretical capacity and practical capacity. B) master-budget capacity and theoretical capacity. C) practical capacity. D) master-budget capacity. E) normal capacity or master-budget capacity. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-1
24) Wallace's Wrench Company manufactures socket wrenches. For next month the vice-president of production plans on producing 4,400 wrenches per day. The company can produce as many as 5,000 wrenches per day, but are more likely to produce 4,500 per day. The demand for wrenches for the next three years is expected to average 4,250 wrenches per day. Fixed manufacturing costs per month total $336,600. The company works 20 days a month due to local zoning restrictions. Fixed manufacturing overhead is charged on a per wrench basis. Required: a. What is the theoretical fixed manufacturing overhead rate per wrench? b. What is the practical fixed manufacturing overhead rate per wrench? c. What is the normal fixed manufacturing overhead rate per wrench? d. What is the master-budget fixed manufacturing overhead rate per wrench? Answer: a. Theoretical overhead rate = $336,600/(5,000 × 20) = $3.366 b. Practical overhead rate = $336,600/(4,500 × 20) = $3.74 c. Normal overhead rate = $336,600/(4,250 × 20) = $3.96 d. Master-budget overhead rate = $336,600/(4,400 × 20) = $3.825 Diff: 2 Type: SA CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-1
25) Strong Tool Manufacturing Ltd. manufactures wrenches at their Hamilton facility. For the next month, the vice-president of production plans on producing 2,700 wrenches per day. The company can produce as many as 4,000 wrenches per day, but are more likely to produce 3,500 per day. The demand for wrenches for the next three years is expected to average 3,100 wrenches per day. Fixed manufacturing costs per month total $282,400. The company works 22 days a month due to local zoning restrictions. Fixed manufacturing overhead is charged on a per wrench basis. Required: a. What is the theoretical fixed manufacturing overhead rate per wrench? b. What is the practical fixed manufacturing overhead rate per wrench? c. What is the normal fixed manufacturing overhead rate per wrench? d. What is the master-budget fixed manufacturing overhead rate per wrench? Answer: a. Theoretical overhead rate = $282,400/(4,000 × 22) = $3.21 b. Practical overhead rate = $282,400/(3,500 × 22) = $3.67 c. Normal overhead rate = $282,400/(3,100 × 22) = $4.14 d. Master-budget overhead rate = $282,400/(2,700 × 22) = $4.75 Diff: 2 Type: SA CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-1
9.2 Explain how the choice of denominator affects capacity management, costing, pricing, and
performance evaluation. 1) Theoretical capacity is rarely used to calculate the budgeted fixed manufacturing cost per case because it departs significantly from the real capacity available to a company. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-2
2) The downward demand spiral for a company is the continuing reduction in the demand for its products that occurs when prices of competitors' products are not met and higher unit costs result in more reluctance to meet competitors' prices. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-2
3) Using practical capacity is best for evaluating the marketing manager's performance for a particular year. Answer: FALSE Explanation: Using master-budget capacity is best for evaluating the marketing manager's performance. Diff: 3 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-2
4) Master-budget capacity utilization can be more reliably estimated than normal capacity utilization. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-2
5) Unused capacity is considered wasted resources and the result of poor planning. Answer: FALSE Explanation: Unused capacity is not considered wasted resources because capacity has to be purchased in "large chunks" to accommodate future needs, not just the needs of the current period. Diff: 1 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-2
6) The master-budget capacity utilization, rather than normal capacity utilization or practical capacity, is what should be used for evaluating a marketing manager's performance in the current year. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-2
7) Which denominator-level concept results in the highest amount of fixed manufacturing overhead costs per unit of ending inventory when seasonal demand is low? A) theoretical capacity B) practical capacity C) normal capacity D) master-budget capacity E) supply capacity Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-2
8) Master-budget capacity utilization A) hides the amount of unused capacity. B) represents the maximum units of production for current capacity. C) provides the best cost estimate for benchmarking purposes. D) when used for product costing results in the lowest cost estimate of the four capacity options. E) represents the long-term utilization expected to meet customer demand. Answer: A Diff: 3 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-2
9) Using ________ capacity fixes the cost of capacity at the cost of supplying the capacity regardless of the demand for capacity. A) practical B) theoretical C) supply D) demand E) master-budget Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-2
10) ________ utilization is an average that provides no meaningful feedback to the marketing manager for a particular year. A) Normal capacity B) Master-budget capacity C) Practical capacity D) Flexible budget capacity E) Planned unused capacity Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-2
11) The marketing manager's performance evaluation is most fair when based on a denominator level using A) practical capacity. B) theoretical capacity. C) master-budget capacity. D) normal capacity. E) supply capacity. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-2
12) Explain how using master-budget capacity utilization for setting prices can lead to a downward demand spiral. Answer: If master-budget capacity utilization is used as the denominator level for determining fixed manufacturing costs per unit, the cost includes a charge for unused capacity. If prices are based on this cost, the product may be priced higher than competitor's products. With a higher selling price, volume of sales will probably decrease reducing the expected number of future sales. Lower expected sales leads to a lower denominator level, which in turn results in an even higher selling price and even lower sales volume, etc. Diff: 2 Type: ES CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-2
13) Should a company with high fixed costs and unused capacity raise selling prices to try to fully recoup its costs? Answer: No, companies in this situation might experience greater reductions in the demand of their products if they continue to raise selling prices. This would result in the fixed capacity costs being spread over fewer and fewer units, increasing reported costs, resulting in more pressure to raise prices. Diff: 3 Type: ES CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-2
14) How does the capacity level chosen to compute the budgeted fixed overhead cost rate affect the production-volume variance? Answer: The chosen capacity level is directly related to the size and direction of the production-volume variance. When the chosen capacity level exceeds the actual production level, there will be an unfavourable production-volume variance; when the chosen capacity level is less than the actual production level, there will be a favourable production-volume variance. Diff: 3 Type: ES CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-2
15) a. List the four different measures of capacity. b. Which measure of capacity is best for setting prices? Why? c. Which measure of capacity is best for evaluating the performance of the marketing manager for the current year? Why? Answer: a. Theoretical capacity, practical capacity, normal capacity utilization, and master-budget capacity utilization are the four measures of capacity. b. Practical capacity is best to use when setting prices because only the actual cost of capacity used for production is included in the cost of a unit. c. Master-budget capacity utilization is best for evaluating performance of managers over the current year because the manager should only be held accountable for budgeted sales of the current year and not production capacity, especially when there is unused capacity. d. Normal capacity. Diff: 2 Type: ES CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-2
9.3 Distinguish absorption from variable costing; prepare and explain the differences in operating income under each costing policy. 1) Full product costs under absorption costing include only inventoriable costs and upstream costs. Answer: FALSE Explanation: Include only inventoriable costs. Diff: 2 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
2) Variable costing includes all direct manufacturing costs and all manufacturing overhead costs. Answer: FALSE Explanation: Only variable manufacturing costs are included. Diff: 1 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
3) Companies using absorption costing do not need to make any distinction between variable and fixed costs in their accounting system for inventory costing purposes. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-3
4) The difference between variable costing and absorption costing centres on accounting for variable costs. Answer: FALSE Explanation: Centres on the accounting for fixed costs. Diff: 2 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
5) Another common term used by some companies for variable costing is direct costing. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
6) The distinction between variable costs and fixed costs is highlighted in variable costing via the contribution-margin format while the distinction between manufacturing and nonmanufacturing costs is central to absorption and is highlighted by the gross-margin format. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
7) Variable manufacturing costs are accounted for in the same manner on the income statement regardless of whether absorption or variable costing is used. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
8) Direct costing is not truly synonymous with variable costing since variable costing does not include all direct costs as inventoriable costs. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
9) Variable costing does not include variable indirect manufacturing costs as inventoriable costs. Answer: FALSE Explanation: Variable manufacturing costs are inventoriable. Diff: 2 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
10) Variable costs of value chain areas other than manufacturing are typically written off as period costs regardless of the costing method used. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
11) Absorption-costing income statements cannot easily differentiate between variable and fixed costs. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
12) The period-to-period change in operating income under variable costing is driven by unit level of sales, if the fixed costs are constant. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-3
13) Variable costing will generally report less operating income than absorption costing when the inventory level decreases. Answer: FALSE Explanation: Less inventory results from sales exceeding production. Therefore, fixed costs absorbed in the previous period are recognized in the current period so operating income will being lower for absorption costing and higher for variable costing. Diff: 2 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
14) Absorption costing defers the fixed manufacturing costs in ending inventory to a future period, but variable costing expenses these costs in the current period. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
15) Changes in inventory levels do not affect income amounts between variable and absorption costing because the difference in accounting for fixed manufacturing overhead offsets the affect. Answer: FALSE Explanation: Changes in inventory levels affect the recognition of fixed costs carried in inventory. Diff: 2 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
16) Absorption costing prevents managers from increasing production to levels above customer demand, as a means of inflating operating income. Answer: FALSE Explanation: Managers evaluated by operating income are motivated to increase production so that more fixed costs are inventoried and cost of goods sold is reduced. Diff: 2 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
17) Each unit in inventory under absorption costing absorbs fixed manufacturing costs. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
18) Absorption costing can be criticized as a method that encourages managers to make decisions that may be contrary to the long-term interest of the company. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
19) The main difference between variable costing and absorption costing is the way in which fixed manufacturing costs are accounted. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
20) The gross-margin format of the income statement highlights the lump sum of fixed manufacturing costs. Answer: FALSE Explanation: The gross-margin format of the income statement distinguishes manufacturing costs from nonmanufacturing costs, but it does not highlight the lump sum of fixed manufacturing costs. Diff: 2 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
21) In absorption costing, all nonmanufacturing costs are subtracted from gross margin. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
22) Direct costing is a perfect way to describe the variable-costing inventory method. Answer: FALSE Explanation: Direct costing is a less than perfect way to describe this method because not all variable costs are inventoriable costs. Diff: 2 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
23) Period-to-period changes in operating income under absorption costing are driven by variations in both the unit level of sales and the unit level of production. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
24) The heart of the difference between variable and absorption costing for financial reporting is accounting for fixed manufacturing and variable non-manufacturing costs. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
25) The distinction between absorption costing and variable costing is most important for which type of industry? A) manufacturing B) marketing C) retail D) service E) educational Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
26) When all fixed manufacturing costs and variable manufacturing costs are included as inventoriable costs, the method being used is A) absorption costing. B) fixed overhead costing. C) manufacturing overhead costing. D) variable costing. E) direct costing. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
27) The method of costing that excludes fixed manufacturing costs from inventoriable costs is known as A) absorption costing. B) fixed overhead costing. C) manufacturing overhead costing. D) variable costing. E) full manufacturing costing. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
28) The contribution-margin format is used for the ________. A) variable costing income statement B) mixed costing income statement C) absorption costing income statement D) job order costing income statement Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
29) The gross-margin format is used for the ________. A) variable costing income statement B) mixed costing income statement C) absorption costing income statement D) standard costing income statement Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
Use the information below to answer the following question(s). Honda Heaven produces and sells an auto part for $20.00 per unit. Direct materials are $8 per unit, while direct manufacturing labour averages $1.50 per unit. Variable manufacturing overhead is $0.50 per unit and fixed manufacturing overhead is $250,000 per year. Administrative expenses, all fixed, run $90,000 per year, with sales commissions of $2 per part. Production is 100,000 parts per year. And this year, 75,000 boxes were sold. 30) What is Honda Heaven's inventory cost per box using variable costing? A) $9.50 B) $10.00 C) $12.50 D) $13.40 E) $15.40 Answer: B Explanation: $8.00 + $1.50 + $0.50 = $10.00 Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
31) What is Honda Heaven's inventoriable cost per box using absorption costing? A) $9.50 B) $10.00 C) $12.50 D) $13.40 E) $15.40 Answer: C Explanation: $8.00 + $1.50 + $0.50 + ($250,000/100,000) = $12.50 Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
32) Under variable costing, which of the following expenses is inventoriable? A) variable manufacturing overhead B) direct manufacturing labour and fixed manufacturing overhead C) marketing and direct manufacturing labour D) variable manufacturing overhead and administrative E) variable and fixed manufacturing overhead Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
33) Absorption costing is also known as A) direct costing. B) full absorption costing. C) non-traditional costing. D) manufacturing costing. E) variable costing. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
34) Variable costing regards fixed manufacturing overhead as A) an unexpired cost. B) an inventoriable cost. C) a period expense. D) a product cost. E) a deferred asset. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
Use the information below to answer the following question(s). Feel-Good Supply Company manufactures shampoo. The supervisor has provided the following information and stated that standard costing is used for manufacturing, marketing, and administrative costs. January 0 2,500 2,250
Beginning inventory Production Sales Other information: Selling price Standard variable manufacturing cost/unit Standard variable market/admin. cost/unit Standard fixed manufacturing overhead cost/month Standard fixed market/admin. cost/month Budgeted denominator level per month (output units)
February --3,000 3,025
$20.00 $8.00 $4.00 $40,000 $20,000 4,000
There were no beginning or ending inventories of materials or work-in-process. 35) What is the per unit variable cost? A) $22.00 B) $18.00 C) $14.00 D) $12.00 E) $11.00 Answer: D Explanation: Standard variable manufacturing costs Standard variable Mkt./Admin. costs Total = $12.00
$8.00 4.00
Diff: 1 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
36) What is the per unit manufacturing cost using absorption costing? A) $23.00 B) $18.00 C) $27.00 D) $12.00 E) $10.00 Answer: B Explanation: Standard variable manufacturing costs $8.00 Standard fixed manufacturing 10.00 * Total = $18.00 *($40,000/4,000) = $10.00 Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
37) What would Feel-Good Supply Company's operating income (loss) be for January and February, respectively, using the variable costing approach? A) $18,000 and $24,200 B) $(45,000) and $(35,500) C) $(44,000) and $(33,809) D) $(42,000) and $(35,800) E) $(22,000) and $(15,800) Answer: D Explanation: January February Sales $45,000 $60,500 Variable costs: Beginning Inventory $0 $2,000 Variable cost of goods manufactured 20,000 24,000 Cost of goods available for sale $20,000 $26,000 Ending inventory 2,000 1,800 Cost of goods sold $18,000 $24,200 Variable mkt/admin. costs 9,000 12,100 Total variable costs $27,000 $36,300 Contribution margin $18,000 $24,200 Fixed costs Fixed manufacturing overhead $40,000 $40,000 Fixed mkt/admin. costs 20,000 20,000 $60,000 $60,000 Operating Income $(42,000) $(35,800) Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
38) What would Feel-Good Supply Company's operating income (loss) be for January and February, respectively, using the absorption costing approach? A) $(22,000) and $(15,800) B) $(24,750) and $(33,275) C) $(15,750) and $(21,175) D) $(24,500) and $(26,050) E) $18,000 and $24,200 Answer: D Explanation: January February Sales $45,000 $60,500 Cost of goods sold (2,250; 3,025) × $18 40,500 54,450 Gross margin $ 4,500 $ 6,050 Administrative costs: Variable (2,250; 3,025) × $4 $9,000 $12,100 Fixed 20,000 20,000 Operating Income $(24,500) $(26,050) Diff: 3 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
Use the information below to answer the following question(s). So-Beautiful Body Products Ltd. manufactures body wash liquid soap. The controller has provided the following information and stated that standard costing is used for manufacturing, marketing, and administrative costs.
Beginning inventory Production Sales
January 0 39,500 36,500
February 3,000 43,000 41,000
Other information: Selling price Standard variable manufacturing cost/unit Standard variable market/admin. cost/unit Standard fixed manufacturing overhead cost/month Standard fixed market/admin. cost/month Budgeted denominator level per month (output units)
$10.00 $1.00 $3.00 $88,000 $52,000 40,000
There were no beginning or ending inventories of materials or work-in-process. 39) What is the per unit variable cost at So-Beautiful Body Products Ltd.? A) $7.50 B) $1.00 C) $4.00 D) $12.00 E) $6.20 Answer: C Explanation: Standard variable manufacturing costs $1.00 Standard variable Mkt./Admin. costs 3.00 Total = $4.00 Diff: 1 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
40) What is the per unit manufacturing cost using absorption costing at So-Beautiful Body Products Ltd.? A) $2.20 B) $6.20 C) $7.50 D) $5.20 E) $3.20 Answer: E Explanation: Standard variable manufacturing costs $1.00 Standard fixed manufacturing 2.20 * Total = $3.20 *($88,000/40,000) = $2.20 Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
41) What would So-Beautiful Body Products Ltd. operating income (loss) be for February using the variable costing approach? A) $(82,000) B) $155,800 C) $102,500 D) $106,000 E) $229,000 Answer: D Explanation: February Sales $410,000 Variable costs: Cost of goods sold $41,000 Variable mkt/admin. costs 123,000 Total variable costs $164,000 Contribution margin $246,000 Fixed costs: Fixed manufacturing overhead $88,000 Fixed mkt/admin. costs 52,000 Operating Income $106,000 Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
42) What would So-Beautiful Body Products Ltd. operating income (loss) be for February, using the absorption costing approach? A) $103,800 B) $144,800 C) $50,500 D) $102,500 E) $(11,000) Answer: A Explanation: February Sales $410,000 Cost of goods sold (41,000 × $3.20) 131,200 Gross margin $278,800 Marketing and Administration costs: Variable (41,000 × $3) 123,000 Fixed 52,000 Operating Income $103,800 Diff: 3 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
43) Advanced Lighting's total variable costs are $102 and total manufacturing costs are $98. Standard variable marketing/administrative costs constitute 20 percent of the total variable costs. Respectively, what are Advanced Lighting's standard variable manufacturing costs and standard fixed manufacturing costs? A) $77.60 and $81.60 B) $78.40 and $98.00 C) $81.60 and $16.40 D) $81.60 and $77.60 E) $78.40 and $16.40 Answer: C Explanation: $102.00 × 0.20 = $20.40 marketing and administrative $102.00 - $20.40 = $81.60 standard variable manufacturing costs $98.00 - $81.60 = $16.40 standard fixed manufacturing costs Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
44) When the distinction between variable and fixed costs is one of the important elements in the preparation of the income statement, the method used should be the A) capitalization method. B) contribution margin method. C) gross margin method. D) inventoriable method. E) absorption method. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-3
45) Which of the following is correct concerning variable vs absorption costing? A) Absorption costing income statement classifies fixed costs as period costs. B) The absorption costing income statement combines costs by cost behaviour. C) Absorption costing income statements need to differentiate between variable and fixed costs. D) The difference in operating income between the two approaches is captured by the difference between fixed manufacturing costs in ending inventory minus fixed manufacturing costs in opening inventory. E) The difference in operating income between the two approaches is captured by the difference between fixed manufacturing costs in ending inventory minus variable manufacturing costs in ending inventory. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-3
46) Which of the following variances exists only under absorption costing? A) spending variance B) efficiency variances C) sales-volume variance D) variable overhead flexible budget variance E) production-volume variance Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
Use the information below to answer the following question(s). Car Tunes produces car radios. Actual fixed manufacturing overhead is the same as the budgeted amount, $300,000. Production in September increased by 10% over the previous month's production. August production was 6,000 radios. The production level is the same as the budgeted denominator level. At the end of September, 1,000 radios remained in stock. In August, all of the radios were sold by the end of the month and there was no remaining work in process inventory. 47) What are Car Tune's appropriate period costs for September if variable costing is used? A) $300,000 B) $363,000 C) $550,000 D) $583,000 E) $0 Answer: A Explanation: $300,000 fixed cost is expensed Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
48) What is Car Tune's September cost of goods sold amount if absorption costing is used? A) $300,000 B) $266,000 C) $254,545 D) $258,600 E) $297,000 Answer: C Explanation: 6,600 - 1,000 = 5,600; 5,600 × $45.4545 = $254,545 Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
Use the information below to answer the following question(s). Western Technologies Inc. produces dashboard displays. Actual fixed manufacturing overhead is the same as the budgeted amount, $715,000. Production in September increased by 10% over the previous month's production. August production was 26,000 displays. The production level is the same as the budgeted denominator level. At the end of September, 2,000 displays remained in stock. In August, all of the displays were sold by the end of the month and there was no remaining work in process inventory. 49) What are Western Technologies' appropriate period costs for September if variable costing is used? A) $668,380 B) $726,500 C) $632,500 D) $715,000 E) $637,500 Answer: D Explanation: $715,000 fixed cost is expensed Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
50) What is the Western Technologies' September cost of goods sold amount if absorption costing is used? A) $668,380 B) $726,500 C) $632,500 D) $687,500 E) $691,600 Answer: E Explanation: ((26,000 × 1.1) - 2,000) × ($715,000/(26,000 × 1.1)) = $691,600 Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
51) When large differences exist between practical capacity and master-budget capacity utilization, companies can classify part of the large difference as A) production-volume variance. B) sales volume variance. C) normal capacity utilization. D) theoretical capacity utilization. E) planned unused capacity. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-3
52) For Consumer Lumber what would be the total difference between operating incomes under absorption costing and variable costing? Beginning fixed manufacturing overhead in inventory Fixed manufacturing overhead in production Ending fixed manufacturing overhead in inventory Beginning variable manufacturing overhead in inventory Variable manufacturing overhead in production Ending variable manufacturing overhead in inventory
$47,500 $37,500 $12,500 $5,000 $25,000 $7,500
A) $35,000 B) $25,000 C) $20,000 D) $2,500 E) $1,500 Answer: A Explanation: $12,500 - $47,500 = (35,000) Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
53) One possible means of determining the difference between absorption and variable costing based operating incomes is A) to add fixed manufacturing cost to the variable costing operating income. B) by subtracting the variable overhead rate from the fixed overhead rate and then multiplying the difference by the number of units in inventory. C) by subtracting fixed manufacturing overhead in beginning inventory from fixed manufacturing overhead in ending inventory. D) by multiplying the number of units produced by the budgeted fixed manufacturing overhead rate. E) by adding fixed manufacturing overhead in beginning inventory to income. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-3
54) The following information pertains to XYZ Corporation: Beginning fixed manufacturing overhead in inventory Ending fixed manufacturing overhead in inventory Beginning variable manufacturing overhead in inventory Ending variable manufacturing overhead in inventory Selling price per unit Standard fixed manufacturing costs per unit Variable selling and administrative cost per unit Fixed selling and administrative costs Units produced Units sold
$40,000 $30,000 $20,000 $9,500 $41 $20 $4 $16,000 10,000 9,600
What is the difference between absorption costing operating income and variable costing operating income? A) $11,500 B) $5,000 C) $10,000 D) $10,500 E) $21,500 Answer: C Explanation: $40,000 - $30,000 = $10,000 Diff: 3 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
55) The following information pertains to ABC Corporation: Beginning fixed manufacturing overhead in inventory Ending fixed manufacturing overhead in inventory Beginning variable manufacturing overhead in inventory Ending variable manufacturing overhead in inventory Selling price per unit Standard fixed manufacturing costs per unit Variable selling and administrative cost per unit Fixed selling and administrative costs Units produced Units sold
$50,000 $30,000 $20,000 $9,500 $41 $20 $4 $16,000 10,000 9,600
What is the difference between absorption costing operating income and variable costing operating income? A) $11,500 B) $20,000 C) $10,000 D) $10,500 E) $9,500 Answer: B Explanation: $50,000 - $30,000 = $20,000 Diff: 3 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
56) The costing method that has been labelled as a "black hole" because fixed costs are inventoried is commonly known as A) absorption costing. B) direct costing. C) break-even point costing. D) variable costing. E) standard costing. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-3
57) Which of the following concepts is most compatible with absorption costing in a manufacturing environment? A) "the whole world is the market and the whole world is the competitor" B) niche marketing C) flexible manufacturing D) continuous improvement E) matching revenue to expense for financial reporting Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-3
58) When comparing the operating incomes between absorption costing and variable costing, and beginning finished inventory exceeds ending finished inventory, it may be assumed that A) sales increased during the period. B) variable cost per unit is less than fixed cost per unit. C) absorption costing income exceeds variable costing income. D) variable costing income exceeds absorption costing income. E) variable costing income equals absorption costing income. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-3
59) Which of the following is TRUE concerning operating income calculated under variable costing as compared to absorption costing? A) Operating income is lower under variable costing when production exceeds sales. B) Operating income is higher under variable costing when production exceeds sales. C) Operating income is lower under variable costing when sales exceeds production only if there is a production-volume variance. D) operating income is higher under variable costing when production exceeds sales only if there is a production-volume variance. E) The relationship between production and sales has no bearing on the differences in operating income between the two methods. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-3
60) A possible criticism of ________ costing is that fixed manufacturing overhead is treated as a/an
________. A) variable; asset B) absorption; period cost C) absorption; asset D) variable; liability E) absorption; variable cost in the long run Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-3
61) Which of the following costs is inventoried when using variable costing? A) rent on factory building B) electricity consumed in the manufacturing process C) sales commission paid on each sale D) advertising costs incurred for the product Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
Use the information below to answer the following question(s). Balloon Arrangements produces balloon bouquets. The following information has been provided by management: Budgeted production Direct manufacturing costs Fixed manufacturing overhead Variable manufacturing overhead Variable administrative costs
100,000 bouquets $2.50/bouquet $1.00/bouquet $0.75/bouquet $1.25/bouquet
62) What is the total cost per bouquet if absorption costing is used? A) $5.50 B) $4.75 C) $3.75 D) $2.50 E) $1.98 Answer: A Explanation: $2.50 + $1.00 + $0.75 + $1.25 = $5.50 Diff: 1 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
63) Which of the following criteria should be used to evaluate management according to critics of absorption costing? A) the extent to which inventory production matches demand B) the extent to which financial performance measures are used C) the extent to which operating income is increased in the short run D) the extent to which production quotas are exceeded E) We should rely only on financial criteria to measure performance. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-3
Answer the following question(s) using the information below. Harry's Decorating produces and sells a mantel clock for $100 per unit. In 2022, 100,000 clocks were produced and 80,000 were sold. Other information for the year includes: Direct materials Direct manufacturing labour Variable manufacturing costs Sales commissions Fixed manufacturing costs Administrative expenses, all fixed
$30.00 per unit $2.00 per unit $3.00 per unit $5.00 per part $25.00 per unit $15.00 per unit
64) What is the inventoriable cost per unit using variable costing? A) $32 B) $35 C) $40 D) $60 E) $75 Answer: B Explanation: $30.00 + $2.00 + $3.00 = $35.00 Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
65) What is the inventoriable cost per unit using absorption costing? A) $32 B) $35 C) $40 D) $60 E) $75 Answer: D Explanation: $30 + $2 + $3 + $25 = $60 Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
66) Which of the following best describes how fixed costs are treated in a variable cost method? A) They are part of the product cost. B) They are excluded from inventory cost and are treated as period costs. C) They are allocated to the product cost using a denominator-level capacity choice. D) They are classified as nonmanufacturing costs. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
Answer the following question(s) using the information below. Gabe's Auto produces and sells an auto part for $30.00 per unit. In 2022, 100,000 parts were produced and 75,000 units were sold. Other information for the year includes: Direct materials Direct manufacturing labour Variable manufacturing costs Sales commissions Fixed manufacturing costs Administrative expenses, all fixed
$12.00 per unit $2.25 per unit $0.75 per unit $3.00 per part $375,000 per year $135,000 per year
67) What is the inventoriable cost per unit using variable costing? A) $14.25 B) $15.00 C) $18.75 D) $20.10 E) $20.00 Answer: B Explanation: $12.00 + $2.25 + $0.75 = $15.00 Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
68) What is the inventoriable cost per unit using absorption costing? A) $14.25 B) $15.00 C) $18.75 D) $20.10 E) $20.00 Answer: C Explanation: $12.00 + $2.25 + $0.75 + ($375,000/100,000) = $18.75 Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
Answer the following question(s) using the information below. Peggy's Pillows produces and sells a decorative pillow for $75.00 per unit. In the first month of operation, 2,000 units were produced and 1,750 units were sold. Actual fixed costs are the same as the amount budgeted for the month. Other information for the month includes: Variable manufacturing costs Variable marketing costs Fixed manufacturing costs Administrative expenses, all fixed Ending inventories: Direct materials WIP Finished goods
$20.00 per unit $3.00 per unit $7.00 per unit $15.00 per unit -0-0250 units
69) What is cost of goods sold per unit using variable costing? A) $45 B) $30 C) $27 D) $23 E) $20 Answer: E Explanation: $20, only variable manufacturing costs are included when using variable costing. Diff: 1 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
70) What is cost of goods sold using variable costing? A) $35,000 B) $40,250 C) $47,250 D) $52,500 E) $78,750 Answer: A Explanation: $20 × 1,750 units = $35,000 Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
71) What is contribution margin using variable costing? A) $96,250 B) $91,000 C) $84,000 D) $78,750 E) $52,500 Answer: B Explanation: ($75 × 1,750) - [($20 + $3) × 1,750 units] = $91,000 Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
72) What is operating income using variable costing? A) $52,500 B) $78,750 C) $65,750 D) $47,000 E) $40,000 Answer: D Explanation: Contribution margin of $91,000 - [($7 + $15) × 2,000 units] = $47,000 Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
73) Potter Company has the following information for the current year: Beginning fixed manufacturing overhead in inventory Fixed manufacturing overhead in production Ending fixed manufacturing overhead in inventory
$95,000 375,000 25,000
Beginning variable manufacturing overhead in inventory Variable manufacturing overhead in production Ending variable manufacturing overhead in inventory
$10,000 50,000 15,000
What is the difference between operating incomes under absorption costing and variable costing? A) $65,000 B) $50,000 C) $40,000 D) $5,000 E) $70,000 Answer: E Explanation: $95,000 - $25,000 = $70,000 Diff: 3 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
74) The following information pertains to Brian Stone Corporation: Beginning fixed manufacturing overhead in inventory Ending fixed manufacturing overhead in inventory Beginning variable manufacturing overhead in inventory Ending variable manufacturing overhead in inventory Fixed selling and administrative costs Units produced Units sold
$60,000 45,000 $30,000 14,250 $724,000 5,000 units 4,800 units
What is the difference between operating incomes under absorption costing and variable costing? A) $750 B) $7,500 C) $15,000 D) $15,750 E) $30,750 Answer: C Explanation: $60,000 - $45,000 = $15,000 Diff: 3 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
Answer the following question(s) using the information below. Heinrich Corporation budgeted fixed manufacturing costs of $6,000 during 2022. Other information for 2022 includes: The budgeted denominator level is 1,000 units. Units produced total 750 units. Units sold total 600 units. Beginning inventory was zero. The company uses absorption costing and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold. 75) Fixed manufacturing costs expensed on the income statement (excluding adjustments for variances) total ________. A) $3,600 B) $4,800 C) $6,000 D) $0 E) $7,200 Answer: A Explanation: $6,000/1,000 units = $6 × 600 = $3,600 Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
76) Fixed manufacturing costs included in ending inventory total ________. A) $1,200 B) $1,500 C) $0 D) $900 E) $2,400 Answer: D Explanation: $6,000/1,000 units = $6 × 150 = $900 Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
77) The production-volume variance is ________. A) $2,000 B) $900 C) $2,400 D) $0 E) $1,500 Answer: E Explanation: $6,000/1,000 units = $6 × 250 = $1,500 Diff: 3 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
78) Operating income using absorption costing will be ________ than operating income using variable costing. A) $1,500 higher B) $1,200 lower C) $900 higher D) $2,400 lower E) no different Answer: C Explanation: Different operating incomes are reported because the unit level of inventory increased during the accounting period by 150 units × $6 denominator rate = $900. Therefore, operating income is $900 higher under absorption costing because $900 of fixed manufacturing costs remains in inventory. Diff: 3 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
79) Which of the following is an example of a drawback of using absorption costing? A) It allows management the ability to manipulate operating income via production schedules. B) An inventoried cost will eventually become part of cost of goods sold. C) The company's sales level drives the production schedules. D) A manager may increase maintenance activities above the budgeted level for the current period. E) Expensing fixed costs as period costs reducing operating income. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
80) Which of the following is a weakness particular to the absorption costing method? A) A production manager cannot manipulate operating income. B) A manager is always encouraged to match the production schedule to estimated demand. C) A manager may be encouraged to switch production to difficult to manufacture products. D) A downward demand spiral can be created. E) A manager may be encouraged to defer maintenance. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
81) Amalgamated Glass and Mirror Inc. had sales of 37,500 units and production of 50,000 units. Other information for the year included: Direct manufacturing labour Variable manufacturing overhead Direct materials Variable selling expenses Fixed administrative expenses Fixed manufacturing overhead There was no beginning inventory.
$375,000 200,000 300,000 200,000 200,000 400,000
Required: a. Compute the ending finished goods inventory under both absorption and variable costing. b. Compute the cost of goods sold under both absorption and variable costing. Answer: a. Absorption Variable Direct materials $300,000 $300,000 Direct manufacturing labour 375,000 375,000 Variable manufacturing overhead 200,000 200,000 Fixed manufacturing overhead 400,000 0 Total $1,275,000 $875,000 Unit costs: $1,275,000/50,000 units $875,000/50,000 units Ending inventory: 12,500 units × $25.50 12,500 units × $17.50 b. Cost of goods sold: 37,500 × $25.50 37,500 × $17.50
$25.50 $17.50
$318,750 $218,750
$956,250 $656,250
Diff: 2 Type: SA CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
82) For the current year, Nichols Inc., had sales of 75,000 units and production of 100,000 units. Other information for the year included: Direct manufacturing labour Variable manufacturing overhead Direct materials Variable selling expenses Fixed administrative expenses Fixed manufacturing overhead There was no beginning inventory.
$187,500 100,000 150,000 100,000 100,000 200,000
Required: a. Compute the ending finished goods inventory under both absorption and variable costing. b. Compute the cost of goods sold under both absorption and variable costing. Answer: a. Absorption Variable Direct materials $150,000 $150,000 Direct manufacturing labour 187,500 187,500 Variable manufacturing overhead 100,000 100,000 Fixed manufacturing overhead 200,000 0 Total $637,500 $437,500 Unit costs: $637,500/100,000 units $437,500/100,000 units Ending inventory: 25,000 units × $6.375 25,000 units × $4.375 b. Cost of goods sold: 75,000 × $6.375 75,000 × $4.375
$6.375 $4.375
$159,375 $109,375
$478,125 $328,125
Diff: 2 Type: SA CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
83) For the current year, Bonnet Inc., had sales of 42,000 units and production of 50,000 units. Other information for the year included: Direct manufacturing labour Variable manufacturing overhead Direct materials Variable selling expenses Fixed administrative expenses Fixed manufacturing overhead There was no beginning inventory.
$169,900 73,500 62,300 21,000 224,000 125,500
Required: a. Compute the ending finished goods inventory under both absorption and variable costing. b. Compute the cost of goods sold under both absorption and variable costing. Answer: a. Absorption Variable Direct materials $62,300 $62,300 Direct manufacturing labour 169,900 169,900 Variable manufacturing overhead 73,500 73,500 Fixed manufacturing overhead 125,500 0 Total $431,200 $305,700 Unit costs: $431,200/50,000 units $305,700/50,000 units Ending inventory: 8,000 units × $8.624 8,000 units × $6.114 b. Cost of goods sold: 42,000 × $8.624 42,000 × $6.114
$8.624 $6.114
$68,992 $48,912
$362,208 $256,788
Diff: 2 Type: SA CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
84) Ace Products sells its products for $22 each. Unit manufacturing costs are: direct materials, $4.00; direct manufacturing labour, $6.00; and variable manufacturing overhead, $3.00. Total fixed manufacturing overhead costs are $60,000 and marketing expenses are $2.00 per unit plus $20,000 per year. The current production level is 25,000 units although only 20,000 units are anticipated to be sold. Required: a. Prepare an income statement using absorption costing in the gross margin format. b. Prepare an income statement using variable costing in the contribution margin format. Answer: a. Absorption costing income statement: Sales (20,000 × $22) Cost of goods sold (20,000 × $15.40*) Gross margin Marketing: Variable (20,000 × $2) $40,000 Fixed 20,000 Operating income
$440,000 308,000 $132,000
60,000 $72,000
* $4.00 + $6.00 + $3.00 + ($60,000/25,000) = $15.40 b. Variable costing income statement: Sales (20,000 × $22) Variable costs: Cost of goods sold (20,000 × $13*) Marketing (20,000 × $2) Contribution margin Fixed costs: Manufacturing Marketing Operating income
$440,000 $260,000 40,000
$60,000 20,000
300,000 $140,000
80,000 $60,000
* $4.00 + $6.00 + $3.00 = $13 Diff: 3 Type: SA CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
85) Bruster Company sells its products for $66 each. The current production level is 25,000 units, although only 20,000 units are anticipated to be sold. Unit manufacturing costs are: Direct materials Direct manufacturing labour Variable manufacturing costs Total fixed manufacturing costs Marketing expenses $6.00 per unit, plus
$12.00 $18.00 $9.00 $180,000 $60,000 per year
Required: a. Prepare an income statement using absorption costing in the gross margin format. b. Prepare an income statement using variable costing in the contribution margin format.
Answer: a. Absorption-costing income statement: Sales (20,000 × $66) Cost of goods sold (20,000 × $46.20*) Gross margin Marketing: Variable (20,000 × $6) Fixed
$1,320,000 924,000 396,000 $120,000 60,000
Operating income
180,000 $216,000
* $12.00 + $18.00 + $9.00 + ($180,000/25,000) = $46.20 b. Variable-costing income statement: Sales (20,000 × $66) Variable costs: Cost of goods sold (20,000 × $39*) Marketing (20,000 × $6) Contribution margin Fixed costs: Manufacturing Marketing Operating income
$1,320,000 $780,000 120,000
900,000 420,000
$180,000 60,000
240,000 $180,000
* $12.00 + $18.00 + $9.00 = $39 Diff: 3 Type: SA CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
86) Ewing Company planned to be in operation for three years. During the first year, it had no sales but incurred $120,000 in variable manufacturing expenses and $40,000 in fixed manufacturing expenses. In the next year, it sold half of the finished goods inventory from the previous year for $100,000 but it had no manufacturing costs. In the third year, it sold the remainder of the inventory for $120,000, had no manufacturing expenses and went out of business. Marketing and administrative expenses were fixed and totalled $20,000 each year. Required: a. Prepare an income statement for each year using absorption costing in the gross margin format. b. Prepare an income statement for each year using variable costing contribution margin format. Answer: a. Absorption costing income statements: Year 1 Year 2 Year 3 Sales $0 $100,000 $120,000 Cost of goods sold 0 80,000 80,000 Gross margin $0 $20,000 $40,000 Marketing and administrative 20,000 20,000 20,000 Operating income $(20,000) $0 $20,000 b. Variable costing income statements: Sales Variable expenses Contribution margin Fixed expenses: Manufacturing Marketing and adm. Total fixed Operating income
Year 1 $0 0 $0
Year 2 $100,000 60,000 $40,000
Year 3 $120,000 60,000 $60,000
$40,000 20,000 $60,000 $(60,000)
$0 20,000 $20,000 $20,000
$0 20,000 $20,000 $40,000
Diff: 3 Type: SA CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
87) Longview Golf Company sells a special putter for $20 each. In March it sold 28,000 putters while manufacturing 30,000. There was no beginning inventory on March 1. Production information for March was: Direct manufacturing labour per unit Fixed selling and administrative costs Fixed manufacturing overhead Direct materials cost per unit Direct manufacturing labour per hour Variable manufacturing overhead per unit Variable selling expenses per unit
15 minutes $40,000 $132,000 $2 $24 $4 $2
Required: a. Compute the cost per unit under both absorption and variable costing. b. Compute the ending inventories under both absorption and variable costing. c. Compute operating income under both absorption and variable costing. Answer: a. Absorption Variable Direct manufacturing labour ($24/4) Direct materials Variable manufacturing overhead Fixed manuf ovh ($132,000/30,000) Total cost per unit
$6.00 2.00 4.00 4.40 $16.40
$6.00 2.00 4.00 0 $12.00
Absorption
Variable
$0
$0
b.
Beginning inventory Cost of good manufactured: 30,000 × $16.40 30,000 × $12.0 Cost of goods available for sale Cost of goods sold: 28,000 × $16.40 28,000 × $12.00 Ending inventory
492,000 $492,000
360,000 $360,000
459,200 $32,800
336,000 $24,000
c. Absorption-costing income statement: Sales (28,000 × $20) Cost of goods sold (28,000 × $16.40)
$560,000 459,200
Gross margin Less: Variable selling and administrative Fixed selling and administrative
$100,800 $56,000 40,000
Operating income
96,000 $4,800
Variable-costing income statement: Sales (28,000 × $20) Variable COGS (28,000 × $12) Variable selling expenses (28,000 × $2) Contribution margin Fixed costs: Manufacturing Selling and administrative Operating income
$560,000 $336,000 56,000
392,000 $168,000
$132,000 40,000
172,000 $(4,000)
Diff: 3 Type: SA CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
88) Alliance Realty bought a 2,000 acre island for $10,000,000 and divided it into 200 equal size lots. As the lots are sold they are cleared at an average cost of $5,000. Storm drains and driveways are installed at an average cost of $8,000 per site. Sales commissions are 10 percent of selling price. Administrative costs are $850,000 per year. The average selling price was $160,000 per lot during the year when 50 lots were sold. During the subsequent year, the company bought another 2,000 acre island and developed it exactly the same way. Lot sales in the second year totalled 300 with an average selling price of $160,000. All costs were the same as in the first year. Required: Prepare income statements for both years using both absorption and variable costing methods. Use the gross margin format for the absorption method and the contribution margin format for the variable costing method.
Answer: Cost per site: Land cost $10,000,000/200 sites Clearing costs Improvements Total
Absorption $50,000 5,000 8,000 $63,000
Variable $0 5,000 8,000 $13,000
Absorption Costing Income Statements: Sales Cost of goods sold: 50 × $63,000 300 × $63,000 Gross margin Variable marketing Fixed administrative Operating income
Year 1 $8,000,000
Year 2 $48,000,000
3,150,000 $4,850,000 - 800,000 - 850,000 $3,200,000
18,900,000 $29,100,000 - 4,800,000 - 850,000 $23,450,000
Year 1 $8,000,000
Year 2 $48,000,000
Variable Costing Income Statements:
Sales Variable expenses: Cost of operations: 50 × $13,000 300 × $13,000 Variable marketing Contribution margin Fixed expenses: Land Administrative Operating income
- 650,000 - 800,000 $6,550,000
- 3,900,000 - 4,800,000 $39,300,000
-10,000,000 - 850,000 $(4,300,000)
-10,000,000 - 850,000 $28,450,000
Diff: 3 Type: SA CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
89) Johnson and Sons Company was concerned that increased sales did not result in increased profits for 2022. Both variable unit and total fixed manufacturing costs for 2021 and 2022 remained constant at $20 and $2,000,000, respectively. In 2021, the company produced 100,000 units and sold 80,000 units at a price of $50 per unit. There was no beginning inventory in 2021. In 2022, the company made 70,000 units and sold 90,000 units at a price of $50. Selling and administrative expenses were all fixed at $100,000 each year. Required: a. Prepare income statements for each year using absorption costing in the gross margin format. b. Prepare income statements for each year using variable costing in the contribution margin format. c. Explain why the income was different each year using the two methods. Show computations. Answer: a. Absorption Costing Income Statements: 2021 2022 Sales $4,000,000 $4,500,000 Cost of goods sold: Begin. inventory $0 $800,000 Variable 2,000,000 1,400,000 Fixed 2,000,000 2,000,000 Total Available $4,000,000 $4,200,000 Ending inventory 800,000 0 COGS $3,200,000 $4,200,000 Gross margin $800,000 $300,000 Selling and adm. 100,000 100,000 Operating income $700,000 $200,000 b.
Variable Costing Income Statements:
Sales Variable expenses Contribution margin Fixed expenses: Manufacturing Selling and adm. Operating income c.
2021 $4,000,000 1,600,000 $2,400,000
2022 $4,500,000 1,800,000 $2,700,000
$2,000,000 100,000 $300,000
$2,000,000 100,000 $600,000
Budgeted fixed mfg. overhead rate for 2021 = $2,000,000/100,000 = $20 2021 difference of $400,000 = (100,000 - 80,000) × $20 = $400,000 2022 difference of $400,000 = (70,000 - 90,000) × $20 = $400,000
Diff: 3 Type: SA CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
90) The following data are available for Ruggles Company for the year ending September 30, 2022. Sales: 24,000 units at $50 each Expected and actual production: Manufacturing costs incurred: Variable: Fixed: Nonmanufacturing costs incurred: Variable: Fixed: Beginning inventories:
$ 1,200,000 30,000 units $525,000 $372,000 $144,800 $77,400 none
Required: a. Determine operating income using the variable costing approach. b. Determine operating income using the absorption costing approach. c. Explain why the income was different each year using the two methods. Show computations. Answer: a. 24,000 × $50 = $1,200,000 sales ($525,000/30,000) × 24,000 = $420,000 variable manufacturing cost $1,200,000 - $420,000 - $144,800 = $635,200 contribution margin $635,200 - $372,000 - $77,400 = $185,800 operating income b. 24,000 × $50 = $1,200,000 sales ($372,000/30,000) × 24,000 = $297,600 manufacturing fixed cost ($525,000/30,000) × 24,000 = $420,000 variable manufacturing cost $1,200,000 - $420,000 - $297,600 = $482,400 gross margin $482,400 - $144,800 - $77,400 = $260,200 operating income c. $260,200 - $185,800 = $74,400 or 6,000 units in ending inventory × $12.40 per unit of fixed manufacturing cost. Diff: 3 Type: SA CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
91) Stamp Bottling Works manufactures glass bottles. January began with 15,000 units carried at $108,750. An additional 35,000 units were produced that month. February had production of 40,000 units. Fixed manufacturing costs totalled $119,000 in January and $132,000 in February. Sales for both months totalled 45,000 units with variable manufacturing costs of $4 per unit. Selling and administrative costs were $0.40 per unit variable and $60,000 fixed. The selling price was $10 per unit. Inventory moves on a first-in, firstout basis. Required: Compute the operating income for both months using absorption costing. Answer: January manufacturing cost per unit: Beginning inventory [(($108,750 - (15,000 × $4))/15,000] + $4 $ 7.25 Production ($119,000/35,000) + $4 $ 7.40 February manufacturing cost per unit: Beginning inventory Production ($132,000/40,000) + $4 Income Statement January Sales (45,000 × $10) Cost of goods sold (15,000 × $7.25) + (30,000 × $7.40) Gross margin Other costs: Variable selling and administrative $18,000 Fixed selling and administrative 60,000 Operating income
$ 7.40 $ 7.30
$450,000 330,750 $119,250
78,000 $41,250
Income Statement February Sales (45,000 × $10) Cost of goods sold (5,000 × $7.40) + (40,000 × $7.30) Gross margin Other costs: Variable selling and administrative $18,000 Fixed selling and administrative 60,000 Operating income
$450,000 329,000 $121,000
78,000 $43,000
Diff: 3 Type: SA CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
92) Fresco Bottling Works manufactures glass bottles. January began with 10,000 units carried at $71,500. An additional 55,000 units were produced that month. February had production of 50,000 units. Fixed manufacturing costs totalled $192,500 in January and $180,000 in February. Sales for both months totalled 45,000 units with variable manufacturing costs of $4 per unit. Selling and administrative costs were $0.35 per unit variable and $70,000 fixed. The selling price was $11 per unit. Inventory moves on a first-in, firstout basis. Required: Compute the operating income for both months using absorption costing. Answer: January manufacturing cost per unit: Beginning inventory [(($71,500 - (10,000 × $4))/10,000] + $4 $ 7.15 Production ($192,500/55,000) + $4 $ 7.50 February manufacturing cost per unit: Beginning inventory Production ($180,000/50,000) + $4 Income Statement January Sales (45,000 × $11) Cost of goods sold (10,000 × $7.15) + (35,000 × $7.50) Gross margin Other costs: Variable selling and administrative $15,750 Fixed selling and administrative 70,000 Operating income
$ 7.50 $ 7.60
$495,000 334,000 $161,000
85,750 $75,250
Income Statement February Sales (45,000 × $11) Cost of goods sold (20,000 × $7.50) + (25,000 × $7.60) Gross margin Other costs: Variable selling and administrative $15,750 Fixed selling and administrative 70,000 Operating income
$495,000 340,000 $155,000
85,750 $69,250
Diff: 3 Type: SA CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
93) Megredy Company prepared the following absorption costing income statement for the year ending May 31, 2022. Sales (16,000 units) Cost of goods sold Gross margin Selling and administrative expenses Operating income
$320,000 216,000 $104,000 46,000 $58,000
Additional information follows: Selling and administrative expenses include $1.50 of variable cost per unit sold. There was no beginning inventory, and 17,500 units were produced. Variable manufacturing costs were $11 per unit. Actual fixed costs were equal to budgeted fixed costs. Required: Prepare a variable-costing income statement for the same period. Answer: Sales $320,000 Variable expenses: Manufacturing cost of goods sold1 $176,000 Selling and administrative2 Contribution margin Fixed expenses: Fixed factory overhead3 Fixed selling and administrative4 Operating income 1. 2. 3. 4.
24,000
200,000 $120,000
$43,750 22,000
65,750 $54,250
16,000 units × $11 = $176,000 16,000 units × $1.50 = $24,000 [($216,000/16,000 units) - $11] × 17,500 units = $43,750 $46,000 - $24,000 = $22,000
Diff: 2 Type: SA CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
94) Normandeau Corporation manufactures and sells laptop computers and uses standard costing. For the month of September there was no beginning inventory, there were 1,500 units produced and 1,250 units sold. The manufacturing variable cost per unit is $770 and the operating cost per unit was $625. The fixed manufacturing cost is $450,000 and the fixed operating cost is $75,000. The selling price per unit is $1,850. Required: Prepare the income statement for Normandeau Corporation for September under variable costing. Answer: Revenues (1,250 × $1,850) $2,312,500 Variable costs Variable cost of goods sold (1,250 × $770) $962,500 Variable operating costs (1,250 × $625) 781,250 Total variable costs 1,743,750 Contribution margin $568,750 Fixed costs Fixed manufacturing costs $450,000 Fixed operating costs 75,000 Total fixed costs 525,000 Operating income $43,750 Diff: 2 Type: SA CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
95) Finch-Hutton Machine Works Ltd. uses standard costing based on a practical capacity of 1,050 tractor bearings per month. The actual production for the month of January was 980. The standard variable cost per unit is $11 and budgeted monthly fixed manufacturing overhead is $78,750. Actual costs for January were $11,760 and $78,400 for variable and fixed respectively. There was no work-in-process inventory at the beginning or end of January. The finished goods inventory had no balance at the beginning of January; January sales were 900 units at $135 per unit. Non-manufacturing costs totalled $38,000. Variances are pro-rated to inventory and cost of goods sold based on the balances in the accounts before proration. Required: 1. Prepare an income statement in gross margin format using absorption costing. 2. Determine the balance of the January ending finished goods inventory. 3. Determine the variances in as much detail as possible then prepare the journal entries to clear the variance accounts.
Answer: 1. Income statement in gross margin format Finch-Hutton Machine Works Ltd. Income Statement For the month ending January 31 Sales (900 × $135) Cost of goods sold (900/980) × ($11,760 + $78,400) Gross margin Operating expenses Operating income 2.
Ending inventory balance (80/980) × ($11,760 + $78,400)
3.
Journal entries
$ 121,500 82,800 $ 38,700 38,000 $ 700 $ 7,360
Variable cost variance = ($11 × 980) - $11,760 = FMO budget variance = $78,750 - $78,400 = FMO prod-vol variance = $78,750 - (980 × ($78,750/1,050)) Cost of Goods Sold (900/980) × $980 Inventory (80/980) × $980 Variable Cost Variance Cost of Goods Sold (900/980) × ($5,250 - $350) Inventory (80/980) × ($5,250 - $350) FMO Budget Variance FMO Production-Volume Variance Cost of goods sold reconciliation: Variable standard cost (900 × $11) FMO standard cost (900 × ($78,750/1,050) Variable cost variance Fixed cost variances
$ 980 U 350 F 5,250 U 900 80 980
4,500 400 350 5,250
$ 9,900 67,500 900 4,500 $ 82,800
Diff: 3 Type: SA CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 8-1; 9-3
96) You are the management accountant for the West coast division of a musical instrument manufacturing company. There are three manufacturing plants in your division. Each plant manager was given decision making authority in terms of production, as long as income for their plant kept on pace. The manager at Plant A has consistently been the leader in profit for the division, but the other two managers are complaining that Plant A doesn't seem to be selling any more product than they are. The division manager has noticed higher inventory levels at Plant A, which the plant manager justifies by saying the higher levels are needed to ensure adequate sales. The division manager suspects that there could be other reasons, and she has asked you to provide three proposals for revising performance evaluation. Answer: Any three of the following: 1. 2. 3. 4. 5.
Change the accounting system to variable or throughput costing. Increase diligence in budgeting and inventory planning. Incorporate a carrying charge for inventory. Extend the time period used to evaluate performance. Include non-financial measures in the evaluation of performance.
Diff: 2 Type: ES CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
97) The manager of the manufacturing division of Winnipeg Windows does not understand why gross margin went down in February when sales went up. Some of the information she has selected for evaluation include: January February Units produced 40,000 30,000 Units sold 30,000 40,000 Sales $600,000 $800,000 Beginning inventory 0 $150,000 Cost of production $600,000 $550,000 Ending inventory $150,000 0 Gross margin $150,000 $100,000 The division operated at normal capacity during January. Variable manufacturing cost per unit was $5, and the fixed manufacturing costs were $400,000. Selling and administrative expenses were all fixed. Required: Explain why the gross margin in February was lower than January even though February sales were higher. How would variable costing income statements help the manager understand the division's operating income? Answer: The difference is caused by the 10,000 units in inventory being assigned fixed manufacturing costs. The fixed manufacturing cost assigned to the inventory is carried into the next month. The fixed cost per unit were $10 per unit ($400,000/40,000), therefore $100,000 (10,000 × $10) were carried into February. This caused the reported gross margin in February to be $100,000 lower than would have been the case if all the 40,000 units sold in February were produced in February. Variable costing helps avoid confusion by relating variations in expenses to sales rather than to inventory fluctuations. Under variable costing the total fixed amount ($400,000) would be expensed in January and none carried forward into February. Therefore, January's income would be $100,000 less than reported and February's $100,000 more than reported. Diff: 3 Type: ES CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3
98) a. Explain the difference between the variable and absorption costing methods. b. Which method(s) are required for external reporting? For internal reporting? Answer: a. Absorption costing includes both fixed and variable manufacturing costs as inventoriable costs, whereas variable costing only includes variable manufacturing costs as inventoriable costs. b. Absorption costing is required for external reporting to shareholders and for income tax reporting. A company may use whichever method it chooses for internal reporting purposes. Diff: 2 Type: ES CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-3
99) SamTech Company has two identical divisions, East and West. Their sales, production volume, and fixed manufacturing costs have been the same for the last five years. The amounts for each division were as follows: Year 1 Year 2 Year 3 Year 4 Year 5 Units produced 50,000 55,000 55,000 44,000 44,000 Units sold 45,000 45,000 50,000 50,000 50,000 Fixed mfg. costs $55,000 $55,000 $55,000 $55,00 $55,000 East Division uses absorption costing and West Division uses variable costing. Both use FIFO inventory methods. Variable manufacturing costs are $5 per unit. Selling and administrative expenses were identical for each division. There were no inventories at the beginning of Year 1. Required: Which division reports the highest income each year? Explain. Answer: East Division had the higher income during the first three years because production exceeded sales; this stored some of the fixed manufacturing costs each year in the ending inventory balances. West had the higher income during the last two years because sales exceeded production. During these years East incurred all of the year's fixed manufacturing costs plus those costs that were in inventory from the prior years. Diff: 2 Type: ES CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-3
100) Plate Company just hired its fourth production manager in three years. All three previous managers had quit because they could not get the company above the break-even point, even though sales had increased somewhat each year. The company was operating at about 60 percent of plant capacity. The flatware industry was growing, so increased sales were not out of the question. I. R. Dumm took the job as manager of the production division with a very attractive salary package. After interviewing for the position, he proposed a salary and bonus package that would give him a very small salary but a large bonus if he took the operating income (using absorption costing) above the breakeven point during his very first year. Required: What do you think Mr. Dumm had in mind for increasing the company's operating income? Answer: Mr. Dumm realized that he could probably increase both production and sales during the coming year. If he substantially overproduced he knew that the extra costs would be hidden in unsold inventory. If the new production level could be sold by the sales force in the growing market, the profits would increase anyway and everybody would be happy. Also, he could combine increased production with reduced fixed manufacturing costs such as maintenance. In the short-run, several combinations could be undertaken by Dumm to ensure that the profit picture would improve. Diff: 3 Type: ES CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-3
101) Briefly discuss two methods of reducing the undesirable incentives associated with the use of absorption costing to evaluate the performance of a plant manager. Answer: There are several ways to reduce the undesirable incentives associated with the use of absorption costing to evaluate the performance of a plant manager. Any two of the following would be sufficient to answer this question: 1) 2) 3) 4) 5)
Change the accounting system. Careful budgeting and inventory planning. Incorporate a carrying charge for inventory. Change the time period to evaluate performance. Include non-financial as well as financial measures in the manager's performance evaluation.
Diff: 2 Type: ES CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-3
102) Explain the difference between the gross margin format and the contribution margin format for the income statement. What information is highlighted with each? Answer: The gross margin format divides costs into product and period costs while the contribution format divides costs into variable and fixed costs. The gross margin format highlights cost function while the contribution format highlights cost behavior. Diff: 2 Type: ES CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-3
103) Explain three methods under absorption costing that managers can use to improve operating income. Answer: 1) A plant manager may switch to manufacturing products that absorb the highest amount of fixed manufacturing costs, regardless of the demand for the product. 2) A plant manager may accept a particular order to increase production, even though another plant in the same company may be better suited to handle the order. 3) To increase production, a manager may defer maintenance beyond the current period. Diff: 3 Type: ES CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-3
9.4 Appendix 9A: Distinguish throughput costing from variable costing and absorption costing, and explain differences in operating income under each costing policy. 1) Throughput costing treats all costs as period costs. Answer: FALSE Explanation: Direct material costs are inventoried. Diff: 1 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-4
2) Throughput costing provides more incentive to produce inventory than does absorption costing. Answer: FALSE Explanation: Throughput costing provides less incentive to produce inventory than does absorption costing. Diff: 1 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-4
3) Throughput costing is also referred to as super-variable costing. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-4
4) Throughput costing considers only direct materials and direct manufacturing labour to be truly variable costs. Answer: FALSE Explanation: Throughput costing considers only direct materials to be truly variable costs. Diff: 1 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-4
5) Throughput costing results in a higher amount of manufacturing costs being placed in inventory than either variable or absorption costing. Answer: FALSE Explanation: Throughput costing results in a lower amount of manufacturing costs being placed in inventory than either variable or absorption costing. Diff: 2 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-4
Answer the following question(s) using the information below. Reusser Company produces wood statues. Management has provided the following information: Actual sales Budgeted production Selling price
80,000 statues 100,000 statues $20.00 per statue
Direct material costs Variable manufacturing costs Variable administrative costs Fixed manufacturing overhead
$5.00 per statue $1.50 per statue $2.50 per statue $2.00 per statue
6) What is the cost per statue if throughput costing is used? A) $11.00 B) $9.50 C) $7.50 D) $5.00 E) $6.50 Answer: D Explanation: Equal to direct materials = $5.00 Diff: 1 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-4
7) What is the total throughput contribution? A) $720,000 B) $840,000 C) $1,000,000 D) $1,080,000 E) $1,200,000 Answer: E Explanation: 80,000 × ($20.00 - $5.00) = $1,200,000 Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-4
8) If 400 units are produced and 600 units are sold, ________ results in the greatest amount of operating income. A) throughput costing B) variable costing C) absorption costing D) period costing E) direct costing Answer: A Diff: 3 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-4
9) Which of the following is TRUE concerning throughput costing? A) Throughput contribution is the sum of revenues and direct costs. B) Throughput contribution is the difference between revenues and direct costs. C) Throughput contribution is the difference between revenues and variable direct labour. D) Throughput contribution is the difference between revenues and (variable direct labour + variable direct materials). E) Throughput contribution is the difference between revenues and variable direct materials costs. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-4
10) Which of the following is TRUE concerning throughput costing? A) It is also called super-absorption costing. B) It treats all costs except those related to direct labour as period costs. C) It provides more incentive to build-up inventories than does absorption costing. D) It provides more incentive to build-up inventories than does variable costing. E) Other things being equal, is more conservative than absorption costing. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-4
11) "Super-variable costing" assumes that A) all costs are variable in the long run. B) all costs are variable in the short run. C) only direct materials are variable in the short run. D) fixed costs are period costs in the long run. E) all cost are fixed in the long run. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-4
12) One of the biggest reasons variable costing is controversial involves A) external reporting. B) corporate goals and mission statements. C) internal management control reports. D) internal management reports. E) foreign subsidiaries. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-4
13) Which of the following combination of costing systems assigns the same direct labour cost to inventory? A) variable-throughput B) variable-absorption C) throughput-absorption D) normal-standard E) actual-standard Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-4
14) Which of the following inventory costing methods results in the LEAST amount of costs being inventoried? A) absorption costing B) variable costing C) throughput costing D) direct costing E) standard costing Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-4
Use the information below to answer the following question(s). Balloon Arrangements produces balloon bouquets. The following information has been provided by management: Budgeted production Direct manufacturing costs Fixed manufacturing overhead Variable manufacturing overhead Variable administrative costs
100,000 bouquets $2.50/bouquet $1.00/bouquet $0.75/bouquet $1.25/bouquet
15) What is the cost per bouquet if throughput costing is used? A) $5.50 B) $4.75 C) $3.75 D) $2.50 E) $1.98 Answer: D Explanation: Equal to Direct Materials = $2.50 Diff: 1 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-4
Answer the following question(s) using the information below. Stober Company produces a specialty item. Management has provided the following information: Actual sales Budgeted production Selling price
60,000 units 50,000 units $40.00 per unit
Direct material costs Variable manufacturing overhead Variable administrative costs Fixed manufacturing overhead
$10.00 per unit $3.00 per unit $5.00 per unit $4.00 per unit
16) What is the cost per statue if throughput costing is used? A) $22.00 B) $19.00 C) $15.00 D) $10.00 E) $13.00 Answer: D Explanation: Direct material cost of $10 Diff: 1 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-4
17) What is the total throughput contribution? A) $1,080,000 B) $1,260,000 C) $1,500,000 D) $1,620,000 E) $1,800,000 Answer: E Explanation: 60,000 × ($40.00 - $10.00) = $1,800,000 Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-4
Answer the following question(s) using the information below. Bunwell Company produces a specialty item. Management has provided the following information: Actual sales Budgeted production Selling price
50,000 units 65,000 units $39.00 per unit
Direct material costs Variable manufacturing overhead Variable administrative costs Fixed manufacturing overhead
$12.00 per unit $5.00 per unit $7.00 per unit $3.00 per unit
18) What is the total throughput contribution at Bunwell Company? A) $1,350,000 B) $1,200,000 C) $950,000 D) $600,000 E) $1,950,000 Answer: A Explanation: 50,000 × ($39.00 - $12.00) = $1,350,000 Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-4
19) The new plant manager has lots of ideas for change. His bonus is tied directly to plant profit, and last month he had the accounting department change from absorption costing to variable costing, as he heard at a meeting that contribution margin was usually higher than gross margin. This month, he wants to change to throughput costing, in hopes that throughput contribution will be greater than contribution margin. The relevant data are: Sales $150,000; opening inventory $2,500; variable cost of goods manufactured $24,000; ending inventory using variable costing $8,000; variable marketing cost $15,200; and, there are no variable cost variances. The above numbers are the same for throughput costing except as follows: direct materials in goods manufactured $13,200; and, ending inventory $4,400. Required: a. Calculate the contribution margin and throughput margin. b. Does this appear to be a sensible strategy by the plant manager? Answer: a. Var. Costing Throughput Sales $150,000 $150,000 Opening inventory $2,500 $2,500 Var costs of goods manuf. 24,000 Direct materials in manuf goods 13,200 Cost of Goods available $26,500 $15,700 Ending inventory 8,000 4,400 Direct materials cost $11,300 Var manuf COGS $18,500 Var. marketing costs 15,200 Total variable costs $33,700 Contribution margin $116,300 Throughput contribution $138,700 b. This is probably not a wise strategy. There is no cost saving, only a shifting around of costs. While this may affect one year's income in the short run, over time all of the same costs will be expensed. Furthermore, a larger throughput contribution does not mean that operating income will be larger under than calculated under variable costing. Diff: 2 Type: SA CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3; 9-4
20) Calvin Enterprises produces a specialty statue item. The following information has been provided by management: Actual sales Budgeted production Selling price Direct material costs Fixed manufacturing costs Conversion costs Variable administrative costs
150,000 units 160,000 units $34 per unit $9 per unit $5 per unit $4 per unit $2 per unit
Required: a. What is the cost per statue if absorption costing is used? b. What is the cost per statue if throughput costing is used? c. What is the total throughput contribution? Answer: a. $9 + $5 + $4 = $18 b. Equal to direct materials = $9 c. 150,000 × ($34 - $9) = $3,750,000 Diff: 2 Type: SA CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3; 9-4
21) Klein Enterprises produces a specialty statue item. The following information has been provided by management: Actual sales Budgeted production Selling price Direct material costs Fixed manufacturing costs Conversion costs Variable administrative costs
300,000 units 320,000 units $34 per unit $9 per unit $5 per unit $4 per unit $2 per unit
Required: a. What is the cost per statue if absorption costing is used? b. What is the cost per statue if throughput costing is used? c. What is the total throughput contribution? Answer: a. $9 + $5 + $4 = $18 b.
Equal to direct materials = $9
c.
300,000 × ($34 - $9) = $7,500,000
Diff: 2 Type: SA CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3; 9-4
22) Power Foods produces food products for people active in sports. The following budgeted volume and costs has been provided for one of their post-workout beverages: Budgeted production Selling price
65,000 units $4.00 per unit
Direct material costs Direct labour costs Fixed manufacturing costs Variable manufacturing costs Variable administrative costs Fixed administrative costs
$1.25 per unit $0.20 per unit $19,500 $0.25 per unit $0.01 per unit $3,900
Required: What is the inventoriable cost per drink under each of the following methods? a. absorption costing b. variable costing c. throughput costing Answer: a. $1.25 + $0.20 + $0.25 + ($19,500/65,000 units) = $2.00 b.
$1.25 + $0.20 + $0.25 = $1.70
c.
$1.25
Diff: 1 Type: SA CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3; 9-4
23) Energy Foods produces food products for people active in sports. The following budgeted volume and costs has been provided for one of their post-workout beverages: Budgeted production Selling price
100,000 units $4.50 per unit
Direct material costs Direct labour costs Fixed manufacturing costs Variable manufacturing costs Variable administrative costs Fixed administrative costs
$1.35 per unit $0.25 per unit $20,000 $0.30 per unit $0.02 per unit $5,200
Required: What is the inventoriable cost per drink under each of the following methods? a. absorption costing b. variable costing c. throughput costing Answer: a. $1.35 + $0.25 + $0.30 + ($20,000/100,000 units) = $2.10 b.
$1.35 + $0.25 + $0.30 = $1.90
c.
$1.35
Diff: 1 Type: SA CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3; 9-4
24) Power Foods produces food products for people active in sports. The following budgeted volume and costs has been provided for one of their post-workout beverages: Budgeted production Selling price
65,000 units $4.00 per unit
Direct material costs Direct labour costs Fixed manufacturing costs Variable manufacturing costs Variable administrative costs Fixed administrative costs
$1.25 per unit $0.20 per unit $19,500 $0.25 per unit $0.01 per unit $3,900
Required: Calculate the following amounts: a. gross margin per unit under absorption costing b. contribution margin per unit under variable costing c. contribution margin per unit under throughput costing Answer: a. $4.00 - ($1.25 + $0.20 + $0.25 + ($19,500/65,000 units)) = $2.00 b.
$4.00 - ($1.25 + $0.20 + $0.25 + $0.01) = $2.29
c.
$4.00 - $1.25 = $2.75
Diff: 2 Type: SA CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3; 9-4
25) Energy Foods produces food products for people active in sports. The following budgeted volume and costs has been provided for one of their post-workout beverages: Budgeted production Selling price
100,000 units $4.50 per unit
Direct material costs Direct labour costs Fixed manufacturing costs Variable manufacturing costs Variable administrative costs Fixed administrative costs
$1.35 per unit $0.25 per unit $20,000 $0.30 per unit $0.02 per unit $5,200
Required: Calculate the following amounts: a. gross margin per unit under absorption costing b. contribution margin per unit under variable costing c. contribution margin per unit under throughput costing Answer: a. $4.50 - ($1.35 + $0.25 + $0.30 + ($20,000/100,000 units)) = $2.40 b.
$4.50 - ($1.35 + $0.25 + $0.30 + $0.02) = $2.58
c.
$4.50 - $1.35 = $3.15
Diff: 2 Type: SA CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-3; 9-4
26) What is throughput costing? What advantages is it purported to have over variable and absorption costing? Answer: Throughput costing treats all costs except direct materials as costs of the period in which they are incurred. Throughput costing results in a lower amount of manufacturing cost put into inventory than either variable or absorption costing. Supporters of throughput costing claim that it provides less incentive to produce for inventory than absorption costing or even variable costing. Diff: 2 Type: ES CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-4
9.5 Appendix 9B: Explain breakeven under each of the two costing policies. 1) The break-even points are the same under both variable costing and absorption costing. Answer: FALSE Explanation: The break-even points are generally different under both variable costing and absorption costing. Diff: 2 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-5
2) The break-even point under absorption costing depends on the: fixed costs, contribution margin per unit, unit level sales, unit level of production, and overhead cost rate. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 9-5
3) Holding fixed cost and unit contribution margin constant, operating income rises as the level of sales rises. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-5
Answer the following question(s) using the information below. Ms. Andrea Chadwick, the company president, has heard that there are multiple break-even points for every product. She does not believe this and has asked you to provide the evidence of such a possibility. Some information about the company for current year is as follows: Total fixed manufacturing overhead Total other fixed expenses Total variable manufacturing expenses Total other variable expenses Units produced Budgeted production Units sold Selling price
$180,000 $200,000 $120,000 $120,000 30,000 units 30,000 units 25,000 units $40
4) What are break-even sales in units using variable costing? A) 5,625 units B) 6,250 units C) 11,875 units D) 12,180 units E) 10,556 units Answer: C Explanation: Break-even units = ($180,000 + $200,000)/($40 - $4 - $4) = 11,875 units Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-5
5) What are break-even sales in units using absorption costing? A) 5,625 units B) 6,667 units C) 769 units D) 8,000 units E) 7,693 units Answer: E Explanation: Break -even units N =
N = ($380,000 + $6N - $180,000)/$32 $32N = $200,000 + $6N $26N = $200,000 N = 7,693 units Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-5
6) What are break-even sales in units using absorption costing if the production units are actually 25,000? A) 5,625 units B) 6,667 units C) 7,667 units D) 8,847 units E) 1,154 units Answer: D Explanation: Break-even units N =
N = ($380,000 + $6N - $150,000)/$32 $32N = $230,000 + $6N $26N = $230,000 N = 8,847 units Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-5
Answer the following question(s) using the information below. The following information pertains to the Bean Company: Selling price per unit Standard fixed manufacturing costs per unit Variable selling and administrative costs per unit Standard variable manufacturing costs per unit Fixed selling and administrative costs Units produced at budgeted volume Units sold
$123 $60 $12 $3 $48,000 10,000 units 9,600 units
7) What is the variable costing break-even point in units? A) 1,000 units B) 5,556 units C) 4,445 units D) 6,000 units E) 445 units Answer: D Explanation: Break - even units = [$48,000 + (10,000 × $60)]/($123 - $3 - $12) = 6,000 units Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-5
8) What is the absorption costing break-even point in units? A) 917 units B) 1,000 units C) 5,838 units D) 6,000 units E) 4,445 units Answer: B Explanation: Break - even units N = ($648,000 + ($50 × (N - 12,000)))/($123 - $3 - $12) = 1,000 units Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-5
9) What is the absorption costing break-even point in units if production is increased to 12,000 units? A) 917 units B) 1,014 units C) 700 units D) 1,102 units E) 828 units Answer: E Explanation: N = ($648,000 + ($50 × (N - 12,000)))/($123 - $3 - $12) N = ($648,000 + $50N - 600,000)/$108 $108N - $50N = $48,000 N = 828 Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-5
Answer the following question(s) using the information below. Greene Manufacturing incurred the following expenses during the current year: Fixed manufacturing costs Fixed nonmanufacturing costs Unit selling price Total unit cost Variable manufacturing cost rate Units produced
$40,000 $35,000 $100 $40 $20 1,340 units
10) What will the break-even point be if variable costing is used? A) 1,334 units B) 937.5 units C) 1,125 units D) 563.5 units E) 438.5 units Answer: B Explanation: Break - even units = ($40,000 + $35,000)/($100 - $20) = 937.5 units Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-5
11) What will the break-even point in units be if absorption costing is used? A) 1,330 units B) 1,000 units C) 803 units D) 563 units E) 2,660 units Answer: C Explanation: Break- even units N =
N = ($75,000 + $20N - $26,800)/$80 $80N = $48,200 + $20N N = 803 units Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-5
12) What is the break-even point in units using absorption costing if the units produced are actually 2,250? A) 1,330 units B) 1,000 units C) 887 units D) 500 units E) 875 units Answer: D Explanation: Break-even units N =
N = ($75,000 + $20N - $45,000)/$80 $80N = $30,000 + $20N N = 500 units Diff: 2 Type: MC CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-5
13) Sutton Hot Dog Stands sells hot dogs at ballparks across Canada for $1.35. Variable costs are $1.05 per unit with fixed production costs of $90,000 per month at a level of 400,000 units. Fixed administrative costs total $30,000. Sales average 400,000 units per month, with planned production of 400,000 hot dogs. Required: a. What are break-even unit sales under variable costing? b. What are break-even unit sales under absorption costing if she sells everything she prepares? c. What are break-even unit sales under absorption costing if average sales are 498,000 and planned production is changed to 500,000? Answer: a. Break-even units = ($90,000 + $30,000)/($1.35 - $1.05) = 400,000 b.
Break -even units (N) =
N = ($120,000 + $0.225N - $90,000)/$0.30 $0.30N = $30,000 + $0.225N $0.075N = $30,000 N = 400,000 units c.
Break-even units (N) =
N = ($120,000 + $0.18N - $90,000)/$0.30 $0.3N = $30,000 + $0.18N $0.12N = $30,000 N = 250,000 units Diff: 2 Type: SA CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-5
14) Jamie's Hot Dog Stands sells hot dogs at ballparks across Canada for $1.55. Variable costs are $1.15 per unit with fixed production costs of $80,000 per month at a level of 320,000 units. Fixed administrative costs total $25,000. Sales average 320,000 units per month, with planned production of 320,000 hot dogs. Required: a. What are break-even unit sales under variable costing? b. What are break-even unit sales under absorption costing if she sells everything she prepares? c. What are break-even unit sales under absorption costing if average sales are 399,000 and planned production is changed to 400,000? Answer: a. Break-even units = ($80,000 + $25,000)/($1.55 - $1.15) = 262,500 b.
Break -even units (N) =
N = ($105,000 + $0.25N - $80,000)/$0.40 $0.40N = $25,000 + $0.25N $0.15N = $25,000 N = 166,167 units Break -even units (N) =
N = ($105,000 + $0.20N - $80,000)/$0.40 $0.40N = $25,000 + $0.20N $0.20N = $25,000 N = 125,000 units Diff: 2 Type: SA CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 9-5
15) Evaluate the statement, "The breakeven points are generally different under both variable costing and absorption costing." Include in your discussion the factors that can cause the breakeven in absorption costing to vary. Answer: The breakeven points are generally different under both variable costing and absorption costing. If variable costing is used, the breakeven point (that's where operating income is $0) is computed in the usual manner. If absorption costing is used, the required number of units to be sold to earn a specific target operating income is not unique because of the number of variables involved. The breakeven point under absorption costing depends on (1) fixed manufacturing costs, (2) fixed operating (marketing) costs, (3) contribution margin per unit, (4) unit level of production, and (5) the capacity level chosen as the denominator to set the fixed manufacturing cost rate. Diff: 2 Type: ES CPA Competencies: Chapter 9 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 9-5
Cost Accounting: A Managerial Emphasis - Cdn. Ed., 9e (Datar) Chapter 10 Analysis of Cost Behaviour 10.1 Describe linear cost functions and their behaviour. 1) A linear cost function is a function in which the graph of total costs versus a single cost driver forms a straight line, within the relevant range. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-1
2) When estimating linear cost functions, it is assumed that variations in total cost of a cost object cannot be explained by variations in a single cost driver. Answer: FALSE Explanation: Variations in the level of a single activity (the cost driver) explain the variations in the related total costs. Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-1
3) A mixed cost has a fixed element. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-1
4) Correctly identifying the cost driver and separating fixed from variable costs are important inputs for many management decisions. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-1
5) When estimating a cost function, cost behavior can be approximated by a linear cost function within the relevant range. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-1
6) A cost function is a ________. A) process of calculating present value of projected cash flows B) process of allocating costs to cost centers or cost objects C) mathematical description of how a cost changes with changes in the level of an activity relating to that cost D) is a very thorough and detailed way of identifying a cost object when there is a physical relationship between inputs and outputs Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-1
7) Which of the following is an equation of a variable cost function? A) Y = ax + bx B) Y = a + bx C) Y = b D) Y = a E) Y = bx Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-1
8) Which of the following describes the intercept in a linear cost function? A) the component of fixed costs that, within the relevant range, does not vary with changes in the level of the cost driver B) the component of fixed costs that, within the relevant range, does vary with changes in the level of the cost driver C) the component of variable costs that, within the relevant range, does not vary with changes in the level of the cost driver D) the component of variable costs that, within the relevant range, does vary with changes in the level of the cost driver E) the sum of the components of both fixed and variable costs that, within the relevant range, do not vary with changes in the level of the cost driver Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-1
9) For April, the month just ended, the cost components to make tapes were $2 per tape plus fixed costs of $10,000. One thousand tapes were produced. For May the cost to make tapes will be $2.20 per tape plus fixed costs of $10,000. Fifteen hundred tapes are expected to be produced. What are the estimates for the intercept and slope coefficient for May, respectively? A) $2.00 and $10,000.00 B) $2.20 and $10,000.00 C) $10,000.00 and $2.00 D) $10,000.00 and $2.20 E) $22,000 and $10,000 Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-1
10) The cost function y = 1,000 + 5X A) has a slope coefficient of 1,000. B) is curvilinear because of the 5X. C) is a straight line. D) represents a fixed cost. E) is missing the slope coefficient. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-1
11) Which of the following statements related to assumptions about estimating linear cost functions is TRUE? A) Variations in a single cost driver explain variations in total costs. B) A cost object is anything for which a separate measurement of costs is desired. C) A linear function approximates cost behaviour at all ranges of production. D) Correlation refers to the relationship between fixed and variable costs. E) The graph of total costs does not form a straight line within the relevant range because of variable costs. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-1
12) Ottawa Co. employs 30 individuals. Ten employees are paid $10 per hour for 180 hours a month and the rest are salaried employees paid $6,000 a month. How would the total costs of personnel be classified? A) variable and fixed B) a fixed cost within a relevant range C) a variable cost within a relevant range D) a mixed cost E) a fixed cost Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-1
13) For February, the cost components of a picture frame include $0.25 for the glass, $.65 for the wooden frame, and $0.80 for assembly. The assembly desk and tools cost $500. 1,000 frames are expected to be produced in the coming year. What cost function best represents these costs? A) y = 1.70 + 500X B) y = 500 + 1.70X C) y = 2.10 + 1,000X D) y = .90 + 500X E) y = 500 + 0.90X Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-1
14) The cost components of a heater include $35 for the compressor, $12 for the sheet molded compound frame, and $80 per unit for assembly. The factory machines and tools fixed cost is $50,000. The company expects to produce 1,500 heaters in the coming year. What cost function best represents these costs? A) y = 1,500 + 127X B) y = 1,500 + 50,000X C) y = 50,000 + 1,500X D) y = 50,000 + 127X E) y = 50,080 + 47X Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-1
15) Compute the estimated costs for each of the following equations assuming the following costs for July: Fixed manufacturing cost Variable cost per machine-hour Number of hours used
$70,000 6 2,000
In addition, state whether each is for a variable, fixed, or mixed cost. a. b. c. d.
Total estimated costs = intercept Total estimated costs = constant Total estimated costs = constant + (slope × cost driver) Total estimated costs = slope coefficient × cost driver
In addition, state whether each is for a variable, fixed, or mixed cost. Answer: a. fixed, $70,000 b. fixed, $70,000 c. mixed, $70,000 + ($6 × 2,000) = $82,000 d. variable, $6 × 2,000 = $12,000 Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-1
16) Compute the estimated costs for each of the following equations, assuming the following costs for July: Fixed manufacturing cost $40,000 Variable cost per machine-hour 6 Number of hours used 1,200 In addition, state whether each is for a variable, fixed, or mixed cost. a. Total estimated costs = intercept b. Total estimated costs = constant c. Total estimated costs = constant + (slope × cost driver) d. Total estimated costs = slope coefficient × cost driver Answer: a. fixed, $40,000 b. fixed, $40,000 c. mixed, $40,000 + ($6 × 1,200) = $47,200 d. variable, $6 × 1,200 = $7,200 Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-1
17) Write a linear cost function equation for each of the following conditions. Use y for estimated costs and X for the activity of the cost driver. a. Direct manufacturing labour is $30 per hour. b. Direct materials cost is $8.00 per cubic metre. c. Utilities have a minimum charge of $3,000 plus a charge of $0.05 per kilowatt hour. d. Factory supplies average $10 per day plus $1.00 for each machine-hour per day. e. Total manufacturing amortization includes $6,000 for straight-line plant amortization plus machinery amortization of $100 for each day operated. Answer: a. y = $30X b. y = $8X c. y = $3,000 + $0.05X d. y = $10 + $1X e. y = $6,000 + $100X Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-1
18) Write a linear cost function equation for each of the following conditions. Use y for estimated costs
and X for activity of the cost driver. a. Direct manufacturing labour is $30 per hour. b. Direct materials cost is $9.20 per cubic yard. c. Utilities have a minimum charge of $1,000 plus a charge of $0.05 per kilowatt-hour. d. Machine operating costs include $300,000 of machine depreciation per year, plus $75 of utility costs for each day the machinery is in operation. Answer: a. y = $30X b. y = $9.20X c. y = $1,000 + $0.05X d. y = $300,000 + $75X Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-1
19) Write a linear cost function equation for each of the following conditions. Use y for estimated costs and X for activity of the cost driver. a. Direct materials cost is $2.50 per kilogram. b. Direct labour cost is $33.50 per hour. c. Auto rental has a fixed fee of $250.00 per day plus $1.00 per kilometre driven. d. Machine operating costs include $900 of maintenance per month and $10.00 of coolant usage costs for each day the machinery is in operation. Answer: a. y = $2.50X b. y = $33.50X c. y = $250 + $1.00X d. y = $900 + $10X Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-1
20) Write a linear cost function equation for each of the following conditions. Use y for estimated costs and X for activity of the cost driver. a. Direct materials cost is $1.75 per kilogram. b. Direct labour cost is $16.75 per hour. c. Auto rental has a fixed fee of $175.00 per day plus $.50 per kilometre driven. d. Machine operating costs include $1350 of maintenance per month and $5.00 of coolant usage costs for each day the machinery is in operation. Answer: a. y = $1.75X b. y = $16.75X c. y = $175 + $0.50X d. y = $1350 + $5X Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-1
21) Write a linear cost function equation for each of the following conditions. Use y for estimated costs and X for activity of the cost driver. a. Direct materials cost is $11.30 per kilogram. b. Direct labour cost is $119.20 per hour. c. Auto rental has a fixed fee of $120.00 per day plus $.40 per kilometre driven. d. Machine operating costs include $1500 of maintenance per month and $2 of coolant usage costs for each day the machinery is in operation. Answer: a. y = $11.30X b. y = $119.20X c. y = $120 + $0.40X d. y = $1500 + $2X Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-1
22) Describe the two assumptions upon which managers often estimate cost functions. Answer: Managers often estimate cost functions based on two assumptions: 1. Variations in the level of a single activity (the cost driver) explain the variations in the related total costs. 2. Cost behaviour is approximated by a linear cost function within the relevant range. A relevant range is the range of the activity in which there is a relationship between total cost and the level of activity. For a linear cost function represented graphically, total cost versus the level of a single activity related to that cost is a straight line within the relevant range. Diff: 2 Type: ES CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-1
10.2 Explain the importance of causality in estimating cost functions. 1) A cause-and-effect relationship, relative to cost drivers and resulting costs, may develop because of physical relationships, contractual relationships, or implicit relationships. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-2
2) The selection of the best measure of benefit will depend upon the corresponding change in the cost pool. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-2
3) There is a homogeneous relationship between the individual cost items in the dependent variable pool and the cost driver when each activity whose costs are included in the dependent variable has the same cost driver. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-2
4) Managers should use past data to create a cost function and then use the exact information provided by that cost function to create the budgetary forecast for the next year. Answer: FALSE Explanation: Managers are interested in estimating past cost-behavior functions because the estimates can help them make more accurate cost predictions, or forecasts, about future costs. But better management decisions, cost predictions, and estimation of cost functions can be achieved only if managers correctly identify the factors that affect costs. Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-2
5) Which of the following statements regarding a linear cost function is TRUE? A) When there are only fixed costs, total material costs increase as the number of units produced increases. B) The slope coefficient of a mixed cost line intersects the vertical axis at zero. C) The relationship between the cost driver and the fixed cost is represented by the cost-benefit relationship. D) It is easier to identify a single measure of benefit in a more heterogeneous cost pool. E) A linear cost function for manufacturing overhead can be graphed when their is a cause-and-effect relationship between the level of activity and the costs related to that level of activity. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-2
6) Which of the following does NOT represent a cause-and-effect relationship? A) Material costs increase as the number of units produced increases. B) A company is charged 40 cents for each brochure printed and mailed. C) Utility costs increase at the same time that insurance costs increase. D) It makes sense that if a complex product has a large number of parts it will take longer to assemble than a simple product with fewer parts. E) The amount of direct labour used. Answer: C Diff: 3 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-2
7) Understanding the drivers of costs is crucially important for managing costs. Provide two causes that create a cause-and-effect relationship between a cost driver and a cost. Answer: Any two of: 1. A physical relationship between the level of activity and costs. 2. A contractual arrangement. 3. Knowledge of operations. For example, when number of parts is used as the activity measure of ordering costs, a product with many parts will incur higher ordering costs than a product with few parts. Diff: 2 Type: ES CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-2
10.3 Understand various methods of cost estimation. 1) The account analysis method estimates cost functions by classifying various cost accounts as variable, fixed, or mixed with respect to the identified level of activity. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-3
2) All of the following are approaches to cost estimation EXCEPT A) the account analysis method. B) the conference method. C) the flexible cost analysis method. D) the industrial engineering method. E) quantitative analysis. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-3
3) Which of the following statements about the cost estimation methods is FALSE? A) With the conference method, the accuracy of the cost estimates largely depends on the accuracy and details of the inputs. B) The methods require more historical data than most quantitative analysis. C) The methods are not mutually exclusive. D) There are four methods generally used for cost estimation. E) Many organizations use a combination of the approaches. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-3
4) The industrial-engineering method is A) for analyzing relationships between inputs and outputs in physical terms. B) for significant costs which cannot be easily traced. C) used only for governmental contracts which are cost plus based. D) used with qualitative rather than quantitative information. E) used with both qualitative and quantitative information. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-3
5) The collection of information on costs and their drivers, gathered through observations and interviews, from departments within an organization is known as the A) account analysis method. B) conference method. C) industrial-engineering method. D) quantitative analysis method. E) departmental analysis method. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-3
6) Which cost estimation method typically uses qualitative analysis rather than quantitative analysis? A) the account analysis method B) the conference method C) the industrial-engineering method D) the quantitative analysis method E) the departmental analysis method Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-3
7) Which cost estimation method uses time-and-motion studies to reveal that to make a high-quality men's suit jacket, it takes 3 hours of direct labour effort per jacket and 5 minutes of a salaried manager's time to perform quality control? A) the accrual accounting method B) the high-low method C) the industrial engineering method D) the cash accounting method Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-3
8) Which cost estimation method would be described as a formal method to fit linear cost functions to past data observations? A) the account analysis method B) the conference method C) the industrial-engineering method D) the quantitative analysis method E) the departmental analysis method Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-3
9) The account analysis method estimates cost functions ________. A) by classifying cost accounts as variable, fixed, or mixed based on qualitative analysis B) using time-and-motion studies C) at a high cost, which renders it seldom used D) in a manner that cannot be usefully combined with any other cost estimation methods Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-3
Answer the following question(s) using the information below. Penny's TV and Appliance Store is a small company that has the following information pertaining to current year operations. Sales (2,000 televisions) Cost of goods sold Store manager's salary per year Operating costs per year Advertising and promotion per year Commissions (4% of sales)
$900,000 400,000 70,000 157,000 15,000 36,000
10) What was the Fahmy's TV variable cost per unit sold? A) $18 B) $235 C) $339 D) $200 E) $218 Answer: E Explanation: ($400,000 + $36,000)/2,000 = $218 per unit Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-3
11) What were total fixed costs at Fahmy's TV for the current year? A) $242,000 B) $436,000 C) $678,000 D) $227,000 E) $278,000 Answer: A Explanation: $70,000 + $157,000 + $15,000 = $242,000 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-3
12) What are the estimated total costs if Fahmy's expects to sell 3,000 units next year? A) $896,000 B) $678,000 C) $1,259,000 D) $269,000 E) $542,000 Answer: A Explanation: $896,000 = $70,000 + $157,000 + $15,000 + [($400,000 + $36,000)/2,000] × 3,000 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-3
Answer the following question(s) using the information below. COCO Store is a small retail company that has the following information pertaining to current year operations. Sales (2,500 fruit bowls) Cost of goods sold Manager's salary allocation Rent cost allocation Advertising Commissions (10% of sales)
$100,000 45,000 20,000 700 2,000 10,000
13) What was the COCO Store variable cost per unit sold? A) $30 B) $22 C) $44 D) $18 E) $4 Answer: B Explanation: ($45,000 + $10,000)/2,500 = $22 per unit Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-3
14) What were total fixed costs at COCO Store for the current year? A) $45,000 B) $20,700 C) $22,700 D) $32,700 E) $2,700 Answer: C Explanation: $20,000 + $700 + $2,000 = $22,700 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-3
15) What are the estimated total costs if COCO's expects to sell 3,000 units next year? A) $86,700 B) $98,700 C) $76,700 D) $88,700 E) $84,240 Answer: D Explanation: $22,700 + (3,000 units × $22/unit) = $88,700 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-3
Answer the following question(s) using the information below. Penny's TV and Appliance Store is a small company that has the following information pertaining to current year operations. Sales (2,000 televisions) Cost of goods sold Store manager's salary per year Operating costs per year Advertising and promotion per year Commissions (4% of sales)
$900,000 400,000 70,000 157,000 15,000 36,000
16) Which cost estimation method is being used by Penny's TV and Appliance Store? A) the industrial engineering method B) the conference method C) the high-low method D) the quantitative analysis method E) the account analysis method Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-3
Use the information below to answer the following question(s). Nova Scotia is a small computer software company which uses the account analysis method and has hired you to perform some management advisory services. The company sold 2,500 high quality payroll programs last year. Cost of goods sold Store manager's salary Secretary's salary Operating costs (Store) Sales Personnel 4 employees Salary Commissions of 15% of sales Advertising and promotion per year Sales
$600,000 80,000 40,000 120,000 $29,000 each ? 20,000 1,200,000
17) What is the variable cost per unit sold? A) $180,000 B) $320 C) $312 D) $240 E) $72 Answer: C Explanation: ($600,000/2,500 units) = $240 ($1,200,000 × .15 = $180,000/2,500 units = 72 $312 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-3
18) What is the total cost per unit sold? A) $240.00 B) $288.00 C) $358.40 D) $362.40 E) $462.40 Answer: E Explanation: y = a + bx y = [$80,000 + $40,000 + $120,000 + $29,000(4) + $20,000] + ($312 × 2,500) = $1,156,000 cost per unit = $1,156,000/2,500 = $462.40 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-3
19) What would be the estimated cost per unit if Nova Scotia expects to sell 2,000 units next year? A) $300 B) $312 C) $370 D) $498 E) $500 Answer: E Explanation: y = $376,000 + (312 × 2,000 units) = $1,000,000 cost per unit = $1,000,000/2,000 = $500 per unit Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-3
20) What is the predicted indirect manufacturing labour cost if 160 machine-hours are budgeted and 170 are actually worked, assuming the estimated cost function is y = $81.04 + 5.32x? A) $985.44 B) $932.24 C) $904.40 D) $851.20 E) $81.04 Answer: B Explanation: y = $81.04 + ($5.32 × 160) = $932.24 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-3
Answer the following question(s) using the information below: At the Teddy Bear Company, the cost of the personnel department has always been charged to the various departments based upon the number of employees. Recently, opinions gathered from the department managers indicated that the number of new hires might also be a predictor of personnel costs to be assigned. Total personnel costs are $320,000.
Cost Driver Number of employees Number of new hires
Department A 30 8
Department B 270 12
Department C 100 5
21) If the number of employees is considered to be the cost driver, what amount of personnel costs will be allocated to Department A? A) $24,000 B) $10,667 C) $102,400 D) $40,000 E) $50,000 Answer: A Explanation: [30/(30 + 270 + 100)] × $320,000 = $24,000 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-3
22) If the number of new hires is considered to be the cost driver, what amount of personnel costs will be allocated to Department A? A) $24,000 B) $10,667 C) $102,400 D) $40,000 E) $50,000 Answer: C Explanation: [8/(8 + 12 + 5)] × $320,000 = $102,400 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-3
23) The cost of the personnel department at the Miller Company has always been charged to the production departments based upon number of employees. Recently, opinions gathered from the department managers indicated that the number of new hires might also be a predictor of personnel costs to be assigned. Total personnel department costs are $120,000.
Cost Driver Number of employees The number of new hires
Department A 300 15
Department B 250 25
Department C 50 10
Required: Using the above data, prepare a report that contrasts the different amounts of personnel department cost that would be allocated to each of the production departments if the cost driver used is: a. number of employees. b. the number of new hires. c. Which cost estimation method is being used by Miller Company? Answer: Department Department Department Cost Driver A B C a. Number of employees 300/600 250/600 50/600 $60,000 $50,000 $10,000 b. The number of new hires 15/50 25/50 10/50 $36,000 $60,000 $24,000 c. Miller Company is using the conference method for cost estimation. Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-3
24) At the Corner Brook Company, the cost of the library and information centre has always been charged
to the various departments based upon the number of employees. Recently, opinions gathered from the department managers indicated that the number of engineers might also be a predictor of personnel costs to be assigned. Total library and information costs are $150,000.
Cost Driver Number of employees Number of engineers
Department A 125 0
Department B 500 75
Department C 125 25
Required: Using the above data, prepare a report that contrasts the different amounts of the library and information centre cost that would be allocated to each of the departments if the cost driver used is: a. number of employees. b. the number of engineers. c. Which cost estimation method is being used by Corner Brook Company? Answer: Department Department Department Cost Driver A B C a. Number of employees 125/750 500/750 125/750 $25,000 $100,000 $25,000 b. The number of engineers 0/100 75/100 25/100 $0 $112,500 $37,500 c. Corner Brook Company is using the conference method for cost estimation. Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-3
25) Miller's Good Value Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2019 operations. Sales (5,000 microwave ovens) Cost of goods sold Store manager's salary per year Operating costs per year Advertising and promotion per year Commissions (4% of sales)
$1,350,000 540,000 75,000 225,000 25,000 67,500
Required: Determine the operating costs using the account analysis method if Miller's expects to sell 6,500 units next year. Answer: $1,114,750 = ($75,000 + $225,000 + 25,000) + [[($540,000 + $67,500)/5,000] × 6,500] Explanation: ($540,000 + $67,500)/5,000 = $121.50 per unit Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-3
26) Lumberjack Inc. is a manufacturer of equipment for the forestry industry. The following account analysis represents account data for the past fiscal year:
Direct materials Direct manufacturing labour Utilities Supervision labour Shipping and receiving Maintenance Depreciation Rent, property taxes, central office
Classification all variable all variable 90% variable 10% variable 20% variable 25% variable 0% variable 0% variable
Amount $3,900,000 1,200,000 64,000 250,000 180,000 150,000 500,000 400,000
The company produced 25,000 pieces of equipment in the past fiscal year. Required: 1. Create a linear cost function for total costs using the account analysis method. 2. Forecast total cost for the upcoming year if production is budgeted at 30,000 pieces of equipment. Answer: 1. Variable Fixed Total Direct materials $3,900,000 $3,900,000 Direct manufacturing labour 1,200,000 1,200,000 Utilities 57,600 $ 6,400 64,000 Supervision labour 25,000 225,000 250,000 Shipping and receiving 36,000 144,000 180,000 Maintenance 37,500 112,500 150,000 Depreciation 500,000 500,000 Rent, property taxes, central office 400,000 400,000 Total $5,256,100 $1,387,900 $6,644,000 Variable cost per unit = $5,256,100/25,000 units = $210.24 y = $1,387,900 + $210.24x 2. y = $1,387,900 + ($210.24 × 30,000 ) = $7,695,100 Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-3
27) Munir Hassan, controller, gathered data on overhead costs and direct labour-hours over the past 12 months. List and discuss the different approaches Munir can use to estimate a cost function for overhead costs using direct labour-hours as the cost driver. Answer: The four approaches to cost estimation are: 1. 2. 3. 4.
Industrial engineering method Conference method Account analysis method Quantitative analysis of current or past cost relationships
The industrial engineering method, also called the work-measurement method, estimates cost functions by analyzing the relationship between inputs and outputs in physical terms. The conference method estimates cost functions on the basis of analysis and opinions about costs and their drivers gathered from various departments of an organization (purchasing, process engineering, manufacturing, employee relations, etc.). The account analysis method estimates cost functions by classifying cost accounts in the ledger as variable, fixed, or mixed with respect to the identified cost driver. Quantitative analysis of cost relationships are formal methods, such as the high-low method or regression, to fit linear cost functions to past data observations. Diff: 2 Type: ES CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-3
10.4 Outline the steps in estimating a cost function using quantitative analysis. 1) There is poor goodness of fit if the predicted values do not match actual cost observation. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-4
2) Cross-sectional data pertain to the same entity over successive past periods. Answer: FALSE Explanation: Time-series data pertain to the same entity (organization, plant, activity, and so on) over successive past periods. Diff: 1 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-4
3) The advantage of the high-low method when compared to regression analysis is that it considers multiple data points. Answer: FALSE Explanation: The disadvantage of the high-low method is that it ignores information from all but two observations when estimating the cost function. Diff: 1 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-4
4) For cost estimation purposes data must be collected using both time-series data and cross-sectional data. Answer: FALSE Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-4
5) Time-series data analysis includes
A) using a variety of time periods to measure the independent variable. B) using the highest and lowest observation. C) observing different entities during the same time period. D) comparing information in different cost pools. E) analyzing cost drivers at different levels of production. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-4
6) Cross-sectional data analysis includes A) using a variety of time periods to measure the dependent variable. B) using the highest and lowest observation. C) analyzing different cost drivers. D) comparing information in different cost pools. E) observing different entities during the same time period. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-4
Use the information below to answer the following question(s). Presented below is the production data for the last six months of the year for the mixed costs incurred by Mount Pearl Company. Month July August September October November December
Cost $24,450 20,120 32,400 44,200 29,000 36,680
Units 8,200 6,400 10,600 15,000 9,600 13,200
7) Using the high-low method, the cost function would be stated as ________. A) y = $2,200 + $2.80x B) y = $17,816 + $0.36x C) y = $536 + $3.06x D) y = $24,450 + $0.33x E) y = $39,250 + $0.33x Answer: A Explanation: b = ($44,200 - $20,120)/(15,000 - 6,400) = $2.80 $44,200 = a + $2.80 (15,000) $2,200 = a Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4
8) The total cost at an operating level of 10,000 units would be ________. A) $31,136 B) $30,200 C) $21,416 D) $42,550 E) $46,625 Answer: B Explanation: y = $2,200 + $2.80x y = $2,200 + $2.80(10,000) y = $30,200 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4
Use the information below to answer the following question(s). The Edmundston Corporation has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable. Edmundston Corporation has heard about a method of measuring cost functions called the high-low method and has decided to use it in this situation. Cost $20,000 12,200 17,000 15,640 18,200 22,080 21,200 18,600
Hours 7,000 4,000 5,200 4,900 6,000 7,800 7,480 6,760
9) The cost function would be stated as ________. A) y = $13,386 + $0.46x B) y = $10,680 + $0.38x C) y = $5,056 + $2.16x D) y = $1,800 + $2.16x E) y = $1,800 + $2.60x Answer: E Explanation: b = ($22,080 - $12,200)/(7,800 - 4,000) = $2.60 $22,080 = a + $2.60 (7,800) $1,800 = a Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4
10) The total cost at an operating level of 2,850 hours would be ________. A) $19,210 B) $11,763 C) $14,697 D) $11,212 E) $9,210 Answer: E Explanation: y = $1,800 + $2.60x y = $1,800 + $2.60(2,850) y = $9,210 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4
Use the information below to answer the following question(s). The Dieppe Company uses the high-low method to estimate the cost function. The information for the current year is provided below.
Highest observation of cost driver Lowest observation of cost driver
Machine Hours 240 110
Labour Costs $4,000 2,960
11) What is Dieppe Company's slope coefficient per machine hour? A) $26.91 B) $18.00 C) $16.67 D) $10.00 E) $8.00 Answer: E Explanation: Slope = ($4,000 - $2,960)/(240 - 110) = $8.00 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4
12) What is the constant for the estimating cost equation? A) $2,080 B) $2,960 C) $3,970 D) $4,000 E) $8,000 Answer: A Explanation: EITHER: Constant = $4,000 - ($8.00 × 240 hours) = $2,080 OR: Constant = $2,960 - ($8.00 × 110 hours) = $2,080 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4
13) What is the estimate of Dieppe's cost function when 200 machine hours are used? A) $1,840.00 B) $1,997.50 C) $2,280.00 D) $3,333.33 E) $3,680.00 Answer: E Explanation: y = $2,080 + ($8 × 200) = $3,680 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4
Use the information below to answer the following question(s). At the high point of the relevant range, labour hours at Fredericton Restoration were 10,000 and wages were $22,500. At the low point of the relevant range, labour hours were 7,500 and wages were $17,500. 14) Using the high-low method determine the slope coefficient per labour hour at Fredericton Restoration? A) $5.25 B) $4.00 C) $2.00 D) $0.50 E) $0.25 Answer: C Explanation: Slope = ($22,500 - 17,500)/(10,000 - 7,500) = $2.00 per labour hour Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4
15) Using the high-low method, determine the constant at Fredericton Restoration? A) $17,500 B) $13,750 C) $2,500 D) $1,250 E) $750 Answer: C Explanation: EITHER: Constant = $22,500 - ($2 × 10,000) = $2,500 OR: Constant = $17,500 - ($2 × 7,500) = $2,500 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4
16) What is the high-low estimate of the labour costs at Fredericton Restoration when 8,000 hours are used? A) $21,500 B) $18,500 C) $17,750 D) $17,250 E) $17,125 Answer: B Explanation: y = $2,500 + ($2 × 8,000) = $18,500 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4
17) When using the high-low method, the denominator in the equation that determines the slope is the A) dependent variable. B) independent variable. C) difference between the high and low observations of the cost driver. D) difference between the high and low observations of the dependent variables. E) the intercept. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-4
18) When using the high-low method, the two observations used are the high and low observations of the A) cost driver. B) dependent variables. C) outliers. D) mixed costs. E) total pool cost. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-4
Answer the following question(s) using the information below. The Miramichi Company uses the high-low method to estimate its cost function. The information for the current year is provided below:
Highest observation of cost driver Lowest observation of cost driver
Machine-hours 2,000 1,000
Costs $225,000 $125,000
19) What is the slope coefficient per machine-hour? A) $125.00 B) $12.50 C) $10.00 D) $100.00 E) $0.50 Answer: D Explanation: Slope = ($225,000 - $125,000)/(2,000 - 1,000) = $100 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4
20) What is the constant for the estimating cost equation? A) $125,000 B) $225,000 C) $25,000 D) $0 E) $12,500 Answer: C Explanation: EITHER: Constant = $225,000 - ($100.00 × 2,000 hours) = $25,000 OR: Constant = $125,000 - ($100.00 × 1,000 hours) = $25,000 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4
21) What is the estimate of the total cost when 1,100 machine-hours are used? A) $125,000 B) $135,000 C) $150,000 D) $200,000 E) $136,000 Answer: B Explanation: y = $25,000 + ($100 × 1,100) = $135,000 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4
Use the information below to answer the following question(s). The Barnett Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable. Barnett Company has heard about a method of measuring cost functions called the high-low method and has decided to use it in this situation. Cost $24,900 24,000 36,400 44,160 45,000
Hours 5,250 5,500 7,500 9,750 9,500
22) What is the cost function derived from using the high-low method? A) y = $43,191 + $0.19x B) y = $4,875 + $4.28x C) y = $41,900 + $0.23x D) y = $2,430 + $4.28x E) y = -$4,875 + $5.25x Answer: D Explanation: b = ($44,160 - $24,900)/(9,750 - 5,250) = $4.28 for the highest and lowest values of the cost driver $44,160 = a + ($4.28 × 9.750) a = $2,430 Cost function is y = $2,430 + $4.28x Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4
23) What is the estimated total cost at an operating level of 8,000 hours? A) $39,115 B) $36,670 C) $44,711 D) $43,470 E) $37,125 Answer: B Explanation: b = ($44,160 - $24,900)/(9,750 - 5,250) = $4.28 for the highest and lowest values of the cost driver $44,160 = a + ($4.28 × 9.750) a = $2,430 Cost function is y = $2,430 + $4.28x $36,670 = $2,430 + ($4.28 × 8,000) Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4
24) The managers of the production department have decided to use the production levels of 2018 and 2019 as examples of the highest and lowest years of operating levels. During 2018 the department used 280,000 litres of chemicals and during 2019 it used 240,000 litres. The department's costs for 2018 were $460,000, but only $400,000 in 2019. Required: Using the high-low method determine the cost estimating equation for the department if litres of direct material are used as the cost driver? Answer: Slope (variable cost) = ($460,000 - $400,000)/(280,000 - 240,000) = $60,000/40,000 = $1.50 Constant (fixed cost) = $400,000 - $1.50(240,000) = $40,000 Estimating equation = $40,000 + $1.50D Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4
25) Cari's Locker Service ran its freezer in January, a slow month, for 200 hours for a total cost of $60,000. In June, a peak month, the freezer ran for 1,000 hours for a total cost of $92,000. Required: Using the high-low method determine the average cost of running the machine one hour in a month were the freezer ran for 800 hours? Answer: Slope (variable costs) = ($92,000 - $60,000)/(1,000 - 200) = $32,000/800 hours = $40 Constant (fixed cost)
= $92,000 - (1,000 × $40) = $52,000
Estimating equation
= $52,000 + $40D
Total costs of 800 hours
= $52,000 + $40(800) = $84,000
Average cost at 800 hour level = $84,000/800 = $105 per hour Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4
26) A cost analyst collected the following information for the Machining Department: Observation July August September October November
Machine-hours 8,000 9,200 7,600 8,800 9,000
Total Operating Costs $60,000 66,000 61,000 64,000 65,000
Required: a. Determine the estimating cost function with machine-hours as the cost driver using the high-low method. b. If December's estimated machine-hours total 8,400, what is the estimated cost of the Machining Department? Answer: a. Slope coefficient = ($66,000 - $61,000)/(9,200 - 7,600) = $5,000/1,600 = $3.125 per machine-hour Constant = $66,000 - ($3.125 × 9,200) = $66,000 - $28,750 = $37,250 Estimating equation = $37,250 + $3.125x b. December's estimated costs = $37,250 + $3.125(8,400) = $63,500 Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4
27) Birch Canvas and Tarp manufactures canvas products in a highly automated assembly plant in Edmonton, Alberta. Their automated system is in its first year of operation, and management is still unsure of the best way to estimate the overhead costs of operations for budgetary purposes. For the first six months of operations the following data were collected: Observation January February March April May June
Machine-hours 1,950 1,825 1,900 1,650 1,625 1,550
Kilowatt-hours 2,260,000 2,170,000 2,250,000 2,145,000 2,100,000 2,060,000
Total Overhead Costs $116,000 114,000 115,000 114,000 105,000 100,000
Required: a. Compute a cost estimating equation for each independent variable (machine-hours and kilowatthours) using the high-low method. b. For July the company ran the machines for 1,600 hours and used 2,075,000 kilowatt hours of power. The overhead costs totalled $95,000. Which driver was the best predictor for July?
Answer: a. Machine-hours: Slope coefficient = ($116,000 - $100,000)/(1,950 - 1,550) = $16,000/400 = $40.00 per machine-hour Constant = $116,000 - ($40 × 1,950) = $38,000 Machine-hour estimating equation = $38,000 + $40x Kilowatt-hours: Slope coefficient = ($116,000 - $100,000)/(2,260,000 - 2,060,000) = $16,000/200,000 = $0.08 per kilowatt-hour Constant = $116,000 - ($0.08 × 2,260,000) = $(64,800) Kilowatt-hour estimating equation = -$64,800 + $0.08x b. July's estimated costs: with machine-hours = $38,000 + $40(1,600) = $102,000 with kilowatt-hours = -$64,800 + $0.08(2,075,000) = $101,200 The best estimator for July was the kilowatt-hour cost driver. Diff: 3 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4
28) Tessmer Manufacturing Company produces inventory in a highly automated assembly plant in Windsor, Ontario. The automated system is in its first year of operation and management is still unsure of the best way to estimate the overhead costs of operations for budgetary purposes. For the first six months of operations, the following data were collected:
January February March April May June
Machine-hours 3,800 3,650 3,900 3,300 3,250 3,100
Kilowatt-hours 4,520,000 4,340,000 4,500,000 4,290,000 4,200,000 4,120,000
Total Overhead Costs $138,000 136,800 139,200 136,800 126,000 120,000
Required: a. Use the high-low method to determine the estimating cost function with machine-hours as the cost driver. b. Use the high-low method to determine the estimating cost function with kilowatt-hours as the cost driver. c. For July, the company ran the machines for 3,150 hours and used 4,180,000 kilowatt-hours of power. The overhead costs totaled $114,000. Which cost driver was the best predictor for July? Answer: a. Machine-hours: Slope coefficient = ($139,200 - $120,000)/(3,900 - 3,100) = $24.00 per machine-hour Constant = $139,200 - ($24 × 3,900) = $45,600 Machine-hour estimating equation = $45,600 + $24X b.
Kilowatt-hours: Slope coefficient = ($138,000 - $120,000)/(4,520,000 - 4,120,000) = $0.045 per kilowatt-hour Constant = $138,000 - ($0.045 × 4,520,000) = -$65,400 Kilowatt-hour estimating equation = -$65,400 + $0.045KWH
c.
July's estimated costs: with machine-hours = $45,600 + ($24 × 3,150) = $121,200 with kilowatt-hours = -$65,400 + ($0.045 × 4,180,000) = $122,700 The best estimator for July was the machine-hour cost driver.
Diff: 3 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4
29) The Wildcat Company has provided the following information for the factory overhead cost pool: Units of Output Indirect materials Indirect labour Supervisors' salaries Equipment depreciation Maintenance Utilities Total
30,000 Units $180,000 1,080,000 312,000 151,200 81,600 384,000 $2,188,800
42,000 Units $252,000 1,512,000 312,000 151,200 110,400 528,000 $2,865,600
Required: Using the high-low method and the information provided above, a. identify the linear cost function equation and b. estimate the total cost at 36,000 units of output. Answer: a. Variable cost = ($2,865,600 - $2,188,800)/(42,000 - 30,000) = $56.40 Fixed cost = $2,865,600 - ($56.40 × 42,000) = $496,800 Cost function is y = $496,800 + $56.40x b.
Output level of 36,000 units = $496,800 + ($56.40 × 36,000) = $2,527,200 total cost
Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4
30) Patrick Ross, the president of Ross's Wild Game Company, has asked for information about the cost behaviour of manufacturing overhead costs. Specifically, he wants to know how much overhead cost is fixed and how much is variable. The following data are the only records available: Month February March April May June
Machine-hours 1,700 2,800 1,000 2,500 3,500
Overhead Costs $20,500 22,250 19,950 21,500 23,950
Required: Using the high-low method, determine the overhead cost equation. Use machine-hours as your cost driver. Answer: High: June 3,500 $23,950 Low: April 1,000 19,950 Difference 2,500 $4,000 Variable cost per MH: $4,000/2,500 = $1.60 per MH Fixed cost: $19,950 = a + $1.60 × 1,000 a = $18,350 Estimated cost equation: y = $18,350 + $1.60x Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4
31) As part of his job as cost analyst, Max Thompson collected the following information concerning the operations of the Machining Department: Observation January February March April May
Machine-hours 4,000 4,600 3,800 4,400 4,500
Total Operating Costs $45,000 49,500 45,750 48,000 49,800
Required: a. Use the high-low method to determine the estimating cost function with machine-hours as the cost driver. b. If June's estimated machine-hours total 4,200, what are the total estimated costs of the Machining Department? Answer: a. Slope coefficient = ($49,500 - $45,750)/(4,600 - 3,800) = $4.6875 per machine-hour Constant = $49,500 - ($4.6875 × 4,600) = $27,937.50 Estimating equation = $27,937.50 + $4.6875x b. June's estimated costs = $27,937.50 + $4.6875 × 4,200 = $47,625 Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4
32) Wimmer's Storage ran its freezer in February, a slow month, for 360 hours for a total cost of $57,600. In July, a peak month, the freezer ran for 720 hours for a total cost of $82,080. Required: a. Using the high-low method, determine the overhead cost equation for the department if hours of freezer use are used as the cost driver? b. What is the estimated total cost at an operating level of 500 hours? Answer: a. Slope (variable costs) = ($82,080 - $57,600)/(720 - 360) = $68
b.
Constant (fixed cost)
= $82,080 - (720 × $68) = $33,120
Estimating equation
= $33,120 + $68DLH
Total costs of 500 hours = $33,120 + $68 × 500 = $67,120
Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4
33) The managers of the production department have decided to use the production levels of 2019 and 2020 as examples of the highest and lowest years of operating levels. Data for those years are as follows: Year 2019 2020
Chemicals used 140,000 litres 120,000 litres
Overhead Costs $115,000 $100,000
Required: Using the high-low method, determine the overhead cost equation for the department if litres of chemicals are used as the cost driver? Answer: Slope (variable cost) = ($115,000 - $100,000)/(140,000 - 120,000) = $0.75 Constant (fixed cost)
= $100,000 - $0.75(120,000) = $10,000
Estimating equation = $10,000 + $0.75DM Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4
34) Presented below are the production data for the first six months of the year for the mixed costs incurred by Gallup Company. Month January February March April May June
Cost $4,890 4,024 6,480 8,840 5,800 7,336
Units 4,100 3,200 5,300 7,500 4,800 6,600
Required: Using the high-low method determine the forecasted cost for July if the number of units produced is expected to be 5,000. Answer: b = ($8,840 - $4,024)/(7,500 - 3,200) = $1.12 $8,840 = a + ($1.12 × 7,500) a = $440 Cost function is y = $440 + $1.12x y = $440 + ($1.12 × 5,000 units) = $6,040 Explanation: $36,880 Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4
35) The Gangwere Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable. Gangwere Company has heard about a method of measuring cost functions called the high-low method and has decided to use it in this situation. Month January February March April May June
Cost $40,000 24,400 31,280 36,400 44,160 42,400
Hours 3,500 2,000 2,450 3,000 3,900 3,740
Required: Using the high-low method determine the forecasted cost for July if the number of hours used is expected to be 3,200. Answer: b = ($44,160 - $24,400)/(3,900 - 2,000) = $10.40 $44,160 = a + $10.40 × 3,900 a = $3,600 y = $3,600 + ($10.40 × 3,200 hours) = $36,880 Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4
36) The Kochen Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable. Month January February March April May June
Cost $41,000 26,766 31,280 36,400 48,200 43,500
Hours 3,500 2,120 2,790 3,450 4,100 3,980
Required: Using the high-low method determine the forecasted cost for July if the number of hours used is expected to be 3,000. Answer: b = ($48,200 - $26,766)/(4,100 - 2,120) = $10.83 $44,900 = a + ($10.83 × 4,100) a = $497 y = $497 + ($10.83 × 3,000 hours) = $32,987 Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-1; 10-4
37) List and briefly describe the five steps in estimating a cost function using quantitative analysis. Answer: Step 1: Choose the dependent variable. Choice of the dependent variable (the cost to be predicted and managed) will depend on the cost function being estimated. Step 2: Identify the independent variable, or cost driver. The independent variable (level of activity or cost driver) is the factor used to predict the dependent variable (costs). Step 3: Collect data on the dependent variable and the cost driver. This is usually the most difficult step in cost analysis. Cost analysts obtain data from company documents, from interviews with managers, and through special studies. These data may be time series data or cross-sectional data. Step 4: Plot the data. The general relationship between the cost driver and costs can be readily observed in a graphical representation of the data, which is commonly called a plot of the data. The plot provides insight into the relevant range of the cost function, and reveals whether the relationship between the driver and costs is approximately linear. Step 5: Estimate the cost function and evaluate the cost driver of the estimated cost function. The high––low method and regression analysis are the two most frequently described forms of quantitative analysis. Diff: 2 Type: ES CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-4
10.5 Explain nonlinear cost functions, in particular those arising from learning curve effects. 1) An "economy of scale" function is an example of a linear cost function. Answer: FALSE Explanation: A nonlinear cost function is a cost function for which the graph of total costs is not a straight line within the relevant range. In an economy of scale situation, where there is a possibility of producing double the product for less than double the cost; the function would be nonlinear. Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-5
2) A step cost function is an example of a linear function. Answer: FALSE Explanation: A step cost function is a nonlinear cost function. Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-5
3) Which of the following is an example of a nonlinear cost function? A) variable-cost functions B) fixed-cost functions C) learning curves D) mixed cost functions Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-5
4) A nonlinear cost function A) has two constants and a single slope. B) does not effectively describe the behaviour of outside the relevant range. C) never describes the behaviour of costs in relation to the cost driver. D) always describes the behaviour of costs in relation to the cost drivers. E) means the relevant range cannot be determined for that cost. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-5
5) The fixed costs from adding a second shift to a factory can best be described as a A) step variable-cost function B) linear cost function C) curvi-linear cost function D) fixed-step curve E) step fixed-cost function Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-5
6) Discuss the potential use of nonlinear curves in cost functions and cost analysis. Give some examples. Answer: Cost functions are not always linear. A nonlinear cost function is a cost function for which the graph of total costs is not a straight line within the relevant range of operations. One example is a series of straight line segments that change their slopes at critical intersection points within the range of operation. Another example would be a step function. A step function is a function where the cost remains the same over various ranges of the level of activity, but the cost increases by discrete amounts (or steps) as the level of activity advances from one range to another. In addition to the examples mentioned above, there are situations where the cost or use of resources can be represented by a curve instead of a single straight line or a group of segmented straight lines. One example of a curve is a learning curve. A learning curve is a function that measures how labour-hours per unit decline as units of production increase because workers are learning and becoming better at their jobs. Diff: 2 Type: ES CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-5
10.6 Describe the impact of time as a cost driver. 1) The customer response time reveals how quickly customers respond to a company's new products. Answer: FALSE Explanation: Customer-response time is the length of time between a customer placing an order for a product or service and the time the product or service is delivered to the customer. Diff: 1 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-6
2) Customer response time is the time between when a company first markets a new product, and when sales exceed supplies on hand (test inventory). Answer: FALSE Explanation: Customer-response time is the length of time between a customer placing an order for a product or service and the time the product or service is delivered to the customer. Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-6
3) Uncertainty about when customers will demand a product or service is generally credited as being the primary cause of bottlenecks. Answer: FALSE Explanation: Bottlenecks due to limited capacity. Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-6
4) Manufacturing lead time is a combination of order receipt time and order manufacturing time. Answer: FALSE Explanation: Manufacturing cycle time (also called manufacturing lead time ) is the length of time between receiving an order and producing a finished good; it is the sum of waiting time and manufacturing time for an order. Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-6
5) Manufacturing lead times can affect costs but do not affect sales revenue. Answer: FALSE Explanation: Manufacturing cycle times affect both revenues and costs. Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-6
6) Customer-response time is a measure of how long it takes for the customer to return a call. Answer: FALSE Explanation: Customer response time is how long it takes from the time a customer places an order for a product or service to the time the product or service is delivered to the customer. Diff: 1 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-6
7) Manufacturing lead time is the sum of waiting time and manufacturing time for an order. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-6
8) Two important drivers of time are limited capacity and bottlenecks. Answer: FALSE Explanation: The drivers of time are uncertainty and limited capacity (also known as bottleneck). Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-6
9) The average waiting time is the average amount of time an order will wait at the company's shipping office before it is sent to the customer. Answer: FALSE Explanation: The average waiting time is the average amount of time that an order will wait in line before it is set up and processed. Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-6
10) Inventory carrying costs include the opportunity cost of the investment. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-6
11) Which of the following is NOT included in customer response time? A) order delivery time B) order manufacturing time C) order waiting time D) order receipt time E) order opening time Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-6
12) Manufacturing lead time includes A) all indirect time. B) waiting time. C) marketing time. D) time to process the customer's order to delivery. E) all indirect time and waiting time. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-6
13) ________ is the amount of time from when a customer places an order for a product or requests a service to when the product or service is delivered to the customer. A) A bottleneck B) A time driver C) Customer response time D) Manufacturing lead time E) Quality customer time Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-6
14) On-time performance is A) the time it takes distribution to pick up an order and deliver it to the customer. B) within 2 standard deviations of customer response time. C) within 2 standard deviations of manufacturing time. D) equal to customer response time, divided by the number of orders from a specific customer. E) when the product is delivered at the time scheduled to be delivered. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-6
15) ________ refers to the average amount of time that an order will be in line before it is set up and processed. A) Average manufacturing cycle time B) Average customer response time C) Average waiting time D) Average on-time performance E) Average setup time (per cycle) Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-6
16) A factor where the change in the factor causes a change in the speed with which an activity is undertaken is referred to as A) a bottleneck. B) value added time. C) opportunity cost. D) cycle time. E) a time driver. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-6
17) The annual capacity of a machine is 12,000 hours, with the balance being taken for routine maintenance. It takes 10 hours to process one job (each job = 1 batch),. Altogether, there are seven employees who operate the machine at different times. Orders for the first six months of the year, which are typical, have averaged 50 jobs per month. The company expects 300 orders over the next six months. Which of the following is TRUE? A) Expected capacity utilization = 700 batches. B) Expected capacity utilization = 650 batches. C) Expected capacity utilization = 600 batches. D) Average waiting time is not relevant when expected capacity utilization is less than capacity. E) Waiting time for at least one order will be nil. Answer: E Explanation: Since annual capacity exceeds utilization, at least one unit will have a zero wait time. Average wait time will not be zero, however. Diff: 3 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-6
18) For a fast-food restaurant the average waiting time might be formulated as which of the following equations? A) B) [(average number of customers) × (average serving time)]/capacity C) D) E) [(average number of employees) × (average serving time)]/serving time Answer: A Diff: 3 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-6
19) The demand for Niagara Glass Company's products varies, ranging from 10 to 20 windows a day with an average of 15. John Ballard is the only worker, and he works a maximum of eight hours a day, five days a week. Each order is one window, and each window takes 26 minutes to install. What is the average waiting time in minutes? A) 1.6 B) 4.4 C) 28.2 D) 56.33 E) 82.3 Answer: D Explanation: Waiting minutes = [15 × 262]/[2 × (480 minutes per day - (15 × 26))] = 10,140/180 = 56.33 minutes Diff: 3 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-6
20) The demand for Niagara Glass Company's products varies. Each order is one window, and each window takes 26 minutes to install. Assuming the wait time is 12 minutes and order receipt time equals 21 minutes, what is the cycle time for an order on average? A) 21 minutes B) 26 minutes C) 38 minutes D) 41 minutes E) 59 minutes Answer: C Explanation: Cycle time = waiting time + manufacturing time = 12 + 26 = 38 because wait time is assumed in the question Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-6
21) The demand for John Wick Glass Company's products varies, ranging from 10 to 20 windows a day with an average of 15. John Wick is the only worker, and he works a maximum of eight hours a day, five days a week. Each order is one window, and each window takes 26 minutes to install. The company plans to add doors to its product line and anticipates selling an average of 5 doors per day. Each door takes 12 minutes to install. What is the average waiting time if Wick is the only worker? A) 38.0 minutes B) 112.4 minutes C) 181.0 minutes D) 410.0 minutes E) 523.4 minutes Answer: C Explanation: WT = = 10,860/60 = 181 minutes Diff: 3 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-6
22) The demand for John Wick Glass Company's products varies, ranging from 10 to 20 windows a day with an average of 15. John Wick is the only worker, and he works a maximum of eight hours a day, five days a week. Each order is one window, and each window takes 26 minutes to install. The company plans to add doors to its product line and anticipates that they will sell an average of 5 doors per day. Each door takes 12 minutes to install. John Wick is concerned with the increased waiting time if the company adds doors. To offset this concern, the company can hire a part-time employee. This will decrease window time to 20 minutes and door time to 10 minutes, increase the cost of windows from $10 to $12, and increase the cost of doors from $6 to $7.50. Since Wick is giving customers faster service, the company will increase its prices from $17 to $20 for windows and from $10 to $12 for doors.
What is the expected daily revenue with and without doors, respectively, assuming average sales units are used and the company hires a part-time employee if doors are sold? A) $230 and $170 B) $260 and $200 C) $360 and $255 D) $315 and $300 E) $400 and $340 Answer: C Explanation: With doors = (15 × $20) + (5 × $12) = $360 Without doors = 15 × $17 = $255 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-6
23) The demand for John Wick Glass Company's products varies, ranging from 10 to 20 windows a day with an average of 15. John Wick is the only worker, and he works a maximum of eight hours a day, five days a week. Each order is one window, and each window takes 26 minutes to install. The company plans to add doors to its product line and anticipates that they will sell an average of 5 doors per day. Each door takes 12 minutes to install. John Wick is concerned with the increased waiting time if the company adds doors. To offset this concern, the company can hire a part-time employee. This will decrease windows time to 20 minutes and doors to 10 minutes. However, this will increase the cost of windows from $10 to $12 and doors from $6 to $7.50. Since he is giving customers faster service, he will increase his prices from $17 to $20 for windows and from $10 to $12 for doors. What is the daily contribution margin if he sells both windows and doors and the part-time person is hired? A) $185.00 B) $142.50 C) $140.00 D) $97.50 E) $72.00 Answer: B Explanation: Sales (15 × $20) + (5 × $12) $360.00 Variable costs (15 × $12) + (5 × $7.50) 217.50 Contribution margin $142.50 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-6
24) A company has identified the following data: order waiting time order manufacturing lead time order receipt time order manufacturing cycle time
8 minutes 18 minutes 7 minutes 72 minutes
What is the order manufacturing time? A) 25 minutes B) 15 minutes C) 18 minutes D) 64 minutes E) 79 minutes Answer: D Explanation: 72 - 8 = 64 minutes Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-6
25) Speed Printing Shop has two workstations, cutting and pasting. The cutting station is limited by the speed of operating the cutting machine. Pasting is limited by the speed of the workers. Pasting normally waits on work from cutting. Each department currently works an eight-hour day. The company is considering having cutting begin work two hours earlier than pasting each day; the two departments would then finish their work at the same time. Not only does this eliminate the bottleneck, it increases finished units produced each day by 80 units. All units produced can be sold, even though the change increases inventory stock by 10 percent from 200 units. The cost of operating the cutting department two more hours each day is $800. The contribution margin of the finished products is $3 each. Inventory carrying costs are $0.20 per unit per day. What is the change in the daily contribution margin if the change is made? A) $(396) B) $(564) C) $240 D) $236 E) $(604) Answer: B Explanation: Total contribution margin (80 × $3) $240 Carrying costs (20 × $0.20) -4 Increased costs -800 Net change in contribution margin $(564) Diff: 3 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-6
Answer the following question(s) using the information below: The tool crib at a large manufacturing company is responsible for providing tools to the factory workers on demand. The tool crib has a variable demand. Historically, its demand has ranged from 150 to 250 small tools per day with an average of 200. Diane, the tool crib attendant, works eight hours a day, five days a week. Each order is for one small tool and each small tool takes Diane 2 minutes to retrieve from the bins. 26) What is the average waiting time, in minutes? A) 2 B) 3 C) 5 D) 2.5 E) 7 Answer: C Explanation: Waiting minutes = [200 × (2 2)]/{2 × [480 minutes per day - (200 × 2)]} = 5 minutes Diff: 3 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-6
27) What is the tool crib cycle time for an order? A) 2 minutes per tool B) 3 minutes per tool C) 5 minutes per tool D) 7 minutes per tool E) 4 minutes per tool Answer: D Explanation: Waiting minutes = [200 × (2 squared)]/{[2 × [480 minutes per day - (200 × 2)]} = 5 minutes Cycle time = waiting time + manufacturing time = 5 + 2 = 7 minutes Diff: 3 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-6
28) Diane has been asked to consider plans to add the retrieval of larger tooling fixtures to her duties. She anticipates that there would be an average of 12 tooling fixtures per day requested. Each tooling fixture would take Diane 4 minutes to retrieve. What is the average waiting time, in minutes, if Diane continues to be the only worker that would retrieve the small tools as well as the larger tooling fixtures? A) 5.0 minutes B) 10.0 minutes C) 15.5 minutes D) 18.5 minutes E) 31.0 minutes Answer: C Explanation: WT =
= 992/64 = 15.5 minutes
Diff: 3 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-6
29) White Laundry has a variable demand. The daily demand ranges from 100 to 140 customers a day with an average of 5 items. The average daily demand is 110 customers. The laundry operates 10 hours a day. Each order takes approximately 5 minutes. Required: a. What is the average customer waiting time in minutes? b. What is the cycle time for an order? c. The manager has decided that the waiting time is too long and has increased the work day to 11 hours. What is the waiting time now? Will the customers be any happier? Answer: a. Waiting minutes = [110 × 52]/[2 × (600 minutes per day - (110 × 5))] = 2,750/100 = = 27.5 minutes b.
Cycle time = waiting time + processing time = 27.5 + 5 = 32.5 minutes
c.
Waiting minutes = [110 × 52]/[2 × (660 minutes per day - (110 × 5))] = 2,750/220 = 12.5 minutes
The customers are probably not much happier unless they change the time when they stop by the laundry. If the customers now fill the 11-hour day, the new reduced waiting time will be a definite improvement. Diff: 3 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-6
30) Norton's Convenience store has a variable demand. The daily demand ranges from 270 to 330 customers a day who average purchasing 5 items each. The average daily demand is 300 customers. The convenience store currently operates 12 hours a day. Each order takes approximately 2 minutes. Required: a. What is the average customer waiting time, in minutes? b. What is the cycle time for an order? c. What is the waiting time if the average daily demand remains at 300 customers? Answer: a. Waiting minutes = [300 × (2) 2]/{2 × [720 minutes per day - (300 × 2)]} = 5 minutes b.
Cycle time = waiting time + processing time = 5 + 2 = 7 minutes
c.
Waiting minutes = [300 × (2) 2]/{2 × [900 minutes per day - 300 × 2)]} = 2 minutes
Diff: 3 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-6
31) PMW Unlimited makes small motorcycles. The monthly demand ranges from 80 to 100 motorcycles. The average demand is 92 motorcycles. The plant operates 300 hours a month. Each cycle takes approximately 1.5 hours. If the company adds a new line of scooters, initial demand will be 20 per month. Each scooter will take 1 hour to make. To offset approaching production capacity, expanding the assembly line is possible. This will decrease manufacturing time for all products by 20 percent. However, this will increase the costs of cycles from $400 to $500 and scooters from $200 to $240. The change will also cause increases in prices from $700 to $750 for cycles and from $450 to $500 for scooters. Required: a. What is the average waiting time for cycles if they are the only item manufactured? b. What is the average waiting time if both cycles and scooters are produced and the assembly line is not enlarged? c. What is the average waiting time if both cycles and scooters are produced and the assembly line is enlarged? d. What is the expected monthly margin without scooters if the company sells all 92 cycles it manufactures? e. What are the expected monthly contribution margins if scooters are made with the current assembly line and with the new assembly line? Assume average sales and that sales equals production. f. What action do you recommend?
Answer: a.
Waiting time = [92 × 1.52/[2 × (300 hr. a month - (92 × 1.5))] = 207/324 = = 0.639 hours
b.
WT = (92 × 1.52) + (20 × 12)/[2 × (300 - (92 × 1.5) - (20 × 1))] = 227/284 = = 227/284 = 0.799 hours
c.
WT = (92 × 1.22) + (20 × 0.82)/[2 × (300 - (92 × 1.2) - (20 × 0.8))] = = 145.28/347.2 = 0.418 hours
d.
Motorcycle Sales (92 × $700) Manufacturing costs (92 × $400) Expected margin
e.
Without changing assembly line. Motorcycle Sales Scooter Sales (20 × $450) Total expected sales Manufacturing costs: Motorcycles (92 × $400) $36,800 Scooters (20 × $200) 4,000 Expected margin With new assembly line. Motorcycle Sales (92 × $750) Scooter Sales (20 × $500) Total expected sales Manufacturing costs: Motorcycles (92 × $500) Scooters (20 × $240) Expected margin
$64,400 36,800 $27,600
$64,400 9,000 $73,400
40,800 $32,600
$69,000 10,000 79,000 $46,000 4,800
50,800 $28,200
f. Unless there are critical customer relation problems with a slower response time, the scooters should be added without changing the assembly line. The expected margin is $4,400 higher without the new assembly line. Diff: 3 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-6
32) Brix, Inc. prepares frozen food for fast-food restaurants. It has two workstations, cooking and assembly. The cooking station is limited by the cooking time of the food. Assembly is limited by the speed of the workers. Assembly normally waits on food from cooking. Because the demand has increased in recent months to 2,800 dozen units, management is considering adding another cook station or else having the cooks start to work earlier. The monthly cost of operating the cooking station one more hour each day is $2,400. The cost of adding another cook station would add an average of $10 per hour. The current operating hours total eight hours a day, 22 days a month. The contribution margin of the finished products is currently $8 per dozen. Inventory carrying costs average $2.00 per dozen per month. Either the extra hour or the new cook station would increase production by 20 dozen a day with a long-run increase of 80 dozen units in finished goods inventory to 280 dozen. Required: a. What is the total production per month if the change is made? b. What is the increase in the expected monthly product contribution for each of the possible changes? Assume long-run production equals sales. Answer: a. Total dozen per month = 2,800 + (22 × 20) = 3,240 b. Current product contribution margin (2,800 × $8) Carrying costs (200 × $2) Current net contribution More hours: Expected product contribution margin (3,240 × $8) Carrying costs (280 × $2) Increased costs Expected net product contribution New cook station: Expected product contribution margin 3,240 × $8 Carrying costs (280 × $2) Increased costs ($10 × 22 × 8) Expected net product contribution
$22,400 400 $22,000
$25,920 $560 2,400
2,960 $22,960
$25,920 $560 1,760
2,320 $23,600
Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-6
33) Sof-T, Inc. manufactures foam products for upholstery companies. It has two workstations, mixing/heating and cutting/assembly. The mixing/heating station is limited by the capacity of the equipment. Cutting/assembly is limited by the speed of the cutting machine workers. Cutting/assembly normally lags behind mixing/heating. Because the demand has increased in recent months, management is considering adding another person to cutting/assembly. This would increase the department's costs by $4,000 a month. If the person is moved from mixing/heating, that department's cost would decline by $3,000. By keeping mixing/heating labourers the same, the department can increase production on-call by 10 percent. Current idle time in mixing/heating averages one-half person a day for a net cost of $1,400 a month. Required: a. What is the net effect of moving the employee from mixing/heating to cutting/assembly? b. What is the net effect if a new employee is hired for cutting/assembly? Answer: a. Additional costs of cutting/assembly $4,000 Savings from mixing/heating (3,000) Savings from idle time in mixing/heating (1,400) Net savings
$(400)
b. Addition of new employee Opportunity cost of idle time
$4,000 0
Net costs
$4,000
Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-6
34) Aunt Lydia's Cookies, Inc., prepares frozen gourmet cookies for shipment to upscale grocery stores as well as mailing to web and catalog customers. The company has two workstations, cooking and distribution. The cooking station is limited by the cooking time of the food. Distribution is limited by the speed of the workers. Distribution normally waits on food from cooking. Because the demand has increased in recent months to 4,000 dozen cookies, management is considering adding another oven in the cooking station or else having the cooks start to work earlier. The monthly cost of operating the cooking station one more hour each day is $1,500. The cost of adding another cooking station would add an average of $8 per hour. The current operating hours total eight hours a day, 24 days a month. The contribution margin of the finished products is currently $2 per dozen. Inventory carrying costs average $0.50 per dozen per month. Either the extra hour or the new cooking station would increase production by 50 dozen a day, with a long-run increase of 100 dozen units in finished goods inventory to 500 dozen. Required: a. What is the total production per month if the change is made? b. What is the increase in the expected monthly product contribution for each of the possible changes? Assume long-run production equals sales. c. What course of action would you recommend?
Answer: a. Total dozen per month = 4,000 + (24 × 50) = 5,200 b. Current product contribution margin (4,000 × $2) Carrying costs (400 × $0.50) Current net contribution More hours: Expected unit contribution margin (5,200 × $2) Carrying costs (500 × $0.50) Increased costs Expected net product contribution
$8,000 (200) $7,800
$10,400 $250 1,500
Increase = $8,650 - $7,800 = New oven in the cooking station: Expected unit contribution margin (5,200 × $2) Carrying costs (500 × $0.50) Increased costs ($8 × 24 × 8) Expected net product contribution Increase = $8,614 - $7,800 =
(1,750) $8,650 $850
$10,400 $250 1,536
(1,786) $8,614 $814
c. The most cost effective option is to have the cooks start to work an hour earlier and work an extra hour each day. Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-6
35) Bank of Bowmanville has variable demand for its counter services. The daily demand ranges from 200 to 250 customers a day and the average banking transaction takes 6 minutes. The average daily demand is 228 customers. The bank currently has 5 staff members serving the counter and operates 7 hours a day. Required: a. What is the average customer waiting time in minutes? b. In an effort to reduce costs, the bank is considering eliminating one of its counter services staff and having a manager fill in during two hours of the day. What would be the effect of this change on wait time? What might the customers' reaction be? Answer: a. Capacity = 5 staff × 7 hrs. × 60 minutes = 2,100 minutes/day Waiting minutes = [228 × 62]/[2 × (2,100 minutes per day - (228 × 6))] = 2,750/100 = 8,208/1,464 = 5.6 minutes b. Capacity = [4 × 7 × 60] + [1 × 2 × 60] = 1,680 + 120 = 1,800 Waiting minutes = [228 × 62]/[2 × (1,800 minutes per day - (228 × 6))] = 2,750/100 = 8,208/864 = 9.5 minutes This would increase the average wait time by 3.9 minutes to 9.5 minutes. This would likely not be perceived well by customers. This might cause customers to use more online banking services or look at competitors' services. Diff: 3 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-6
36) EcoJet Inc. has variable demand for its check-in counter services. The daily demand ranges from 3,000 to 4,000 customers, and the average check-in takes 3 minutes. The average daily demand is 3,200 customers. The airline currently has 12 staffed stations operating 16 hours a day. Required: a. What is the average customer waiting time in minutes? b. In an effort to reduce costs, the airline is considering adding six automatic check-in stations. Management estimates that 25% of their customers will use the automatic check-in stations. They would like the average wait time to increase up to 12 minutes to encourage customer participation. How many staffed stations should be in operation to facilitate this wait time? Answer: a. Capacity = 12 stations × 16 hrs. × 60 minutes =11,520 minutes/day Waiting minutes = [3,200 × 32]/[2 × (11,520 minutes per day - (3,200 × 3))] = 7.5 minutes b. Capacity = "n" stations × 16 hrs. × 60 minutes ="x" minutes/day "x" minutes per day: 12 minutes = [(3,200 × 75%) × 32]/[2 × ("x" minutes per day - ((3,200 × 75%) × 3)))] 12 = 21,600/(2x - 14,400) 12 × (2x - 14,400) = 21,600 24x - 172,800 = 21,600 x = 8,100 minutes "n" stations" = 8,100 minutes/(16 hrs. × 60 minutes) = 8.44 rounded to 9 stations Proof: 8.44 stations × 16 hrs. × 60 minutes = 8,102 minutes Waiting minutes = [(2,400) × 32]/[2 × (8,102 minutes per day - (2,400 × 3))] = 12 minutes Diff: 3 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-6
37) Adventure Gear Ltd. manufactures a self inflatable mattress that is marketed as durable and light weight. Their target market is serious adventurers who demand high quality. Quality and time data for the last two years include the following:
Mattresses produced and sold Number of defective units shipped Number of customer complaints Units scrapped before shipping Manufacturing cycle time Average customer response time
Previous Year 6,000 6 11 30 1 day 5 days
Current Year 6,600 9 21 20 3 days 8 days
Required: a. For each year calculate the following (round percentages to three decimal places): i. percentage of defective units shipped ii. customer complaints as a percentage of units shipped iii. percentage of units scrapped before shipping iv. manufacture cycle time as a percentage of average customer response time b. Analyze the quality data and provide that includes a description of the relationship between the quality metrics. c. Describe the factors that could have caused the increase in manufacturing cycle time and customer response time. Analyse the time data. Answer: a. Previous Current Year Year percentage of defective units shipped 0.100% 0.137% customer complaints as a percentage of units shipped 0.183% 0.318% percentage of units scrapped before shipping 0.500% 0.303% manufacture cycle time % of customer response time 20.0% 37.5% b. Quality has decreased significantly in percentage terms. It appears that the increase in external failure costs can be at least partly attributed to the decrease in the identification of units that should be scrapped. c. Manufacturing cycle time can be increased by either waiting time or manufacturing time. In addition to these, customer response time can be increased by receipt time and delivery time. In this case customer response time increase more than manufacturing cycle time so either or both of receipt time and delivery time will have increased. Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Analyzing Objective: LO 10-6
38) Acme Janitor Service has always taken pride in the fact that it had one of the highest customer response times in the home cleaning service industry. However, as the products manufactured for this industry have become more complex, the company's customer response time has declined. Required: Why do you think that response time declined if all other quality factors have remained the same? Answer: If quality production was one of the other control factors, and the products became more complex, it probably takes more time to inspect and verify the quality of the finished products. Therefore, to maintain the same level of quality, additional time had to be put into the product cycle. Apparently this was not allowed for in the setting of the production times of the newer, more complex products. Diff: 2 Type: ES CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-6
10.7 Describe quality control and its implications as a cost driver. 1) The number of defects in units shipped to customers as a percentage of total units shipped, is a nonfinancial measure. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
2) Costs of quality (COQ) reports usually do not consider opportunity costs. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
3) Costs of Quality (COQ) are classified into four categories: prevention costs, appraisal costs, inspection costs, and warranty costs. Answer: FALSE Explanation: Costs of Quality (COQ) are classified into four categories: prevention costs, appraisal costs, internal failure costs, and external failure costs. Diff: 1 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-7
4) The costs relating to product testing are classified as prevention costs. Answer: FALSE Explanation: The costs relating to product testing are classified as appraisal costs. Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
5) The costs relating to new materials testing are classified as appraisal costs. Answer: FALSE Explanation: The costs relating to product testing are classified as prevention costs. Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
6) An example of a nonfinancial balanced scorecard measure concerning internal business processes would be the percentage of products that fail soon after delivery. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
7) A measurement of market share is considered a financial measure of customer satisfaction in a balanced scorecard. Answer: FALSE Explanation: A measurement of market share is considered a nonfinancial measure of customer satisfaction in a balanced scorecard. Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
8) Costs of quality include all of the following EXCEPT A) correction costs. B) external failure costs. C) internal failure costs. D) prevention costs. E) appraisal costs. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-7
9) Costs incurred in detecting which of the individual units do not conform to specifications are called A) correction costs. B) external failure costs. C) internal failure costs. D) prevention costs. E) appraisal costs. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-7
10) Warranty repair costs are A) prevention costs. B) appraisal costs. C) an internal failure cost. D) a marketing cost. E) an external failure cost. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
11) Try-Us-First Motors manufactures and sells off-road vehicles. The September sales were $6,000,000. Monthly design costs are $112,000 and rework is running at $75,000 per month. Its painting department is fully automated and requires substantial inspection to keep the machines operating properly. An improperly painted vehicle is very expensive to correct, and inspection hours for the 8,000 vehicles painted in September totaled 2,000 hours by 14 employees, who earn an average of $28 an hour. Ten litres of paint were used on average for each vehicle. The standard amount of paint per vehicle is nine litres. The cost of inspection for September was equal to the budgeted amount of $56,000. What are appraisal costs as a percentage of sales? A) 0.93% B) 1.25% C) 1.87% D) 2.20% E) 2.80% Answer: A Explanation: 56,000/6,000,000 = 0.93% Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-7
12) Supplier evaluations are an example of A) appraisal costs. B) prevention costs. C) internal failure costs. D) design costs. E) external failure costs. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
13) Internal failure costs include A) field repairs. B) rework. C) liability claims D) warranty expenses. E) supplier evaluations. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
14) Prevention costs include all of the following EXCEPT A) quality training. B) design engineering. C) product testing. D) supplier evaluations. E) testing of new materials. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
15) Appraisal costs include all of the following EXCEPT A) inspection. B) spoilage. C) product testing. D) process inspection. E) online product manufacturing. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
16) External failure costs include all of the following EXCEPT A) scrap. B) customer support. C) liability claims. D) transportation costs on repaired products. E) warranty costs. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
17) Costs incurred by a nonconforming product detected before it is shipped to customers are A) prevention costs. B) appraisal costs. C) internal failure costs. D) external failure costs. E) design costs. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-7
18) Preventive equipment maintenance is an example of A) prevention costs. B) appraisal costs. C) internal failure costs. D) external failure costs. E) rework costs. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
19) An example of a nonfinancial measure for customer satisfaction is A) delivery delay. B) employee turnover. C) number of defects on the production line. D) process yield. E) number of employees trained. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
20) An example of a nonfinancial measure for customer satisfaction is A) Average manufacturing time for for key products. B) Contribution margin. C) Percentage of products that fail soon after delivery. D) Number of employees trained on managing bottleneck operations. E) Number of units reworked. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
Use the information below to answer the following question(s). Bond Products has a budget of $1,200,000 in 2021 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $90,000 in variable costs. The new method will require $40,000 in training costs and $150,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 210,000 units. Appraisal costs for the year are budgeted at $500,000. The new prevention procedures will save appraisal costs of $50,000. Internal failure costs average $20 per failed unit of finished goods. The internal failure rate is expected to be 4% of all completed items. The proposed changes will cut the internal failure rate by one-half. Internal failure units are destroyed. External failure costs average $48 per failed unit. The company's average external failures average 2.5% of units sold. The new proposal will reduce this rate to 1%. Assume all units produced are sold and there are no ending inventories. 21) What is the net change in the budget of prevention costs if the procedures are automated in 2021? Will management agree with the changes? A) $100,000 decrease, yes B) $90,000 decrease, yes C) $190,000 increase, no D) $100,000 increase, yes E) $90,000 increase, no Answer: D Explanation: New costs: Training $ 40,000 New equipment 150,000 $190,000 Savings (90,000) Net increase in budget $ 100,000 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-7
22) How much will appraisal costs change assuming that the new prevention methods reduce material failures by 30% in the appraisal phase? A) $150,000 decrease B) $229,000 decrease C) $50,000 increase D) $50,000 decrease E) $84,000 decrease Answer: D Explanation: The new prevention procedures will save appraisal costs of $50,000. Diff: 1 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-7
23) How much will internal failure costs change if the internal product failures are reduced by 50% with the new procedures? A) $168,000 decrease B) $126,000 decrease C) $ 84,000 decrease D) $ 84,000 increase E) $50,000 decrease Answer: C Explanation: Internal failure rate (210,000 × 0.04) 8,400 Cost per unit × $20 Total $168,000 Savings rate × 0.50 Savings $84,000 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-7
24) How much do external failure costs change if all the changes are as the new prevention procedures anticipated? Assume all units produced are sold and there are no ending inventories. A) $126,000 decrease B) $156,400 decrease C) $100,800 decrease D) $158,900 decrease E) $151,200 decrease Answer: E Explanation: External failure costs - before (210,000 × 0.025 × $48) $252,000 External failure costs - after (210,000 × 0.01 × $48) ($100,800) Savings $151,200 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-7
25) Carl Clarkson and Lenny Lenid have been assigned to review the costs of quality at the Sprotton Chemicals Ltd. for the month of September. All amounts are in thousands (000's). Cost Item Product testing Clean up of toxic spills within the plant Employee training Quality Engineering Supplies used in testing Statistical Process Control Payments on lawsuits from product failures Total
Amount $350 14,200 200 675 500 1,750 25,000 $42,675
Some information from a competitor, Sheltonville Industries, has been leaked. You learn that Sheltonville's costs of quality (as a percentage of total costs of quality) are 15% on external failure, 20% on internal failure, 35% on appraisal and the rest on prevention. Required: a. Prepare a cost of quality report for September for the Sprotton Chemicals including calculations of each cost category as a percentage of total costs of quality. b. Compare Sprotton's approach to quality management to Sheltonville's. Comment on your findings. (What are the implications of the differences?)
Answer: a. Sprotton Sept Prevention: Quality Engineering Employee Training Statistical Process Control Total Prevention Costs Appraisal: Product Testing Supplies used in Testing Total Appraisal Costs Internal Failure: Cleanup of toxic spills in plant Total Internal Failure External Failure: Lawsuits Total External Failure Total Costs of Quality
% of Cost Sheltonville
$675 200 1,750 $2,625
6.15%
30.00%
$350 500 $850
1.99%
35.00%
$14,200 $14,200
33.27%
20.00%
58.58%
15.00%
$25,000 $25,000 $42,675
b. There is a distinct difference as to the distribution of the costs of quality between the two organizations. Sheltonville invests more in upstream costs (65% in prevention and appraisal costs) compared to Sprotton (8.14%). Failures downstream are generally more costly in terms of both actual costs (product costs are incurred when units fail and external failure costs tend to be high) and the opportunity costs from lost sales. Diff: 3 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Analyzing Objective: LO 10-7
26) The costs of quality at Yanaha Construction Ltd. for the current year are as follows: Cost Item Raw materials inspection Rework Employee training Lost contracts from dissatisfied customers Quality Engineering Supplies used in testing new materials Post construction inspection Payments on lawsuits from product failures Building inspector fees Total
Amount $17,500 89,000 36,000 15,000 45,000 2,600 62,000 40,000 26,000 $333,100
Some information from a competitor, Canada Wide Construction (CWC), has been provided. CWC's costs of quality (as a percentage of total costs of quality) are 30% on external failure, 35% on internal failure, 20% on appraisal and the rest on prevention. Required: a. Prepare a cost of quality report for the year, including calculations of each cost category as a percentage of total costs of quality. b. Compare Yanaha's approach to quality management with CWC's. Comment on your findings. (What are the implications of the differences?)
Answer: a. Yanaha Prevention: Raw materials inspection Quality Engineering Employee Training Supplies used in testing Total Prevention Costs Appraisal: Post construction inspection Building inspector fees Total Appraisal Costs Internal Failure: Rework Total Internal Failure External Failure: Lawsuits Lost contracts Total External Failure Total Costs of Quality
% of Cost
CWC
$17,500 45,000 36,000 2,600 $101,100
30%
15%
$62,000 26,000 $88,000
26%
20%
$89,000 $89,000
27%
35%
17%
30%
$40,000 15,000 $55,000 $333,100
b. There is a distinct difference as to the distribution of the costs of quality between the two organizations. Yanaha invests more in upstream costs (56% in prevention and appraisal costs) compared to CWC (35%). Failures downstream are generally more costly in terms of both actual costs (product costs are incurred when units fail and external failure costs tend to be high) and the opportunity costs from lost sales. Diff: 3 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Analyzing Objective: LO 10-7
27) Five Stars Manufacturing expects to spend $800,000 in 2022 in appraisal costs if it does not change its incoming materials inspection method. If it decides to implement a new receiving method, it will save $80,000 in fixed appraisal costs and variable costs of $0.40 per unit of finished product. The new method involves $120,000 in training costs and an additional $160,000 in annual equipment rental. It takes four units of material for each finished product. Internal failure costs average $160 per failed unit of finished goods. During 2022, 5% of all completed items had to be reworked. External failure costs average $400 per failed unit. The company's average external failures are 1% of units sold. The company carries no ending inventories, because all jobs are on a per order basis and a just-in-time inventory ordering method is used. Required: a. What is the net effect on appraisal costs for 2022, assuming the new receiving method is implemented and that 800,000 material units are received? b. How much will internal failure costs change, assuming 800,000 units of materials are received and that the new receiving method reduces the amount of UNACCEPTABLE product units in the manufacturing process by 10%? Answer: a. Expected costs $800,000 Savings: Fixed $ (80,000) Variable (320,000) ($400,000) New method: Training cost $ 120,000 Equipment cost 160,000 280,000 (120,000) New costs of method 680,000 Net change — Decrease $ 120,000 b. Internal failure costs [(800,000/4) × 0.05 × $160 10% reduction from new method Savings
$1,600,000 × 0.10 $ 160,000
Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-7
28) DiCaprio Products has a budget of $900,000 in 2022 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $80,000 in variable costs. The new method will require $40,000 in training costs and $100,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 150,000 units. Appraisal costs for the year are budgeted at $600,000. The new prevention procedures will save appraisal costs of $50,000. Internal failure costs average $15 per failed unit of finished goods. The internal failure rate is expected to be 3% of all completed items. The proposed changes will cut the internal failure rate by one-third. Internal failure units are destroyed. External failure costs average $54 per failed unit. The company's external failures average 3% of units sold. The new proposal will reduce this rate by 50%. Assume all units produced are sold and there are no ending inventories. Required: a. What is the net change in the budget of prevention costs if the procedures are automated in 2022? Will management agree with the changes? b. How much will internal failure costs change if the internal product failures are reduced by 1/3 with the new procedures? c. How much do external failure costs change if all changes are as anticipated with the new prevention procedures? Assume all units produced are sold and there are no ending inventories. Answer: a. New costs: Training $40,000 New equipment 100,000 $140,000 Savings Variable costs (80,000) Net increase in budget
$ 60,000
b. Internal failure rate (150,000 × 0.03) Cost per unit Total Savings rate Savings
4,500 × $15 $67,500 × 1/3 $22,500
c. External failure costs (150,000 × 0.03 × $54) = Savings rate Savings
$243,000 × 0.50 $121,500
Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-7
29) Discuss how a manufacturer of personal computers such as Dell Computer can benefit from the
introduction of a quality improvement program. Answer: A quality improvement program for Dell would result in substantial savings in operating costs and higher revenues. Operating costs would be reduced since fewer funds would be spent checking output and correcting defective products. Higher revenues would result since existing customers would likely increase their orders and the higher quality output would attract additional customers. In addition, a number of competitors will likely be implementing quality programs. Dell must meet the competition to succeed. Diff: 2 Type: ES CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
30) Cari and Jereme just bought a bed and breakfast inn at a very attractive price. The business had been doing poorly. Before they reopened the inn for business, they attended a seminar on operating a high quality business. Now that they are ready to open the inn, they need some advice on quality costs and management. Required: Identify four categories of quality costs. In addition, identify three items that would be classified in each of the categories. Answer: Prevention: Hiring employees with good references. Training of owners and employees. Good security. Good reservation system. Purchasing quality furniture. Appraisal: Verifying accuracy of reservation and registration procedures. Inspecting rooms, facilities, building and grounds regularly. Observing activities of employees. Testing furniture and fixtures. Taste testing food. Internal failure: Recleaning rooms and facilities. Restocking rooms with linens, glasses, etc. Out of stock supplies. Reinspection. Failure to bill on a timely basis. External failure: Responding to complaints about rooms and food. Responding to complaints about reservations. Emergency cleaning of rooms when not ready on time. Customer refunds because of unsatisfactory conditions. Opportunity cost of lost revenue resulting from unhappy customers. Diff: 3 Type: ES CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
31) Define cost of quality (COQ), list the four categories, and provide an example of each. Answer: The cost of quality (COQ) are costs incurred to prevent or rectify the production of a lowquality product. These costs focus on conformance quality and are incurred in all areas of the value chain. They are broken into four categories: 1. Prevention costs: costs incurred in precluding the production of products that do not conform to specifications. 2. Appraisal costs: costs incurred in detecting which of the individual units of products do not conform to specifications. 3. Internal failure costs: costs incurred when a nonconforming product is detected before it is shipped to customers. 4. External failure costs: costs incurred when a nonconforming product is detected after it is shipped to customers. Diff: 2 Type: ES CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
32) Compare financial and nonfinancial performance, and explain why planning and control systems should consider both. Answer: Some objectives of responsibility centres are financial in nature, such as operations budgets, profit targets and required return on investment. Other objectives are nonfinancial, such as quality, productivity and customer satisfaction. A well-designed management control system functions alike for both financial and nonfinancial objectives to develop and report measures of performance. Financial performance measures are more readily available than nonfinancial measures, but are no more important to the overall goals of the organization. By considering nonfinancial measures, the organization can improve operational control. Superior financial performance usually follows from superior nonfinancial performance. Diff: 2 Type: ES CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
33) A corporation can measure its quality performance by using financial or nonfinancial measures of quality. Discuss the merits of each method and whether the use of one precludes the use of the other. Answer: Financial measures of quality are quantifiable. The business can calculate the costs of setting up quality control systems, the costs of noncompliance with quality in terms of the internal and external costs (rework, warranty costs, etc.), and estimate the revenues lost as a result of quality problems. Nonfinancial measures of quality are useful indicators of future long-run performance. They are helpful in revealing future needs and preferences of customers and in indicating the specific areas that need improvement. The use of one measure does not preclude the use of the other. Financial measures tend to be short term in nature (what is happening now). Nonfinancial measures tend to be long term and are useful in terms of estimating trends. Financial performance measures are more readily available than nonfinancial measures, but they are no more important to the overall goals of the organization. By considering nonfinancial measures, the organization can improve operational control. Superior financial performance usually follows from superior nonfinancial performance. Diff: 2 Type: ES CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
34) Wilson's Language School manufactures CDs and DVDs to teach English as a Second Language. Wilson has just prepared a Cost of Quality Report, and the staff has noticed a decline in prevention costs as a percentage of total sales over a three-year period. What changes might Wilson expect to see in appraisal costs as a percentage of sales, internal failure costs as a percentage of sales, and external failure costs as a percentage of sales given this trend? Answer: Most likely, the decline in prevention costs as a percentage of sales over a three-year period would result in increased internal and external failure costs as a percentage of sales during this same period. The reduced prevention activities might result in more defective products. Appraisal costs as a percentage of sales might also rise as management attempts to compensate for the higher failure rates by increasing inspection and appraisal costs to prevent defects from reaching the final customer. Diff: 3 Type: ES CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
35) The Brick Shirt House is concerned about its declining sales, especially the reduction in the number of customers. For the last two years its shirts have won industry awards for high quality and trend-setting styles. At the latest executive managers' meeting everyone was blaming everyone else for the decline. After much discussion, and the presenting of some fact-finding information, it was determined that sales relationships were the cause of most of the problems. Required: What may be some of the causes and how can the causes be detected if product quality is not an issue? Answer: The causes may be customer satisfaction with sales staff (poor sales skills), delivery problems (not on time), accounting problems (poor billing and collection procedures), or poor returns and allowance policies. The causes may be detected by comparing nonfinancial measures of the company with those found in the industry. These might include measures of: number of shipments incorrect or not on time, number of customer complaints about certain areas (billing, shipping, etc.), response time to customer complaints, or a questionnaire about why former customers quit buying from the company. Diff: 2 Type: ES CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
Nidek manufactures sport swear. Classify each of the following quality costs as prevention, appraisal, internal failure or external failure. A) Prevention B) External failure C) Appraisal D) Internal failure 36) Disposal of spoiled work in process Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
37) Downtime due to quality problems Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
38) Expediting work to meet delivery schedule Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
39) Field testing Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
40) Maintaining a complaint department Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
41) Product liability Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
42) Quality training Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
43) Reinspection Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
44) Rework direct manufacturing labour and overhead Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
45) Scrap Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
46) Testing and inspecting of machinery Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
47) Testing and inspecting of direct materials Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
48) Utilities in inspection area of plant Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
49) Warranty repairs Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
Answers: 36) D 37) D 38) D 39) C 40) B 41) B 42) A 43) D 44) D 45) D 46) A 47) A 48) C 49) B The Door Company manufactures doors. Classify each of the following quality costs as prevention costs, appraisal costs, internal failure costs, or external failure costs.
A) Internal failure B) External failure C) Appraisal D) Prevention 50) Retesting of reworked products Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
51) Downtime due to quality problems Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
52) Analysis of the cause of defects in production Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
53) Depreciation of test equipment Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
54) Warranty repairs Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
55) Lost sales arising from a reputation for poor quality Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
56) Quality circles Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
57) Rework direct manufacturing labour and overhead Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
58) Net cost of spoilage Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
59) Technical support provided to suppliers Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
60) Audits of the effectiveness of the quality system Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
61) Plant utilities in the inspection area Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
62) Reentering data because of keypunch errors Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-7
Answers: 50) A 51) A 52) A 53) C 54) B 55) B 56) D 57) B 58) A 59) D 60) C 61) C 62) A
10.8 Understand issues of data collection and quality. 1) The ideal database for estimating cost functions quantitatively includes values for the independent variable over a wide range. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-8
2) Data collection problems arise when A) data are recorded electronically rather than manually. B) accrual-basis costs are used rather than cash-basis costs. C) outliers are removed. D) purely inflationary price effects are removed. E) fixed and variable costs are not separately identified and both are allocated to products on a per unit basis. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-8
3) A better database for estimating cost functions has the following characteristics. A) Fixed costs are allocated as if they are variable costs. B) Extreme observations are adjusted or removed. C) Time periods differ for measuring items included in the dependent variable and the cost driver(s). D) Homogeneous relationships between individual cost items in the dependent variable pool and cost drivers may not be present. E) There is no causal, economically plausible relationship between individual cost items in a heterogeneous mixed pool and a single cost driver. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-8
4) The ideal data base for estimating cost functions quantitatively has the following characteristic: A) The data base should consider many values spanning a wide range for the cost driver. B) There is no homogeneous relationship between the cost driver and the individual cost items. C) The gaps in the data can be reliably estimated. D) The data base should contain a few reliably measured observations. E) The data based should be based on audited accounts. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-8
5) Brad Henry has just purchased the film studio of a movie company that specializes in action adventures. He found that the company did not try to estimate the cost of making a movie. Instead it just gave the producer a budget and told him/her to make a movie within budget. Mr. Henry does not like the former movie-budget concept and desires to establish a formal cost estimation system. Required: What are some of the potential problems that may be encountered in changing from a budget to a cost estimation movie-making system? Answer: One of the first problems will be the timing of matching the cost drivers with the actual movie production process. Under the former budget system, the relationships with many of the cost drivers were probably forced to meet budget, or else poorly kept because they were substantially under budget and control over them was weak. Next will be the problem of determining which costs were fixed and which were variable under the budget system. It may be difficult to determine those which were truly variable. Timing problems will also have to be reconciled. Some costs may be incurred monthly rather than by movie, and some type of accrual will have to be made to keep the costs allocated to the proper cost driver. Lastly, there may be gaps in the historical data because only total costs had to be maintained within the budget. There was probably little attention paid to cost categories, thereby causing reliable cost data to be scarce. Diff: 3 Type: ES CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-8
6) The ideal database for estimating cost functions has two characteristics: 1. The database should contain numerous reliably measured observations of the cost driver (the independent variable) and the related costs (the dependent variable). 2. It includes values for the independent variable over a wide range. Unfortunately, management accountants rarely have the advantage of working with a database that has both characteristics. Required: Following are a list of data problems that may be encountered. Select three, then for each selection describe the describe the cause/effect of the problem and provide a remedy. 1. The time period for measuring the dependent variable does not match the period for measuring the independent variable. 2. Fixed costs are allocated as if they were variable. 3. Data are either unavailable for all observations or not uniformly available. 4. Extreme values of observations, or outliers, occur when recording costs. 5. There is no causal, economically plausible relationship between the individual cost items in a heterogeneous mixed pool and a single cost driver. 6. Inflation affects the dependent variable, the independent variable(s), or both. Answer: 1. Cause/Effect: Financial accounting records are cash based rather than accrual based resulting in sporadic recording of costs. that do not correlate with a cost driver. Remedy: Keep records on an accrual basis. 2. Cause/Effect: Variability results from multiplying a unit fixed cost based on a specific quantity of input by a different quantity of input units. Remedy: Divide total fixed costs by actual input in the relevant range, then adding unit variable costs to arrive at a total cost per output unit. 3. Cause/Effect: In attention to data collection and recording results in errors and missing data. Remedy: Formalize procedures and automate processing. 4. Cause/Effect: Abnormal operations such as those resulting from a machine break-down can create anomalies in the data. Remedy: Clean up the data by adjusting or eliminating outliers. 5. Cause/Effect: The size and composition of the cost pool result in poor correlation between total cost and potential cost drivers. Remedy: Employ ABC to create cost pools that have better correlation with cost drivers. 6. Cause/Effect: Inflation systematically effects cost pools when there is no change in the quantity of cost driver consumed. Remedy: re-specify the cost function to include inflation as a second variable and conduct multiple regression analysis. Diff: 3 Type: ES CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-8
10.9 Appendix 10A: Discuss the interpretation of regression models. 1) Statistical significance of independent variables is determined by comparing the t-value to a threshold called degrees of freedom. Answer: FALSE Explanation: Statistical significance of independent variables is determined by comparing the t-value to a threshold t-value. Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-9
2) The standard error of the estimated coefficient indicates whether a relationship exists between the predictor variable and the outcome variable that cannot be attributed to chance alone. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-9
3) Multicollinearity exists in multiple linear regression when two or more predictor variables are highly correlated with each other. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-9
4) The coefficient of determination (r2) measures the percentage of variation in Y explained by X (the independent variable). Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-9
5) The t -value of the b coefficient measures how large the value of the estimated coefficient is relative to
its specification. Answer: FALSE Explanation: The t -value of the b coefficient measures how large the value of the estimated coefficient is relative to its standard error. Diff: 1 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-9
6) The use of a single independent variable (X) to estimate the dependent variable (y) is known as A) high-low method. B) multiple regression. C) simple regression. D) singular regression. E) least squares regression. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-9
7) Simple regression analysis provides the means to evaluate a line of regression which is fitted to a plot of data and represents A) the way costs change in respect to the independent variable. B) the way costs change in respect to the dependent variable. C) the variability of expense with dollars of operation. D) the variability of expense with dollars of production. E) the estimated variability in costs. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-9
8) Regression analysis differs from high-low analysis in that regression analysis A) measures the average amount of change in the dependent variable. B) measures the total amount of change in the dependent variable. C) ignores the high and low observations of the dependent variable. D) ignores non-representative data. E) ignores both the high and low observations of the dependent variable, and non-representative data. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-9
9) The slope of the line of regression is A) the rate at which the dependent variable varies. B) the rate at which the independent variable varies. C) the level of total fixed costs. D) the level of total variable costs. E) equal to the intercept. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-9
10) Pam's Stables used two different independent variables (trainer hours and number of horses) in two different equations to evaluate the cost of training horses. The most recent results of the two regressions are as follows: Trainer's hours: Variable Constant independent variable
Coefficient Standard Error $913.32 $198.12 $20.90 $2.94
t-Value 4.61 7.11
Coefficient Standard Error $4,764.50 $1,073.09 $864.98 $247.14
t-Value 4.44 3.50
r2 = 0.56 Number of horses: Variable Constant Independent Variable r2 = 0.63 What is the estimated total cost for the coming year if 16,000 trainer hours are incurred and the stable has 400 horses to be trained, based on the best cost driver? A) $99,929.09 B) $350,756.50 C) $335,313.32 D) $84,233.50 E) $47,238.12 Answer: B Explanation: y = $4,764.50 + ($864.98 × 400) = $350,756.50 based on highest r 2, which uses # of horses as the cost driver Diff: 3 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-9
11) Leonardo's Cola was to manufacture 1,000 cases of cola next week. The accountant provided the following analysis of total manufacturing costs. Variable Constant Independent Variable
Coefficient 100 200
Standard Error 71.94 91.74
t-Value 1.39 2.18
r2 = 0.82 What is the estimated cost of producing the 1,000 cases of cola? A) $200,100 B) $72,032 C) $100,200 D) $9,000 E) $91,812 Answer: A Explanation: y = $100 + ($200 × 1,000) = $200,100 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-9
12) What common sense criteria should be applied to statistical analysis when evaluating cost drivers using regression analysis? A) goodness of fit B) economic plausibility C) the significance of the difference between the costs associated with the highest and lowest observations of the cost driver D) the significance of the difference between the unit values for the highest and lowest observations of the cost driver E) the Durbin-Watson statistic Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-9
13) In multiple regression, when two or more independent variables are correlated with one another, the situation is known as A) heteroscedasticity. B) homoscedasticity. C) spurious correlation. D) autocorrelation. E) multicollinearity. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-9
14) Multicollinearity exists when which of the following conditions is present? A) At least two variables change due to changes in the cost driver. B) There are at least two cost pools (usually separated for fixed and variable costs). C) The underlying value of the coefficient can only be explained in relation to dependent variables. D) There are two or more statistically significant observations of at least two independent variables. E) Two or more independent variables are highly correlated with each other. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-9
15) In regression analysis, the term independence of residuals means A) the residual term for any one observation is not related to the residual term of any other observation. B) the data exhibit serial correlation. C) the data exhibit autocorrelation. D) there is a systematic pattern of positive residuals. E) there is a systematic pattern of either only positive or only negative residuals. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-9
16) Gold Chain was to manufacture 1,000 chain saws next month. Its accountant has provided the following analysis of the total manufacturing costs. Variable Constant Predictor Variable r2 = 0.71
Coefficient 200 400
Standard Error 143.88 183.49
t-Value 1.39 2.18
What is the estimated cost of producing the 1,000 chain saws? A) $400,200 B) $284,142 C) $200,400 D) $18,000 E) $9,000 Answer: A Explanation: Y = 200 + (400 × 1,000) = 400,200 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-9
17) Goodness-of-fit measures how well the predicted values in a cost estimating equation A) match the cost driver. B) match the actual cost observations. C) fit the coefficient of determination. D) rely on the independent variable. E) rely on the dependent variable. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-9
18) Which of the following statements about a high correlation between two variables s and t is FALSE? A) s may cause t. B) t may cause s. C) They both may be affected by a third variable. D) The correlation establishes an economically plausible relationship between costs and their cost drivers. E) The correlation may be due to random chance. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-9
19) The Bhaskara Corporation used regression analysis to predict the annual cost of indirect materials. The results were as follows: Intercept coefficient Standard error of Y estimate r2 Number of observations Independent variable coefficient Standard error of coefficient(s)
$21,890 $4,560 0.7832 22 11.75 2.1876
What is the linear cost function? A) y = $4,560 + $2.1876X B) y = $4,560 + $11.75X C) y = $21,890 + $4.56X D) y = $21,890 + $2.1876X E) y = $21,890 + $11.75X Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-9
20) Simple regression differs from multiple regression in that A) multiple regression uses all available data to estimate the cost function whereas simple regression only uses simple data. B) simple regression is limited to the use of only the outcome variables and multiple regression can use both outcome and predictor variables. C) simple regression uses only one predictor variable and multiple regression uses more than one predictor variable. D) simple regression uses only one outcome variable and multiple regression uses more than one outcome variable. E) the lease squares technique cannot be used for simple regression whereas it can be used for multiple regression. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-9
21) A paper company manufactures cardboard boxes. Because the efforts of manufacturing are approximately equal between labour and machinery, management is considering other possible cost drivers. By considering different cost drivers, it is anticipated that the estimating process can be improved. The following cost estimating equations with their r, values have been determined for 2018: 10-1. x = glueing time
y = $39,000 + $17x
r2 = 0.60
10-2. x = labour
y = $10,000 + $23x
r2 = 0.46
10-3. x = machinery
y = $99,000 + $3x
r2 = 0.53
Required: a. Which equation should be selected for the analysis? b. What are other factors that should be included in the selection of the estimating equation? Answer: a. Equation 1 for glueing time is slightly better than the other two equations based on r 2 values. Generally an r2 above 0.30 indicates a goodness of fit that is acceptable for most situations. Therefore all three equations are acceptable when considering only the coefficient of determination. However, because the values are so close together, other factors should be considered. b. Other factors to be considered are economic plausibility, the significance of independent variables, and specification analysis. The best cost drivers of the dependent variables are those that meet all these criteria plus that of best coefficient of determination. Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-9
22) Miller Company manufactures chairs. Because the efforts of manufacturing are approximately equal between labour and machinery, management is considering other possible cost drivers. By considering different cost drivers, it is anticipated that the estimating process can be improved. The following cost estimating equations with their r2 values have been determined for 2022: 1.
X = cutting time
y = $19,500 + $20X
2.
X = labour
y = $5,000 + $25X
r2 = 0.65 r2 = 0.49
3.
X = machinery
y = $44,500 + $5X
r2 = 0.55
Required: a. Which equation should be selected for the analysis? b. What other factors should be included in the selection of the estimating equation? Answer: a. Equation 1 for cutting time is slightly better than the other two equations based on r 2 values. Generally, an r2 above 0.30 indicates a goodness of fit that is acceptable for most situations. Therefore, all three equations are acceptable when considering only the coefficient of determination. However, because the values are so close together, other factors should be considered. b. Other factors to be considered are economic plausibility, the significance of independent variables, and specification analysis. The best cost drivers of the dependent variables are those that meet all these criteria plus that of best coefficient of determination. Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-9
23) Review the following report of the results of a simple regression program for cost estimation. Variable Coefficient Constant 24.88 Independent Variable 444.70 r2 = 0.72
Standard Error 17.90 179.31
t-Value 1.39 2.48
Required: a. What is the cost estimation equation according to the report? b. What is the goodness of fit? What does it tell about the estimating equation? Answer: a. y = $24.88 + $444.70x b. Goodness of fit is 0.72. It measures how well the predicted values match the actual observations. In this case the equation passes the goodness of fit test because it is substantially above 0.30, the threshold of acceptance. Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-9
24) The new cost analyst in your accounting department has just received a computer-generated report that contains the results of a simple regression program for cost estimation. The summary results of the report appear as follows: Variable Coefficient Constant $35.92 Independent Variable $563.80
Standard Error $16.02 $205.40
t-Value 2.24 2.74
r2 = 0.75 Required: a. What is the cost estimation equation according to the report? b. What is the goodness of fit? What does it tell about the estimating equation? Answer: a. y = $35.92 + $563.80X b. Goodness of fit is 0.75. It measures how well the predicted values match the actual observations. In this case, the equation passes the goodness of fit test because it is substantially above 0.30, the threshold of acceptance. Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-9
25) A Manufacturing Company uses two different independent variables in two different equations to evaluate the cost activities of the packaging department, machine-hours and number of packages. The most recent month's results of the two regressions are as follows: Machine hours: Variable Constant Predictor Variable
Coefficient Standard Error 652.32 209.75 44.30 24.61
t-Value 3.11 1.68
Coefficient Standard Error 65.08 75.04 4.30 2.00
t-Value 2.20 2.15
r2 = 0.29 Number of packages: Variable Constant Predictor Variable r2 = 0.61 There were twenty degrees of freedom. The critical value at the 95% level is 1.729. Required: a. What are the estimating equations for each cost driver? b. Which cost driver is best and why? Answer: a. machine-hours y = $652.32 + $44.30x number of packages y = $65.08 + $4.30x b. Machine-hours has a low r2 which implies that a small proportion of the variance is explained by machine-hours, thereby making it less attractive than number of packages as a cost predictor. For the independent variable, number of packages, the t-value of 2.15 indicates that a relationship exists between the independent and dependent variables. For machine-hours, the t-value is below 1.729, indicating that the coefficient is not significantly different from zero and that there may not be a relationship between the independent and dependent variables. The t-value of the constant terms for both drivers is greater than 1.729, therefore no distinguishing characteristic between the constants. Given the above findings, it appears that number of packages is the best predictor of costs of the packaging department. Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-9
26) Schotte Manufacturing Company uses two different independent variables (machine-hours and number of packages) in two different equations to evaluate costs of the packaging department. The most recent results of the two regressions are as follows: Machine-hours: Variable Constant Predictor Variable
Coefficient $748.30 $52.90
Standard Error $341.20 $35.20
t-Value 2.19 1.50
Coefficient $242.90 $5.60
Standard Error $75.04 $2.00
t-Value 3.24 2.80
r2 = 0.33 Number of packages: Variable Constant Predictor Variable r2 = 0.73 There were twenty degrees of freedom. The critical value at the 95% level is 1.729. Required: a. What are the estimating equations for each cost driver? b. Which cost driver is best and why? Answer: a. Machine-hours y = $748.30 + $52.90X Number of packages y = $242.90 + $5.60X b. Machine-hours has a low r2 which implies that a small proportion of the variance is explained by machine-hours, thereby making it less attractive than number of packages as a cost predictor. Also, for the independent variable, number of packages, the t-value of 2.80 indicates that a relationship exists between the independent and dependent variables. For machine-hours, the t-value (1.50) is below 1.729, indicating that the coefficient is not significantly different from zero and that there may not be a relationship between the independent and dependent variables. The t-values of the constant terms (g) for both drivers is greater than 1.729, therefore, there is no distinguishing characteristic between the constants. Given the above findings, it appears that number of packages is the best predictor of costs of the packing department. Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-9
27) Cross Distribution Company uses two different independent variables (number of orders and weight
of orders) in two different equations to evaluate costs of the packaging department. The most recent results of the two regressions are as follows: Number of orders: Variable Constant Predictor Variable
Coefficient $854.50 $12.40
Standard Error $571.02 $1.47
t-Value 2.10 7.12
Coefficient $1,642.54 $9.80
Standard Error $705.33 $2.10
t-Value 1.50 4.65
r2 = 0.87 Weight of orders: Variable Constant Predictor Variable r2 = 0.72 There were twenty degrees of freedom. The critical value at the 95% level is 1.729. Required: a. What are the estimating equations for each cost driver? b. Which cost driver is best and why? c. Prepare the cost equation using the following high and low points: High point = $12,900 and 700 orders Low point = $5,200 and 200 orders Comment on the appropriateness of this cost equation compared to the results obtained in requirement a.
Answer: a. # of orders Weight of orders
y = $854.50 + $12.40X y = $1,642.54 + $9.80X
b. Weight of orders has a lower r 2 which implies that a small proportion of the variance is explained by weight, thereby making it less attractive than number of orders as a cost predictor. Also, for the independent variable, number of orders, the t-value of 7.12 indicates that a relationship exists between the independent and dependent variables as this value is greater than the t-stat. For weight of orders, the t-value of 4.65 also indicates that a relationship exists between the independent and dependent variables. The t-values of the constant term for number of orders is greater than 1.729; however, for weight of order the value is less than the critical value. This indicates that a relationship exists for number of orders but not for weight of orders. Given the above findings, it appears that number of orders is the best predictor of costs of the packaging department. c.
variable cost = ($12,900 - $5,200)/(700 - 200) = $15.40 fixed cost = $12,900 - (700 × $15.40) = $2,120 y = $2,120 × $15.40 x
Statistically the number of orders has the highest correlation with packaging department total cost, this is followed by weight of orders. The high-low method. equation coefficients are larger than the weight of order equation coefficients so it is reasonable to conclude that there is a higher probability that this equation has less correlation with the data. This is likely due to the high-low method having only two data points. Also, there is the possibility that one or both of the data points is an outlier. Diff: 3 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-4; 10-9
28) Newton Company used linear regression analysis to obtain the following output: Payroll Department Cost Explained by Number of Employees Constant $5,800 Standard error of Y estimate 630 2 r 0.8924 Number of observations X coefficient Standard error of coefficient
20 $1.902 0.0966
Required: a. What is the total fixed cost? b. What is the variable cost per employee? c. Prepare the linear cost function. d. What is the coefficient of determination? Comment on the goodness of fit. Answer: a. The constant or intercept is the total fixed cost of $5,800. b. The variable cost per employee is the X coefficient of $1.902. c. y = $5,800 + $1.902X d. The coefficient of determination is the r2 of 0.8924. This represents a very high goodness of fit. The closer to 1.0, the better the cost driver explains the cost. Therefore, the conclusion can be drawn that there is a significant relationship between the cost of the payroll department and the number of employees. Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-9
29) Stow-a-way Luggage Ltd. manufactures luggage for the traveler concerned about excessive airline luggage fees. They have two designs of carry-on luggage. The "Exec" is targeted to business travelers and the "Companion" for those on a holiday. The company used simple regression to budget indirect costs of $823,400 based on the following equation: y = $542,400 + $5.62X, where X is 50,000 direct labour hours for a budgeted production of 250,000 units. At the end of the year the company's controller evaluated the actual costs for producing 220,000 units. Using simple regression that actual indirect cost of $810,825; represented by the following equation y = $535,400 + $5.75X for the 47,900 actual direct labour hours. Required: a. Determine the rate, efficiency/production-volume variances for the indirect costs. b. What statistical measure of serial correlation could the controller use to determine if the independence of the residuals is within an acceptable range? Answer: a. VMO rate variance = ($5.62 - $5.75) × 47,900 hours = $6,227 U VMO efficiency variance = (44,000* - 47,900) × $5.62 = $21,918 U FMO budget variance = ($542,400 - $535,400) = $7,000 F FMO production-volume variance = $542,400 - (44,000 × $10.848**) $65,088 U * standard hours allowed for output achieved = (50,000/250,000) × 220,000 units = 44,000 hours ** $542,400/44,000 hours = $10.848 b. Durbin-Watson statistic Diff: 3 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Analyzing Objective: LO 7-3; 8-2; 10-9
30) List and describe the assumptions that must hold if simple regression procedures are to give reliable estimates of coefficient values. Answer: 1. Linearity within the relevant range. A common assumption that a linear relationship exists between the independent variable X and the dependent variable Y within the relevant range. 2. Constant variance of residuals. The vertical deviation of the observed value Y from the regression line estimate y is called the residual term, disturbance term, or error term, u = Y –. y . The assumption of constant variance implies that the residual terms are unaffected by the level of the cost driver. The assumption also implies that there is a uniform scatter, or dispersion, of the data points about the regression line. 3. Independence of residuals. The assumption of independence of residuals is that the residual term for any one observation is not related to the residual term for any other observation. The problem of serial correlation (also called autocorrelation ) in the residuals arises when there is a systematic pattern in the sequence of residuals such that the residual in observation n conveys information about the residuals in observations n + 1, n + 2, and so on. 4. Normality of residuals. The normality of residuals assumption means that the residuals are distributed normally around the regression line. Diff: 3 Type: ES CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-9
Match the description with the appropriate term. A) goodness of fit B) homoskedasticity C) constant variance of residuals D) heteroscedasticity E) economic plausibility F) t-value G) standard error of the regression H) Durbin-Watson statistic I) specification analysis J) autocorrelation 31) Measures how large the value of the estimated coefficient is relative to its standard error. Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-9
32) The testing of the assumptions of regression analysis. Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-9
33) An alternative measure to the coefficient of determination (r 2). Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-9
34) A criteria used to prevent the indiscriminate inclusion of independent variables that have an acceptable correlation. Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-9
35) Measures the percentage of variation in Y (the dependent variable) explained by X (the independent variable). Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-9
36) The implication that error terms are unaffected by the level of the cost driver. Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-9
37) A constant variance of the residuals. Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-9
38) A systematic pattern in the sequence of residuals. Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-9
39) A measure of the serial correlation in the estimated residuals. Diff: 2 Type: MA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-9
Answers: 31) F 32) I 33) G 34) E 35) A 36) C 37) B 38) J 39) H
10.10 Appendix 10B: Describe a learning curve model. 1) In the incremental unit-time learning model, the incremental unit time decreases by a constant percentage each time the cumulative quantity of units produced is doubled. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-10
2) A learning curve measures the effect of learning on efficiency. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-10
3) Plotting learning curve observations is helpful in selecting the appropriate learning curve model. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-10
4) When new products are introduced, learning-curve effects can have a major influence on production scheduling. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-10
5) It is appropriate to incorporate expected learning-curve efficiencies when evaluating performance. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-10
6) The cumulative average-time learning model with a 90% learning curve indicates that if it takes 100 minutes to manufacture the first unit of a new model, then the second unit will take only 90 minutes to manufacture. Answer: FALSE Explanation: 100 × .90 = 90; (100 + X)/2 = 90; X = 80 minutes Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-10
7) The incremental unit-time learning model with a 90% learning curve indicates that if it takes 100 minutes to manufacture the first unit of a new model, then the second unit will take only 90 minutes to manufacture. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Understanding Objective: LO 10-10
8) A learning curve is a function that measures how labour-hours per unit decrease, as units of production increase. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-10
9) What is the time needed to produce the last unit when production doubles from 100 units to the 200 unit level, given that the incremental unit time learning model has a 60% learning curve, and the corresponding time at the 100 unit level of production is 4.0 minutes? A) 8.0 minutes B) 6.4 minutes C) 4.0 minutes D) 2.4 minutes E) 1.6 minutes Answer: D Explanation: 60% × 4.0 = 2.4 minutes Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-10
10) When an average unit of time declines by a constant percentage each time that the cumulative quantity of units produced is doubled, it is known as A) cumulative average time. B) incremental unit time. C) last unit time. D) relative unit time. E) cumulative unit time. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-10
11) A learning curve is a function A) that measures the decline in labour-hours per unit due to workers becoming better at a job. B) that increases at a greater rate as workers become more familiar with their tasks. C) where unit costs increase as productivity increases. D) that is linear. E) that measures productivity improvements from new technology. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-10
12) An experience curve A) is a narrower application of the learning curve. B) measures the decline in cost per unit as production decreases for various value-chain functions such as marketing as production increases. C) only measures the decline in labour-hours per unit as units produced increases. D) measures the increase in cost per unit as productivity increases. E) measures the increase in labour-hours per unit as units produced increases. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-10
13) Which of the following are learning-curve models? A) the cumulative average-time learning model and the incremental unit-time learning model B) the simple regression model and the multiple regression model C) the multicollinearity learning model and the goodness of fit learning model D) the account analysis learning model and the conference learning method model Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Remembering Objective: LO 10-10
14) To complete the first setup on a new machine took an employee 200 minutes. Using an 80% cumulative average-time learning curve indicates that the second setup on the new machine is expected to take A) 160 minutes. B) 120 minutes. C) 80 minutes. D) 60 minutes. E) 128 minutes. Answer: B Explanation: 200 × .80 = 160; (200 + X)/2 = 160; X = 120 minutes Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-10
15) To complete the first setup on a new machine took an employee 200 minutes. Using an 80% incremental unit-time learning curve indicates that the second setup on the new machine is expected to take A) 160 minutes. B) 120 minutes. C) 80 minutes. D) 60 minutes. E) 128 minutes. Answer: A Explanation: 200 × .80 = 160 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-10
16) Vestor Ltd. has estimated a 90% cumulative average-time learning curve applies to labour time to manufacture its new product. The first unit took 18 hours. If Vestor's estimates are correct, how many hours will be used to manufacture 4 total units? A) 14.58 hours B) 64.80 hours C) 72.00 hours D) 64.01 hours E) 58.32 hours Answer: E Explanation: 18 × .9 × .9 = 14.58 average 14.58 × 4 = 58.32 hours Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-10
17) Vestor Ltd. has estimated a 90% incremental unit time learning curve applies to labour time to manufacture its new product. The first unit took 18 hours. If Vestor's estimates are correct, how many hours will be used to manufacture 4 total units? A) 14.58 hours B) 64.80 hours C) 72.00 hours D) 64.01 hours E) 58.32 hours Answer: D Explanation: A 90% learning curve is a factor of -0.1520 (LN 90%/LN2) 18 + (18 × .9) + 15.23 + 14.58 = 64.01 hours 15.23 = 18 × 3 -.1520 Diff: 2 Type: MC CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-10
18) Each time Maiertree Care hires a new employee it must wait for some period of time before the employee can meet production standards. Management is unsure of the learning curve in its operations but it knows the first job by a new employee averages 60 hours and the second job averages 48 hours. Assume all jobs to be equal in size. Required: a. What is the learning curve percentage, assuming the cumulative average-time method? b. What is the time for a new employee to build 16 units with this learning curve using the cumulative average-time method? Assume the rate of learning factor is -0.1520. Answer: a. Job Hours Cumulative Cumul. Average 1 60 60 60 2 48 108 54 learning percentage = 54/60 = 0.90 b. Y = p × q = 60 × 16-0.1520 = 39.366 or 1 unit = 60 2 units = 60 × 0.9 = 54.000 4 units = 54 × 0.9 = 48.600 8 units = 48.6 × 0.9 = 43.740 16 units = 43.74 × 0.9 = 39.366 16 × 39.366 = 629.900 hours Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-10
19) Andrew Pallet Co., Inc. manufactures pallets for various manufacturing companies. Each new employee takes 10 hours to make the first pallet and 8 hours to make the second. The manufacturing overhead charge per hour is $80. Required: a. What is the learning curve percentage assuming the cumulative average method? b. What is the time needed to build 8 pallets by a new employee using the cumulative average-time method? Assume the rate of learning factor is -0.1520. c. What is the time needed to produce the 16th pallet by a new employee using the incremental unittime method? Assume the rate of learning factor is -0.3219. Answer: a. Job Hours Cumulative Cumul. Average 1 10 10 10 2 8 18 9 learning percentage = 9/10 = 0.90 Learning curve percentage = 8/10 = 0.80 b. Y = p Xq = 10 × 8-0.1520 = 7.29 hours or 1 unit = 10 2 units = 10 × 0.9 = 9.00 4 units = 9 × 0.9 = 8.10 8 units = 8.1 × 0.9 = 7.29 c.
Y = p Xq = 10 × 8-0.3219 = 4.096 hours
or 1 unit = 10 2 units = 10 × 0.8 = 8 4 units = 8 × 0.8 = 6.4 8 units = 6.4 ×.8 = 5.12 16 units = 5.12 × .8 = 4.096 Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-10
20) Harry's Picture manufactures various picture frames. Each new employee takes 5 hours to make the first picture frame and 4 hours to make the second. The manufacturing overhead charge per hour is $20. Required: a. What is the learning-curve percentage, assuming the cumulative average method? b. What is the time needed to build 8 picture frames by a new employee using the cumulative averagetime method? Assume the rate of learning factor is -0.1520. c. What is the time needed to produce the 16th frame by a new employee using the incremental unittime method? Assume the rate of learning factor is -0.3219. Answer: a. Job Hours Cumulative Cumulative Average 1 5 5 5 2 4 9 4.5 Learning percentage = 4.5/5 = 0.90 b. Y = p Xq = 5 × 8-.1520 = 3.65 hours or 1 unit = 5 2 units = 5 × 0.9 = 4.5 4 units = 4.5 × 0.9 = 4.05 8 units = 4.05 × 0.9 = 3.65 hours Time to build 8 units: 8 × 3.65 = 29.2 hours c.
Y = p Xq
= 5 × 16-0.3219 = 2.048 hours or 1 unit = 5 2 units = 5 × 0.8 = 4 4 units = 4 × 0.8 = 3.2 8 units = 3.2 × 0.8 = 2.56 16 units = 2.56 × .8 = 2.048 hours Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-10
21) Joe's Copy Centre hires a new employee. Joe knows he has to be patient with the employee until the employee gains enough experience to meet production standards. Joe is unsure of the learning curve in his operation, but he knows the first job by a new employee averages 40 minutes and the second job averages 32 minutes. Assume all jobs to be equal in size. Required: a. What is the learning-curve percentage, assuming the cumulative average-time method? b. What is the time for a new employee to do 32 jobs with this learning curve using the cumulative average-time method? You may use an index of -0.1520. Answer: a. Job Minutes Cumulative Cumulative Average 1 40 40 40 2 32 72 36 Learning percentage = 36/40 = 0.90 b.
Y
= p Xq = 40 × 16-.1520 = 23.62 minutes
or 1 unit = 40 2 units = 40 × 0.9 = 36 4 units = 36 × 0.9 = 32.4 8 units = 32.4 × 0.9 = 29.16 16 units = 29.16 × 0.9 = 26.244 32 units = 26.244 × 0.9 = 23.62 minutes 32 × 23.62 = 755.827 minutes = Approximately 12 hours and 36 minutes Diff: 2 Type: SA CPA Competencies: Chapter 10 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.2 Evaluates sustainable profit maximization and capacity management performance Skill: Applying Objective: LO 10-10
Cost Accounting: A Managerial Emphasis - Cdn. Ed., 9e (Datar) Chapter 11 Decision Making and Relevant Information 11.1 Distinguish relevant from irrelevant information in decision situations. 1) A decision model is a formal method of making a choice that uses only quantitative analyses. Answer: FALSE Explanation: A decision model is a formal method of making a choice that often involves both quantitative and qualitative analyses. Diff: 1 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-1
2) Flash City Inc. manufactures small flash drives and is considering raising the price by 75 cents a unit for the coming year. With a 75-cent price increase, demand is expected to fall by 7,000 units.
Demand Selling price Incremental cost per unit
Current 79,000 units $8.50 $5.80
Projected 72,000 units $9.25 $5.80
If the price increase is implemented, operating profit is projected to ________. A) increase by $35,100 B) decrease by $5,250 C) increase by $5,250 D) decrease by $7,000 Answer: A Explanation: Change in operating income = [72,000 × ($9.25 - $5.80)] - [79,000 × ($8.50 - $5.80)] = Increase of $35,100 Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-1
3) Flash City Inc. manufactures small flash drives and is considering raising the price by 75 cents a unit for the coming year. With a 75-cent price increase, demand is expected to fall by 7,000 units.
Demand Selling price Incremental cost per unit
Current 78,000 units $9.00 $6.80
Projected 71,000 units $9.75 $6.80
Would you recommend the 75-cent price increase? A) No, because demand decreased. B) No, because the selling price increases. C) Yes, because contribution margin per unit increases. D) Yes, because operating profits increase. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-1
11.2 Identify the differences among relevant costs for short-term and long-term production output decisions. 1) The purpose of evaluating performance in the decision process is to provide feedback. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-2
2) Anticipated future costs that differ with alternative courses of action are known as relevant costs. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-2
3) Divisional revenues which remain at the same level from year to year are known as relevant revenues. Answer: FALSE Explanation: Relevant revenues are expected future revenues. Diff: 2 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-2
4) The total cost difference between two separate alternatives in a decision making process is the net relevant cost. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-2
5) Each item included in the relevant-cost analysis should differ according to the alternative being considered and be an expected future revenue or cost. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-2
6) When choosing between two alternatives, costs that do not differ between the two alternatives can be considered to be irrelevant to that decision. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-2
7) All fixed costs are irrelevant in relevant-cost analysis. Answer: FALSE Explanation: Fixed costs that occur in the future or are different between alternatives are relevant. Diff: 2 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-2
8) All variable costs are relevant in relevant-cost analysis. Answer: FALSE Explanation: Fixed costs that occur in the future or are different between alternatives are relevant. Diff: 2 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-2
9) The last step in the decision process is normally to A) evaluate and explain outcomes. B) make assumptions and predictions. C) choose alternatives. D) perform quantitative analysis. E) gather information. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-2
10) The feedback obtained in the decision process cannot affect A) future predictions. B) the prediction method. C) the decision model. D) implementation. E) past performance. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-2
11) The Good Gameshop manufactures specialized board games. Management is attempting to search for ways to reduce costs and is considering two alternatives for an upcoming project of special games that must be delivered to the customer in 12 months' time. Management agreed to the special project job as they have an idle plant that is scheduled for demolition 18 months from now, and either alternative will easily meet the delivery deadline. Alternative 1 requires 10 machine operators and 2.5 individuals to handle direct materials. Employee pay averages $17.50 per hour and will increase to $18.50 at the mid-point (July 1) of next year. Each employee currently works 2,500 hours but will decrease to 2,400 hours if Alternative 2 is implemented. The second proposal only requires 8.5 workers. Which of the following items of information are relevant to this decision? A) property taxes for the idle plant B) hourly wage rates C) the timing of the wage increase D) the number of employees required in each alternative E) the delivery deadline Answer: D Explanation: Note: none of the other items differ between the available alternative. Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-2
12) Which of the following anticipated future costs always differ among alternative courses of actions? A) direct labour costs B) historical costs C) relevant costs D) direct materials costs E) indirect costs Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-2
13) When making decisions, it is best to use A) average costs. B) fixed costs that would be incurred. C) unit cost, rather than total cost. D) variable costs that would be incurred. E) relevant costs. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-2
14) Which of the following should management consider to avoid the pitfalls of relevant-cost analysis? A) Consider all current revenues and costs. B) Include any item of revenue or cost that is either an expected future revenue or expected future cost, and, differs between the alternatives. C) Historic revenues and costs for items that differ according to alternatives should be considered. D) Assume that all fixed costs are irrelevant. E) Assume that all variable costs are relevant. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-2
15) Sunk costs ________. A) are relevant B) are differential C) have future implications D) are irrelevant and ignored when evaluating alternatives E) are evaluated to determine if they are relevant or not evaluating alternatives Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-2
16) Past costs that are unavoidable and unchangeable are known as ________. A) fixed overhead costs B) operating costs C) product production costs D) sunk costs E) constraining costs Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-2
17) An accounting system installed last year is an example of a(n) ________. A) sunk cost B) relevant cost C) differential cost D) avoidable cost E) opportunity cost Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-2
18) Which of the following costs are never relevant in the decision-making process? A) fixed costs B) historical costs C) relevant costs D) variable costs E) opportunity costs Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-2
19) Laura Industries is considering replacing a machine that is presently used in its production process. The following information is available:
Original cost Remaining useful life in years Current age in years Book value Current disposal value in cash Future disposal value in cash (in 5 years) Annual cash operating costs
Replacement Old Machine Machine $35,000 $45,000 1 5 5 0 $5,000 $3,000 $0 $2,000 $7,000 $4,000
Which of the information provided in the table is irrelevant to the replacement decision? A) the annual operating cost of the old machine B) the original cost of the old machine C) the current disposal value of the old machine D) the future disposal value of the replacement machine E) the remaining useful life of the old machine Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-2
Answer the following question(s) using the information below. John's 5-year-old Geo Prizm requires repairs estimated at $2,900 to make it road worthy again. His friend Julie suggested that he buy a 5-year-old used Honda Civic instead for $3,000 cash. Julie estimated the following costs for the two cars:
Acquisition cost Repairs Annual operating costs (Gas, maintenance, insurance)
Geo Prizm Honda Civic $15,000 $3,000 $2,900 — $2,280
$2,100
20) The cost NOT relevant for this decision is the ________. A) acquisition cost of the Geo Prizm B) acquisition cost of the Honda Civic C) repairs to the Geo Prizm D) annual operating costs of the Honda Civic E) annual operating costs of the Geo Prizm Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-2
21) A product cost is composed of the following: Direct materials Direct labour Manufacturing overhead
$11 $3 $8
The product sells for $40 and a 15% commission is paid to a salesperson for every unit sold. Management accountants also estimate that storage cost per unit averages $0.75 per unit. What is the full cost of the product? A) $14 B) $22 C) $28.75 D) $28.00 Answer: C Explanation: $11 + $3 + $8 + ($40 x 15%) + $0.75 = $28.75 Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-2
22) Crandle Manufacturers Inc. is approached by a potential customer to fulfill a one-time-only special
order for a product similar to one offered to domestic customers. The company has excess capacity. The following per unit data apply for sales to regular customers: Variable costs: Direct materials Direct labour Manufacturing support Marketing costs Fixed costs: Manufacturing support Marketing costs Total costs Markup (50%) Targeted selling price
$130 110 125 65 175 85 690 345 $1,035
What is the full cost of the product per unit? A) $430 B) $1,035 C) $690 D) $345 Answer: C Explanation: Full cost = $130 + $110 + $125 + $65 + $175 + $85 = $690 Diff: 3 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-2
Answer the following question(s) using the information below. John's 5-year-old Geo Prizm requires repairs estimated at $2,900 to make it road worthy again. His friend Julie suggested that he buy a 5-year-old used Honda Civic instead for $3,000 cash. Julie estimated the following costs for the two cars:
Acquisition cost Repairs Annual operating costs (Gas, maintenance, insurance)
Geo Prizm Honda Civic $15,000 $3,000 $2,900 — $2,280
$2,100
23) What should John do? What are his savings in the first year? A) Buy the Honda Civic; $15,080 B) Fix the Geo Prizm; $2,820 C) Buy the Honda Civic; $180 D) Fix the Geo Prizm; $5,280 E) Buy the Honda Civic; $80 Answer: E Explanation: Geo ($2,900 + $2,280) - Honda ($3,000 + $2,100) = $80 cost savings with the Honda option Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-2
Answer the following question(s) using the information below. John's 8-year-old Chevrolet Trail Blazer requires repairs estimated at $6,000 to make it roadworthy again. His wife Sherry suggested that he buy a 5-year-old used Jeep Grand Cherokee instead for $6,000 cash. Sherry estimated the following costs for the two cars:
Acquisition cost Repairs Annual operating costs (Gas, maintenance, insurance)
Trail Blazer $25,000 $6,000
Grand Cherokee $6,000 —
$2,280
$2,100
24) The cost NOT relevant for this decision is the ________. A) acquisition cost of the Trail Blazer B) acquisition cost of the Grand Cherokee C) repairs to the Trail Blazer D) annual operating costs of the Grand Cherokee E) annual operating costs of the Trail Blazer Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-2
25) What should John do? What are his savings in the first year? A) Buy the Grand Cherokee; $8,100 B) Fix the Trail Blazer; $3,180 C) Buy the Grand Cherokee; $180 D) Fix the Trail Blazer; $6,280 E) Buy the Grand Cherokee; $280 Answer: C Explanation: Trail Blazer ($6,000 + $2,280) - Grand Cherokee ($6,000 + $2,100) = $180 cost savings with the Grand Cherokee option Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-2
26) Ben Tool Company is a tool manufacturer. Production capacity is 3,000 units per month; however, they are considering alternative ways to increase capacity to 3,500 units. One of the alternatives involves purchasing new equipment. In this alternative, there are two choices: machine A will provide increased capacity of 4,000 units per month, with unit costs of $14 at capacity, and machine B will increase capacity to 3,600 units per month with unit costs of $15 at capacity. Both machines are adequate since Ben's does not intend to go beyond the 3,500 units per month level for the foreseeable future. Relevant information for this decision includes ________. A) whether other costs will change solely due to a capacity increase B) the different unit cost of production between the two machines at their capacity levels C) Ben's planned capacity utilization D) excess capacity of either machine E) the different unit cost of production between the two machines at Ben's planned capacity levels Answer: E Explanation: Note: A and D are common to both alternatives, C is already decided, B will never be a factor Diff: 3 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-2
27) Companies periodically confront decisions about discontinuing or adding branches or business segments. In order to determine the best course of action, a ________ should be performed in order to make the optimal decision. A) relevant feasibility study B) relevant risk assessment C) relevant-revenue and relevant-cost analysis D) relevant-risks and relevant-loss analysis E) relevant capital and relevant cash flow analysis Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-2
28) Koch Brothers purchased a new production machine for $200,000. It is capable of producing 400,000 units over its useful life, thus the manufacturer's salesperson claimed the unit cost would only be $0.50. Koch's own engineers recommended that the company acquire a machine that would have a unit cost of production of no more than $0.48 (with a $0.03 variance). A competitor of the vendor, who also was trying to sell Koch some equipment, claimed that the $0.50 is understated by $0.04 per unit. The total anticipated demand over the asset's useful life is 300,000 units. Relevant information includes A) the $0.50 unit cost. B) the fact that the $0.50 falls below the $0.48 + $0.03 variance. C) the unit cost at Koch's planned capacity utilization. D) being able to produce at excess capacity. E) the different unit costs of production between the two vendors' machines. Answer: C Explanation: Note: A, B and E are in the past; D will never be a factor. Diff: 3 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-2
29) Zobrist is the new manager of the credit card department of a large bank. One of his first changes, directed by the president, was to reorganize the activities of the department. He is reluctant to start the reorganization without including a comprehensive report from accounting about the current costs of operations and possible costs of changes. Required: Explain how the decision process model can assist the manager and discuss the steps in the decision process model that might be taken to ensure an orderly decision process. Answer: The accounting information can assist the manager by helping him understand the actual costs of operating the department. Costs would probably need to be categorized as fixed and variable to help the manager understand how costs behave when changes take place. The steps that should be taken include: 1. Identify the problem and uncertainties. 2. Obtain information. 3. Make predictions about the future. 4. Make decisions by choosing among the alternatives. 5. Implement the decision, evaluate the performance, and learn. Feedback can affect future predictions, the prediction method used, the decision model, or the implementation. Careful monitoring aids in fine-tuning the new system and ensuring that all necessary activities are being properly performed. Diff: 2 Type: ES CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-2
30) A student is considering whether to finish their university program in four consecutive years, or take a year off and work for some extra cash. Required: a. Identify at least two revenues or costs that are relevant to making this decision. Explain why each is relevant. b. Identify at least two costs that would be considered sunk costs for this decision. c. Comment on at least one qualitative consideration for this decision. Answer: a. Relevant revenues/costs are those that differ between the alternatives of continuing with university or taking a year off from university and working. Relevant costs for continuing your college education without a break include: 1. Earnings lost next year due to the hours you are not able to work because of classes and homework. 2. As a result of graduating a year earlier, higher wages will be earned a year earlier as well. b.
Sunk costs for this decision include: 1. Amounts paid for university tuition and books during the past two years. 2. Amounts committed for university tuition and books for the remaining two years.
c. A qualitative consideration would include having different activities and priorities than your friends who are students, graduating later than students who started university the same time you did, and retaining information over the year off from school. Diff: 2 Type: ES CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-2
31) Explain what revenues and costs are relevant when choosing among alternatives. Answer: Future amounts that differ among alternatives are considered relevant. Amounts that remain the same among alternatives do not add useful information for selecting an alternative, and therefore, are not considered relevant for decision making. Diff: 2 Type: ES CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-2
32) Explain why sunk costs are not considered relevant when choosing among alternatives. Answer: Amounts that remain the same among alternatives do not add useful information for selecting an alternative, and therefore, are not considered relevant for decision making. Sunk costs by definition are those costs that have already been committed, cannot be changed, and will never differ among alternatives. Diff: 2 Type: ES CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-2
33) Chalet Ski & Patio manufactures a product that has two parts, X and Y. It is currently considering two alternative proposals related to parts X and Y. The first proposal is for buying part Y. This would free up some of the plant space for the manufacture of more of part X and assembly of the final product. The product vice-president believes the additional production of the final product can be sold at the current market price. No other changes in manufacturing would be needed. The second proposal is for buying new equipment for the production of part Y. The new equipment requires fewer workers and uses less power to operate. The old equipment has a net disposal value of zero. Required: Tell whether the following items are relevant or irrelevant for each proposal. Treat each proposal independently. a. Sales revenue of the product. b. Variable costs of assembling final products. c. Direct manufacturing materials, part X. d. Direct manufacturing materials, part Y. e. Direct manufacturing labour, part X. f. Direct manufacturing labour, part Y. g. Variable manufacturing overhead, part X. h. Variable manufacturing overhead, part Y. i. Cost of old equipment for manufacturing Y. j. Cost of new equipment for manufacturing Y. k. Variable selling and administrative costs. Answer: Proposal 1 Proposal 2 a. R I b. R I c. R I d. R I e. R I f. R R g. R I h. R R i. I I j. I R k. R I Diff: 2 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-2
11.3 Contrast relevant and irrelevant costs and revenue as well as quantitative and qualitative information influencing decisions. 1) Quantitative factors are always expressed in financial terms. Answer: FALSE Explanation: Some quantitative factors are not expressed in monetary terms. Diff: 2 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-3
2) If a manufacturer chooses to continue purchasing direct materials from a supplier because of the ongoing relationship that has developed over the years, the decision is based on qualitative factors. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-3
3) Insourcing is the process of producing goods and services within the firm rather than purchasing them from an outside supplier. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-3
4) An example of an outsourcing process is when a computer company purchases keyboards from another company instead of producing the components internally. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-3
5) For one-time-only special orders, variable costs may be relevant but not fixed costs. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-3
6) Outsourcing is risk free to the manufacturer because the supplier now has the responsibility of producing the part. Answer: FALSE Explanation: Outsourcing has risks since the manufacturer is dependent on the supplier for a quality product, delivered in a timely manner, for a reasonable price. Diff: 2 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-3
7) Bid prices and costs that are relevant for regular orders are the same costs that are relevant for onetime-only special orders. Answer: FALSE Explanation: Since long-term costs are relevant for regular orders and short-term costs are relevant for one-time-only special orders, the relevant costs differ. Diff: 2 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-3
8) The variation in total costs between two alternatives is known as A) differential cost. B) analyzed cost. C) irrelevant cost. D) predictable cost. E) expected cost. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-3
9) Employee morale at Homeland Inc. is very high. This type of information is known as ________.
A) a qualitative factor B) a quantitative factor C) a nonmeasurable factor D) a financial factor E) a numerical factor Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-3
10) Peter owns a small body shop. His major costs include labour, parts, and rent. In the decision making process, these costs are always considered to be ________. A) fixed B) qualitative factors C) quantitative factors D) variable E) relevant costs Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-3
11) Which of the following represents a qualitative factor? A) any nonfinancial factor B) historical costs C) relevant costs D) the timing of variable costs E) an outcome that cannot be measured in numerical terms Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-3
12) A one-time-only special order decision A) should consider only long-term costs and benefits. B) must still consider short-term and long-term costs and benefits. C) allows a company to sell products at prices which only cover fixed costs. D) should consider only short-term costs and benefits. E) should only be undertaken if there is idle capacity. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-3
13) Comics Plus has a current production level of 200,000 comics per month. Unit costs at this level are: Direct materials Direct labour Variable overhead Fixed overhead Marketing - Fixed Marketing/distribution - Variable
$0.225 0.200 0.075 0.100 0.100 0.200
Current monthly sales are 180,000 units. Printers Ltd. has contacted Comics Plus about purchasing 15,000 units at $1.00 each. Current sales would not be affected by the special order, and variable marketing/distributing costs would not be incurred on the special order. What is Comics Plus' change in profits if the order is accepted? A) $6,000 increase B) $6,000 decrease C) $8,500 increase D) $7,500 increase E) $3,000 increase Answer: D Explanation: Relevant variable cost per unit = $0.225 + $0.20 + $0.075 = $0.50 15,000 × ($1.00 - $0.50) = $7,500 increase Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-3
14) Northern Glass Manufacturing has a current production level of 200,000 glass jars per month. Unit costs at this level are: Direct materials Direct labour Variable overhead Fixed overhead Marketing - Fixed Marketing/distribution - Variable
$0.345 0.300 0.175 0.100 0.100 0.200
Current monthly sales are 180,000 units. Canadian Hardware Ltd. has contacted Northern Glass Manufacturing about purchasing 15,000 units at $1.00 each. Current sales would not be affected by the special order, and variable marketing/distributing costs would not be incurred on the special order. What is Comics Plus' change in profits if the order is accepted? A) $4,800 increase B) $4,800 decrease C) $1,800 decrease D) $300 decrease E) $2,700 increase Answer: E Explanation: Manufacturing cost per unit = $0.345 + $0.30 + $0.175 = $0.82 15,000 × ($1.00 - $0.82) = $2,700 increase Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-3
15) First Choice has a plant capacity of 80,000 units per month. Unit costs at capacity are: Direct materials Direct labour Variable overhead Fixed overhead Marketing - Fixed Marketing/distribution - Variable
$4.00 3.00 1.50 1.50 3.50 1.80
Current monthly sales are 78,000 units at $12.60 each. Computer Output Management has contacted First Image about purchasing 2,000 units at $12.00 each. Current sales would not be affected by the special order. What is First Image's change in profits if the order is accepted? A) $3,400 increase B) $8,600 increase C) $4,400 increase D) $2,600 decrease E) $3,600 decrease Answer: A Explanation: ($4.00 + 3.00 + 1.50 + 1.80) = $10.30 ($12.00 - 10.30) × 2,000 = $3,400 increase Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-3
16) Rainbow Company has a current production level of 20,000 units per month. Unit costs at this level are: Direct materials Direct labour Variable overhead Fixed overhead Marketing - fixed Marketing/distribution - variable
$0.35 0.40 0.15 0.20 0.20 0.40
Current monthly sales are 18,000 units. Jim Company has contacted Rainbow Company about purchasing 1,500 units at $2.00 each. Current sales would NOT be affected by the one-time-only special order, and variable marketing/distribution costs would NOT be incurred on the special order. What is Rainbow Company's change in operating profits if the special order is accepted? A) $400 increase in operating profits B) $400 decrease in operating profits C) $1,650 increase in operating profits D) $1,800 decrease in operating profits E) $1,500 increase in operating profits Answer: C Explanation: Manufacturing cost per unit = $0.35 + $0.40 + $0.15 = $0.90; 1,500 × ($2.00 - $0.90) = $1,650 increase Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-3
17) Precision Sewing Company incorporates the services of Rosie's Sewing. Precision purchases pre-cut dresses from Rosie's. This is primarily known as A) insourcing. B) outsourcing. C) product needs analysis. D) product specialization. E) qualitative analysis. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-3
18) Good Sign Company manufactures signs from direct materials to the finished product. This is an example of which of the following? A) insourcing B) outsourcing C) product needs analysis D) product specialization E) utilization of idle facilities Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-3
19) Omar Corporation currently manufactures a subassembly for its main product. The variable costs per unit are $48 in addition to a $6 charge based on estimated selling expenses. R-Corp has contacted Omar with an offer to sell them 5,000 of the subassemblies for $44.00 each. Omar will eliminate $60,000 of fixed overhead if it accepts the proposal. What is increase or decrease in profit from accepting the offer? A) $50,000 increase B) $110,000 increase C) $170,000 increase D) $50,000 decrease E) $70,000 increase Answer: B Explanation: (($54 × 5,000) + $60,000) - ($44 × 5,000) = $110,000 Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-3
20) When considering a project that will require production using otherwise idle resources, which of the following are TRUE? A) Avoidable fixed costs are irrelevant. B) Only the variable costs of the project are relevant. C) Only financial factors should be considered. D) The project should not be undertaken if total revenue from the project is less than the total costs of production. E) In the short run, even if revenue is less than the total costs of production, the project could help the company's overall operating income. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-3
Use the information below to answer the following question(s). Northwoods manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $90 per table, consisting of 80% variable costs and 20% fixed costs. The company has surplus capacity available. It is Northwoods' policy to add a 50% markup to full costs. 21) Northwoods is invited to bid on a one-time-only special order to supply 110 rustic tables. What is the lowest price Northwoods should bid on this special order? A) $6,300 B) $7,920 C) $10,800 D) $13,500 E) $9,000 Answer: B Explanation: $90 × 80% × 110 tables = $7,920 Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-3
Answer the following question(s) using the information below. Walace Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. Walace Manufacturing has excess capacity. The following per unit data apply for sales to regular customers: Variable costs: Direct materials Direct labour Manufacturing support Marketing costs Fixed costs: Manufacturing support Marketing costs Total costs Markup (50%) Targeted selling price
$50 30 35 15 45 15 $190 95 $285
22) What is the full cost of the product per unit? A) $110 B) $190 C) $255 D) $95 E) $140 Answer: B Explanation: $50 + $30 + $35 + $15 + $45 + $15 = $190 Diff: 1 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-3
23) What is the contribution margin per unit? A) $85 B) $110 C) $155 D) $160 E) $195 Answer: C Explanation: $285 - ($50 + $30 + $35 + $15) = $155 Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-3
24) For Walace Manufacturing, what is the minimum acceptable price of this special order? A) $130 B) $140 C) $170 D) $240 E) $255 Answer: A Explanation: $50 + $30 + $35 + $15 = $130 Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-3
25) What is the change in operating profits if the one-time-only special order for 1,000 units is accepted for $180 a unit by Walace? A) $50,000 increase in operating profits B) $10,000 increase in operating profits C) $10,000 decrease in operating profits D) $75,000 decrease in operating profits E) $40,000 increase in operating profits Answer: A Explanation: $180 - ($50 + $30 + $35 + $15) = $50; 1,000 × $50 = $50,000 increase Diff: 3 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-3
Answer the following question(s) using the information below. Toronto's Kitchens is approached by Ms. Tammy Wang, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers: Direct materials Direct labour Variable manufacturing support Fixed manufacturing support Total manufacturing costs Markup (60%) Targeted selling price
$455 320 45 100 $920 552 $1,472
Toronto's Kitchens has excess capacity. Ms. Wang wants the cabinets in cherry rather than oak, so direct material costs will increase by $30 per unit. 26) For Toronto's Kitchens, what is the minimum acceptable price of this one-time-only special order? A) $850 B) $900 C) $930 D) $1,440 E) $800 Answer: A Explanation: $455 + $320 + $45 + $30 = $850 Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-3
27) Other than price, what other item should Toronto's Kitchens consider before accepting this one-timeonly special order? A) reaction of shareholders B) management stock options C) demand for cherry cabinets D) price is the only consideration E) reaction of existing customers to the lower price offered to Ms. Wang Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-3
28) For make-or-buy decisions, a supplier's ability to deliver the item on a timely basis is considered a(n) A) qualitative factor.
B) relevant cost. C) differential factor. D) opportunity cost. E) quantitative factor. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-3
Answer the following question(s) using the information below. Golden Engine Company manufactures part TE456 used in several of its engine models. Monthly production costs for 1,000 units are as follows: Direct materials Direct labour Variable overhead costs Fixed overhead costs Total costs
$50,000 10,000 30,000 20,000 $110,000
It is estimated that 10% of the fixed overhead costs assigned to TE456 will no longer be incurred if the company purchases TE456 from the outside supplier. Golden Engine Company has the option of purchasing the part from an outside supplier at $85 per unit. 29) If Golden Engine Company accepts the offer from the outside supplier, the monthly avoidable costs (costs that will no longer be incurred) total ________. A) $80,000 B) $98,000 C) $50,000 D) $100,000 E) $92,000 Answer: E Explanation: $50,000 + $10,000 + $30,000 + ($20,000 × 10%) = $92,000 Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-3; 11-4
30) If Golden Engine Company purchases 1,000 TE456 parts from the outside supplier per month, then its monthly operating income will ________. A) increase by $13,000 B) increase by $15,000 C) decrease by $5,000 D) increase by $7,000 E) decrease by $35,000 Answer: D Explanation: Avoidable costs $92,000 - ($85 × 1,000 units) = increase of $7,000 Diff: 3 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-3; 11-4
31) The maximum price that Golden Engine Company should be willing to pay the outside supplier is ________. A) $80 per TE456 part B) $92 per TE456 part C) $98 per TE456 part D) $100 per TE456 part E) $50 per TE456 part Answer: B Explanation: Avoidable costs $92,000/1,000 units = $92 per part Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-3; 11-4
Answer the following question(s) using the information below. Silver Engine Company manufactures part Z92 used in several of its engine models. Monthly production costs for 1,000 units are as follows: Direct materials Direct labour Variable overhead costs Fixed overhead costs Total costs
$30,000 8,000 21,000 5,000 $64,000
Silver Engine Company has the option of purchasing the part from an outside supplier at $61 per unit. It is estimated that all of the fixed overhead costs assigned to Z92 will remain if the company purchases Z92 from the outside supplier. 32) If Silver Engine Company accepts the offer from the outside supplier, the monthly avoidable costs (costs that will no longer be incurred) total ________. A) $59,000 B) $38,000 C) $64,000 D) $15,000 E) $21,000 Answer: A Explanation: $30,000 + $8,000 + $21,000 = $ 59,000 Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-3; 11-4
33) If Silver Engine Company purchases 1,000 Z92 parts from the outside supplier per month, then its monthly operating income will ________. A) increase by $3,000 B) decrease by $46,000 C) decrease by $2,000 D) decrease by $40,000 E) decrease by $23,000 Answer: C Explanation: Avoidable costs $59,000 - ($61 × 1,000 units) = decrease of $2,000 Diff: 3 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-3; 11-4
34) The maximum price that Silver Engine Company should be willing to pay the outside supplier is ________. A) $43 per Z92 part B) $38 per Z92 part C) $61 per Z92 part D) $59 per Z92 part E) $64 per Z92 part Answer: D Explanation: ($30,000 + $8,000 + $21,000)/1,000 units = $59 per unit Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-3; 11-4
35) Unit cost data can mislead decisions by including irrelevant costs or by A) not computing fixed overhead costs. B) computing labour and materials costs only. C) computing administrative costs. D) not computing unit costs at the relevant output level. E) including qualitative data. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-3
36) Audio Labs collected the following information on the cost of producing 20,000 speaker units: Direct materials Direct labour Variable overhead Fixed overhead
$32.00 per unit 4.00 per unit 16.00 per unit 20.00 per unit
Cartunes has offered to sell Audio 10,000 speakers for $56.00 each. Should Audio Labs make or buy the parts if the facilities remain idle when speakers are purchased? A) buy, save $16.00 per unit B) buy, save $4.00 per unit C) make, save $2.00 per unit D) make, save $4.00 per unit E) make, save $6.00 per unit Answer: D Explanation: Make Buy Purchase price $56 Direct materials $32 Direct labour 4 Variable overhead 16 $52 $56 $52 - $56 = (4); fixed costs are the same under both alternatives Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-3
37) Snapper Tool Company has a production capacity of 3,000 units per month, but current production is only 2,500 units. Total manufacturing costs are $60 per unit and marketing costs are $16 per unit. Doug Levy offers to purchase 500 units at $76 each for the next five months. Should Snapper accept the onetime-only special order if only absorption-costing data are available? A) Yes, good customer relations are essential. B) No, the company will only break even. C) No, since only the employees will benefit. D) Yes, since operating profits will most likely increase. E) Yes, because breaking even is better than having idle capacity. Answer: D Explanation: Since the $60 absorption cost per unit is most likely not all variable costs and since the entire $16 per unit of marketing costs may not be incurred, operating profits will most likely increase. Diff: 3 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-3
38) Clearwater Company operates a wine outlet in a tourist area. One litre bottles sell for $12. Daily fixed costs are $3,000, and variable costs are $6 per litre. An average of 750 litres are sold each day. Clearwater has a capacity of 800 litres per day. Required: a. Determine the average cost per bottle. b. A bus loaded with 40 senior citizens stops by at closing time and the tour director offers Clearwater $300 for 40 litres. Clearwater refuses, saying they would lose $2.50 on each litre. Is Clearwater correct about the $2.50? Why or why not? c. A fund-raising organization has offered Clearwater a one-year contract to buy 300 litres a day for $7.50 each. Should they accept the offer? Why or why not? Answer: a. Variable costs ($6 × 750) $4,500 Fixed costs 3,000 Total costs $7,500 Average costs = $7,500/750 = $10 b. Average costs Offer ($300/40) Net loss
$10.00 7.50 $2.50
Clearwater is correct in that she would lose $2.50. However, since it is the end of the day, and assuming she has capacity, she should accept the offer since it covers her variable cost. She would make a contribution of $1.50 × ($7.50 - $6.00) per unit for a total of $60. c. Capacity Offer Net to other customers Current average Lost regular sales
800 300 500 750 250
Lost regular sales 250 × ($12 - $6) Offer 250 × ($7.50 - $6) = Lost contribution margin Margin gained 50 × (7.50 - $6) Net loss
$1,500 375 $1,125 75 $1,050
Clearwater should not accept the offer because it reduces sales by 50 units at the regular price of $12. This reduces total contribution margin by $1,050 a day. Diff: 3 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-3
39) Axle and Wheel Manufacturing is approached by a European customer to fill a one-time-only special order for a product similar to one offered to domestic customers. The following per unit data apply for sales to regular customers: Direct materials Direct labour Variable manufacturing support Fixed manufacturing support Total manufacturing costs Markup (50%) Targeted selling price
$33 15 24 52 $124 62 $186
Axle and Wheel Manufacturing has excess capacity. Required: a. What is the full cost of the product per unit? b. What is the contribution margin per unit? c. Which costs are relevant for making the decision regarding this one-time-only special order? Why? d. For Axle and Wheel Manufacturing, what is the minimum acceptable price of this one-time-only special order? e. For this one-time-only special order, should Axle and Wheel Manufacturing consider a price of $100 per unit? Why or why not? Answer: a. $124 b. $114 = Selling price $186 - Variable costs ($33 + $15 + $24). c. Relevant costs for decision making are those costs that differ between alternatives, which in this situation are the incremental costs. The incremental costs total $72 = Variable costs ($33 + $15 + $24). d. The minimum acceptable price is $72 = Variable costs ($33 + $15 + $24), which are the incremental costs in the short term. e. Yes, because this price is greater than the minimum acceptable price of this special order determined in (d). Diff: 2 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-3
40) Parker and Spitzer Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. The following per unit data apply for sales to regular customers: Direct materials Direct labour Variable manufacturing support Fixed manufacturing support Total manufacturing costs Markup (50%) Targeted selling price
$66 30 48 104 248 124 $372
Parker and Spitzer Manufacturing has excess capacity. Required: a. What is the full cost of the product per unit? b. What is the contribution margin per unit? c. Which costs are relevant for making the decision regarding this one-time-only special order? Why? d. For Parker and Spitzer Manufacturing, what is the minimum acceptable price of this one-time-only special order? e. For this one-time-only special order, should Parker and Spitzer Manufacturing consider a price of 200 per unit? Why or why not? Answer: a. $248 b. $228 = Selling price $372 - Variable costs ($66 + $30 + $48). c. Relevant costs for decision making are those costs that differ between alternatives, which in this situation are the incremental costs. The incremental costs total $144 = Variable costs ($66 + $30 + $48). d. The minimum acceptable price is $144 = Variable costs ($66 + $30 + $48), which are the incremental costs in the short tem. e. Yes, because this price is greater than the minimum acceptable price of this special order determined in (d). Diff: 2 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-3
41) Silver Lake Cabinets is approached by Ms. Jenny Zhang, a new customer, to fulfill a large one-timeonly special order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers: Direct materials Direct labour Variable manufacturing support Fixed manufacturing support Total manufacturing costs Markup (60%) Targeted selling price
$100 125 60 75 $360 216 $576
Silver Lake Cabinets has excess capacity. Ms. Zhang wants the cabinets in cherry rather than oak, so direct material costs will increase by $30 per unit. Required: a. For Silver Lake Cabinets, what is the minimum acceptable price of this one-time-only special order? b. Other than price, what other items should Silver Lake Cabinets consider before accepting this onetime-only special order? c. How would the analysis differ if there was limited capacity? Answer: a. $315 = Variable costs ($100 + $125 + $60) + $30 additional cost for cherry. b. Silver Lake Cabinets should also consider the impact on current customers when these customers hear that another customer was offered a discounted price, and the impact on the competition and if they might choose to meet the discounted price. c. Currently, the incremental costs total $315. If additional capacity is needed to process this order, these incremental costs will increase by the cost of adding capacity. Diff: 2 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-3; 11-4
42) Gold River Cabinets is approached by Ms. Mary Wong, a new customer, to fulfill a large one-timeonly special order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers: Direct materials Direct labour Variable manufacturing support Fixed manufacturing support Total manufacturing costs Markup (40%) Targeted selling price
$90 105 30 25 $250 100 $350
Gold River Cabinets has excess capacity. Ms. Wong wants the cabinets in cherry rather than oak, so direct material costs will increase by $30 per unit. Required: a. For Gold River Cabinets, what is the minimum acceptable price of this one-time-only special order? b. Other than price, what other items should Gold River Cabinets consider before accepting this onetime-only special order? c. How would the analysis differ if there was limited capacity? Answer: a. $255 = Variable costs ($90 + $105 + $30) + $30 additional cost for cherry. b. Silver Lake Cabinets should also consider the impact on current customers when these customers hear that another customer was offered a discounted price, and the impact on the competition and if they might choose to meet the discounted price. c. Currently, the incremental costs total $255. If additional capacity is needed to process this order, these incremental costs will increase by the cost of adding capacity. Diff: 2 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-3; 11-4
43) Are relevant revenues and relevant costs the only information needed by managers to select among alternatives? Explain using examples. Answer: No, relevant revenues and costs provide a financial analysis but do not take into consideration qualitative implications. In a make-or-buy decision, examples of qualitative issues include the supplier's ability to meet expected quality and delivery standards, and the likelihood that suppliers increase prices of the components in the future. Diff: 2 Type: ES CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-3
44) A restaurant is deciding whether it wants to update its image or not. It currently has a cozy appeal with loyal customers. The outdated décor that is still in good condition; menus and carpet need to be replaced. Required: Identify for the restaurant management: a. those costs that are relevant to this decision b. qualitative considerations. Answer: For the decision of whether to update the restaurant's image: a. Relevant costs include a one-time cost of the renovation for the updated image, and a change in future sales which includes an increase in sales due to the updated image, decrease in sales due to loss of that cozy appeal, and loss of sales due to being closed or having a limited serving area during renovation. b. Qualitative considerations include whether the restaurant will lose that cozy appeal it currently has, if the restaurant needs to be closed for renovations it may result in loss of customers, and new customers may not be the type of customer they want to attract. Diff: 2 Type: ES CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-3
11.4 Explain the opportunity-cost concept and why it is used in decision making. 1) Opportunity cost is the contribution to income that is recognized through the use of limited resources available in the best alternative. Answer: FALSE Explanation: Opportunity cost is the contribution to operating income that is lost by not using a limited resource in its next-best alternative use. Diff: 2 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-4
2) Quantitative factors are relevant, and qualitative factors are irrelevant, in making outsourcing decisions. Answer: FALSE Diff: 2 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-3; 11-4
3) If the $17,000 spent to purchase inventory could be invested and earn interest of $2,000, then the opportunity cost of holding inventory is $17,000. Answer: FALSE Explanation: The opportunity cost of holding inventory is $2,000. Diff: 2 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-4
4) When opportunity costs exist, they are always irrelevant. Answer: FALSE Diff: 2 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-4
5) When managers are faced with constraints the product line with the higher contribution margin per unit is always the best choice to make. Answer: FALSE Diff: 2 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-4
6) A decision as to whether to insource or outsource is a(n) A) idle capacity decision. B) production scheduling analysis. C) product mix decision. D) short-run focus decision. E) make/buy decision. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-3; 11-4
7) Which of the following would NOT be considered in a make or buy decision? A) potential usage of manufacturing capacity B) variable costs of production C) potential rental income from space occupied by production area D) unchanged fixed costs E) qualitative factors Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-3; 11-4
8) Which of the following is TRUE concerning opportunity costs? A) They are incorporated into formal financial accounting reports. B) They entail cash receipts. C) They entail cash disbursements. D) They require accounting journal entries. E) They are relevant for the make/buy decision. Answer: E Diff: 3 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-4
9) If Henry Inc. doesn't use one of its limited resources in the best possible way, the lost contribution to income could be called ________. A) an alternative cost B) a total alternative cost C) an opportunity cost D) a resource cost E) a constraining factor Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-4
10) A company has two manufacturing facilities: one in Alberta that produces a bulk chemical that it sells to many different retailers and one in Ontario that is dedicated to producing a specialty chemical for one client only. The annual profit from the single client is $150,000, and the profit from the other facility's sales is $1,500,000 after allocating combined fixed costs based on units produced. Another company has offered to lease the Ontario facilities for $260,000. Which of the following is TRUE? A) The $260,000 is an opportunity cost of continuing to use the Ontario plant. B) The company incurred a $260,000 opportunity cost for the past years, but this was not recorded on its books. C) The company needs to determine the contribution margin for each product before making any decisions. D) Incremental revenues exceed total costs if the plant is rented. E) Incremental costs exceed incremental revenues if the plant is rented. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-4
Answer the following question(s) using the information below. Central Medical Supply Inc., a manufacturer of medical testing equipment, has $240,000 worth of an obsolete line of testing equipment. The obsolete equipment can be adapted to fit another line of testing equipment at a cost of $65,000; the market value would then be $146,000. However, Tripac offered to purchase the obsolete equipment as is for $88,000. 11) What are the relevant figures above for management in their decision? A) ($240,000 + $65,000); ($88,000 - 0) B) ($240,000 + $65,000); ($88,000 - 240,000) C) ($240,000 + $65,000); ($88,000 + 240,000) D) ($146,000 - $65,000); ($88,000 - 0) E) ($136,000 - $65,000); ($88,000 - 240,000) Answer: D Explanation: Note: the $240,000 is a sunk cost.
Revenues Additional Costs Differential totals
Repair $146,000 65,000 $81,000
Sell $88,000 ..........0 $88,000
Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-3; 11-4
12) What is the opportunity cost associated with the adaptation of the equipment to another line of testing equipment, assuming Central accepts Tripac's offer? A) $81,000 B) $88,000 C) $63,000 D) $240,000 E) none of the above Answer: A Explanation: Best alternative is to sell; therefore, the opportunity cost is $81,000. Diff: 3 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-4
13) For make-or-buy decisions, relevant costs include A) direct material costs plus direct labour costs. B) incremental costs plus opportunity costs. C) differential costs plus sunk costs. D) incremental costs plus fixed costs. E) variable costs plus fixed overhead. Answer: B Diff: 3 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-3; 11-4
14) The opportunity cost of holding significant inventory includes A) contribution margin on the extra inventory. B) additional insurance costs. C) additional storage costs. D) the cost of the inventory plus the added insurance and storage costs. E) the interest forgone on an alternative investment. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-4
Answer the following question(s) using the information below. Jupiter Corporation produces a part that is used in the manufacture of one of its products. The costs associated with the production of 10,000 units of this part are as follows: Direct materials Direct labour Variable factory overhead Fixed factory overhead Total costs
$55,000 65,000 30,000 70,000 $220,000
Of the fixed factory overhead costs, $30,000 is avoidable. 15) Phil Company has offered to sell 10,000 units of the same part to Jupiter Corporation for $19 per unit. Assuming there is no other use for the facilities, Jupiter should ________. A) make the part, as this would save $3 per unit B) buy the part, as this would save $3 per unit C) make the part, as this would save $4 per unit D) make the part, as this would save $1 per unit E) buy the part, as this would save $4 per unit Answer: D Explanation: Avoidable costs total $170,000 = $55,000 + $65,000 + $30,000 + $30,000. $19 - ($180,000/10,000) = $1 Diff: 3 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-3; 11-4
16) Assuming no other use of their facilities, the highest price that Jupiter should be willing to pay for 10,000 units of the part is ________. A) $210,000 B) $180,000 C) $110,000 D) $130,000 Answer: B Explanation: $55,000 + $65,000 + $30,000 + $30,000 = $180,000 Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-3; 11-4
17) Assume that accepting the offer creates excess facility capacity that can be used to produce 2,000 units of another product that has a unit selling price of $24, variable costs of $12, and a fixed cost allocation of $3. What is the highest price that Jupiter should be willing to pay Phil Company for 10,000 units of the part? A) $156,000 B) $164,000 C) $152,000 D) $134,000 E) $140,000 Answer: A Explanation: ($55,000 + $65,000 + $30,000 + $30,000) - (2,000 × ($24 - $12)) = $156,000 Diff: 3 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-3; 11-4
18) Green Valley Corporation currently manufactures a subassembly for its main product. The costs per unit are as follows: Direct materials Direct labour Variable overhead Fixed overhead
$2.00 20.00 10.00 16.00
Reliance Corp has contacted Green Valley with an offer to sell them 5,000 of the subassemblies for $44.00 each. Green Valley will eliminate $50,000 of fixed overhead if it accepts the proposal. Should Green Valley make or buy the subassemblies? What is the difference between the two alternatives? A) buy; savings = $20,000 B) buy; savings = $50,000 C) make; savings = $60,000 D) make; savings = $10,000 E) buy; savings = $10,000 Answer: D Explanation: Cost to buy: 5,000 × $44 = $220,000; Cost to make: (($2.00 + 20.00 + 10.00) × 5,000) + $50,000 = $210,000 $220,000 - 210,000 = $10,000 ** make Diff: 3 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-3; 11-4
Answer the following question(s) using the information below.
Day Light collected the following information: Cost to buy one unit Production costs per unit: Direct materials Direct labour Variable overhead Total fixed overhead
$48 $22 $16 $2 $360,000
Day Light can sell 25,000 units per year at $80 each. The company also has an offer from a subsidiary to rent its plant facilities for $2,000,000. The fixed overhead will be incurred in each alternative, but there will be a savings of $150,000 in the fixed costs under the renting alternative. 19) Based on the above information only, should Day Light make or buy the product or rent its facilities out? A) buy B) make C) either make or buy - indifferent D) rent the facilities to the subsidiary E) either make or rent - indifferent Answer: D Explanation: As the revenue is the same for each alternative, only cost is relevant. Relevant cost to make: ($22 + $16 + $2) × 25,000 + $360,000 = $1,360,000 Relevant cost to buy: [(25,000 × $48) + $360,000] = $1,560,000 Relevant revenue/cost if rent = $210,000 Diff: 3 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-3; 11-4
20) What production level is required for Day Light to be indifferent between making or buying the part if $260,000 of fixed costs can be eliminated by buying? A) 32,500 units B) 26,500 units C) 12,500 units D) 1,000 units E) 0 units Answer: A Explanation: [$48X + ($360,000 - $260,000)] = $40X + $360,000 $48X - $40X = $260,000 $8X = $260,000 X = 32,500 units Diff: 3 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-3; 11-4
Answer the following question(s) using the information below. Helmer's Rockers manufactures two models, Standard and Premium. Weekly demand is estimated to be 100 units of the Standard Model and 70 units of the Premium Model. The following per unit data apply:
Contribution margin per unit Number of machine-hours required
Standard $21 3
Premium $24 4
21) The contribution per machine-hour is ________. A) $18 for Standard, $20 for Premium B) $54 for Standard, $80 for Premium C) $15 for Standard, $16 for Premium D) $7 for Standard, $6 for Premium E) $5 for Standard, $6 for Premium Answer: D Explanation: Standard $21/3 = $6; Premium $24/4 = $6 Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-4
22) If there are 496 machine-hours available per week, how many rockers of each model should Jim Helmer produce to maximize profits? A) 100 units of Standard and 54 units of Premium B) 72 units of Standard and 70 units of Premium C) 100 units of Standard and 70 units of Premium D) 85 units of Standard and 60 units of Premium E) 100 units of Standard and 49 units of Premium Answer: E Explanation: Standard (100 units × 3 mh) + Premium (49 units × 4 mh) = 496 machine-hours of the constrained resource Diff: 3 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-4
Answer the following question(s) using the information below. Braun's Brakes manufactures three different product lines, Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply: Model X Selling price $50 Direct materials 6 Direct labour ($12 per hour) 12 Variable support costs ($4 per machine-hour) 4 Fixed support costs 10
Model Y $60 6 24 8 10
Model Z $70 6 24 8 10
23) If there is excess capacity, then which model(s) is(are) the most profitable to produce? A) Model X B) Model Y C) Model Z D) Models X and Y E) Models X and Z Answer: B Explanation: Model Y since it has the greatest contribution margin per unit Model X $50 - $6 - $12 - $4 = $28 Model Y $60 - $6 - $12 - $8 = $34 highest Model Z $70 - $6 - $24 - $8 = $32 Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-4
24) If capacity is constrained by machine hours, then which model(s) is(are) the most profitable to produce? A) Model X B) Model Y C) Model Z D) Models Y and Z E) Models X and Z Answer: A Explanation: Model X since it has the greatest contribution margin per machine-hour Model X $50 - $6 - $12 - $4 = $28 highest Model Y $60 - $6 - $24 - $8 = $22/2 = $11 Model Z $70 - $6 - $24 - $8 = $32/2 = $16 Diff: 3 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-4
Answer the following question(s) using the information below. Specialty Wheels Ltd. manufactures three different product lines, Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply: Model X Selling price $300 Direct materials 200 Direct labour ($32 per hour) 32 Variable support costs ($24 per machine-hour) 24 Fixed support costs 10
Model Y $400 220 96 24 10
Model Z $480 250 96 48 10
25) If there is excess capacity, then which model is the most profitable to produce? A) Model X B) Model Y C) Model Z D) Models X and Y E) Models X and Z Answer: C Explanation: Model Z since it has the greatest contribution margin per unit Model X $300 - $200 - $32 -$24 = $44 Model Y $400 - $220 - $96 - $24 = $60 Model Z $480 - $250 - $96 - $48 = $86 highest Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-4
26) If capacity is constrained by machine hours, then which model(s) is the most profitable to produce? A) Model Y B) Model X C) Model Z D) Models Y and Z E) Models X and Z Answer: A Diff: 3 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-4
27) The greatest possible contribution margin per unit of the constraining factor will ensure which of the following? A) minimum total variable costs B) zero imputed costs C) minimum fixed cost per unit of production D) minimum variable costs per unit of production E) maximum operating income Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-4
28) Decisions on product mix involving multiple products, should be based on which of the following? A) the variable cost differential between the products B) the differential selling prices between the products C) fixed cost savings D) the amount of idle capacity E) individual product contribution margin totals Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-4
29) Last year, a sailboard company produced two types of boards: a regular board for multi-purpose sailing; and, a special trick board used by experts for competitions. The regular board sells for $750 and the competition board sells for $1,350. The variable production costs are $250 and $400 respectively, and the company has $400,000 in fixed costs overall. Marketing staff have determined that the company should specialize in the competition boards only, and sell the regular boards, if at all, under a different brand name. Last year the company made a profit, selling twice as many regular boards as competition boards, resulting in a fixed cost allocation of $5.00 per board. It takes 6 hours of direct labour to make a regular board and 12 hours to make a competition board. The company worked at full capacity of 19,500 direct labour hours last year. Based on the above information only, which product or mix of products, should the company choose? Assume that any and all production can be sold. A) the regular board only, as it takes fewer direct labour hours to build B) both, as the company made a profit last year using this strategy C) the competition board only, as it has a higher contribution margin D) the regular board only, as it has the highest contribution margin per direct labour hour E) Any combination is equivalent, based on the contribution margin times the number of boards that could be sold. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-4
30) A local accounting firm has offered to do all the billings and collections of a general practitioner. The annual fee will be $15,000. The service will replace the part-time bookkeeper who works for $12 an hour, 10 hours a week. Because outsourcing accounting activities will take place away from the office, the doctor estimates that she will have one additional hour a week to see patients. Normally, she sees four patients an hour with an average visit fee of $100. The office is open 50 weeks a year. Since the accounting service will maintain all records in its office, the doctor will no longer need to rent storage space for the office files. The storage space rents for $150 a month. Required: Determine whether or not the doctor should accept the offer to use the accounting service. Answer: Accounting service Keep In-house Accounting service $15,000 Bookkeeper (10 × 50 × $12) 6,000 Rent (12 × $150) 1,800 Opportunity costs (4 × 1 × $100 × 50) 20,000 Totals $15,000 $27,800 Therefore, she should accept the offer to use the accounting service Diff: 3 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-4
31) Best Parts Company manufactures a part for use in its production of automobiles. The costs per unit when 10,000 items are produced are: Direct materials Direct manufacturing labour Variable manufacturing overhead Fixed manufacturing overhead Total
$6 30 12 16 $64
Auto Company has offered to sell to Best Parts Company 10,000 units of the part for $60. The plant facilities could be used to manufacture another part at a savings of $90,000 if Best Parts accepts the offer. In addition, $10 per unit of fixed manufacturing overhead on the original part would be eliminated. Required: a. What is the relevant per unit cost for the original part? b. Which alternative is best for Best Parts Company? By how much? Answer: a. Direct materials $6 Direct manufacturing labour 30 Variable manufacturing overhead 12 Avoidable fixed mfg. overhead 10 Total relevant per unit costs $58 b. Make Purchase price Savings in space Direct materials Direct mfg. labour Variable overhead Fixed overhead saved Totals
Buy $(600,000) 90,000
Effect of Buying
$60,000 300,000 120,000 $480,000
100,000 $410,000
$70,000
Diff: 3 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-3; 11-4
32) Travolta Company sells two items, product A and product B. The company is considering dropping product B. It is expected that sales of product A will increase by 40% as a result. Dropping product B will allow the company to cancel its monthly equipment rental costing $100 per month. The other existing equipment will be used for additional production of product A. One employee earning $200 per month can be terminated if product B production is dropped. Travolta's other fixed costs are allocated and will continue regardless of the decision made. A condensed, budgeted monthly income statement with both products follows:
Sales Direct materials Direct labour Equipment rental Other allocated overhead Operating income
Product A $12,000 2,500 2,000 300 1,000 $6,200
Product B $8,000 2,000 1,200 2,600 2,100 $100
Total $20,000 4,500 3,200 2,900 3,100 $6,300
Required: Prepare an incremental analysis to determine the financial effect of dropping product B. Answer: Incremental change in revenue: Product A increase in sales $12,000 × 40% $4,800 Product B decrease in sales (8,000) Incremental decrease in revenue ($3,200) Incremental change in variable costs: Direct materials: Product A increase $2,500 × 40% Product B decrease Direct labour: Product A increase $2,000 × 40% Product B decrease Incremental decrease in variable costs Equipment rental deduction Incremental decrease in profits if product B is dropped
$(1,000) 2,000 (800) 200 $400 100 ($2,700)
Diff: 3 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-4
33) Douglas Company manufactures a part for use in its production of hats. When 10,000 items are produced, the costs per unit are: Direct materials Direct manufacturing labour Variable manufacturing overhead Fixed manufacturing overhead Total
$0.60 3.00 1.20 1.60 $6.40
Mike Company has offered to sell to Douglas Company 10,000 units of the part for $6.00 per unit. The plant facilities could be used to manufacture another item at a savings of $9,000 if Douglas accepts the offer. In addition, $1.00 per unit of fixed manufacturing overhead on the original item would be eliminated. Required: a. What is the relevant per unit cost for the original part? b. Which alternative is best for Douglas Company? By how much? Answer: a. Direct materials $0.60 Direct manufacturing labour 3.00 Variable manufacturing overhead 1.20 Avoidable fixed manufacturing overhead 1.00 Total relevant per unit costs $5.80 b. Make Purchase price Savings in space Direct materials Direct mfg. labour Variable overhead Fixed overhead saved Totals
$6,000 30,000 12,000 $48,000
Buy Effect of Buying $60,000 $(60,000) (9,000) 9,000 6,000 30,000 12,000 (10,000) 10,000 $41,000 $7,000
Diff: 3 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-3; 11-4
34) Speed Auto Company manufactures a part for use in its production of automobiles. When 10,000 items are produced, the costs per unit are: Direct materials Direct manufacturing labour Variable manufacturing overhead Fixed manufacturing overhead Total
$12 60 24 32 $128
Monty Company has offered to sell Speed Auto Company 10,000 units of the part for $120 per unit. The plant facilities could be used to manufacture another part at a savings of $180,000 if Speed Auto accepts the supplier's offer. In addition, $20 per unit of fixed manufacturing overhead on the original part would be eliminated. Required: a. What is the relevant per unit cost for the original part? b. Which alternative is best for Speed Auto Company? By how much? Answer: a. Direct materials $12 Direct manufacturing labour 60 Variable manufacturing overhead 24 Avoidable fixed manufacturing overhead 20 Total relevant per unit costs $116 b. Make Purchase price Savings in space Direct materials Direct manufacturing labour Variable overhead Fixed overhead saved Totals
Buy $1,200,000 (180,000)
$120,000 600,000 240,000 $960,000
(200,000) $820,000
Effect of Buying $(1,200,000) 180,000 120,000 600,000 240,000 200,000 $140,000
The best alternative is to buy the part. Diff: 3 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-3; 11-4
35) Lang Manufacturing Company manufactures a part for use in its production of recreation vehicles. When 10,000 items are produced, the costs per unit are: Direct materials Direct manufacturing labour Variable manufacturing overhead Fixed manufacturing overhead Total
$20 70 32 15 $137
Gehen Company has offered to sell Lang Manufacturing Company 10,000 units of the part for $130 per unit. The plant facilities could be used to manufacture another part at a savings of $150,000 if Lang Manufacturing accepts the supplier's offer. In addition, $10 per unit of fixed manufacturing overhead on the original part would be eliminated. Required: a. What is the relevant per unit cost for the original part? b. Which alternative is best for Lang Manufacturing Company? By how much? Answer: a. Direct materials $20 Direct manufacturing labour 70 Variable manufacturing overhead 32 Avoidable fixed manufacturing overhead 10 Total relevant per unit costs $132 b. Make Purchase price Savings in space Direct materials $200,000 Direct manufacturing labour 700,000 Variable overhead 320,000 Fixed overhead saved Totals $1,220,000
Buy $1,300,000 (150,000)
(100,000) $1,050,000
Effect of Buying $(1,300,000) 150,000 200,000 700,000 320,000 100,000 $170,000
The best alternative is to buy the part. Diff: 3 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-3; 11-4
36) A cafe specializes in short order meals; and, morning and afternoon snack breaks. It is open from 9:00 am until 4:00 pm. An office manager in a nearby high rise office building offers the owner a contract to provide her 50 employees with afternoon snack breaks for $2.00 each. Each employee would receive a drink and a snack item. The shop has an hourly capacity of 50 customers. The owner estimates that the variable costs of the afternoon breaks would be $1.20 each. Currently the afternoon service, starting at 2:00, is running at only 50 percent capacity, although the morning and noon activities are near capacity. At the present level of operations each meal/snack served is allocated a fixed cost of $0.25. Required: a. What nonfinancial factors should be considered by the owner? b. Given your concerns listed in part a. and quantitative analysis, should the offer be accepted? Why or why not? Answer: a. Nonfinancial factors to consider in evaluating the offer: 1. Length of the offer. 2. Impact on walk-in customers, continued same quality of service. 3. Types of food to be allowed under terms of contract. 4. Number of employees in office who are already regular customers. 5. How does the $2.00 compare to current prices? b. Current costs allocations: Variable costs $1.20 + Fixed costs .25 = $1.45 *If the current level of operations permits a proper allocation of $0.25 per customer visit, any permanent increase in volume should reduce the fixed cost per customer visit. The current level should be about 600 customers a day ((5 hours × 100) + (2 hours × 50)). This level of 600 times $0.25 equals fixed costs of $150. At a capacity of 700 customers the average fixed cost is approximately $0.214 per customer. Proposed costs allocations: Variable costs $1.20 + Fixed costs $0.21 = $1.41 If the financial and nonfinancial factors can be combined into a satisfactory level of service the owner might accept the offer. However, a $0.04 profit per customer is probably not acceptable without some advantages offered by the nonfinancial factors. Most respondents to this problem will probably not accept the offer. Diff: 3 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-3; 11-4
37) London Bicycles has been manufacturing its own wheels for its bikes. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 30% of direct labour cost. The direct materials and direct labour cost per unit to make the wheels are $1.50 and $1.80, respectively. Normal production is 200,000 wheels per year. A supplier offers to make the wheels at a price of $4 each. If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $42,000 of fixed manufacturing overhead currently being charged to the wheels will have to be absorbed by other products. Required: a. Prepare an incremental analysis for the decision to make or buy the wheels. b. Should London Bicycles buy the wheels from the outside supplier? Justify your answer. Answer: a. Make Buy Direct materials (200,000 × $1.50) $300,000 -0Direct labour (200,000 × $1.80) 360,000 -0Variable manufacturing costs ($360,000 × 30%) 108,000 -0Purchase price (200,000 × $4) -0800,000 Total annual cost $768,000 $800,000 b. The wheels should continue to be manufactured by London Bicycles. The company's net income would decrease $32,000 if it purchased the wheels. Diff: 2 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-3; 11-4
38) Sarah Bicycles has been manufacturing its own wheels for its bikes. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 30% of direct labour cost. The direct materials and direct labour cost per unit to make the wheels are $3.00 and $3.60 respectively. Normal production is 200,000 wheels per year. A supplier offers to make the wheels at a price of $8 each. If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $84,000 of fixed manufacturing overhead currently being charged to the wheels will have to be absorbed by other products. Required: a. Prepare an incremental analysis for the decision to make or buy the wheels. b. Should Sarah Bicycles buy the wheels from the outside supplier? Justify your answer. Answer: a. Make Buy Direct materials (200,000 × $3.00) $600,000 -0Direct labour (200,000 × $3.60) 720,000 -0Variable manufacturing costs ($720,000 × 30%) 216,000 -0Purchase price (200,000 × $8) -01,600,000 Total annual cost $1,536,000 $1,600,000 b. The wheels should continue to be manufactured by Sarah Bicycles. The company's net income would decrease by $64,000 if it purchased the wheels. Diff: 2 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-3; 11-4
39) Southwestern Company needs 1,000 motors in its manufacture of automobiles. It can buy the motors from Jinx Motors for $1,250 each. Southwestern's plant can manufacture the motors for the following costs per unit: Direct materials Direct manufacturing labour Variable manufacturing overhead Fixed manufacturing overhead Total
$500 300 200 350 $1,350
If Southwestern buys the motors from Jinx, 30% of the fixed manufacturing overhead applied will be avoided. Required: a. Should the company make or buy the motors? b. What additional qualitative factors should Southwestern consider in deciding whether or not to make or buy the motors? Answer: a. Cost to buy the part: (1,000 × $1,250) $1,250,000 Relevant costs to make: Variable costs: Direct materials (1,000 × $500) $500,000 Direct manufacturing. labour (1,000 × $300) 300,000 Variable manufacturing overhead (1,000 × $200) 200,000 Total 1,000,000 Avoidable fixed costs: ($350 × 1,000 × 0.30) 105,000 1,105,000 Savings if part is manufactured $145,000 b. Management should consider several qualitative factors in deciding whether to make or buy the motors. ∙ Quality controls: The company's ability to manufacture quality motors versus that of the supplier. ∙ Delivery: Can they make them when needed versus Jinx delivering them when needed? ∙ Reputation: What is the overall reputation of Jinx? ∙ Term: Is Jinx willing to make long-term commitments for delivery of the motors? ∙ Facilities: What are the opportunity costs of using the space and equipment to manufacture other items? Diff: 3 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-3; 11-4
40) Quiett Truck manufactures part WB23 used in several of its truck models. 10,000 units are produced each year with production costs as follows: Direct materials Direct manufacturing labour Variable support costs Fixed support costs Total costs
$45,000 15,000 35,000 25,000 $120,000
Quiett Truck has the option of purchasing part WB23 from an outside supplier at $11.20 per unit. If WB23 is outsourced, 40% of the fixed costs cannot be immediately converted to other uses. Required: a. Describe avoidable costs. What amount of the WB23 production costs is avoidable? b. Should Quiett Truck outsource WB23? Why or why not? c. What qualitative factors should Quiett Truck consider before outsourcing any of the parts it currently manufactures? Answer: a. Avoidable costs are those costs eliminated when a part, product, product line, or business segmented is discontinued. Avoidable production costs for WB23 total $110,000, which are all but the $10,000 ($25,000 × 40%) of fixed costs that cannot be immediately converted to other uses. b. Based on the financial considerations given, Quiett Truck should NOT outsource WB23 because the $112,000 (10,000 units × $11.20 per part) outsourced cost is greater than the $110,000 reduction in annual production costs. In other words, the outsourcing would cost Quiett Truck an additional $2,000 annually. c. Other factors to consider include the supplier's ability to meet expected quality and delivery standards, and the likelihood of suppliers increasing prices of components in the future. Diff: 3 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-3; 11-4
41) Nall Custom Pools Inc. needs 10,000 units of a certain part for its manufacturing process. It can buy the part from Wholesale Pool Supplies and Equipment for $53. Nall's plant can manufacture the part for the following costs per unit: Direct materials Direct manufacturing labour Variable manufacturing overhead Fixed manufacturing overhead Total
$9 24 12 15 $60
If Nall buys the part from Wholesale, 60 percent of the fixed manufacturing overhead applied will continue to be incurred. Required: What is the relevant dollar difference between making and buying the part? Answer: Cost to buy the part: (10,000 × $53) = $530,000 Relevant cost to make: Variable costs: Direct materials (10,000 × $9) $90,000 Direct mfg. labour (10,000 × $24) 240,000 Variable mfg. overhead (10,000 × $12) 120,000 Total $450,000 Avoidable fixed costs ($150,000 × 0.40) 60,000 510,000 Savings if part is manufactured $20,000 Diff: 2 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-3; 11-4
42) A florist produces table settings for weddings. Based on an annual volume of 10,000 units it incurs $100,000 in fixed manufacturing costs. Variable costs per unit are $16 for direct materials, $3 for direct manufacturing labour, and $14 for variable factory overhead. Another company has offered to supply empty baskets for the settings for $8, with a minimum annual order of 5,000 units. If the florist accepts the offer, it will be able to reduce variable labour and overhead costs by 50 percent. The materials for the empty baskets will cost $4 if the florist assembles them. Required: a. Determine if they should make or assemble the empty baskets. b. Should they make or assemble the empty baskets if they could rent the space that the basket assembly requires for $16,000 per year to another company? Answer: a. Make Buy Effect of Buying Purchase from supplier $80,000 Manufacturing costs: Materials $160,000 40,000 Direct labour* 30,000 15,000 Variable overhead* 140,000 70,000 Totals $330,000 $205,000 $125,000 Difference favours purchasing the baskets. *Labour = $3 × 10,000 × 0.50 = $15,000 Variable overhead = $14 × 10,000 × 0.50 = $70,000 b. from part a. Part a. Totals Rent Totals
$330,000 $330,000
$205,000 (16,000) $189,000
$125,000 16,000 $141,000
Difference favours purchasing the baskets. Diff: 3 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-3; 11-4
43) Lovejoy's Cake Shop makes three types of cakes: White, Chocolate, and Swirl on one assembly line that has a limit of 400 labour-hours per week. Lovejoy can sell all the cakes it can make under current operating capacity. Manufacturing information per cake for each product is as follows:
Selling price Variable costs Labour-hours per cake
White $16 10 .4
Chocolate $10 5 .2
Swirl $20 18 .4
Required: Determine the total weekly contribution margin when all labour-hours are allotted to the product with the highest: a. Unit selling price. b. Unit contribution margin. c. Contribution per labour-hour. Answer: White Chocolate Swirl Selling price $16 $10 $20 Variable costs 10 5 18 Contribution margin $6 $5 $2 Contribution per labour hour: White = $6/0.4 = $15; Chocolate = $5/0.2 = $25; Swirl = $2/0.4 = $5 a.
Selling price: Swirl Total cakes = 400/0.4 = 1,000 Total contribution margin = $2 × 1,000 = $2,000
b.
Unit contribution margin: White Total cakes = 400/0.4 = 1,000 Total contribution margin = $6 × 1,000 = $6,000
c.
Contribution per labour hour: Chocolate Total cakes = 400/0.2 = 2,000 Total contribution margin = $5 × 2,000 = $10,000
Diff: 2 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-4
44) Ralph's Mufflers manufactures three different product lines, Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply: Model X Model Y Model Z Selling price $160 $180 $200 Direct materials 60 60 60 Direct labour ($20 per hour) 30 30 40 Variable support costs ($10 per machine-hour) 10 20 20 Fixed support costs 40 40 40 a. For each model, compute the contribution margin per unit. b. For each model, compute the contribution margin per machine-hour. c. If there is excess capacity, which model is the most profitable to produce? Why? d. If there is constrained capacity, which model is the most profitable to produce? Why? e. How can Ralph encourage her sales people to promote the more profitable model? Answer: a. The contribution margin per unit is: $60 for Model X ($160 - $90 - $30 - $10), $70 for Model Y ($180 - $60 - $30 - $20), and $80 for Model Z ($200 - $60 - $40 - $20). b. The contribution margin per machine-hour is $60 for Model X ($60 contribution margin/1.0 machine-hour per unit), $35 for Model Y ($70/2.0), and $40 for Model Z ($80/2.0). c. When there is excess capacity, Model Z is the most profitable because it has the greatest contribution margin per unit. d. When there are machine-hour capacity constraints, Model X is the most profitable because it has the greatest contribution margin per constrained resource. e. To encourage sales persons to promote specific products, Ralph may want to provide marketing incentives such as higher sales commissions for products contributing the most to profits. Ralph may also want to educate salespeople about the effects of constrained resources. Diff: 3 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-4
45) Steel Mufflers manufactures three different product lines: Model X, Model Y, and, Model Z. Considerable market demand exists for all models. The following per unit data apply: Model X Model Y Model Z Selling price $80 $90 $100 Direct materials 30 30 30 Direct labour ($10 per hour) 15 15 20 Variable support costs ($5 per machine-hour) 5 10 10 Fixed support costs 20 20 20 Required: a. For each model, compute the contribution margin per unit. b. For each model, compute the contribution margin per machine-hour. c. If there is excess capacity, which model is the most profitable to produce? Why? d. If there is a machine breakdown, which model is the most profitable to produce? Why? e. How can Steel Mufflers encourage their sales people to promote the more profitable model? Answer: a. The contribution margin per unit is: $30 for Model X ($80 - $30 - $15 - $5), $35 for Model Y ($90 - $30 - $15 - $10), and $40 for Model Z ($100 - $30 - $20 - $10). b. The contribution margin per machine-hour is $30 for Model X ($30 contribution margin/1.0 machine-hour per unit), $17.50 for Model Y ($35/2.0), and $20 for Model Z ($40/2.0). c. When there is excess capacity, Model Z is the most profitable because it has the greatest contribution margin per unit. d. When there are machine-hour capacity constraints, Model X is the most profitable because it has the greatest contribution margin per constrained resource. e. To encourage sales persons to promote specific products, Steel Mufflers may want to provide marketing incentives such as higher sales commissions for products contributing the most to profits. Steel Mufflers may also want to educate salespeople about the effects of constrained resources. Diff: 3 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-4
46) John Hatelak, a sales representative for a manufacturing equipment company, has decided to spend less time traveling. He is going to spend only 172 hours per month with his customers. To do this he will have to give up some of his clients. The following information is from his last full month's sales activities.
Number of customers Average sale per customer Commission (% of sales $) Average time per customer
Large Customers 20 $6,000 10% 6 hours
Medium Customers 100 $2,000 7% 4 hours
Small Customers 160 $1,200 5% 3 hours
Required: a. What should be his customer mix in order to maximize his sales commissions? b. What will be his income at the best possible customer mix? Answer: a. Large Medium Small Customers Customers Customers Average sale $6,000 $2,000 $1,200 Commission rate × 0.10 × 0.07 × 0.05 Average commission $600 $140 $60 Hours per customer /6 /4 /3 Commission per hour $100 $35 $20 First, he should service all the large customers because they provide the most commissions per hour. 20 large customers × 6 hours = 120 hours This leaves 52 hours (172 - 120) for the next best group, the medium customers. 13 Medium customers × 4 hours = 52 hours b. Total commissions: Large customers 20 × $600 Medium customers 13 × $140 Total
$12,000 1,820 $13,820
Diff: 3 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-4
47) Under what conditions might a manufacturing firm sell a product for less than its long-term price? Why? Answer: The price for a short-term order may be less than the price offered to a long-term customer. If a firm has excess capacity that is sitting idle, it is more profitable for the firm to accept a special order for a price below the long-run price than it is to let the capacity sit idle. In addition, the firm may use this strategy for market penetration and to obtain greater market share. Diff: 2 Type: ES CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-3; 11-4
48) For short-term pricing decisions, what costs are relevant when there is available surplus capacity? When there is no available surplus capacity? Answer: For both situations the relevant costs are the future incremental costs. However, when there is limited capacity the incremental costs will be greater because they will include the costs of adding capacity or the opportunity costs of alternative manufacturing choices. Diff: 2 Type: ES CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-3; 11-4
49) How does a manager go about choosing which of three products to produce and sell when each product uses a single machine with a limited capacity? Answer: Management should attempt to maximize output from the machine which is the limited resource. This involves maximizing the contribution margin per unit of the scarce resource. First of all, management needs to determine the contribution margin of each of the three products. Then, the time that it takes to produce a unit of each of the three products should be determined. Then, a contribution margin per machine hour can be calculated. The first product that should be produced is the one with the highest contribution margin per machine hour. Diff: 2 Type: ES CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-4
A client in another province needs immediate help in solving a personnel training problem in the shipping department. Match each activity on the basis of its relationship with this consulting engagement. Items may have multiple classifications. A) Relevant Costs B) Opportunity Cost C) Sunk, Irrelevant Costs D) Irrelevant Costs E) Opportunity, Irrelevant Costs F) Sunk Costs 50) Four employees will have to spend three nights in Quebec City, the hotel bill has been negotiated in advance for $1,800 Diff: 2 Type: MA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-2; 11-3; 11-4
51) All staff members receive $1,000 per diem for travel Diff: 2 Type: MA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-2; 11-3; 11-4
52) Current year's amortization of the firm's computer system is $15,000 Diff: 2 Type: MA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-2; 11-3; 11-4
53) Round-trip transportation for each staff member is $500 Diff: 2 Type: MA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-2; 11-3; 11-4
54) The firm is also sending the same four staff members to Toronto, for a two week engagement upon their return from this trip. The firm's cost of this trip will be $10,000 Diff: 2 Type: MA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-2; 11-3; 11-4
55) The firm has a $2,000 maintenance contract on its telecommunication system for the current year Diff: 2 Type: MA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-2; 11-3; 11-4
56) If the firm accepts this job, it will have to decline a job in Vancouver that has the potential of providing a net cash inflow of $5,000 after all expenses Diff: 2 Type: MA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-2; 11-3; 11-4
57) The firm's variable overhead is $50 per client hour Diff: 2 Type: MA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-2; 11-3; 11-4
58) The firm will pay $60 next month for this year's membership in the Canadian Consultants Society for each professional staff member Diff: 2 Type: MA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-2; 11-3; 11-4
59) Last year the firm paid $4,000 to make improvements in its 5-year leasehold on its offices Diff: 2 Type: MA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-2; 11-3; 11-4
Answers: 50) A 51) A 52) C 53) A 54) D 55) D 56) B 57) A 58) D 59) C
11.5 Explain the theory of constraints and how to manage "bottlenecks." 1) The theory of constraints describes methods of reducing bottlenecks by identifying and reducing fixed costs previously viewed as variable. Answer: FALSE Explanation: The theory of constraints (TOC) describes methods to maximize operating income (or, "throughput") when faced with operations that because of limited capacity form a constraint, or "bottleneck." Diff: 2 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-5
2) The theory of constraints analyzes fixed costs and considers short-run costs to be variable costs. Answer: FALSE Explanation: It focuses on shortrun maximization of throughput margin, revenues minus direct materials costs of goods sold. Diff: 2 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-5
3) In a manufacturing operation, the bottleneck machine sets the pace for all non-bottleneck machines. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-5
4) Producing more non-bottleneck output increases throughput contribution. Answer: FALSE Explanation: Throughput contribution is increase by increasing bottleneck capacity. Diff: 2 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-5
5) The objective of the theory of constraints is to increase throughput contribution while decreasing investments and operating costs. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-5
6) Throughput contribution is equal to revenues minus direct material and direct labour costs. Answer: FALSE Explanation: Throughput contribution is equal to revenues minus the direct materials cost of goods sold. Diff: 1 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-5
7) When considering the theory of constraints, operating costs refer to all costs involved in the manufacturing process. Answer: FALSE Explanation: When considering the theory of constraints, all costs except for direct materials are considered operating costs. Diff: 3 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-5
8) The only cost of poor quality at a nonbottleneck operation is the cost of the materials wasted. Answer: FALSE Explanation: At a bottleneck operation, the cost of poor quality is the cost of materials wasted plus the opportunity cost of lost throughput margin. Diff: 2 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-5
9) When a firm has a bottleneck machine, a good way to manage the bottleneck is to make sure that prior machines produce more units for the bottleneck machine to increase its throughput. Answer: FALSE Explanation: When a firm has a bottleneck machine, making sure that prior machines produce more units for the bottleneck machine will not increase throughput of the bottleneck machine. Diff: 2 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-5
10) The theory of constraints focuses on shortrun maximization of throughput margin, revenues minus the cost of goods manufactured. Answer: FALSE Explanation: The theory of constraints focuses on shortrun maximization of throughput margin, revenues minus direct materials costs of goods sold. Diff: 2 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-5
11) The theory of constraints is more useful than activity-based costing in long-run decisions. Answer: FALSE Explanation: In contrast (to TOC), activity-based costing (ABC) systems take a long-run perspective and focus on improving processes by eliminating non-value-added activities and reducing the costs of performing value-added activities. Diff: 2 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-5
12) A company would subordinate all bottleneck production to non-bottleneck machines when
A) the bottleneck resource was temporarily unused. B) setup time on the non-bottleneck machine is higher than on the bottleneck machine. C) setup time on the non-bottleneck machine is less than on the bottleneck machine. D) it intends to increase throughput contribution. E) it wants to produce at least a minimum buffer inventory. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-5
13) Which of the following statements related to the theory of constraints is/are TRUE? A) Sales less direct materials costs equals throughput contribution. B) Throughput contribution equals sales plus direct materials, and the theory of constraints focuses on revenue and cost management when an organization is faced with bottlenecks. C) Throughput contribution equals sales plus direct materials. D) The theory of constraints focuses on process-costing when an organization is faced with bottlenecks. E) Throughput contribution equals sales plus direct manufacturing costs. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-5
14) Increasing throughput contribution and managing bottlenecks includes all of the following EXCEPT A) workstations without large quantities of jobs to be worked on are ignored. B) recognize that a bottleneck determines throughput contribution of the entire process related to the bottleneck. C) a cost-benefit analysis of alternative actions to increase bottleneck efficiency. D) short-run time horizons. E) a cost-benefit analysis of alternative actions to increase bottleneck capacity. Answer: A Diff: 3 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-5
15) Producing more non-bottleneck output A) creates more inventory but does not increase throughput contribution. B) creates more inventory and increases throughput contribution. C) creates less pressure for the bottleneck workstations. D) allows for the maximization of overall contribution. E) allows for the maximization of overall shop effectiveness. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-5
Answer the following question(s) using the information below. Quick Shop Printing has two workstations, cutting and pasting. The cutting station is limited by the speed of operating the cutting machine. Pasting is limited by the speed of the workers. Pasting normally waits on work from cutting. Each department works an eight-hour day. If cutting begins work two hours earlier than pasting each day, the two departments generally finish their work at about the same time. Not only does this eliminate the bottleneck, but it increases finished units produced each day by 80 units. All units produced can be sold. The cost of operating the cutting department two more hours each day is $800. The contribution margin of the finished products is $3 each. Inventory carrying costs are $0.20 per unit per day. 16) What is the daily capacity of the pasting workstation based on a ten hour day? A) 320 B) 400 C) 440 D) 800 E) 820 Answer: B Explanation: Units per hour = 80 incremental units/2 hours = 40/hour; Daily output = 40 × 10 = 400 Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-5
17) What is the change in the daily contribution margin if the change is made? A) $1,200 B) $(128) C) $(560) D) $240 E) $(568) Answer: E Explanation: Units per hour = 80/2 = 40 units per day = 40 × 10 = 400 units Total contribution margin (80 × $3) Carrying cost (40 units × $0.20) Increased costs Net change in contribution margin
$240 (8) (800) $(568)
Diff: 3 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-5
18) Which of the following is NOT a key step in managing bottleneck resources? A) Recognize that the bottleneck resource determines throughput contribution of the plant as a whole. B) Search and find the bottleneck resource by identifying resources with large quantities of inventory waiting to be worked on. C) Keep the bottleneck operation busy and subordinate all nonbottleneck resources to the bottleneck resource. D) Reduce the number of employees who work in the bottleneck area. E) Take action to increase bottleneck efficiency and capacity. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-5
19) Which of the following sets of sentences has two statements which are TRUE? A) Poor quality is more costly at a bottleneck workstation than it is at a nonbottleneck workstation. The cost of poor quality at a bottleneck workstation is the cost of materials in waiting. B) Throughput contribution increases only by increasing bottleneck output. Throughput contribution is not increased when nonbottleneck output is increased. C) The cost of poor quality at a nonbottleneck operation is the cost of materials wasted. Increasing idle time at the bottleneck operation helps relieve the delays at the nonbottleneck operations. D) The cost of poor quality at a bottleneck operation is the cost of materials wasted. Increasing idle time at the nonbottleneck operation helps relieve the delays at the bottleneck operations. E) Throughput contribution increases only by decreasing bottleneck output. Throughput contribution is not increased when nonbottleneck output is increased. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-5
20) Which of the following statements is TRUE? A) The elimination of defects always increases productivity. B) Nonbottleneck operations should be refined for high efficiency before starting on bottleneck improvement because nonbottleneck operations are generally easier to correct and improve. C) Throughput contribution is not increased when nonbottleneck output is increased. D) Quality and time are seldom related in service industries. E) The elimination of defects always decreases revenues. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-5
Answer the following question(s) using the information below. Speedy Dress Manufacturing has two workstations, cutting and finishing. The cutting station is limited by the speed of operating the cutting machine. Finishing is limited by the speed of the workers. Finishing normally waits for work from cutting. Each department works an eight-hour day. If cutting begins work two hours earlier than finishing each day, the two departments generally finish their work at about the same time. Not only does this eliminate the bottleneck, but also it increases finished units produced each day by 200 units. All units produced can be sold even though the change increases inventory stock by 20% from 400 units. The cost of operating the cutting department two more hours each day is $1,600. The contribution margin of the finished products is $6 each. Inventory carrying costs are $0.40 per unit per day. 21) What is the total production per day if the change is made? A) 6,400 units B) 1,000 units C) 880 units D) 1,600 units E) 640 units Answer: B Explanation: Units per hour = 200/2 = 100 Units per day = 100 × 10 hours a day =1,000 units Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-5
22) What is the change in the daily contribution margin if the change is made? A) $(608) B) $(634) C) $(432) D) $800 E) $960 Answer: C Explanation: Units per hour = 200/2 = 100 units per day = 100 × 10 = 1,000 units Total contribution margin (200 × $6) Carrying cost (80 units × $0.40) Increased costs Net change in contribution margin
$1,200 (32) (1,600) $(432)
Diff: 3 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-5
23) The WOW Shop, a manufacturer of large windows, is experiencing a bottleneck in its plant. Setup time at one of its workstations has been identified as the culprit. A manager has proposed a plan to reduce setup time at a cost of $72,000. The change will result in 8,000 additional windows. The selling price per window is $18, direct labour costs are $3 per window, and the cost of direct materials is $5 per window. Assume all units produced can be sold. The change will result in an increase in the throughput contribution of ________. A) $104,000 B) $80,000 C) $32,000 D) $8,000 E) $120,000 Answer: A Explanation: 8,000 × ($18 - $5) = $104,000 Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-5
24) Palmateer Industries makes an electronic component in two departments, Machining and Assembly. The capacity per month is 30,000 units in the Machining Department and 20,000 in the Assembly Department. The only variable cost of the product is the direct material of $90 per unit. All direct material cost is incurred in the Machining Department. All other costs of operating the two departments are fixed costs. Palmateer can sell as many units of this electronic component as it produces at a selling price of $300 per unit. Required: Assuming any defective units produced in either department must be scrapped: a. Compute the loss that occurs if a defective unit is produced in the Machining Department. b. Compute the loss that occurs if a defective unit is produced in the Assembly Department. c. How do your answers in parts (a) and (b) relate to the theory of constraints? Explain. Answer: a. Direct material cost $90 Add forgone contribution margin on lost sale, $0 because Machining has more capacity than Assembly 0 Loss from producing a defective unit in Machining $90 b. Direct material cost Add forgone contribution margin on lost sale ($300-90) Loss from producing a defective unit in Assembly
$90 210 $300
c. Under the theory of constraints, the objective is to maximize throughput contribution, which is equal to revenues minus direct material cost of the cost of goods sold. In this case, Palmateer Industries should focus on improving quality first in the Assembly Department because poor quality (defective units) in that department are more costly. That is, because the Machining Department has more capacity than the Assembly Department, forgone throughput contribution only occurs from poor quality in the Assembly Department. Diff: 3 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-5
25) Fanshawe Inc., prepares frozen food for fast-food restaurants. It has two workstations, cooking and assembly. The cooking station is limited by the cooking time of the food. Assembly is limited by the speed of the workers. Assembly normally waits on food from cooking. Because the demand has increased in recent months to 2,800 dozen units, management is considering adding another cooking station or having the cooks start work earlier. The monthly cost of operating the cooking station one more hour each day is $2,400. The cost of adding another cooking station would add an average of $10 per hour. The current operating hours total eight hours a day, 22 days a month. The contribution margin of the finished products is currently $8 per dozen. Inventory carrying costs average $2.00 per dozen per month. Either the extra hour or the new cooking station would increase production by 20 dozen a day, with a long-run increase of 80 dozen units in finished goods inventory to 280 dozen. Required: a. What is the total production per month if the change is made? b. What is the current monthly contribution margin and the expected monthly product contribution for both of the possible changes? Assume long-run production equals sales. c. What course of action would you recommend? Answer: a. Total dozen per month = 2,800 + (22 × 20) = 3,240 b. Current product contribution margin (2,800 × $8) $22,400 Carrying costs (200 × $2) (400) Current net contribution $22,000 More hours: Expected product contribution margin (3,240 × $8) Carrying costs (280 × $2) Increased costs Expected net product contribution
$25,920 $ 560 2,400
Increase = $22,960 - $22,000 = New cooking station: Expected product contribution margin (3,240 × $8) Carrying costs (280 × $2) Increased costs ($10 × 22 × 8) Expected net product contribution Increase = $23,600 - $22,000 =
(2,960) $22,960 $ 960
$25,920 $ 560 1,760
(2,320) $23,600 $1,600
Diff: 3 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-5
26) Aunt Lisa's Cookies, Inc., prepares frozen gourmet cookies for shipment to upscale grocery stores as well as for mailing to internet and catalog customers. The company has two workstations, cooking and distribution. The cooking station is limited by the cooking time of the food. Distribution is limited by the speed of the workers. Distribution normally waits on food from cooking. Because the demand has increased in recent months to 4,000 dozen cookies, management is considering adding another oven in the cooking station or having the cooks start work earlier. The cost of adding another oven in the cooking station would add an average of $8 per hour. The monthly cost of operating the cooking station one more hour each day is $1,500. The current operating hours total eight hours a day, 24 days a month. The contribution margin of the finished products is currently $2 per dozen. Inventory carrying costs average $0.50 per dozen per month. Either the extra hour or the new oven at the cooking station would increase production by 50 dozen a day, with a long-run increase of 100 dozen units in finished goods inventory to 500 dozen. Required: a. What is the total production per month if the change is made? b. What is the current monthly contribution margin and the expected monthly product contribution for both of the possible changes? Assume long-run production equals sales. c. What course of action would you recommend?
Answer: a. Total dozen per month = 4,000 + (24 × 50) = 5,200 b. Current product contribution margin (4,000 × $2) Carrying costs (400 × $0.50) Current net contribution More hours: Expected unit contribution margin (5,200 × $2) Carrying costs (500 × $0.50) Increased costs Expected net product contribution
$8,000 (200) $7,800
$10,400 $ 250 1,500
Increase = $8,650 - $7,800 = New oven in the cooking station: Expected unit contribution margin (5,200 × $2) Carrying costs (500 × $0.50) Increased costs ($8 × 24 × 8) Expected net product contribution Increase = $8,614 - $7,800 =
(1,750) $8,650 $ 850
$10,400 $ 250 1,536
(1,786) $8,614 $814
c. The most cost-effective option is to have the cooks start work an hour earlier and work an extra hour each day. Diff: 3 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-5
27) U-Crack-Me-Up Windows, a manufacturer of windows, is experiencing a bottleneck in its plant. Setup time at one of its workstations has been identified as the culprit. A manager has proposed a plan to reduce setup time at a cost of $54,000. The change will result in 800 additional windows. The selling price per window is $180, direct labour costs are $60 per window, and the cost of direct materials is $95 per window. Assume all units produced can be sold. Required: Determine the change in both contribution margin and throughput contribution from making the investment. Should the investment be made? Justify your answer. Answer: Contribution margin = ($180 - $60 - $95) × 800 = $20,000 Throughput contribution ($180 - $95) × 800 = $68,000 If direct labour costs are truly variable then the $20,000 contribution margin will result in a payback period of 2.7 years and this may or may not be acceptable to management. On the other hand if there is idle time and the workers are paid by salary then the payback period will be reduced and there will be less incremental direct labour cost. Diff: 2 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-5
28) A machine has been identified as a bottleneck and the source of the constraint for a manufacturing company that has multiple products and multiple machines. List and describe five ways the company can overcome the bottleneck. Answer: The ways include: a. Eliminating idle time at the bottleneck operation. Extra staffing at the bottleneck would be a possibility, particularly if numerous manual type tasks were involved. b. Concentrate on processing those parts or products that increase throughput contribution, not parts or products that remain in finished goods or spare parts inventories. c. Shift a part of the products produced at the bottleneck machine to other machines or outsource part of the production. d. Reduce setup time and processing time at bottleneck operations. e. Improve the quality of the production process. Poor quality is especially costly at a bottleneck operation. Diff: 3 Type: ES CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-5
11.6 Explain why book value of equipment is irrelevant in equipment replacement decisions. 1) The financial measures used to evaluate a manager's performance should be consistent with the decision model. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-6
2) The gain or loss on the disposal of a machine is a relevant factor when considering replacing the machine if tax is a consideration. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-6
3) Book value of equipment is irrelevant in equipment-replacement decisions. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-6
4) An item's book value is the historical cost plus accumulated amortization. Answer: FALSE Explanation: ...minute accumulated amortization Diff: 1 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-6
5) When replacing an old machine with a new machine, the purchase price of the old machine is a relevant cost. Answer: FALSE Explanation: The original price of the old machine is a sunk cost and therefore an irrelevant cost. Diff: 1 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-6
6) A customer can be considered to be a cost object, in the decision to add or drop a particular customer. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-6
7) Econ Services has requested your services in determining the book values of the following assets, respectively.
Auto Machinery
Historical Costs $25,000 160,000
Accumulated Amortization $15,000 95,000
General repairs and maintenance for the automobile amounted to $5,000. Machinery maintenance included $3,000 for general upkeep. What are the book values for Auto and Machinery, respectively? A) $10,000; $65,000 B) $9,000; $57,000 C) $20,000; $150,000 D) $35,000; $245,000 E) $1,000; $53,000 Answer: A Explanation: Auto ($25,000 - $15,000) = $10,000 Machinery ($160,000 - $95,000) = $65,000 Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-6
8) Which of the following factors would be considered irrelevant when evaluating equipment replacement decisions?
A) the book value of the old machine B) manufacturing costs C) overhead costs D) product production costs E) useful life of new equipment Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-6
9) Ignoring tax consequences, how should the gain or loss on disposal of an old machine be treated in an equipment replacement decision? A) used to defray installation costs of the new machine B) deducted from the accumulated amortization C) deducted from the cost of the new machine D) added to the accumulated amortization (or deducted from the cost) of the old machine E) It is irrelevant. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-6
10) Food Process Ltd. purchased a machine for $100,000. Current accumulated amortization totals $40,000. Management is contemplating the purchase of a new machine for $120,000. Current disposal of the old machine would cost $65,000. What is the correct category for each item? A) Irrelevant: $120,000 of new machine, $40,000 accumulated amortization; Relevant: $100,000 cost of old machine, $65,000 of disposal of old machine, $5,000 gain on sale B) Irrelevant: $100,000 cost of old machine, $40,000 accumulated amortization; Relevant: $120,000 cost of new machine, $5,000 gain on sale, $65,000 disposal of old machine C) Irrelevant: $120,000 cost of new machine, $65,000 disposal of old machine; Relevant: $100,000 cost of old machine, $60,000 book value of old machine, $5,000 gain on sale D) Irrelevant: $100,000 cost of old machine, $60,000 book value of old machine; Relevant: $120,000 cost of new machine, $65,000 disposal of old machine, $5,000 gain on sale E) Irrelevant: $100,000 cost of old machine, $40,000 accumulated amortization, $5,000 gain on sale; Relevant: $120,000 cost of new machine, $65,000 disposal of old machine Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-6
11) Managers tend to favour the alternative that makes their performance look best. This leads to conflicts between which of the following? A) the status quo and the chosen alternative B) the decision model and the performance evaluation model C) the constraining factor and the performance evaluation model D) gathering the required information and the performance evaluation model E) the accrual accounting model and the performance evaluation model Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-6
12) If management takes a multiple-year view in the decision model and judges success according to the current year's results, a problem will occur in the A) decision model. B) performance evaluation model. C) production evaluation model. D) year-end review model. E) responsibility centre allocation. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-6
13) Top management faces a persistent challenge to make sure that the performance evaluation model of lower level managers is A) focused on short-term performance. B) based solely on quantitative factors. C) not consistent with the decision model. D) consistent with the decision model. E) based only on future costs. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-6
14) Sue, a pizzeria manager, replaced the convection oven just six months ago. Today, Turbo Ovens Manufacturing announced the availability of a new convection oven that cooks more quickly with lower operating expenses. Sue is considering the purchase of this faster, lower-operating cost convection oven to replace the existing one they recently purchased. Selected information about the two ovens is given below: Existing New Turbo Oven Original cost $60,000 $70,000 Accumulated depreciation $5,000 – Current salvage value $42,000 – Remaining life 5 years 5 years Annual operating expenses $10,000 $4,000 Disposal value in 5 years $0 $0 Required: a. What costs are sunk? b. What costs are relevant? c. What are the net cash flows over the next 5 years assuming the Pizzeria purchases the new convection oven? d. What other items should Pat, as manager of the Pizzeria, consider when making this decision? Answer: a. Sunk costs include the original cost of the existing convection oven and the accompanying accumulated depreciation. b. Relevant costs include: Acquisition cost of the new Turbo oven Current disposal value of the existing convection oven Annual operating expenses for the existing oven and the new Turbo oven c. Net cash flows over 5 years with the new Turbo oven: Cash inflow: Decrease in annual operating expenses ($6,000 × 5) Sale of the existing oven Cash outflow: Acquisition of the new Turbo oven Net cash inflow (outflow)
$30,000 42,000 (70,000) $2,000
d. Other items the manager should consider when making this decision include: ∙ The Turbo oven's reliability and efficiency is still unknown since it is a brand-new product. ∙ If the Turbo oven bakes faster as it claims, the Pizzeria may be able to increase sales due to the quicker baking time. ∙ After purchasing another oven just six months prior, top management should consider the Turbo oven option, but instead may question the decision-making ability of Sue, the current manager. Diff: 3 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-6
15) Nesrien, a bakery manager, replaced the convection oven just six months ago. Today, Commercial Ovens Manufacturing announced the availability of a new convection oven that cooks more quickly with lower operating expenses. Nesrien is considering the purchase of this faster, lower-operating cost convection oven to replace the existing one they recently purchased. Selected information about the two ovens is given below:
Original cost Accumulated depreciation Current salvage value Remaining life Annual operating expenses Disposal value in 5 years
Existing $70,000 $3,500 $55,000 5 years $10,000 $0
New Oven $67,000 – – 5 years $9,000 $0
Required: a. What costs are sunk? b. What costs are relevant? c. What are the net cash flows over the next 5 years assuming the bakery purchases the new convection oven? d. What other items should Nesrien, as manager of the bakery, consider when making this decision? Answer: a. Sunk costs include the original cost of the existing convection oven and the accompanying accumulated depreciation. b. Relevant costs include: Acquisition cost of the new oven Current disposal value of the existing convection oven Annual operating expenses for the existing oven and the new oven c. Net cash flows over 5 years with the new oven: Cash inflow: Decrease in annual operating expenses ($1,000 × 5) Sale of the existing oven Cash outflow: Acquisition of the new oven Net cash inflow (outflow)
$5,000 55,000 (67,000) $(7,000)
d. Other items the manager should consider when making this decision include: ∙ The new oven's reliability and efficiency is still unknown since it is a brand-new product. ∙ If the new oven bakes faster as it claims, the bakery may be able to increase sales due to the quicker baking time. Diff: 3 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-6
16) 4K Camera is considering eliminating Model EOS1 from its camera line because of losses over the past
quarter. The past three months of information for model EOS1 is summarized below: Sales (1,000 units) Manufacturing costs: Direct materials Direct labour ($15 per hour) Support Operating loss
$250,000 92,000 83,000 100,000 ($25,000)
Support costs are 70% variable and the remaining 30% is depreciation of special equipment for model EOS1 that has no resale value. Should 4K Camera eliminate Model EOS1 from its product line? Why or why not? Answer: No, 4K Camera should not eliminate Model EOS1 from its product line because it contributes $10,000 toward fixed costs and profits. Sales (1,000 units) Manufacturing costs: Direct materials Direct labour Variable support ($100,000 × 70%) Contribution margin
$250,000 92,000 83,000 70,000 $5,000
Diff: 2 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-6
17) 5K Camera is considering eliminating Model AE1 from its camera line because of losses over the past quarter. The past three months of information for model AE1 is summarized below: Sales (1,000 units) Manufacturing costs: Direct materials Direct labour ($15 per hour) Support Operating loss
$250,000 150,000 30,000 100,000 ($30,000)
Support costs are 85% variable and the remaining 15% is depreciation of special equipment for model AE1 that has no resale value. Should 5K Camera eliminate Model AE1 from its product line? Why or why not? Answer: Yes, 5K Camera should eliminate Model AE1 from its product line because it contributes $(15,000) toward fixed costs and profits. Sales (1,000 units) $250,000 Manufacturing costs: Direct materials 150,000 Direct labour 30,000 Variable support ($100,000 × 85%) 85,000 Contribution margin (loss) $(15,000) Diff: 2 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-6
18) The management accountant for the Awesome Candy Company has prepared the following income statement for the most current year: Chocolate Sales $50,000 Cost of goods sold 24,000 Contribution margin $26,000 Delivery and ordering costs 1,000 Rent (per sq. metre used*) 5,000 Allocated corporate costs 5,000 Corporate profit $15,000
Other Candy $15,000 8,000 $7,000 500 3,000 5,000 $(1,500)
Fudge $40,000 19,000 $21,000 800 4,000 5,000 $11,200
Total $105,000 51,000 $54,000 2,300 12,000 15,000 $24,700
* The company pays for the entire space and allocates based on sq. metres used. a. Do you recommend discontinuing the Other Candy product line? Why or why not? b. If the Chocolate product line had been discontinued, corporate profits for the current year would have decreased by what amount? Answer: a. No, I would not recommend discontinuing the Other Candy product line because this product line contributes $6,500 towards corporate costs and profits. $7,000 - $500 = $6,500 Without the Other Candy product line, corporate profits would be $6,500 less than currently reported. b. If the Chocolate product line were discontinued, corporate profits would immediately decrease by $25,000. $26,000 - $1,000 = $25,000 Diff: 2 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-6
19) The management accountant for the Chocolate S'more Company has prepared the following income statement for the most current year: Chocolate Sales $40,000 Cost of goods sold 26,000 Contribution margin $14,000 Delivery and ordering costs 2,000 Rent (per sq. metre used*) 3,000 Allocated corporate costs 5,000 Corporate profit $4,000
Other Candy Fudge $25,000 $35,000 15,000 19,000 $10,000 $16,000 3,000 2,000 3,000 2,000 5,000 5,000 $(1,000) $7,000
Total $100,000 60,000 $40,000 7,000 8,000 15,000 $10,000
* The company pays for the entire space and allocates based on sq. metres used. Required: a. Do you recommend discontinuing the Other Candy product line? Why or why not? b. If the Chocolate product line had been discontinued, corporate profits for the current year would have decreased by what amount? Answer: a. No, I would not recommend discontinuing the Other Candy product line because this product line contributes $4,000 towards corporate costs and profits. $25,000 - $15,000 - $3,000 = $7,000 Without the Other Candy product line, corporate profits would be $7,000 less than currently reported. b. If the Chocolate product line were discontinued, corporate profits would immediately decrease by $9,000. $40,000 - $26,000 - $2,000 = $12,000 Diff: 3 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 11-6
20) Why is the book value of old equipment irrelevant to the equipment replacement decision? Answer: The book value of old equipment is made up of the cost and accumulated depreciation, both of which are sunk costs and therefore irrelevant. Diff: 2 Type: ES CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-6
21) Doggie Dinner, Inc., currently manufactures three different types of scientifically balanced dog food. The firm is considering eliminating one of the three products. What factors should be taken into account in making this decision? Answer: In deciding whether or not to eliminate a product, the firm should determine if costs that can be eliminated will exceed the revenues that will be lost. The firm needs to classify the costs into those costs which will be eliminated and therefore are relevant, and which costs will continue even if the product is deleted. Costs that often continue are those costs which have been allocated rather than incurred directly by the product. The firm must also look to see if any other products may be harmed by the elimination of the product. Maybe the products are complements, and loss of one sale will result in loss of another. The firm should consider whether another product's sales might increase if the product is deleted, which could be an opportunity to earn more contribution from another area. Can the firm use the space freed up for some other purpose that could generate additional inflows, which is an opportunity cost? The firm must also look at how its reputation among its customers for selling a full line of products might be damaged as a result of this decision. Diff: 2 Type: ES CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-6
11.7 Appendix 11A: Linear Programming 1) Linear programming is a tool that maximizes total contribution margin of a mix of products with multiple constraints. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-7
2) Which of the following is NOT one of the steps involved in linear programming? A) determining the objective B) determining the technical coefficients C) computing the optimal solution D) determining the relevant and irrelevant costs E) specifying the constraints Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-7
3) In linear programming, the goals of management are expressed in A) an objective function. B) constraints. C) operating policies. D) business functions. E) a mathematical inequality or equality. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 11-7
4) In linear programming a mathematical inequality or equality that must be appeased is known as A) an objective function. B) a constraint. C) an operating policy. D) a business function. E) the optimal solution. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-7
5) Computer Products produces two keyboards, Regular and Special. Regular keyboards have a unit contribution margin of $128, and Special keyboards have a unit contribution margin of $720. The demand for Regulars exceeds Computer Products' production capacity, which is limited by available machinehours and direct manufacturing labour hours. The maximum demand for Special keyboards is 80 per month. Management desires a product mix that will maximize the contribution toward fixed costs and profits. Direct manufacturing labour is limited to 1,600 hours a month and machine hours are limited to 1,200 a month. The Regular keyboards require 20 hours of labour and 8 machine hours. Special keyboards require 34 labour hours and 20 machine hours. Select the appropriate linear programming objective and constraint functions designed to maximize Computer Products total contribution margin. Let R represent Regular keyboards and S represent Special keyboards. A) Maximize: $720S + $128R Constraints: Labour hours: 20R + 8S ≤ 1,600 Machine hours: 34R + 20S ≤ 1,200 Special: S ≤ 80 S≥0 Regular: R≥0 B) Maximize: Constraints: Machine hours: Special: Regular: C) Maximize: Constraints: Machine hours: Special: Regular: D) Maximize: Constraints: Machine hours: Special: Regular:
$128R + $720S Labour hours: 20R + 34S ≤ 1,600 8R + 20S ≤ 1,200 S ≥ 80 S≤0 R≤0
$128R + $720S Labour hours: 20R + 34S ≥ 1,600 8R + 20S ≥ 1,200 S ≤ 80 S≥0 R≥0
$128R + $720S Labour hours: 20R + 34S ≤ 1,600 8R + 20S ≤ 1,200 S ≤ 80 S≥0 R≥0
E) Maximize: Constraints: Machine hours: Special: Regular:
$720S + $128R Labour hours: 20R + 34S ≤1,600 8R + 20S ≤ 1,200 S ≤ 80 S≤0 R≤0
Answer: D Diff: 3 Type: MC CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-7
6) Jamboree Manufacturing Ltd. produces two products, steel and wood beams. Steel beams have a unit contribution margin of $400, and wood beams have a unit contribution margin of $300. The demand for steel beams exceeds their production capacity, which is limited by available direct labour and machine hours. The maximum demand for wood beams is 60 per week. Management desires that the product mix should maximize the weekly contribution toward fixed costs and profits. Direct manufacturing labour is limited to 2,700 hours a week and 900 hours is all that the company's outdated machines can run a week. The steel beams require 180 hours of labour and 90 machine hours. Wood beams require 270 labour hours and 60 machine hours. Required: Formulate the linear programming objective function and constraints necessary to determine the optimal product mix. Answer: S = steel beams W = wood beams Maximize: $400S + $300W Constraints: Labour hours: 180S + 270W ≤ 2,700 Machine hours: 90S + 60W ≤ 900 Wood beams: W≥0 Steel beams: S≥0 Note: W ≤ 60 constraint is not necessary as labour and machine hour constraints limit units to less than this amount. Diff: 3 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-7
7) Local Steel Construction Company produces two products, steel and wood beams. Steel beams have a unit contribution margin of $200, and wood beams have a unit contribution margin of $150. The demand for steel beams exceeds Local Steel Construction Company's production capacity, which is limited by available direct labour and machine-hours. The maximum demand for wood beams is 90 per week. Management desires that the product mix should maximize the weekly contribution toward fixed costs and profits. Direct manufacturing labour is limited to 3,000 hours a week and 1,000 hours is all that the company's outdated machines can run a week. The steel beams require 120 hours of labour and 60 machine-hours. Wood beams require 150 labour hours and 120 machine-hours. Required: Formulate the objective function and constraints necessary to determine the optimal product mix. Answer: S = steel beams W = wood beams Maximize: $200S + $150W Constraints: Labour hours: 120S + 150W ≤ 3,000 Machine-hours: 60S + 120W ≤ 1,000 Wood beams: W ≤ 90 W ≥ 0 Steel beams: S≥0 Diff: 3 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-7
8) Kando Manufacturing Ltd. produces two products, lawn mowers and power washers. Lawn mowers have a unit contribution margin of $75, and power washers have a unit contribution margin of $55. The demand for lawn mowers exceeds their production capacity, which is limited by available direct labour and machine hours. The maximum demand for power washers is 300 per week. Management desires that the product mix should maximize the weekly contribution toward fixed costs and profits. Direct manufacturing labour is limited to 600 hours a week and 400 hours is all that the company's outdated machines can run a week. The lawn mowers require 1.5 hours of labour and 1 machine hour. Power washers require 2.5 labour hours and 2 machine hours. Required: Formulate the linear programming objective function and constraints necessary to determine the optimal product mix. Answer: L = lawn mowers P = power washers Maximize: $75L + $55P Constraints: Labour hours: 1.5L + 2.5P ≤ 600 Machine hours: 1L + 2P ≤ 400 Power washers: P≥0 Lawn mowers: L≥0 Note: P≤ 300 is not necessary as labour and machine hours constraints limits demand to less than this amount. Diff: 3 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-7
9) Kilkenny Manufacturing Ltd. produces two products, lawn mowers and weed wackers. Lawn mowers have a unit contribution margin of $80, and weed wackers have a unit contribution margin of $35. The demand for lawn mowers exceeds their production capacity, which is limited by available direct labour and machine hours. The maximum demand for week wackers is 500 per week. Management desires that the product mix should maximize the weekly contribution toward fixed costs and profits. Direct manufacturing labour is limited to 900 hours a week and 700 hours is all that the company's outdated machines can run a week. The lawn mowers require 1.0 hours of labour and 0.5 machine hour. Weed wackers require 0.5 labour hours and 0.25 machine hours. Required: Formulate the linear programming objective function and constraints necessary to determine the optimal product mix. Answer: L = lawn mowers W = weed wackers Maximize: $80L + $35W Constraints: Labour hours: 1.0L + 0.5W ≤ 900 Machine hours: 0.5L + 0.25W ≤ 700 Weed wacker: W ≤ 500 Weed wackers: W≥0 Lawn mowers: L≥0 Diff: 3 Type: SA CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 11-7
10) Describes the steps involved in solving a linear programming problem. Answer: Step 1: Determine the objective function. Step 2: Specify the constraints Step 3: Compute the optimal solution Diff: 2 Type: ES CPA Competencies: Chapter 11 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 11-7
Cost Accounting: A Managerial Emphasis - Cdn. Ed., 9e (Datar) Chapter 12 Data Analytic Thinking and Prediction 12.1 Explain how management accountants can work with data scientists to create value 1) Which of the following best describes data science? A) Any activity that reveals deeper insight into a dataset. B) The process of analyzing numerical data to infer conclusions about the whole from a representative sample. C) The use of data analytics to draw conclusions from data. D) The practice of measuring, analyzing, and interpreting information for managers in pursuit of an organization's goals. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-1
2) Which of the following would be the most compelling reason(s) why data scientists are able to create and train sophisticated algorithms? A) existence of huge amounts of data B) inexpensive data storage and Web-based (cloud) computing power C) inexpensive computers and software D) networking capabilities and inexpensive servers Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-1
3) The ability to accurately predict outcomes can directly impact how an organization develops its ________. A) strategy B) objectives C) mission D) plan Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-1
4) Data science sits at the intersection of computer science and data skills, math and statistics, and ________. A) hardware B) software C) networks D) substantive expertise Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-1
5) Management accountants need to understand some of the computer science and statistical tools used in data science so that they ________. A) can adapt the accounting information system B) can certify the financial statements with a greater degree of certainty C) can effectively interact with members of the data science team to create value D) can comply with generally accepted accounting principles Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-1
6) The data science framework is a ________. A) seven-step decision-making process for applying machine learning techniques to aid decision making B) two-step process that involves understanding the problem and applying machine learning to aid decision making C) three-step process for applying machine learning techniques to aid decision making D) two-step process involving preparing the data and building a model to aid decision making Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-1
7) Which of the following is the first step of the data science framework? A) obtain and explore data B) understand the problem C) prepare data D) build a model Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-1
8) Which of the following best describes data analytics? A) examining big data and drawing conclusions B) examining raw data and drawing conclusions C) examining data and removing excess "noise" to draw conclusions D) examining big data, removing excess "noise," and organizing the data to draw conclusions Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-1
9) Which of the following actions would address a limiting factor when working with big data in the context of data analytics? A) utilization of cloud platforms B) utilization of data analytics software C) acquisition of state-of-the-art hardware D) extraction and transformation of large amounts of data Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-1
10) With big data and data analytics techniques, management can discover ________ to identify future opportunity and risks. A) historical data and decisions B) cost savings C) patterns and anomalies D) opportunity costs Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-1
11) The marriage of data science and management accounting can result in the use of very large datasets to ________ sophisticated algorithmic models. A) construct B) formulate C) exploit D) train Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-1
12) Management accountants need to understand some of the computer science and ________ tools used in data science to work with data analytics in support of management decision making. A) statistical B) financial C) accounting D) software Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-1
13) When management accountants partner with data science professionals to create value for a company, the impact should be ________. A) focused on production B) realized in the supply chain C) concentrated in the production through distribution segments of the value chain D) potentially realized across all parts of the value chain Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-1
14) Exploratory data analysis could encompass all of the following, EXCEPT ________. A) using statistic measures like mean and mode B) using an Excel model to prepare a forecast C) embarking on activities that reveal deeper insight D) calculating the difference between the highest and lowest values Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-1
15) How does a management accountant gain an understanding of a business problem that data analytics may help solve? A) by considering questions that arise from many sources B) knowing everything about the data that he or she anticipates working with C) identifying relationships within the data such as independent and dependent variables D) evaluating the data that can be accessed via exploratory techniques Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-1
16) Which of the following best defines the management accountants' initial data analytics role in facilitating the transformation of data into information that can help add value to an organization? A) obtaining and exploring relevant data for decision making B) developing a data exploratory analysis C) deciding which questions to ask and what data to gather D) preparing data for analysis Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-1
17) Examining a data set to understand its size and content would be an example of ________. A) exploratory data analysis B) exploratory visualization C) data dictionary development D) accessing the potential of data leakage Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-1
18) Which of the following would most likely NOT be the reason for utilizing data analytics? A) investigate customer buying patterns B) delve into surprising variances from the budget C) forecast future impactful events D) fine-tune direct cost allocations Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-1
19) Exploratory data analysis reveals deeper insight into a dataset. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-1
20) Algorithmic models "learn" from the feedback of experts. Answer: FALSE Explanation: Data scientists use very large datasets to train sophisticated algorithmic models; the models learn from training data (thousands or millions of records and not expert feedback or input) and can then predict a new record according to some feature of interest. Diff: 1 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-1
21) Predictive modeling is a data science technique used to make estimates based on past or current data. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-1
22) A binary outcome implies there are more than two possible outcomes to a certain situation, such as a revenue that can produce a profit, a loss, or equal expenses. Answer: FALSE Explanation: A binary outcome implies there are only two possible outcomes to a certain situation. Diff: 1 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-1
23) Calculation of a mean, median, and mode on a new data set could be an activity of an overall exploratory analysis as part of a management accountant's role of obtaining and exploring relevant data while working on a data analytics process. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-1
24) Numeric analysis is a type of exploratory data analysis. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-1
25) Define exploratory data analysis and give some examples of exploratory data analysis.
Answer: Exploratory data analysis refers to any activity that reveals deeper insight into a dataset. This activity may include numeric analysis, such as the use of descriptive statistics such as the mean, median, minimum, and maximum values of test scores in an accounting course or the visualization of data with a line chart or a histogram that might reveal patterns or trends from revenues earned or expenses incurred over time. Various acceptable examples could be offered by the student and be correct. Diff: 2 Type: ES CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-1
26) When data science is depicted at the center of a Venn diagram, the intersecting circles are representative of such things as computer science skills, math and statistics, and substantive knowledge. Discuss what is meant by substantive knowledge (domain knowledge) and why it is a critical piece of data analytics as a decision making tool. Answer: Data science sits at the intersection of computer science and data skills, math and statistics, and, critically, substantive expertise in a particular area of interest or domain, such as industry and management accounting knowledge. To ask the right questions to be answered by data science and to obtain valuable insights related to analytics, products, and services, and to make good decisions, subject matter experts in business and accounting must be involved. When one has solid domain knowledge, one can ask good questions, which is the most critical element of a data science project. The ability to ask good questions requires domain understanding. Diff: 2 Type: ES CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-1
27) Explain what is meant by the following statement: "Data analytics allows accountants to assist managers in working with data that is too large and possibly too complex for traditional systems and tools to extract value." Answer: Managers can now access unprecedented amounts of data; vast amounts of data now populate the databases of companies, including datasets revealing customer preferences, supplier behavior, and other data that is the result of daily operations and activities. Managers use data analytics techniques to make predictions based on this large volume of complex data. This is the age of big data, machine learning, and artificial intelligence, and the management accountant helps companies derive value from big data by helping managers use data analytics techniques to transform the company to better serve its customers, unlock significant cost-saving opportunities, and identify revenue-generating prospects. Diff: 2 Type: ES CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-1
12.2 Identify the questions management wants to ask and the relevant data 1) Which of the following is the proper order (sequence) of the steps in the data science framework? A = Visualize and communicate insights B = Deploy the model C = Prepare data D = Obtain and explore data E = Build a model F = Gain a business understanding of the problem G = Evaluate the model A) E, C, G, F, D, B, A B) B, D, F, E, C, A, G C) F, D, C, E, G, A, B D) F, C, D, G, A, B, E Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-2
2) Which of the following would be the first and foremost question asked when working within the data science framework? A) How objective is the data? B) Can careful and accurate measurement be attained? C) What might we learn? D) What are the relevant costs of gathering and analyzing the data? Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-2
3) An a priori reason to conduct data analytics would be ________. A) thousands of rejected loan applications may reveal low credit scores as the main reason for rejected credit card applications B) after data is entered into a statistical software package, the numbers reveal a correlation between a loan purpose, noted on thousands of loan applications, and the decision to reject a loan C) same facts as part but further evidence indicates causation D) experience seems to indicate that certain phrasing of a loan's applications purpose leads to the rejection of the loan proposal Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-2
4) In which phase of the data science framework might data issues such as access, availability, reliability, and timeliness be a consideration? A) gain an understanding of the problem B) obtain and explore data C) prepare data D) visualize insights Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-2
5) Which of the following questions would NOT be asked while performing Step 3: Prepare the Data? A) What additional data might be needed? B) How should different variables be measured? C) What variables should be excluded? D) How objective is the data? Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-2
6) It could be said that auditors have greater confidence when testing for fraud because data analytics enables the analysis of complete ________. A) samples B) datasets C) value chains D) transactions Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-2
7) Which of the following is the best example of the use of substantive expertise in the "Prepare the Data" step of the data science framework? A) knowing how the statistical concepts of mean, mode, and median help explain the data B) understanding how variance and standard deviation are calculated C) referring to the data dictionary of the data base to understand the concept of annual income and to see if it aligns well with Canadian Accounting Standards D) understanding the dataset structure of a general ledger database Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-2
8) Correcting inconsistencies across the dataset is an example of which of the following? A) assuring that the data is complete B) validating that the data is objective C) scrubbing the data D) extracting the data Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-2
9) In the data analytics world, Web scraping usually primarily involves ________. A) the process of "cleaning" data before analyzing it B) the analysis of large amounts of complex data derived from the web C) the process of copying data from the web and storing it for retrieval or analysis D) scouring the web for information that will help validate internally generated data Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-2
10) Which of the following best summarizes the most serious legal or ethical issues faced by management accountants when practicing web scraping? A) Scraping bots might replace humans, and bots lack the qualitative judgements needed to perform this type of data gathering. B) Web scraping may violate the terms of use of a particular target website. C) Authorization of all web scraping by an accountant violates specific professional ethical standards. D) Web scraping processes significantly affect the performance bandwidth of the accountant's company's web server. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-2
11) Management accountants could include many independent features in an analytical model because, with technology, it is easy and inexpensive to handle large quantities of data. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-2
12) A data dictionary is information describing the contents, format, and structure of a database and the relationship between its elements. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-2
13) In carrying out the data science framework, data leakage happens when some data is inappropriately disclosed to external parties. Answer: FALSE Explanation: Data scientists use the term target leakage to refer to data that is not available at the time of the analysis but is known after a decision has been made (future data) and that should be excluded from the data analytics model. Diff: 1 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-2
14) A listing of descriptions of the data attributes of a dataset is called a data index and is a reference for both database administrators and analysts who are building decision support models. Answer: FALSE Explanation: A listing of descriptions of the data attributes of a dataset is called a data dictionary. Diff: 1 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-2
15) Briefly describe what is meant by gaining an understanding of a business problem within the framework of data analytics. Answer: It means fully comprehending a business situation or problem that needs to be addressed by management decision makers. A deep understanding of the problem can only be gained by asking many questions. Having concrete and specific questions that can potentially be answered by data analytics is the first step in utilizing the tools of data science. Diff: 2 Type: ES CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-2
16) A management accountant may be heavily involved in obtaining, exploring, and preparing data for further analysis. Explain what is meant by assuring that the data is relevant and clean. Answer: Once you have obtained the data, you want to assure that it is relevant. Relevant data is data that can be applied to solve a problem. It must be complete, objective, accurate, and help answer the questions that are being asked. Clean data, also referred to as scrubbed data, is data that has had all irrelevant fields deleted such as incorrect, incomplete, improperly formatted, or duplicate data that will create "noise" and results upon which decisions should not be based. Diff: 2 Type: ES CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-2
17) Contrast these two concepts: scrubbing data versus assuring data quality.
Answer: Scrubbing data (also referred to as cleaning the data) is a process that involves activities such as amending or removing data in a database, correcting incorrect data, fixing improper formatting, and deleting duplicate data. Data quality is often improved by scrubbing, and data quality is achieved by executing procedures that assure that the data is complete, reliable, and valid. Data quality assurance procedures might involve further data scrubbing, such as amending or adding data to achieve completeness, accuracy checks to assure reliability, and an examination of source data to judge validity. Diff: 2 Type: ES CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-2
12.3 Explain the elements of a decision tree model 1) A decision tree would most likely be utilized during which of the following steps? A) Step 1: Gain a Business Understanding of the Problem B) Step 2: Obtain and Explore Relevant Data C) Step 3: Prepare the Data D) Step 4 Building the Model Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-3
2) All of the following describes a decision tree EXCEPT which one? A) It is an information flowchart. B) It is a type of decision model showing possible consequences. C) It can be "learned" by splitting the source set into subsets by using an algorithm. D) It is a model that generates very complex rules and performs classifications via numerous and elaborate computations. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-3
3) In constructing a decision tree, which of the following best describes splits? A) Splits are separate decision trees. B) Splits are the roots of the decision tree. C) Splits (branches) are made that result in the most homogeneous sub-nodes. D) Splits are the removals of sub-nodes of a decision node as the result of running an algorithm. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-3
4) Strengths of a decision tree model include all of the following EXCEPT ________. A) saving time since only one iteration of the decision tree is necessary B) providing a visual representation that users can relate to C) generating understandable rules D) being easily interpretable as a set of questions or business rules Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-3
5) A decision tree is simply a set of cascading ________. A) database B) questions C) costs D) revenues Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-3
6) In a decision tree, which of the following are indicated by circles? A) decision nodes B) leaves C) cuts D) terminal nodes Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-3
7) A "cut" of a scatter plot created from a decision tree exercise creates a rectangle where decision A is made 12 times and decision B is made 16 times and results in a Gini Impurity of: A) .4 B) 1 C) .48 D) .6 Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-3
8) If the first "cut" of a scatter plot results in a rectangle with a Gini Impurity measure of .4 and an algorithm chooses a second "cut" of the same plot that results in a Gini Impurity of .32, it could be said that ________. A) the second cut has more purity than the first cut B) the first cut has more purity than the second cut C) the first cut of .4 means there is a 40% chance of a particular occurrence D) the second cut of .32 means that there is a 72% chance of a particular occurrence Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-3
9) Which of the following attempts to assign each unit in a dataset into a small set of categories? A) classification B) regression C) similarity matching D) pruning Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-3
10) A target variable is a value to be predicted by a model that utilizes feature variables. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-3
11) A logistic regression model to estimate the relationship between independent feature variables and
the target variable would result in a straight-line fit through a scatter plot of data points. Answer: FALSE Explanation: A logistic regression model is considered more "flexible" in that the data may not fit a straight line, and its line is often curved, such as in an S shape. Diff: 2 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-3
12) A functional relationship describes precisely how two variables relate. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-3
13) When building a decision tree, you use each attribute to answer a question. The answer to each question decides the next question. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-3
14) Decision trees are a complex but powerful form of multiple variable analysis and supplement, complement, or substitute for traditional statistical forms of analysis, such as multiple linear regression. Answer: FALSE Explanation: Decision trees are considered a simple, not complex, form of multiple variable analysis. Diff: 2 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-3
15) Gini Impurity is the probability of incorrectly classifying a randomly chosen element in the dataset if it were randomly labeled according to the class distribution in the dataset. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-3
16) What is the connection between algorithms and decision trees? Answer: The goal of building a decision tree is to create a training model that can be used to predict the
class or value of the target variable by learning simple decision rules inferred from prior data. The decision tree emerges from an algorithmic process of subdividing the data and seeking to minimize impure groupings of data. Diff: 2 Type: ES CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-3
17) Explain Gini impurity and what it means if a dataset is mixed. Answer: Gini impurity is a way to measure the purity of a collection of observations in a rectangle (set). If a rectangle is very mixed, it is "impure," and the Gini impurity is high. As a rectangle becomes purer, that is, it contains more members of one class than another, the Gini impurity decreases. Diff: 2 Type: ES CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-3
18) A management accountant is working with data science professionals to develop a decision tree to create a predictive analysis of accounts receivable write-offs. In speaking with the management science experts, discuss your knowledge as a domain of expertise to help define the functional form of the relationship between feature variables and the target variable. Answer: A management accountant would explain to the management science experts that the model may want to consider such potential feature data variables as accounts receivable aging, customer payment histories, current credit scores, and other timely indicators of creditworthiness in predicting the target variable of estimated bad debts. Diff: 2 Type: ES CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-3
12.4 Describe how to refine a decision tree model to ensure the data represent the business context 1) In general, the more complex the model, the greater the chance of ________. A) overfitting the data B) underfitting the data C) pruning the data D) needing to reduce the amount of data considered Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-4
2) Overfitting results in which of the following? A) information gain B) increased accuracy C) increased purity D) noise capture Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-4
3) A solution to overfitting is ________. A) iteration B) pruning C) underfitting D) algorithm Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-4
4) To choose among models and to decide where to prune, data scientists ________ the model to assess the predictive performance of the mode A) overfit B) replicate C) train D) cross-validate Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-4
5) Pruning to a decision tree is done to ________. A) reduce complexity B) improve predictions C) shrink a dataset D) diminish data leakage Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-4
6) Refining a decision tree model means to ________. A) reduce its complexity B) increase its complexity C) decrease its cost D) ensure the data represents the business context Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-4
7) The decision tree is a technique for segmenting the target variable into different ________ based on a set of rules. A) regions B) databases C) datasets D) cost pools Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-4
8) Pruning a decision tree will sharpen the model's predictive powers. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-4
9) Overfitting will most likely increase the predictive power of a model. Answer: FALSE Explanation: Overfitting occurs when a model adheres too closely to the specific details of a dataset so it captures noise from random chance, making it less effective at accurately classifying observations from a new dataset. Overfitting limits a model's ability to predict future outcomes. Diff: 1 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-4
10) The decision tree algorithm simply prepares a linear regression. Answer: FALSE Explanation: The decision tree algorithm attempts to partition the data to separate it into homogenous subsets. Diff: 2 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-4
11) Reading a decision tree involves a series of "if-then-else" statements. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-4
12) One disadvantage of a decision tree is its inflexibility. Answer: FALSE Explanation: A distinctive characteristic of decision trees is their flexibility. Diff: 2 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-4
13) Overfitting is addressed when a model doesn't match the specific details of a dataset too closely and, therefore, limits its predictive powers. Answer: FALSE Explanation: Overfitting is addressed when a model matches the specific details of a dataset too closely, limiting its predictive powers. Diff: 2 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-4
14) Decision trees are used to divide data into smaller groups by splitting the data at each branch into two or more groups. However, after splitting the data, the tree may need to be pruned. Briefly describe the pruning process and the benefits of pruning. Answer: Pruning removes branches from a decision tree to avoid overfitting the model. Pruning can stop the creation of new branches when the information usefulness of an additional branch is low. After an iteration of the model, an evaluation of the decision tree may involve more pruning. Diff: 2 Type: ES CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-4
15) Explain what is meant by recursive partitioning of an algorithm that is seeking to reduce Gini impurity. Answer: An algorithm that evaluates all possible horizontal or vertical cuts of a data set in an attempt to reduce Gini impurity continues this process over and over (iterations) until all rectangles (formed by the cuts) are pure. The technical term for this process is recursive partitioning. Recursion means to apply a procedure again and again. Diff: 2 Type: ES CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-4
12.5 Explain how to validate the predictions of full versus refined decision trees 1) Cross-validation is the process of ________. A) comparing predictions of different models on a new set of data for which the actual outcomes are already known B) comparing predictions of different models on a new set of data for which the actual outcomes are not yet known C) comparing actual results to predictions to determine significant variances D) comparing information on source documents to a trail of information Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-5
2) The main point of cross-validation is that it ________. A) tells you to prune the tree B) specifies where to C) gives you an estimate of the performance of your trained model D) calculates an impurity factor of your trained model when used on different data Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-5
3) All of the following are true regarding full versus pruned decision trees EXCEPT ________. A) pruning is a technique in machine learning that reduces the size of decision trees B) pruning is removing sections of the tree that provide little power to classify instances C) pruning reduces the complexity D) pruning increases overfitting and, therefore, increases accuracy Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-5
4) Comparing the performance of a full decision tree to a pruned one could be done via all of the following approaches EXCEPT ________. A) cross-validation using prediction accuracy B) cross-validation using maximum likelihood value C) using the present value of likely results D) using a technique called testing holdout sample Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-5
5) Which of the following techniques compares the performance of a full decision tree to its pruned version by utilizing probabilities? A) cross-validation using prediction accuracy B) cross-validation using maximum likelihood value C) A and B both use probabilities D) using a technique called testing holdout sample Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-5
6) Machine learning utilizes algorithms that can ________. A) learn from training data B) provide data scientists with rules of thumb to guide their pruning C) consistently produce zero bias D) automatically produce hyperparameters Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-5
7) All of the following are true EXCEPT ________. A) the more complex the model, the lower the bias B) the less complex the model, the higher the bias C) the less complex the model, the lower the variance D) the more complex the model, the lower the variance Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-5
8) Cross-validation techniques could be used to test prediction accuracy. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-5
9) Cross-validation is used to choose between full and pruned decision trees to improve the prediction accuracy of a model. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-5
10) Cross-validation techniques allow you to alternate between training and testing an algorithm. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-5
11) The goal is to build a fully grown decision tree because that version will be the most accurate. Answer: FALSE Explanation: A fully grown tree is likely to overfit data, leading to poor accuracy on unseen data. Diff: 1 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-5
12) A feedback loop occurs when predicted outputs are reused to train new versions of the model. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-5
13) The benefit of pruning is that it avoids overfitting the model to noise. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-5
14) A hyperparameter is a parameter that can be learned by running the model. Answer: FALSE Explanation: A hyperparameter is a parameter that cannot be learned by running the model. It must be chosen before doing the analysis. Diff: 2 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-5
15) The more complex the model is, the higher the bias and the lower the variance. Answer: FALSE Explanation: The more complex the model is, the lower the bias and the higher the variance. Inversely, the less complex the model, the higher the bias and the lower the variance. Diff: 2 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-5
16) When a management accountant and data scientist work with large data sets, can the management accountant rely on data scientists, statistics, and algorithms to make such decisions as to how large to grow a decision tree or if additional pruning is necessary? Explain. Answer: Management accountants must provide important insights into the models that data scientists evaluate. Although a practice such as pruning can help increase the performance of a decision tree model, management accountants may have to develop rules of thumb to determine how far to grow the tree and where to stop growing a tree past certain nodes that have fewer data points. These rules of thumb would be the result of the business insights gained by the management accountant as a result of accounting, finance, and general business experience. Diff: 2 Type: ES CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-5
17) Explain the difference between training data sets and test data sets? Answer: Data science model development relies on historical data to predict future outcomes. A subset of that dataset is used to train the model (training data), which means that the analysis of the historical training data is performed to identify the attributes that are the best predictors of a class or value. Once the model has been developed, another subset of the historical dataset (test data) is extracted to test the model to see which value the model predicts for that data. Then, an analysis compares the predicted values from the test datasets to the actual values in the test data set to evaluate the model for accuracy. A historical dataset can be portioned or partitioned in many ways into training and testing data sets. Diff: 2 Type: ES CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-5
18) How might classification be used in building a model to assist a company's credit granting decision making process (approving or denying) when a potential customer requests a significant line of credit to purchase goods on account? Answer: In this analysis, the class assigned to a transaction would be either "write-off" or "paid." Historical records would be assigned one of these two classes based on the write-offs taken. A classification model would use part of this historical data to train a model to identify the attributes that are the best predictors of seriously delinquent accounts that were written off. The remaining data would be used to validate the model and test for accuracy. Diff: 2 Type: ES CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-5
12.6 Evaluate the predictions of different data science models to choose the best one for the business need and visualize and communicate model insights 1) Management accountants use their knowledge of accounting, finance, and general business to judge if the ________ used to make predictions make economic sense. A) feature variables B) target variables C) variances D) impurities Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-6
2) The ________ plots the false positive rate on the x-axis and the true positive rate on the y-axis. A) confusion matrix B) Gini impurity C) Receiver-Operating-Characteristic (ROC) curve D) hyperparameter Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-6
3) All of the following are true of plotting of the Receiver-Operating-Characteristic (ROC) curve EXCEPT which one? A) plots the false positive rate on the x-axis B) plots the true positive rate on the y-axis C) the closer the curve comes to a 45-degree diagonal, the less accurate the test D) the closer the curve comes to a 45-degree diagonal, the more accurate the test Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-6
4) Which of the following can be said about a ROC curve? A) The more accurate the predictions of a model are, the closer the ROC curve will be to a 45-degree diagonal line on the chart. B) The more accurate the predictions of a model are, the closer the ROC curve will go up along the y-axis and then move horizontally across the top of the chart. C) It only plots the false positives. D) The further the curve is away from the left-hand border of the chart and the further it is from the top border of the ROC space, the more accurate the test. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-6
5) A confusion matrix is a ________. A) line plot that allows interpretation of the performance of an algorithm B) bar chart that allows interpretation of the performance of management C) table that allows visualization of the performance of an algorithm D) table that allows visualization of the performance of management Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-6
6) Both the visualization of the insights of data science models can be achieved by which of the following tools? A) decision tree and ROC curve B) confusion matrix and Gini impurity C) confusion matrix and hyperparameter D) partitions and overfitting Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-6
7) Which of the following helps managers visualize the performance of a model by identifying tradeoffs between false positives and true positives? A) confusion matrix and decision tree B) ROC curve and confusion matrix C) decision tree and ROC curve D) decision tree and Gini impurity Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-6
8) Management accountants must determine if the results of a model make intuitive sense and reflect underlying economic reality. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-6
9) The Receiver-Operating-Characteristic curve plots the true positive rate on the x-axis and the false positive rate on the y-axis. Answer: FALSE Explanation: The Receiver-Operating-Characteristic curve plots the false positive rate on the x-axis and the true positive rate on the y-axis. Diff: 2 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-6
10) The closer the Receiver-Operating-Characteristic (ROC) curve comes to the 45-degree diagonal of the ROC space (chart), the less accurate the test. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-6
11) A confusion matrix shows just the predicted classifications at a given threshold value. Answer: FALSE Explanation: A confusion matrix shows the predicted and actual classifications at a given threshold value. Diff: 1 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-6
12) The image of visualization of a decision tree is a series of decision nodes and connecting lines. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-6
13) Both a ROC Curve and a decision tree can help a manager visualize the performance of a model by identifying the tradeoff between false positives and true positives. Answer: FALSE Explanation: Both a ROC Curve and the confusion matrix can help a manager visualize the performance of a model by identifying the tradeoff between false positives and true positives. Diff: 2 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-6
14) Describe the purpose of the Receiver-Operating-Characteristic (ROC) curve and briefly explain how the curve is interpreted. Answer: The ROC curve is a commonly used tool that illustrates the diagnostic ability of a binary classifier system. It is a plot of the true positive rate against the false positive rate. The closer the curve follows the left-hand border (y-axis) and then the top border of the ROC space, the more accurate the test. The closer the curve comes to the 45-degree diagonal of the ROC space, the less accurate the test. Diff: 2 Type: ES CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-6
15) Data analytics can provide results that provide valuable insights. Explain how data visualization may add more value to data analytics. Answer: Data visualization represents data in a graphical context which may make insights such as trends and patterns inherent in the dataset more explicit to the users. To many decision makers, patterns and trends may not be as noticeable and insightful in text-based data. Data visualization such as scatter charts, line graphs, and 3D visualizations can be highly insightful and more effective as communication tools. The combination of data analytics and data visualization should help manager's analytics go a step deeper, identifying or discovering the trends and patterns inherent in the data. Data visualizations, while allowing users to make sense of the data, need not give the complete picture. Visualizations are only as effective as the data used to prepare the visualization in the first place. Feeding visualization engines with incomplete data will render half-baked, obsolete, or erroneous visualization. Diff: 2 Type: ES CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-6
12.7 Describe how to use and deploy data science models 1) To ________ a data science model, management accountants must balance quantitative and qualitative assessments. A) operationalize B) evaluate C) judge D) construct Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-7
2) Which of the following is the most important judgement to be made when deploying a model? A) The model is powerful enough to handle less than perfect data. B) The data is reasonably adequate and accurate. C) All data must be verified as accurate. D) The volume of data is adequate Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-7
3) Deployment of a data science model is ________. A) working with the model to understand its potential B) applying the model for prediction using new data C) training the model D) evaluating the magnitude of likelihood values and feature variables Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Understanding Objective: LO 12-7
4) The concept of deployment in data science refers to the application of a model for prediction using new data. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-7
5) How can accountants work to operationalize a data science model to be used to support decision making? Answer: An important role that accountants play is to help managers understand the critical inputs to be monitored and evaluated in order to implement effective data science models. Accountants must also help bring about the critical combination of quantitative and qualitative judgment when utilizing data and the model so as to reach conclusions that add value. Diff: 2 Type: ES CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-7
6) Explain the connection that data analytics creates between data, information, and knowledge. Answer: Data analytics, through its ability to process big data, gives companies the ability to transform raw data into information that becomes strategic knowledge and adds value. Diff: 2 Type: ES CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-7
7) Explain how the deployment of a data science model and the use of big data and its related technologies can be both an opportunity and a threat to the management accounting profession as a business partner. Answer: The deployment of this data and the technologies that exploit it present both opportunities and threats to the management accounting profession. Accountants have an opportunity to use big data and related technologies to deploy solutions and tools that help decision makers create value. If management accountants are at the leading edge of the data analytics movement, they can be valuable partners, using data to gain insights into business trends and the operations and taking on a more strategic role. Data analytics can also help enhance an organization's risk management activities. These technologies do present a risk to management accountants as machine learning, AI, and algorithms could replace human accountants; however, management accounting can progress to higher value-added activities by using and exploiting the power of big data. For example, management accountants have a background of working with source data and financial information and can help establish rules to assure high levels of trust in the quality and source of the data. There are also data concerns from a regulatory risk angle that management accountants should help mitigate around issues such as data privacy. Diff: 2 Type: ES CPA Competencies: Chapter 12 4.3.6 Develops appropriate procedures, including Audit Data Analytics (ADA), based on the identified risk of material misstatement. Skill: Remembering Objective: LO 12-7
Cost Accounting: A Managerial Emphasis - Cdn. Ed., 9e (Datar) Chapter 13 Pricing Decisions, Product Profitability Decisions, and Cost Management 13.1 Discuss the three major influences on pricing decisions. 1) The three major influences on pricing decisions are: costs, competitors, and customers. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-1
2) Managers have little discretion in setting prices in market situations which are not competitive. Answer: FALSE Explanation: A company without a competitor is free to set prices. Diff: 2 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-1
3) In less competitive markets where products can be differentiated by their features the pricing decision depends on the pricing strategies of competitors. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-1
4) Relevant costs for pricing decisions include manufacturing costs, but not costs from other value-chain functions. Answer: FALSE Explanation: Relevant costs for pricing decisions include costs from all value-chain functions, from R&D to customer service. Diff: 2 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-1
5) Relevant pricing information for the short-run and long-run should be the same. Answer: FALSE Explanation: Short-run and long-run pricing decisions can have different objectives resulting in different relevant information being required. Diff: 2 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-1
6) Which of the following statements is TRUE about the factors that affect pricing decisions? A) Information about competitors' technologies is not useful for pricing decisions. B) Information about a competitor in a perfect market affects pricing decisions. C) An increase in the price of a substitute product does not affect pricing decisions. D) Managers must always be aware of the competition when pricing their products. Answer: D Diff: 3 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-1
7) Which of the following statements is TRUE of costs and pricing decisions? A) Companies get profit from selling products only when they are the price makers. B) Companies supply products as long as the price the customer is willing to pay for their products exceeds the price that is charged by the competitor. C) Companies supply products as long as there is a demand for the product in the market regardless of the price at which the products are sold. D) Companies supply products as long as the revenues from selling the additional units exceed the cost of producing them. Answer: D Diff: 3 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-1
8) The three major influences on pricing decisions are A) competition, costs, and customers. B) competition, demand, and production efficiency. C) continuous improvement, customer satisfaction, and a dual internal/external focus. D) variable costs, fixed costs, and mixed costs. E) economic, qualitative, and costs. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-1
9) Pricing for one-time-only special orders is, typically A) a pricing decision using the time horizon. B) a short-run decision. C) a long-run decision. D) higher in variable costs than usual. E) based on fixed costs alone. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-1
10) Target pricing is based on A) engineered cost. B) variable manufacturing and nonmanufacturing costs. C) full product cost. D) what customers are willing to pay. E) full manufacturing cost. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-1
11) The controller and sales manager are at odds over the pricing of a new product. What major influences should be considered in pricing the new product? Discuss each briefly. Answer: The major influences are customers, competitors, and costs. Customers: Managers must always examine pricing problems through the eyes of their customers. A price increase may cause customers to reject a company's product and choose a competing or substitute product. Competitors: Competitors' reactions influence pricing decisions. At one extreme, a rival's prices and products may force a business to lower its prices to be competitive. At the other extreme, a business without a rival in a given situation can set higher prices. A business with knowledge of its rivals' technology, plant capacity, and operating policies is able to estimate its rivals' costs, which is valuable information in setting competitive prices. Costs: Companies price products to exceed the costs of making them. The study of cost-behaviour patterns gives insight into the income that results from different combinations of price and output quantities sold for a particular product. Diff: 2 Type: ES CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-1
13.2 Understand how companies make short-run pricing decisions. 1) Special orders increase income if the revenue from the order exceeds the incremental variable and fixed costs incurred to fill the order. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-2
2) In deciding whether to accept a special sales order, any fixed costs that would remain unchanged are considered irrelevant data. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-2
3) Short-run pricing decisions include adjusting product mix and output volume in a competitive market. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-2
4) All costs are relevant in short-run pricing decisions. Answer: FALSE Explanation: Many costs are irrelevant in short-run pricing decisions. Diff: 2 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-2
5) A price-bidding decision for a one-time-only special order includes an analysis of A) only marketing costs. B) all cost drivers. C) all costs of each function in the value chain. D) only fixed manufacturing costs. E) indirect costs of each category in the value chain. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-2
6) Decisions on the price to bid on a one-time-only special order should include A) only cost data. B) only the potential bids of competitors. C) existing fixed manufacturing overhead. D) cost data, and the use of variable costing income statements. E) cost data and potential bids of competitors. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-2
7) Your company produces 700,000 widgets per year but has the capacity to produce 950,000 units.
Company records show the following: full product costs = $95 per unit, which includes fixed manufacturing overhead of $11, variable overhead of $4 per unit, and direct variable costs of $22, all based on the current 700,000 production run. If the company wanted to bid on a special one-time order, based on the above information only, what would be its minimum bid? A) $59 B) $81 C) $63 D) $84 E) $85 Answer: D Explanation: $95 - $11 = $84 Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-2
Use the information below to answer the following question(s). Smart Mopeds manufactures mopeds. The following information pertains to the company's normal operations per month: Output units Machine-hours Direct manufacturing labour hours Direct manufacturing labour per hour Direct materials per unit Variable manufacturing overhead costs Fixed costs: Fixed manufacturing overhead costs Marketing and distribution costs Research and development costs
15,000 mopeds 4,000 hours 5,000 hours $24 $220 $342,000 $1,200,000 $1,125,000 $900,000
8) What is the unit cost for establishing a minimum bid on a one-time-only special order of 1,000 mopeds from an overseas city if all cost relationships remain the same except for a one-time setup charge of $50,000? A) $300.80 B) $309.50 C) $285.50 D) $360.50 E) $344.50 Answer: A Explanation: Direct materials $220.00 Direct manufacturing labour 8.00 Variable manufacturing OVH 22.80 Setup 50.00 Total $300.80 Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-2
9) What is the unit cost when establishing a long-run price for mopeds? A) $309.50 B) $325.48 C) $465.80 D) $484.50 E) $470.00 Answer: C Explanation: Direct materials $220.00 Direct manufacturing labour ($24 × 5,000)/15,000 8.00 Variable manufacturing ($342,000/15,000) 22.80 Fixed manufacturing ($1,200,000/15,000) 80.00 Marketing and distribution ($1,125,000/15,000) 75.00 Research and development ($900,000/15,000) 60.00 Total $465.80 Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-2
Answer the following question(s) using the information below. Hawaiian Heaters is approached by Ms. Yukki, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. Hawaiian Heaters has excess capacity. The following per unit data apply for sales to regular customers: Direct materials Direct manufacturing labour Variable manufacturing support Fixed manufacturing support Total manufacturing costs Markup (30%) Estimated selling price
$200 60 30 100 390 117 $507
10) For Hawaiian Heaters, what is the minimum acceptable price for this one-time-only special order? A) $290 B) $390 C) $260 D) $507 E) $377 Answer: A Explanation: $200 + $60 + $30 = $290 Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-2
11) If Ms. Yukki wanted a long-term commitment for supplying this product, what price would most likely be quoted to her? A) $290 B) $390 C) $260 D) $377 E) $507 Answer: E Explanation: The estimated selling price is $507. Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-2
Answer the following question(s) using the information below. Gerry's Generator Supply is approached by Mr. Gladstone, a new customer, to fulfill a large one-timeonly special order for a product similar to one offered to regular customers. Gerry's Generator Supply has excess capacity. The following per unit data apply for sales to regular customers: Direct materials Direct manufacturing labour Variable manufacturing support Fixed manufacturing support Total manufacturing costs Markup (20%) Estimated selling price
$850 75 150 75 1,150 230 $1,380
12) For Gerry's Generators, what is the minimum acceptable price of this one-time-only special order? A) $900 B) $1,075 C) $1,175 D) $1,290 E) $1,200 Answer: B Explanation: $850 + $75 + $150 = $1,075 Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-2
13) If Mr. Gladstone wanted a long-term commitment for supplying this product, what price would most likely be quoted to him? A) $1,000 B) $1,200 C) $1,380 D) $1,400 E) $1,075 Answer: C Explanation: The estimated selling price is $1,380. Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-2
Answer the following question(s) using the information below. Welch Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. Welch Manufacturing has a policy of adding a 10% markup to full costs and currently has excess capacity. The following per unit data apply for sales to regular customers: Variable costs: Direct materials Direct labour Manufacturing overhead Sales commission Fixed costs: Manufacturing overhead Marketing costs Total costs Markup (10%) Estimated selling price
$40 20 25 15 100 20 220 22 $242
14) For Welch Manufacturing, what is the minimum acceptable price of this one-time-only special order? A) $40 B) $55 C) $100 D) $66 E) $86 Answer: C Explanation: $40 + $20 + $25 + $15 = $100 Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-2
15) What is the full cost of the product per unit? A) $60 B) $220 C) $198 D) $66 E) $155 Answer: B Explanation: $40 + $20 + $25 + $15 + $100 + $20 = $220 Diff: 1 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-2
16) If the European customer wanted a long-term commitment for supplying this product, what price would most likely be quoted? A) $66 B) $180 C) $155 D) $217 E) $242 Answer: E Explanation: The estimated selling price is $242. Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-2
Use the information below to answer the following question(s). Ferryman Products manufactures coffee tables. Ferryman Products has a policy of adding a 20% markup to full costs and currently has excess capacity. The following information pertains to the company's normal operations per month: Output units Machine-hours Direct manufacturing labour hours Direct materials per unit Direct manufacturing labour per hour Variable manufacturing overhead costs Fixed manufacturing overhead costs Product and process design costs Marketing and distribution costs
30,000 tables 8,000 hours 10,000 hours $70 $12 $322,500 $1,200,000 $900,000 $1,125,000
17) Ferryman Products is approached by an overseas customer to fulfill a one-time-only special order for 1,000 units. All cost relationships remain the same except for a one-time setup charge of $20,000. No additional design, marketing, or distribution costs will be incurred. What is the minimum acceptable bid per unit on this one-time-only special order? A) $104.75 B) $457.25 C) $114.75 D) $161.70 E) $122.75 Answer: A Explanation: Direct materials $70.00 Direct manufacturing labour $12 × (10,000/30,000) 4.00 Variable manufacturing ($322,500/30,000) 10.75 Setup (one time charge $20,000) 20.00 Minimum acceptable bid $104.75 Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-2
18) What is the Ferryman Products full product cost for long-run pricing purposes? A) $134.75 B) $242.25 C) $262.25 D) $122.75 E) $192.25 Answer: E Explanation: Direct materials $70.00 Direct manufacturing labour $12 × (10,000/30,000) × 1,000 4.00 Variable manufacturing ($322,500/30,000) 10.75 Fixed manufacturing overhead costs ($1,200,000/30,000) 40.00 Product and process design costs ($900,000/30,000) 30.00 Marketing and distribution costs ($1,125,000/30,000) 37.50 Total $192.25 Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-2
19) Saskatchewan Company manufactures basketball backboards. The following information pertains to the company's normal operations per month: Output units Machine-hours Direct manufacturing labour hours Direct manufacturing labour per hour Direct materials per unit Variable manufacturing overhead costs Fixed manufacturing overhead costs Product and process design costs Marketing and distribution costs
15,000 boards 4,000 hours 5,000 hours $12 $100 $150,000 $300,000 $200,000 $250,000
Required: a. For long-run pricing, what is the full-cost base per unit? b. Saskatchewan Company is approached by an overseas city to fulfill a one-time-only special order for 1,000 units. All cost relationships remain the same except for an additional one-time setup charge of $40,000. No additional design, marketing, or distribution costs will be incurred. What is the minimum acceptable bid per unit on this one-time-only special order? Answer: a. Direct materials $100.00 Direct manufacturing labour ($12 × 5,000)/15,000 4.00 Variable manufacturing ($150,000/15,000) 10.00 Fixed manufacturing ($300,000/15,000) 2.00 Marketing and distribution ($250,000/15,000) 16.67 Product and process ($200,000/15,000) 13.33 Total $146.00 b. Direct materials Direct manufacturing labour Variable manufacturing Setup ($40,000/1,000) Total
$100.00 4.00 10.00 40.00 $154.00
Diff: 2 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-2
20) Muskoka Travel offers guided tours through the lake system. Muskoka Travel provides a guide, necessary equipment, and food for a fee of $75 per person per day. Currently the company is providing an average of 600 guide-days per month. Based on available equipment and guides the maximum capacity is 950 guide-days (customers taken on the equivalent of an all day tour) per month. Variable costs per guide-day for the year were as follows: Food Supplies
$7.50 3.00
Guide's salary Insurance
$37.50 12.00
Fixed costs per month during the year were as follows: Equipment rental Administration
$7,500 6,000
Marketing Customer service
$3,000 1,500
Required: A group of foreign tourists has offered Muskoka Travel a proposal of 300 guide-days in July if they will cut the fee to $67.50 per guide-day. They have their own food and do not want to use the Muskoka Travel menus. Muskoka Travel will incur $300 in additional costs for busing the tourists back and forth to the camp site. If fixed costs would not increase, should Muskoka Travel accept the special offer? Answer: Yes. Special tickets (300 × $67.50) $20,250 Relevant Costs: Guide salaries (300 × $37.50) $11,250 Supplies (300 × $3) 900 Insurance (300 × $12) 3,600 Special costs 300 16,050 Increase in operating income $4,200 Diff: 2 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-2
21) Brady Lumber Company, a producer of oak lumber for furniture companies has an offer to supply a special load of lumber for an exporter. It will take three months to fill the order of 1,000,000 board metres. During the three months half of its production capacity will be utilized for the special order. The total fixed costs for the three months will be $6,000,000. Variable costs per 1,000 board metres will be $2,500. The marketing manager believes that half of the capacity taken up by the special order can be utilized with regular business which will generate income of $240,000. Required: Determine the minimum price that needs to be charged for the special order. Answer: Opportunity costs to be recovered: $240,000 + Variable costs [$2,500 × (1,000,000/1,000) = $2,500,000] = Relevant cost (minimum revenue needed) = $2,740,000 Price = $2,740,000/1,000 = $2,740 per 1,000 board metres. Diff: 3 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-2
22) Backwoods Incorporated manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $80 per table, consisting of 70% variable costs and 30% fixed costs. The company has surplus capacity available. It is Backwoods' policy to add a 50% markup to full costs. Required: a. Backwoods Incorporated is invited to bid on an order to supply 100 rustic tables. What is the lowest price Backwoods should bid on this one-time-only special order? b. A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style. Backwoods Incorporated is invited to submit a bid to the hotel chain. What is the lowest price per unit Backwoods should bid on this long-term order? Answer: a. The lowest price Backwoods should bid on the 100 table one-time special order is $5,600 = Variable costs ($80 × .70 × 100 tables), the short-term incremental costs. b. The lowest price Backwoods should bid on the long-term hotel chain order is $120 per table = Full costs $80 + 50% markup, the long-term targeted price. Diff: 2 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-2
23) Delgreco Products manufactures high-tech cell phones. Delgreco Products has a policy of adding a 30% markup to full costs and currently has excess capacity. The following information pertains to the company's normal operations per month: Output units Machine-hours Direct manufacturing labour-hours Direct materials per unit Direct manufacturing labour per hour Variable manufacturing overhead costs Fixed manufacturing overhead costs Product and process design costs Marketing and distribution costs
10,000 phones 8,000 hours 5,000 hours $25 $15 $175,000 $425,000 $400,000 $475,000
Delgreco Products is approached by an overseas customer to fulfill a one-time-only special order for 1,000 units. All cost relationships remain the same except for a one-time setup charge of $15,000. No additional design, marketing, or distribution costs will be incurred. Required: a. What is the minimum acceptable bid per unit on this one-time-only special order? b. What is the full product cost? Answer: a. Minimum acceptable bid price per unit Direct materials Direct manufacturing labour (5,000/10,000) × $15 Variable manufacturing ($175,000/10,000) Setup ($15,000/1,000) Minimum acceptable bid b.
$25.00 7.50 17.50 15.00 $65.00
Full product cost From a. above $65.00 Fixed costs ($425,000 + $400,000 + $475,000)/10,000 130.00 $195.00
Diff: 2 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-2
24) Larry Bett is considering building a budget hotel that offers clean small rooms with bathrooms. He anticipates that his 120 rooms will rent for 36,000 room-nights per year. The market price for equivalent rooms is $60 per night. Larry estimates that the capital cost will be $7,900,000 and he would like an annual return of 15%. Following are the estimated annual operating costs: Variable operating costs Fixed costs: Salaries and wages Building maintenance General administration Total fixed costs
$ 18 per room night $ 450,000 86,000 230,000 $ 766,000
Required: a. What is the full cost per room-night? b. Can Larry meet the targeted return on investment based on the estimated costs and revenue? Show your calculations. c. A tour operator has offered $30 per night for 20 rooms during a time of the year that there is likely to be at least that many rooms vacant. Should Larry accept this offer? Answer: 1. Full cost per room-night Variable operating costs $ 18.00 Fixed operating costs ($766,000/36,000) = 21.28 $ 39.28 2. Target ROI = 15% × $7,900,000 = $1,185,000 OI = 36,000 × ($60 - $18) - $766,000 = $ 746,000 Larry will have an ROI = $746,000/$7,900,000 = 9% 3. The $30 offer is greater than the $18 variable cost so Larry should accept the offer. Diff: 2 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-2
25) Janice Long is considering building a budget hotel that offers clean small rooms with bathrooms. She anticipates that her 120 rooms will rent for 39,600 room-nights per year. The market price for equivalent rooms is $60 per night. Janice estimates that the capital cost will be $6,500,000 and she would like an annual return of 10%. Following are the estimated annual operating costs: Variable operating costs Fixed costs: Salaries and wages Building maintenance General administration Total fixed costs
$ 21 per room night $ 420,000 89,000 280,000 $ 789,000
Required: a. What is the full cost per room-night? b. Can Janice meet the targeted return on investment based on the estimated costs and revenue? Show your calculations. c. A tour operator has offered $30 per night for 20 rooms during a time of the year that there is likely to be at least that many rooms vacant. Should Janice accept this offer? Show your calculations. Answer: a. Full cost per room-night Variable operating costs $ 21.00 Fixed operating costs ($789,000/39,600) = 19.92 $ 40.92 b. Target ROI = 10% × $6,500,000 = $650,000 OI = 39,600 × ($60 - $21) - $789,000 = $ 755,400 Janice will have an ROI = $755,400,000/$6,500,000 =12% c. The $30 offer is greater than the $21 variable cost so Janice should accept the offer. Diff: 2 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-2
26) At a management meeting, you just finished presenting your cost analysis report, showing unit costs last year for 60,000 widgets produced were $435.00. The sales manager then complained that she was going to lose a special overseas sale because the customer had indicated they could only pay $425.00. She knew from sources that no competitor would be bidding below $440, and she complained that if the company had better cost control, there would be more profit for everyone. The production manager also would like to take the extra job, since even with the extra production, the plant would be under-capacity. Required: What type of information would you need in order to be able to determine if the extra order could be profitably produced if the selling price was held to $425 per unit? Answer: Unit costs are often misleading, usually because of the influence of fixed costs. You would need to determine whether the fixed costs for an order that did not exceed the plant's capacity, were already accounted for or not in the $425.00 figure, that is, assume that fixed cost per unit had been calculated based on full capacity utilization. If this is the case, then the $425 figure will likely hold. If however, the unit cost was calculated at only actual production, then increasing production would lower unit costs. Secondly, since the production manager is eager to increase production, he or she would likely be very interested in reducing costs, using say, continuous improvement. The company could set a target cost and seek ways to attain it. Diff: 2 Type: ES CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-2
27) Explain the differences between short-run pricing decisions and long-run pricing decisions. Answer: Short-run pricing decisions typically have a time horizon of less than a year and include such decisions such as (a) pricing a one-time-only special order with no long-run implications and (b) adjusting product mix and output volume in a competitive market place. Two key differences affect pricing for the long-run versus the short-run. 1. Fixed costs are often irrelevant for the short-run and are generally relevant in the long-run because they can be altered in the long-run. 2. Profit Margins in the long-run pricing decisions are often set to earn a reasonable return on investment. Short-run pricing decisions is more opportunistic. Prices are decreased when demand is weak and increased when demand is strong. Diff: 2 Type: ES CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-2
13.3 Understand how companies make long-run pricing decisions. 1) When prices are set in a competitive marketplace, product costs are the most important influence on pricing decisions. Answer: FALSE Explanation: When prices are set in a competitive marketplace, companies have no control over setting prices and must accept the price determined by the market. Diff: 2 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-3
2) Companies that produce high quality products do not have to pay attention to the actions of their competitors. Answer: FALSE Explanation: No business operates in a vacuum. Companies must always be aware of the actions of their competitors. Diff: 2 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-3
3) Relevant costs for pricing decisions include manufacturing costs, but not costs from other value-chain functions. Answer: FALSE Explanation: Relevant costs for pricing decisions include costs from all value-chain functions, from R&D to customer service. Diff: 2 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-3
4) Profit margins are often set to earn a reasonable return on investment for short-term pricing decisions, but not long-term pricing decisions. Answer: FALSE Explanation: Profit margins are often set to earn a reasonable return on investment for long-term pricing decisions, but not short-term pricing decision. Diff: 2 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-3
5) Knowledge of long-run product costs helps guide decisions about entering or remaining in the market for a given product when in a highly competitive price-setting situation. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-3
6) Long-run pricing is a strategic decision designed to build long-run relationships with customers in competitive markets. Answer: FALSE Explanation: Long-run pricing is a strategic decision designed to build long-run relationships with customers based on stable and predictable prices. Diff: 1 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-3
7) For long-run pricing decisions, using stable prices has the advantage of A) helping build buyer-seller relationships. B) reducing the need to change cost structures frequently. C) reducing competition. D) minimizing the need to monitor competitors prices frequently. E) increasing margins. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-3
8) Which of the following is TRUE of long-run pricing? A) It is fixed at a level that recovers the variable costs of the company and a pre-determined profit markup. B) It is generally a function of the market factors, and the cost involved in production is generally not a consideration. C) It is a strategic decision designed to build long-run relationships with customers based on stable and predictable prices. D) It is based only on internal requirements like cost and estimated rate of return since, in the long run, these requirements are the driving factors of any organization. Answer: C Diff: 3 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-3
9) For setting long-term prices a company should use full product costs. Full product costs for pricing purposes A) include direct costs only. B) include all manufacturing costs only. C) does not include fixed overhead. D) equals manufacturing and selling costs. E) include all direct costs plus an appropriate allocation of the indirect costs of all business functions. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-3
10) Jack's Back Porch manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $270 per table, consisting of 80% variable costs and 20% fixed costs. The company has surplus capacity available. It is Jack's Back Porch's policy to add a 60% markup to full costs. A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style. Jack's Back Porch is invited to submit a bid to the hotel chain. What per unit price will Jack's Back Porch most likely bid on this long-term order? A) $86.40 per unit B) $162.00 per unit C) $345.60 per unit D) $432.00 per unit Answer: D Explanation: Most likely per unit bid = $270 + ($270 × 60%) = $432.00. Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-3
11) A company uses a long-run time horizon to price its product, an electronic component used in aircraft. To produce a normal production run for a year of 100,000 units direct materials are $90,000; direct labour is $180,000; and, rent on leased equipment is $106,000 per year. Currently re-work is running at 4% of production, after testing. The company has the capacity to test 10 units per hour. Manufacturing Overhead has two cost drivers: testing (cost driver is testing hours at $2.50 per hour); and, rework (cost driver is units reworked at $80 per unit re-worked). Calculate current total manufacturing costs for 100,000 units. A) $320,000 B) $376,000 C) $396,000 D) $401,000 E) $721,000 Answer: E Explanation: $90,000 + 180,000 + 106,000 + ($2.50 × 100,000 ÷ 10) + ($80 × 100,000 × 4%) = $721,000 Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-3
12) Which of the following is TRUE of alternative long-run pricing approaches? A) A market-based approach only considers how customers will react. B) A cost-based approach only considers how customers will react. C) A market-based approach only considers costs. D) A market-based approach is more logical in a competitive market. E) In cost-plus pricing, selling price ignores market forces when setting the markup. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-3
13) Valley West Amusement Park is evaluating its ticket prices. It is open during the summer months for 15 weeks. The following information pertains to last year's tourist season. Costs are expected to remain the same for this year. Average tourists per day on Friday thru Tuesday 2,500 Average tourists per day on Wednesday and Thursday 1,000 Variable operating costs per day when open $4,100 Fixed overhead costs per year $180,000 Marketing costs per year $62,500 Customer service costs per year $5,000 Required: What is the unit cost when establishing a long-run price for tour tickets? Answer: Attendance = (15 × 5 × 2,500) + (15 × 2 × 1,000) = 217,500 Variable costs (15 × 7 × $4,100) Fixed Marketing Customer service Total
$430,500 180,000 62,500 5,000 $678,000
Average cost per tourist = $678,000/217,500 = $3.12 Diff: 2 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-3
14) Hitz Video Rental is evaluating rental prices. Historical data show that Friday and Saturday have twice the rentals of other days of the week. The following information pertains to the store's normal operations per week: Average rentals per day on Friday and Saturday Average rentals per day on Sunday through Thursday Store hours per day Total units available for rent
1,150 500 12 10,000
Variable operating costs per hour Marketing costs per week Customer service costs per week
$ 40 $1,500 $ 250
Required: What is the unit cost when establishing a long-run price for rentals? Answer: Variable costs ($40 × 12 × 7) $3,360 Marketing 1,500 Customer service 250 Total costs per week $5,110 Average rental cost per customer $5,110/[(2 × 1,150) + (5 × 500)] = $1.0645 Diff: 2 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-3
15) Taylor Stadium is evaluating ticket prices for its baseball games. Studies have shown that Monday and Tuesday ball games average less than half the fans of games on other days. The following information pertains to the stadium's normal operations per season. Average fans per game Average fans per Monday/Tuesday game Stadium operating hours per season for baseball Stadium capacity Variable operating costs per hour Fixed overhead costs per year for all events Marketing costs per season for baseball Customer service costs per season for baseball
5,000 fans 2,000 fans 300 hours 7,000 seats $2,000 $450,000 $212,500 $25,000
The stadium is open for 5 hours on each day a game is played. The stadium is available for some type of use 300 days a year. All employees work by the hour except for the administrators. In addition, only one game is played per day and each fan would have only one ticket per game. Required: What is the unit cost when establishing a long-run price for ball games assuming all tickets are priced the same? Answer: Games = 300 hrs./5 hrs. per game = 60 games Attendance = 60 × 5,000 = 300,000 fans Percent use per year for baseball 60/300 = 0.20 Variable costs 300 × $2,000 Fixed $450,000 × 0.20 Marketing Customer service Total
$600,000 90,000 212,500 25,000 $927,500
Average cost per fan = $927,500/300,000 = $3.09 Diff: 3 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-3
16) The Maize Eagles are evaluating ticket prices for its basketball games. Studies show that Friday and Saturday night games average more than twice the fans of games on other days. The following information pertains to the stadium's normal operations per season: Average fans per game (all games) Average fans per Friday and Saturday night games Number of home games per season Stadium capacity Variable operating costs per operating hour Marketing costs per season for basketball Customer-service costs per season for basketball
2,500 fans 3,500 fans 30 games 3,500 seats $2,000 $138,750 $25,000
The stadium is open for 5 operating hours on each day a game is played. All employees work by the hour except for the administrators. A maximum of one game is played per day and each fan has only one ticket per game. Required: What is the unit cost when establishing a long-run price for ball games assuming all tickets are priced the same? Answer: Variable operating costs (30 × 5 × $2,000) $300,000 Marketing 138,750 Customer service 25,000 Total $463,750 Attendance = 30 × 2,500 = 75,000 fans Minimum price is $463,750/75,000 = $6.1833 Diff: 3 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-3
17) Explain the differences between short-run pricing decisions and long-run pricing decisions. Answer: Short-run pricing decisions typically have a time horizon of less than a year and include such decisions such as (a) pricing a one-time-only special order with no long-run implications and (b) adjusting product mix and output volume in a competitive market place. Two key differences affect pricing for the long-run versus the short-run. 1. Fixed costs are often irrelevant for the short-run and are generally relevant in the long-run because they can be altered in the long-run. 2. Profit Margins in the long-run pricing decisions are often set to earn a reasonable return on investment. Short-run pricing decisions is more opportunistic. Prices are decreased when demand is weak and increased when demand is strong. Diff: 2 Type: ES CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-3
13.4 Price products using the target-costing approach. 1) Value engineering is a time-and-motion system that can result in: improvements in product designs, changes in material specifications, or modifications in process methods. Answer: FALSE Explanation: Value engineering is a systematic evaluation of all aspects of the value chain. Diff: 1 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-4
2) Financial reporting systems emphasize cost incurrence by recognizing and recording costs only when a resource is sacrificed or consumed. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-4
3) Locked-in costs are costs that have been incurred. Answer: FALSE Explanation: Locked-in costs (or designed-in costs ) are those costs that have not yet been incurred but that will be incurred in the future on the basis of decisions that have already been made. Diff: 2 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-4
4) Target pricing includes: (1) developing a needed product, (2) choosing a target price, (3) deriving a target cost per unit, and (4) performing cost analysis. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-4
5) Reverse engineering has the objective of reducing costs while still satisfying customer needs. Answer: FALSE Explanation: Value engineering has the objective of reducing costs while still satisfying customer needs. Reverse engineering is a means of obtaining information about a companies competitors by disassembling and analyzing the competitor products to determine the design, materials, and technology used. Diff: 2 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-4
6) The strategy in which companies systematically evaluate all aspects of the value-chain business functions with the objective of reducing costs to meet customers' needs is referred to as A) full costing. B) value engineering. C) designed-in costs. D) value analysis. E) cost incurrence. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-4
7) Eliminating non-value added activities by reducing their cost drivers, is referred to as A) value-added pricing. B) value-added activity base pricing. C) cost incurrence costing. D) price engineering. E) value engineering. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-4
8) When are a product's direct materials cost most likely to be locked in? A) when the product is designed B) when purchasing commits to buying the materials C) when the bill for the materials is paid D) when the materials are used in production E) when materials are received from the supplier Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-4
9) In a graph with cumulative costs per unit as the Y-axis, with two curves, one being the cumulative costs locked-in, and a second curve showing the cumulative costs per unit incurred in different business functions, which of the following is TRUE? A) The graph will show the divergence between the amount of locked-in costs and costs incurred, by the end of the production cycle. B) Locked-in costs rise much slower initially than the incurred cost, but joining the incurred cost line at the completion of the value chain functions. C) The two cost lines will run parallel. D) No differences unless the product is manufactured inefficiently. E) Both curves deal with the same cumulative cost per unit. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-4
10) Which of the following is TRUE concerning value-engineering? A) The goal of value-engineering is to eliminate locked-in costs. B) After a product's design has been value-engineered, costs are difficult to influence. C) When and how costs are locked in are more important than when and how costs are incurred. D) Value-engineering does not work when dealing with direct costs. E) Value-engineering activities reduce both value-added and non-value-added costs. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-4
11) Most of a product's life-cycle costs are locked in by decisions made during the ________ business function of the value chain. A) design B) manufacturing C) customer-service D) marketing E) research Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-4
12) When target costing and target pricing are used together A) the target cost is established first, then the target price. B) the target cost per unit is the estimated long-run price per unit that enables a product or service to achieve the target profit per unit. C) the target price is set to undercut the competition. D) target costs are higher than current costs because of inflation over time. E) target price is the estimated price for a product or service that a potential customer will be willing to pay. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-4
13) The target pricing approach is easier when A) products highly differentiated and the consumer life cycle is shorter. B) products highly differentiated and the consumer life cycle is longer. C) products are not well differentiated and the consumer life cycle is shorter. D) products are not well differentiated and the consumer life cycle is longer. E) little is known about market factors. Answer: D Diff: 3 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-4
14) When the firm uses the target-costing approach to pricing, the target cost per unit is the difference between the per unit target price and the per unit target A) contribution margin. B) operating income. C) production costs. D) gross margin. E) fixed costs. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-4
Answer the following question(s) using the information below. After conducting a market research study, Chen Manufacturing decided to produce a new interior door to complement its exterior door line. It is estimated that the new interior door can be sold at a target price of $80. The annual target sales volume for interior doors is 20,000. Chen has a target operating income of 20% of sales. 15) What are target sales revenues? A) $960,000 B) $2,000,000 C) $1,800,000 D) $1,000,000 E) $1,600,000 Answer: E Explanation: $80 × 20,000 = $1,600,000 Diff: 1 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-4
16) What is the target operating income? A) $320,000 B) $360,000 C) $200,000 D) $192,000 E) $400,000 Answer: A Explanation: $1,600,000 × 20% = $320,000 Diff: 1 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-4
17) What is the target cost? A) $800,000 B) $1,280,000 C) $1,440,000 D) $1,600,000 E) $768,000 Answer: B Explanation: $1,600,000 - ($1,600,000 × 20%) = $1,280,000 Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-4
18) What is the target cost for each interior door? A) $64 B) $72 C) $80 D) $38 E) $40 Answer: A Explanation: [$1,600,000 - ($1,600,000 × 20%)]/20,000 = $64 Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-4
Answer the following question(s) using the information below. After conducting a market research study, Potter Products decided to produce an electric coffee pot to complement its line of kitchen products. It is estimated that the new coffee pot can be sold at a target price of $66. The annual target sales volume for the coffee pot is 300,000. Potter has target operating income of 18% of sales. 19) What are the target sales revenues? A) $1,380,000 B) $19,800,000 C) $11,316,000 D) $12,000,000 E) $16,284,000 Answer: B Explanation: $66 × 300,000 = $19,800,000 Diff: 1 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-4
20) What is the target operating income? A) $3,931,120 B) $3,160,000 C) $2,036,880 D) $3,564,000 E) $248,400 Answer: D Explanation: $66 × 300,000 × 18% = $3,564,000 Diff: 1 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-4
21) What is the total target cost? A) $9,840,000 B) $16,232,000 C) $13,352,000 D) $19,279,120 E) $1,131,600 Answer: B Explanation: $66 × 300,000 × (1 - .18) = $16,232,000 Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-4
22) What is the target cost for each coffee pot? A) $32.80 B) $44.51 C) $30.93 D) $3.77 E) $54.12 Answer: E Explanation: $66 × (1 - .18) = $54.12 Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-4
Answer the following question(s) using the information below. Sheltar's TV currently sells small televisions for $180. It has costs of $140. A competitor is bringing a new small television to market that will sell for $160. Management believes it must lower the price to $160 to compete in the market for small televisions. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Sheltar's sales are currently 100,000 televisions per year. 23) What is the target cost if target operating income is 25% of sales? A) $105.00 B) $145.00 C) $140.00 D) $135.00 E) $120.00 Answer: E Explanation: $160 - ($160 × 0.25) = $120.00 Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-4
24) What is the change in operating income if marketing is correct and only the sales price is changed? A) $125,000 B) $950,000 C) $(3,450,000) D) $(1,800,000) E) $2,350,000) Answer: D Explanation: [100,000 × ($180 - $140)] - [110,000 × ($160 - $140)] = $(1,800,000) Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-4
25) What is the target cost if the company wants to maintain its same income level, and marketing is correct (rounded to the nearest cent)? A) $112.50 B) $113.64 C) $123.34 D) $140.00 E) $135.00 Answer: B Explanation: Current income = 100,000 × ($180 - $140) = $4,000,000 Target cost y: $4,000,000 = (110,000 × $160) - 110,000y y = $13,600,000/110,000 = $123.6363 Diff: 3 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-4
Use the information below to answer the following question(s). True Colour TV currently sells large televisions for $360. It has costs of $280. A competitor is bringing a new large television to market that will sell for $300. Management believes it must lower the price to $300 to compete in the market for large televisions. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. True Colour TV sales are currently 100,000 televisions per year. 26) What is the target cost if target operating income is 25% of the new sales price? A) $75 B) $90 C) $225 D) $270 E) $280 Answer: C Explanation: $300 - ($300 × 0.25) = $225 Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-4
27) What is the change in operating income if marketing is correct and only the sales price is changed? A) $2,200,000 B) $600,000 C) $(2,200,000) D) $(5,800,000) E) $(1,900,000) Answer: D Explanation: [100,000 × ($360 - $280)] - [110,000 × ($300 - $280)] = $(5,800,000) Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-4
28) What is the target cost if the company wants to maintain its same income level, and marketing is correct (rounded to the nearest cent)? A) $225.00 B) $227.27 C) $246.68 D) $280.00 E) $270.00 Answer: B Explanation: Current income = 100,000 × ($360 - $280) = $8,000,000 Target cost y: $8,000,000 = (110,000 × $300) - 110,000y y = $25,000,000/110,000 = $227.27 Diff: 3 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-4
Answer the following question(s) using the information below. Saly's Computer Monitors Inc. currently sells 17" monitors for $270. It has costs of $210. A competitor is bringing a new 17" monitor to market that will sell for $225. Management believes it must lower the price to $225 to compete in the market for 17" monitors. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Saly's sales are currently 10,000 monitors per year. 29) What is the target cost if operating income is 25% of sales? A) $189.00 B) $41.25 C) $210.00 D) $202.50 E) $168.75 Answer: E Explanation: $225 - ($225 × 0.25) = $168.75 Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-4
30) What is the change in operating income if marketing is correct and only the sales price is changed? A) $1,421,250 B) $(204,000) C) $(352,500) D) $(435,000) E) $18,750 Answer: D Explanation: [10,000 × ($270 - $210)] - [11,000 × ($225 - $210)] = ($435,000) Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-4
31) What is the target cost if the company wants to maintain its same income level, and marketing is correct (rounded to the nearest cent)? A) $168.75 B) $170.46 C) $185.00 D) $210.00 E) $202.50 Answer: B Explanation: Current income = 10,000 × ($270 - $210) = $600,000 Target cost y: $600,000 = (11,000 × $225) - 11,000y y = $1,875,000/11,000 = $170.4545 Diff: 3 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-4
32) CIMA Engineering uses a manufacturing costing system with one direct cost category (direct materials) and three indirect cost categories: a. Setup, production order, and materials-handling costs that vary with the number of batches. b. Manufacturing operations costs that vary with machine-hours. c. Costs of engineering changes that vary with the number of engineering changes made. In response to competitive pressures at the end of 2019, Medical Instruments used value-engineering techniques to reduce manufacturing costs. Actual information for 2018 and 2019 is:
Setup, production order, and materials-handling costs per batch Total manufacturing-operations cost per machine-hour Cost per engineering change
2018 $ 6,000 $ 50 $ 4,000
2019 $ 5,500 $ 45 $4,400
The management of CIMA Engineering wants to evaluate whether value engineering has succeeded in reducing the target manufacturing cost per unit of one of its flow controllers by 10%. Actual results for 2018 and 2019 for the flow controller are: 2018 2019 Flow controllers produced 2,900 3,300 Direct material cost per unit $1,700 $1,600 Total number of batches required 110 120 Total number of machine-hours required 7,200 7,100 Number of engineering changes made 7 8 Required: a. Calculate the manufacturing cost for both years. b. Did the company achieve the target manufacturing cost per unit in 2019? Explain. Answer: a.
DM (2,900 × $1,700); (3,300 × $1,600) Batch (110 × $6,000); (120 × $5,500) Ops (7,200 × $50); (7,100 × $45) Engin (7 × $4,000); (8 × $4,400) Total b.
2018 2018 2019 2019 Total Per Unit Total Per Unit $4,930,000 $1,700 $5,280,000 $1,600 $ 660,000 $ 228 $ 660,000 $ 200 $ 360,000 $ 124 $ 319,500 $ 97 $
28,000 $5,978,000
$
10 $ 35,200 $2,062 $6,294,700
$
11 $1,908
Target for 2019 = $2,062 × 90% = $1,859; therefore target not achieved
Although cost per unit decreased in every category except engineering the size of the cost reductions were not sufficient. Diff: 2 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 5-4; 12-4
33) Tina, a college student, plans to operate a hot dog stand at the beach during the summer for three
months. Her fixed costs for the booth, which include utilities, will be $2,600. Variable costs per hot dog will be $1.50 for materials and $0.40 for a franchise fee from the hot dog supplier. This year's sales are expected to be 20,000 units based upon the operation of the same booth the prior year. Tina needs to earn $10,000 so that she can pay part of her college expenses for the upcoming academic year. Based on competitor's prices, her target price is $2.40 Required: Determine whether she can expect to earn $10,000 at the target price. Answer: Variable expenses [($1.50 + $0.40)] = $1.90 Fixed cost per unit at 20,000 units = $2,600 ÷ 20,000 units 0.13 Target operating income per unit = $10,000 ÷ 20,000 units = 0.50 $2.53 No, she will not meet her target at a selling price of $2.40. Diff: 2 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-4
34) U-CAN Company manufactures sinker molds for fishing. A sinker mold has a price of $7.00 and has costs currently assigned to it of $5.44. A competitor is introducing a new sinker mold that will sell for $6.00. Management believes it must lower the price to $6.00 in order to compete in the highly costconscious sinker mold market. Marketing believes that the new price will maintain the current sales level. U-CAN Company's sales are currently 200,000 molds per year. Required: a. What is the target cost for the new price if target profit is 20 percent of sales? b. What is the target selling price if costs cannot be reduced and target profit is changed to 15 percent of sales? c. What is the change in operating income for the year if $6.00 is the new price and costs remain the same? d. What is the target cost per unit if the selling price is reduced to $6.00 and the company wants to maintain its same income level? Answer: a. $6.00 - $6.00(0.20) = $4.80 b. $5.44/0.85 = $6.40 c. Change = (200,000 × ($7.00 - $5.44) - (200,000 × ($6.00 - $5.44)) = $312,000 - $112,000 = $200,000 reduction in income. d. Current income = 200,000 × ($7.00 - $5.44) = $312,000 Target cost per unit: $312,000 = (200,000 × $6.00) - 200,000y 200,000y = $888,000 y = $4.44 Diff: 3 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-4
35) Fahmy Corporation manufactures fishing poles that have a price of $42.00. It has costs of $32.64 A competitor is introducing a new fishing pole that will sell for $36.00. Management believes it must lower the price to $36.00 to compete in the highly cost-conscious fishing pole market. Marketing believes that the new price will maintain the current sales level. Fahmy Corporation's sales are currently 200,000 poles per year. Required: a. What is the target cost for the new price if target operating income is 20% of sales? b. What is the change in operating income for the year if $36.00 is the new price and costs remain the same? c. What is the target cost per unit if the selling price is reduced to $36.00 and the company wants to maintain its same income level? Answer: a. $36.00 - ($36.00 × 0.20) = $28.80 b.
Change = 200,000 × ($42.00 - $32.64) - [200,000 × ($36.00 - $32.64)] = $1,872,000 - $672,000 = $1,200,000 reduction in income
c.
Current income = 200,000 × ($42.00 - $32.64) = $1,872,000 Target cost per unit: $1,872,000 = (200,000 × $36.00) - 200,000y 200,000y = $5,328,000 y = $26.64
Diff: 3 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 12-4
36) Ethan's Medical Equipment Company manufactures hospital beds. Its most popular model, Deluxe, sells for $5,000. It has variable costs of $2,800 and fixed costs of $1,000 per unit, based on an average production run of 5,000 units. It normally has four production runs a year, with $400,000 in setup costs each time. Plant capacity can handle up to six runs a year for a total of 30,000 beds. A competitor is introducing a new hospital bed similar to Deluxe that will sell for $4,000. Management believes it must lower the price to compete. Marketing believes that the new price will increase sales by 25% a year. The plant manager thinks that production can increase by 25% with the same level of fixed costs. The company currently sells all the Deluxe beds it can produce. Required: a. What is the annual operating income from Deluxe at the current price of $5,000 and normal production? b. What is the annual operating income from Deluxe if the price is reduced to $4,000 and sales in units increase by 25%? c. What is the target cost per unit for the new price if target operating income is 20% of sales? Answer: a. Sales (20,000 × $5,000) $100,000,000 Costs: Variable costs (20,000 × $2,800) $56,000,000 Fixed costs ($1,000 × 5,000 × 4) 20,000,000 Setup costs ($400,000 × 4) 1,600,000 77,600,000 Operating income b. Sales (25,000 × $4,000) Costs: Variable costs (25,000 × $2,800) Fixed costs, same Setup costs ($400,000 × 5) Operating income c.
$22,400,000
$100,000,000 $70,000,000 20,000,000 2,000,000
92,000,000 $8,000,000
$4,000 - ($4,000 × 0.20) = $3,200
Diff: 2 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-4
37) Shortwave Avionics currently sells radios for $1,800. It has costs of $1,400. A competitor is bringing a new radio to market that will sell for $1,600. Management believes it must lower the price to $1,600 to compete in the market for radios. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Shortwave's sales are currently 1,000 radios per year. Required: a. What is the target cost if target operating income is 25% of sales? b. What is the change in operating income if marketing is correct and only the sales price is changed? c. What is the target cost if the company wants to maintain its same income level, and marketing is correct? Answer: a. $1,600 - ($1,600 × 0.25) = $1,200 b. (1,000 × ($1,800 - $1,400)) - (1,100 × ($1,600 - $1,400)) = $180,000 c. Current income = 1,000 × ($1,800 - $1,400) = $400,000 Target cost y: $400,000 = (1,100 × $1,600) - 1,100y y = $1,360,000/1,100 y = $1,236.36 Diff: 3 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-4
38) Warthog Avionics currently sells radios for $3,600. It has costs of $2,800. A competitor is bringing a new radio to market that will sell for $3,200. Management believes it must lower the price to $3,200 to compete in the market for radios. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Warthog's sales are currently 1,000 radios per year. Required: a. What is the target cost if target operating income is 25% of sales? b. What is the change in operating income if marketing is correct and only the sales price is changed? c. What is the target cost if the company wants to maintain its same income level, and marketing is correct? Answer: a. $3,200 - ($3,200 × 0.25) = $2,400 b. (1,000 × ($3,600 - $2,800)) - (1,100 × ($3,200 - $2,800)) = Decrease $360,000 c. Current income = 1,000 × ($3,600 - $2,800) = $800,000 Target cost y: $800,000 = (1,100 × $3,200) - 1,100y y = $2,720,000/1,100 y = $2,472.72 Diff: 3 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-4
39) Central Dental Company manufactures dental chairs. Its most popular model, Deluxe, sells for $2,500.
It has variable costs totaling $1,400 and fixed costs of $500 per unit based on an average production run of 5,000 units. It normally has four production runs a year with $200,000 setup costs each time. Plant capacity can handle up to six runs a year for a total of 30,000 chairs. A competitor is introducing a new dental chair similar to Deluxe that will sell for $2,000. Management believes it must lower the price in order to compete. Marketing believes that the new price will increase sales by 25 percent a year. The plant manager thinks that production can increase by 25 percent with the same level of fixed costs. The company currently sells all the Deluxe chairs it can produce. Required: What is the target cost per unit for the new price if target profit is 20 percent of sales? Answer: $2,000 - $2,000(0.20) = $1,600 Diff: 1 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-4
40) Steve Corporation manufactures fishing poles that have a price of $21.00. It has costs of $16.32. A competitor is introducing a new fishing pole that will sell for $18.00. Management believes it must lower the price to $18.00 to compete in the highly cost-conscious fishing pole market. Marketing believes that the new price will maintain the current sales level. Steve Corporation's sales are currently 200,000 poles per year. Required: a. What is the target cost for the new price if target operating income is 20% of sales? b. What is the change in operating income for the year if $18.00 is the new price and costs remain the same? c. What is the target cost per unit if the selling price is reduced to $18.00 and the company wants to maintain its same income level? Answer: a. $18.00 - ($18.00 × 0.20) = $14.40 b.
Change = 200,000 × ($21.00 - $16.32) - [200,000 × ($18.00 - $16.32)] = $936,000 - $336,000 = $600,000 reduction in income
c.
Current income = 200,000 × ($21.00 - $16.32) = $936,000 Target cost per unit: $936,000 = (200,000 × $18.00) - 200,000y 200,000y = $2,664,000 y = $13.32
Diff: 3 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 12-4
41) Kezer Crafts currently sells motor boats for $6,000. It has costs of $4,650. A competitor is bringing a new motor boat to the market that will sell for $5,500. Management believes it must lower the price to $5,500 to compete in the market for motor boats. Marketing believes that the new price will cause sales to increase by 12.5%, even with a new competitor in the market. Kezer Crafts' sales are currently 2,000 motor boats per year. Required: a. What is the target cost if target operating income is 25% of sales? b. What is the change in operating income if marketing is correct and only the sales price is changed? c. What is the target cost if the company wants to maintain its same income level, and marketing is correct? Answer: a. $5,500 - ($5,500 × 0.25) = $4,125 b.
(2,000 × ($6,000 - $4,650)) - (2,250 × (5,500 - $4,650)) = $787,500 less operating income
c.
Current income = 2,000 × ($6,000 - $4,650) = $2,700,000 Target cost y: $2,700,000 = (2,250 × $5,500) -2,250y y = $9,675,000/2,250 y = $4,300
Diff: 3 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-4
42) Explain the difference between locked in costs and costs incurred. Which of these types of costs does a traditional accounting system emphasize? At which stage of the value chain are most costs locked-in? At which stage of the value chain are most costs incurred? What implication does this have for good cost management? Answer: Locked-in costs are costs that have not been incurred yet, but based on decisions that have already been made, will be incurred in the future. Traditional accounting systems focus upon incurred costs, or costs as they happen. Most costs are actually locked-in at the design stage, but they are not incurred until the manufacturing stage. Good cost management depends, therefore, on a great deal of attention given to costs at the design stage since it may not be possible to influence costs at the manufacturing stage because the costs are locked-in at that time. Diff: 2 Type: ES CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-4
43) What is the primary reason a firm would adopt target costing? Answer: The primary reason a firm would adopt target costing is to reduce costs. Its unique approach is to design costs out of products during the design stage in the product life cycle. Many firms are adopting this approach when they cannot reduce costs further using traditional costing methods, which focus on cost reductions in manufacturing. Diff: 2 Type: ES CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-4
44) In target costing, what are at least two techniques used to achieve target costing goals? Answer: In target costing, techniques used to achieve target-costing goals include value engineering, cross-functional teams, and value analysis. Diff: 2 Type: ES CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-4
45) Describe the five steps in developing target pricing and target costs. Answer: Step 1: Develop a product that satisfies the needs of potential customers. Step 2: Choose a target price. Step 3: Derive a target cost per unit by subtracting target operating income per unit from the target price. Step 4: Perform cost analysis. Step 5: Perform value engineering to achieve target cost. Diff: 2 Type: ES CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-4
13.5 Price products using the cost-plus approach. 1) Including unit fixed costs for pricing is often used because of its simplicity. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-5
2) The target rate of return on investment is the target operating income that an organization must earn divided by invested capital. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-5
3) Survey evidence suggest that most companies use which type of cost when making pricing decisions? A) cost-plus B) absorption product costing C) variable product costs D) variable manufacturing costs E) manufacturing function costs Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-5
Use the information below to answer the following question(s). Pershing Company budgeted the following costs for the production of its one and only product, blades, for the next fiscal year: Direct materials Direct labour Factory overhead: Variable Fixed Selling and administrative: Variable Fixed Total costs
$187,500 130,000 140,000 107,500 60,000 80,000 $705,000
Pershing has a target profit of $150,000. 4) What is the target profit percentage as a percentage of total manufacturing costs? A) 61% B) 21% C) 47% D) 27% E) 35% Answer: D Explanation: ($187,500 + $130,000 + $140,000 + $107,500) = 565,000 $150,000 ÷ $565,000 = 26.5 percent Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-5
5) If total invested capital is $1,000,000, what is the company's target rate of return on investment? A) 15 % B) 20 % C) 25 % D) 30 % E) 35 % Answer: A Explanation: $150,000 ÷ 1,000,000 = 15% Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-5
6) The target profit percentage for setting prices as a percentage of total variable costs would be A) 47%. B) 33%. C) 29%. D) 38%. E) 61%. Answer: C Explanation: $150,000/($187,500 + $130,000 + $140,000 + $60,000) = 29% Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-5
7) The target profit percentage for setting prices as a percentage of total costs would be A) 61%. B) 21%. C) 47%. D) 27%. E) 35%. Answer: B Explanation: $150,000/$705,000 = 21.3 percent Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-5
Use the information below to answer the following question(s). Patton Company budgeted the following costs for the production of its one and only product, bells, for the next fiscal year: Direct materials Direct labour Factory overhead: Variable Fixed Selling and administrative: Variable Fixed Total costs
$215,000 115,000 80,000 280,000 85,000 70,000 $845,000
Patton has a target profit of $750,000. 8) What is the target profit percentage as a percentage of total manufacturing costs? A) 109% B) 92% C) 122% D) 227% E) 208% Answer: A Explanation: ($215,000 + $115,000 + $80,000 + $280,000) = $690,000 $750,000 ÷ $690,000 = 109% Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 12-4; 12-5
9) If total invested capital is $3,000,000, what is the company's target rate of return on investment? A) 15% B) 20% C) 25% D) 30% E) 35% Answer: C Explanation: $750,000 ÷ 3,000,000 = 25% Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-5
10) The target profit percentage for setting prices as a percentage of total variable costs would be ________. A) 188% B) 227% C) 63% D) 152% E) 517% Answer: D Explanation: ($215,000 + $115,000 + $80,000 + $85,000) = $495,000 $750,000 ÷ $495,000 = 152% Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-5
11) The target profit percentage for setting prices as a percentage of total costs would be A) 99%. B) 89%. C) 113%. D) 109%. E) 158%. Answer: B Explanation: $750,000/$845,000 = 89% Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-5
12) Which of the following best describes the cost-plus pricing approach? A) Cost base + Markup component = Prospective selling price B) Prospective selling price + Cost base = Markup component C) Cost base + Gross margin = Prospective selling price D) Variable cost + Fixed cost + Contribution margin = Prospective selling price E) Cost base plus markup ÷ 100% = selling profit percentage Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-5
13) The current selling price for the Moon, a mid-sized car, is $19,000. For next year, it is anticipated that Moon will have a $12,000 cost base. What is its prospective selling price, using cost-plus pricing, if the company desires a markup component of 15 percent? A) $10,200 B) $13,800 C) $19,000 D) $30,000 E) $31,000 Answer: B Explanation: $12,000 + ($12,000 × 0.15) = $13,800 Diff: 1 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 12-5
14) Oxford Company has invested $1,000,000 in a plant to make gas pumps for service stations. The average long-run income desired from the plant is $150,000 annually. The annual cost base for each pump is $1,000. What should the prospective selling price be for each pump if the company uses a target return on investment as the markup base? A) $1,150 B) $2,500 C) $16,000 D) $17,000 E) $17,500 Answer: A Explanation: Target return = $150,000/$1,000,000 = 0.15 Prospective selling price = $1,000 + ($1,000 × 0.15) = $1,150 Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-5
15) A product's markup percentage would need to cover fixed manufacturing costs if ________. A) the company has only fixed manufacturing costs B) the company wants to break-even during the fiscal period C) the company wants to make a profit D) the cost base does not include fixed manufacturing costs E) the cost base includes fixed manufacturing costs as well as variable costs Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-5
16) Galaxy Petroleum Company is considering pricing its 5,000 litre petroleum tanks using either variable manufacturing or full product costs as the base. The variable cost base provides a prospective price of $2,800 and the full cost base provides a prospective price of $2,850. The difference between the two prices is ________. A) the amount of profit to be included B) because the variable cost base must estimate all fixed costs, other variable costs, and desired profit, while the full cost base must estimate only the desired profit C) known as price discrimination D) caused by the inability of most companies to estimate fixed cost per unit with any degree of reliability E) known as peak pricing Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-5
Use the information below to answer the following question(s). Chao Products currently sells small boats for $360. It has costs currently assigned to it of $280. A competitor is bringing a new small boat to market that will sell for $320. Management believes it must lower the price to $320 to compete in the market for small boats. Marketing believes that the new price will cause sales to increase by 10 percent, even with a new competitor in the market. Chao's sales are currently 100,000 per year. 17) What is the target cost if target profit is 25 percent of the competitor's selling price? A) $75 B) $90 C) $240 D) $270 E) $280 Answer: C Explanation: $320 - $320(0.25) = $240 Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-5
18) Under cost-plus pricing, what is the required selling price to achieve a 15% markup? A) $285 B) $6300 C) $310 D) $315 E) $322 Answer: E Explanation: 280 × 1.15 = $322 Diff: 1 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-5
19) What is Chao's target selling price if costs cannot be reduced and the target profit is changed to cost plus 20 percent? A) $280.00 B) $336.00 C) $350.00 D) $353.33 E) $360.00 Answer: C Explanation: $280/0.80 = $350 Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-5
20) What is Chao's target cost if the company wants to maintain its same income level, and marketing is correct? A) $280.00 B) $270.00 C) $252.00 D) $236.27 E) $247.27 Answer: E Explanation: Current income = 100,000 × ($360 - $280) = $8,000,000 Target cost y: $8,000,000 = (110,000 × $320) - 110,000y y = $27,200,000/110,000 y = $247.27 Diff: 3 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-5
21) Bolin Inc. has budgeted sales of $150,000 with the following budgeted costs: Direct materials $31,500 Direct labour 20,500 Factory overhead: Variable 18,500 Fixed 28,000 Selling and administrative expenses: Variable 12,000 Fixed 16,000 Compute the target profit percentage for setting prices as a percentage of: a. Total costs b. Total variable costs c. Variable manufacturing costs d. Total manufacturing costs Answer: a. $31,500 + $20,500 + $18,500 + $28,000 + $12,000 + $16,000 = $126,500 ($150,000 - $126,500)/$126,500 = 19 percent b. $31,500 + $20,500 + $18,500 + $12,000 = $82,500 ($150,000 - $82,500)/$82,500 = 82 percent c. $31,500 + $20,500 + $18,500 = $70,500 ($150,000 - $70,500)/$70,500 = 113 percent d. $31,500 + $20,500 + $18,500 + $28,000 = $98,500 ($150,000 - $98,500)/$98,500 = 52 percent Diff: 2 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 12-5
22) Dandan Company has budgeted sales of $300,000 with the following budgeted costs: Direct materials Direct manufacturing labour Factory overhead: Variable Fixed Selling and administrative expenses: Variable Fixed
$60,000 40,000 30,000 50,000 20,000 30,000
Compute the average markup percentage for setting prices as a percentage of: a. The full cost of the product b. The variable cost of the product c. Variable manufacturing costs d. Total manufacturing costs Answer: a. $60,000 + $40,000 + $30,000 + $50,000 + $20,000 + $30,000 = $230,000 ($300,000 - $230,000)/$230,000 = 30.4% b.
$60,000 + $40,000 + $30,000 + $20,000 = $150,000 ($300,000 - $150,000)/$150,000 = 100%
c.
$60,000 + $40,000 + $30,000 = $130,000 ($300,000 - $130,000)/$130,000 = 130.8%
d.
$60,000 + $40,000 + $30,000 + $50,000 = $180,000 ($300,000 - $180,000)/$180,000 = 66.7%
Diff: 2 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-5
23) Willington Company has budgeted sales of $487,500 with the following budgeted costs: Direct materials Direct labour Factory overhead: Variable Fixed Selling and administrative expenses: Variable Fixed
$105,000 82,500 $60,000 67,500 $45,000 62,500
Compute the target profit percentage for setting prices as a percentage of: a. Total manufacturing costs b. Total variable costs c. Total costs d. Variable manufacturing costs Answer: a. $105,000 + $82,500 + $60,000 + $67,500 = $315,000 ($487,500 - $315,000)/$315,000 = 55 percent b.
$105,000 + $82,500 + $60,000 + $45,000 = $292,500 ($487,500 - $292,500)/$292,500 = 67 percent
c.
$105,000 + $82,500 + $60,000 + $67,500 + $45,000 + $62,500 = $422,500 ($487,500 - $422,500)/$422,500 = 15 percent
d. $105,000 + $82,500 + $60,000 = $247,500 ($487,500 - $247,500)/$247,500 = 97 percent Diff: 2 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-5
24) Timothy Company has budgeted sales of $780,000 with the following budgeted costs: Direct materials Direct manufacturing labour Factory overhead: Variable Fixed Selling and administrative expenses: Variable Fixed
$168,000 132,000 96,000 108,000 72,000 100,000
Compute the average markup percentage for setting prices as a percentage of: a. Total manufacturing costs b. The variable cost of the product c. The full cost of the product d. Variable manufacturing costs Answer: a. $168,000 + $132,000 + $96,000 + $108,000 = $504,000 ($780,000 - $504,000)/$504,000 = 54.8% b.
$168,000 + $132,000 + $96,000 + $72,000 = $468,000 ($780,000 - $468,000)/$468,000 = 66.7%
c.
$168,000 + $132,000 + $96,000 + $108,000 + $72,000 + $100,000 = $676,000 ($780,000 - $676,000)/$676,000 = 15.4%
d. $168,000 + $132,000 + $96,000 = $396,000 ($780,000 - $396,000)/$396,000 = 97% Diff: 2 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-5
25) For the current year, Babcock Ltd., forecast sales of 42,000 units and production of 40,000 units. Other budget information for the year included: Direct manufacturing labour Variable manufacturing overhead Direct materials Variable selling expenses Fixed administrative expenses Fixed manufacturing overhead
$171,900 83,500 52,300 23,000 190,000 240,000
The standard costs remained the same as in the previous year. Babcock Ltd. is considering various cost bases. The company management require a 15% return on an investment base of $2,500,000; and, wants this cost built into all cost base options. Required: a. Compute the cost-plus price per unit using direct costing. b. Compute the cost-plus price per unit using absorption costing. c. Compute the cost-plus price per unit using the full product cost.
Answer: ROI required = 15% × $2,500,000 = $375,000 a.
cost-plus price using direct costing.
Direct manufacturing labour Variable manufacturing overhead Direct materials Required ROI
b.
cost-plus price using absorption costing.
Direct manufacturing labour Variable manufacturing overhead Direct materials Fixed manufacturing overhead Required ROI
c.
$ 171,900 83,500 52,300 375,000 $ 682,700/40,000 = $17.07 per unit
$171,900 83,500 52,300 240,000 375,000 $922,700/40,000 = $23.07 per unit
cost-plus price using the full product cost.
Direct manufacturing labour Variable manufacturing overhead Direct materials Variable selling expenses Fixed administrative expenses Fixed manufacturing overhead Required ROI
$171,900 83,500 52,300 23,000 190,000 240,000 375,000 $1,135,700/40,000 = $28.39 per unit
Diff: 2 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-5
26) For the current year, Sally Anne Ltd., forecast sales of 32,000 units and production of 30,000 units. Other budget information for the year included: Direct manufacturing labour Variable manufacturing overhead Direct materials Variable selling expenses Fixed administrative expenses Fixed manufacturing overhead
$171,900 83,500 52,300 23,000 190,000 240,000
The standard costs remained the same as in the previous year. Sally Anne Ltd. is considering various cost bases. The company management require a 15% return on an investment base of $2,500,000; and, wants this cost built into all cost base options. Required: a. Compute the cost-plus price per unit using direct costing. b. Compute the cost-plus price per unit using absorption costing. c. Compute the cost-plus price per unit using the full product cost.
Answer: ROI required = 15% × $2,500,000 = $375,000 a.
cost-plus price using direct costing.
Direct manufacturing labour Variable manufacturing overhead Direct materials Required ROI
b.
cost-plus price using absorption costing.
Direct manufacturing labour Variable manufacturing overhead Direct materials Fixed manufacturing overhead Required ROI
c.
$ 171,900 83,500 52,300 375,000 $ 682,700/30,000 = $22.76 per unit
$171,900 83,500 52,300 240,000 375,000 $922,700/30,000 = $30.76 per unit
cost-plus price using the full product cost.
Direct manufacturing labour Variable manufacturing overhead Direct materials Variable selling expenses Fixed administrative expenses Fixed manufacturing overhead Required ROI
$171,900 83,500 52,300 23,000 190,000 240,000 375,000 $1,135,700/30,000 = $37.86 per unit
Diff: 2 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-5
27) List three advantages for including unitized fixed costs for pricing decisions. Answer: 1. Full product cost recovery 2. Price stability 3. Simplicity Diff: 2 Type: ES CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-5
13.6 Use life-cycle budgeting and costing when making pricing decisions.
1) A business that engages in predatory pricing violates Canadian law. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-6
2) Dumping occurs when a company is trying to get rid of out-of-style products and substantially reduces their prices. Answer: FALSE Explanation: Dumping occurs when a non-Canadian company sells goods in Canada at a price below the market value in the home country; receives a government subsidy; and, the action materially injures or threatens to materially injure an industry in Canada Diff: 1 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-6
3) Collusive pricing occurs when companies in an industry conspire in their pricing and output decisions to achieve a price above the competitive price. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-6
4) Peak-load pricing focuses on direct costs when setting prices for peak and nonpeak periods. Answer: FALSE Explanation: Peak load pricing is the practice of charging a higher price for the same product or service when demand approaches physical capacity limits. Diff: 1 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-6
5) Price discrimination is the practice of charging some customers a higher price than is charged to other customers. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-6
6) Life-cycle budgeting is necessary before a company can determine the product life cycle of a given product. Answer: FALSE Explanation: Determining the life cycle must come before budgeting. Diff: 2 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-6
7) Developing life-cycle reports for each product requires tracking both costs and revenues on a productby-product basis over a number of accounting periods. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-6
8) Customer life-cycle costs focus on the total costs to a customer of acquiring and using a product or service until it is replaced. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-6
9) Life-cycle costing, from an environmental sustainability perspective, considers the end of a products life-cycle to include disposal and recycling costs. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-6
10) Predatory pricing is a type of price discrimination that A) allows prices to be cut to the level of variable costs. B) is required when a company declares bankruptcy so that it can sell its remaining goods quickly. C) is used in the food industry for perishable goods. D) deliberately sets prices very low, sometimes even below costs, so as to minimize competition. E) actually ensures more supply access as high prices reduce demand. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-6
11) To minimize the chances of violating pricing laws, a company should A) maintain records that permit easy compilation of variable costs. B) use a variable cost plus markup method of pricing. C) keep a record of the upstream costs associated with low cost products. D) use dumping only when a product is at the end of its life-cycle. E) ensure that prices do not exceed variable costs plus fixed costs. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-6
12) Collusive pricing occurs when A) a company wants two products to sell for the same, or almost the same, amount. B) a company wants a product to sell for the same as a competitor's product. C) two or more companies agree to sell a product at a price higher than should be expected. D) competitors are part of the same large parent organization. E) one large company dominates an industry. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-6
13) Price discrimination to customers is the practice of A) setting different prices for different products. B) charging different prices for quantity amounts. C) using variable costing for some products and full costing for other products when setting prices. D) charging different prices to different customers or clients for the same products or services. E) changing prices frequently. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-6
14) An airline charges business and pleasure travellers different amounts. This is an example of A) customer-preference pricing. B) high-load pricing. C) peak-load pricing. D) price discrimination. E) off-load pricing. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-6
15) Life-cycle budgeting differs from life-cycle costing in that A) budgeting includes revenues and costs, and costing includes only the costs. B) budgeting includes all products of a company and costing is only for individual products. C) budgeting is for the development and production of a product while costing is for only the production activities. D) budgeting is for one accounting period and is a total dollar concept while costing is a per unit concept. E) budgeting includes revenues, and costing includes only the costs. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-6
Use the information below to answer the following question(s). Fanshawe Inc. is in the process of evaluating its new products. A new signal receiver has two production runs each year, each with $20,000 in setup costs. The new receiver incurred $60,000 in development costs and is expected to be produced for three years. The direct costs of producing the receivers are $80,000 per run of 5,000 receivers. Indirect manufacturing costs charged to each run are $90,000. Destination charges for each receiver average $2.00. Customer service expenses average $0.40 per receiver. The receivers are going to sell for $50 the first year and increase by $6 each year thereafter. Sales units equal production units each year. 16) What is the Fanshawe Inc. life cycle budgeted revenue? A) $500,000 B) $560,000 C) $1,620,000 D) $1,680,000 E) $1,500,000 Answer: D Explanation: First year 10,000 × $50 $500,000 Second year 10,000 × $56 560,000 Third year 10,000 × $62 620,000 Total $1,680,000 Diff: 1 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-6
17) What are the Fanshawe Inc. life cycle budgeted costs? A) $424,000 B) $1,272,000 C) $639,000 D) $1,392,000 E) $298,000 Answer: B Explanation: Development costs $60,000 Setup costs (2 × $20,000) × 3 120,000 Direct costs (2 × $80,000) × 3 480,000 Indirect manufacturing costs (2 × $90,000) × 3 540,000 Destination costs ($2.00 × 10,000) × 3 = 60,000 Customer service ($0.40 × 10,000) × 3 12,000 $1,272,000 Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-6
18) What is the Fanshawe Inc. life cycle operating income? A) $408,000 B) $76,000 C) $388,000 D) $348,000 E) $288,000 Answer: A Explanation: First year 10,000 × $50 $500,000 Second year 10,000 × $56 560,000 Third year 10,000 × $62 620,000 Total $1,680,000 Development costs Setup costs (2 × $20,000) × 3 Direct costs (2 × $80,000) × 3 Indirect manufacturing costs (2 × $90,000) × 3 Destination costs ($2.00 × 10,000) × 3 Customer service ($0.40 × 10,000) × 3
Life-cycle operating income
$60,000 120,000 480,000 540,000 60,000 12,000 $1,272,000 $408,000
Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-6
Use the information below to answer the following question(s). ABC Associates is in the process of evaluating its new client services for the business consulting division. Estate Planning, a new service, incurred $600,000 in development costs and employee training. The direct costs of providing this service, which is all labour, averages $100 per hour. Other costs for this service are estimated at $2,000,000 per year. The current program for estate planning is expected to last for two years. At that time, a new law will be in place which will require new operating guidelines for tax consulting. Customer service expenses average $400 per client, with each job lasting an average of 400 hours. The current staff expects to bill 40,000 hours for each of the two years the program is in effect. Billing averages $140 per hour. 19) What is the ABC Associates' life-cycle budgeted revenue? A) $5,600,000 B) $8,000,000 C) $11,200,000 D) $22,400,000 E) $28,500,000 Answer: C Explanation: First year 40,000 × $140 $5,600,000 Second year 40,000 × $140 5,600,000 Total $11,200,000 Diff: 1 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-6
20) What is the ABC Associates' life-cycle operating income (loss)? A) $(1,480,000) B) $(1,440,000) C) $(2,080,000) D) $11,200,000 E) $5,600,000 Answer: A Explanation: Year 1 Year 2 Totals Life-cycle revenue $5,600,000 $5,600,000 $11,200,000 Life-cycle costs: Development $600,000 $600,000 Direct costs 4,000,000 $4,000,000 8,000,000 Indirect costs 2,000,000 2,000,000 4,000,000 Customer service 40,000 40,000 80,000 Total costs $6,640,000 $6,040,000 $12,680,000 Life-cycle operating loss $(1,480,000) Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-6
21) Knowledge Transfer Associates is in the process of evaluating its new client services for the business systems consulting division. ∙ Server Planning, a new service, incurred $250,000 in development costs. ∙ The direct costs of providing the service, which is all labour, averages $50 per hour. ∙ Other costs for this service are estimated at $300,000 per year. ∙ The current program for server planning is expected to last for two years. At that time, expected new operating systems are likely to make the service non viable. ∙ Customer service expenses average $250 per client, with each job lasting an average of 40 hours. The current staff expects to bill 15,000 hours for each of the two years the program is in effect. Billing averages $90 per hour. What is the estimated life-cycle operating income for both years combined? A) $206,250 B) $162,500 C) $(43,750) D) $(87,500) E) $412,500 Answer: B Explanation: Year 1 Year 2 Totals Life-cycle revenue $1,350,000 $1,350,000 $2,700,000 Life-cycle costs: Development 250,000 250,000 Direct costs 750,000 750,000 1,500,000 Indirect costs 300,000 300,000 600,000 Customer service 93,750 93,750 187,500 Total costs Life-cycle operating income
$1,393,750
$1,143,750
$2,537,500 $162,500
Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-6
22) The life-cycle reporting process A) is the same as traditional accounting reporting. B) matches the company's normal fiscal year reporting. C) usually includes several accounting reporting periods. D) tracks costs, but not revenues, from the beginning to the end of a product's or service's life. E) is used only when yearly costs are not definable. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-6
23) Which of the following is TRUE concerning life cycle budgeting? A) It obscures revenues in minor business functions. B) It highlights only costs for the life cycle. C) It has a calendar year focus. D) It assumes that selling price is the same over the life cycle of the product. E) It helps in setting prices to cover costs in all business functions. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-6
24) Which of the following is NOT a benefit of life cycle reporting? A) The full set of revenues associated with each product becomes visible. B) The full set of costs associated with each product becomes visible. C) The differences between products in the percentage of their total costs incurred at earl stages in the life cycle are highlighted. D) Upstream costs, such as R & D, are the only costs that need to be added in when a life cycle report is complete. E) Interrelationships among business function cost categories are highlighted. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-6
25) Which of the following is TRUE of products with a long life cycle? A) Their costs are more difficult to manage, early in their life cycle. B) It is not as important to have accurate predictions of revenues. C) They highlight the interrelationships with other parts of the life cycle. D) They are highly visible and therefore must be carefully controlled. E) A smaller fraction of the total life costs are actually incurred at the time when costs are locked-in. Answer: E Diff: 3 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-6
26) Customer life-cycle costs A) are the costs the selling company incurs to satisfy the customer. B) are the costs to the customer of buying and using a product until it is replaced. C) are the same as the selling life-cycle prices. D) are the replacement costs of using a product or service. E) focus on marketing costs. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-6
27) Dumping is closely related to predatory pricing and occurs when A) companies get rid of obsolete inventory at prices below cost. B) a business drops a large order at a customer location at a lower price if the customer accepts the order. C) a Canadian company sells its products in another province below the variable cost. D) a foreign company sells goods in Canada at a price below the market value in the home country. E) a Canadian or foreign company sells its products below the variable cost. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-6
28) Long Life Products is in the process of evaluating its new cosmetic products. One new product, Nice Hair, has one production run each month with $8,000 in setup costs. Nice Hair incurred $20,000 in development costs and is expected to be produced for three years. The direct costs of producing Nice Hair are $28,000 per run of 15,000 bottles. Indirect manufacturing costs charged to each run are $44,000. Destination charges for each batch average $9,000. Nice Hair sells for $10 in Canada and $20 in all other countries. Sales are one-third domestic and two-thirds exported. Assume everything produced is sold. Required: What is the life-cycle budgeted operating income? Answer: Domestic ($10 × 12 months × 15,000 × 3 yrs. × 1/3) Export ($20 × 12 months × 15,000 × 3 yrs. × 2/3) Total life-cycle budgeted revenue
$1,800,000 7,200,000 $9,000,000
Life-cycle costs: Development Setup (12 × $8,000) × 3 Direct (12 × $28,000) × 3 Indirect (12 × $44,000) × 3 Destination (12 × $9,000) × 3 Total life-cycle budgeted costs
3,224,000
$20,000 288,000 1,008,000 1,584,000 324,000
Life-cycle budgeted operating income
$5,776,000
Diff: 2 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-6
29) Long and Short are starting a new business venture and are in the process of evaluating their product lines. One new product, hand-made wooden tables, has incurred $30,000 in development costs. These costs are to be amortized over a three-year period, the expected product life cycle. The direct costs of each table averages $90. Other costs for making the tables are estimated at $100,000 per year. The current sales program for tables is expected to change every six months. At that time, a new pattern will be put in place with $7,000 of setup costs. Each table requires 12 labour hours and 2 machine hours. Current annual sales are expected to be 2,000 units of each table at $140 each. Customer service expenses average $10 per table. Required: What is the life-cycle operating income? Answer: Revenue (2,000 × $140 × 3) Development costs $30,000 Direct costs (2,000 × $90 × 3) 540,000 Other costs ($100,000 × 3) 300,000 Setup ($7,000 × 2 × 3) 42,000 Customer service (2,000 × $10 × 3) 60,000 Life cycle Operating income/(loss)
$840,000
972,000 $(132,000)
Diff: 2 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-6
30) Apple World Inc. develops apps for sporting enthusiasts. They have decided to create a new app for golfers that they are calling Slice. The total life cycle of Slice is expected to be three years, with the design phase taking the first year. Following are the estimated costs for the three years:
Year 1 Years 2-3
R & D Costs Design Costs Production Marketing Customer Service
Fixed Costs $ 225,000 175,000
Variable Cost per Unit
$0.25 per app $0.10 per app
360,000 $ 760,000 The management team is considering two pricing strategies: 1. Sell the app for $1.00. At this price, they expect to sell 1,500,000 apps per year. 2. Sell the app in year two when it first comes out at $1.50; expected demand is 1,000,000. Then, reduce the cost in year two to $0.50; demand is expected to be 3,500,000. Required: Which pricing strategy is more profitable over the product's life cycle? Answer: 1. Sell the app for $1.00 (($1.00 - $0.25 - $0.10) × 3,000,000) - $760,000 = $1,190,000 2. Sell the app for $1.50 in year 1 and $0.50 in year 2 = [(($1.50 - $0.25 - $0.10) × 1,000,000) + (($0.50 - $0.25 - $0.10) × 3,500,000)] - $760,000 = $915,000 Diff: 2 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-6
31) Hudson Company is in the process of evaluating a new part using the following information. ∙ Part SLC2002 has one production run each month, each with $16,000 in setup costs. ∙ Part SLC2002 incurred $40,000 in development costs and is expected to be produced over the next three years. ∙ Direct costs of producing Part SLC2002 are $56,000 per run of 24,000 parts each. ∙ Indirect manufacturing costs charged to each run are $88,000. ∙ Destination charges for each run average $18,000. ∙ Part SLC2002 is selling for $12.50 in Canada and $25 in all other countries. Sales are one-third domestic and two-thirds exported. ∙ Sales units equal production units each year. Required: a. What are the estimated life-cycle revenues? b. What is the estimated life-cycle operating income if the product life cycle is one year? Answer: a. Domestic ($12.50 × 12 months × 24,000 × 3 yrs. × 1/3) $3,600,000 Export ($25 × 12 months × 24,000 × 3 yrs. × 2/3) 14,400,000 Estimated life-cycle revenues
$18,000,000
b. Sales Domestic ($12.50 × 12 months × 24,000 × 1/3) Export ($25 × 12 months × 24,000 × 2/3)
$1,200,000 4,800,000
Total Sales Costs: Development costs $40,000 Setup costs (12 × $16,000) Direct manufacturing costs (12 × $56,000) Indirect manufacturing costs (12 × $88,000) Destination costs (12 × $18,000) Estimated life-cycle operating income, first year
$6,000,000
192,000 672,000 1,056,000 216,000
2,176,000 $3,824,000
Diff: 2 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-6
32) Stone and Sandy are starting a new business venture and are in the process of evaluating their product lines. Information for one new product, hand-made lamps, is as follows: ∙ Every six months, a new lamp pattern will be put into production. Each new pattern will require $11,200 in setup costs. ∙ The lamp product line incurred $48,000 in development costs and is expected to be produced over the next six years. ∙ Direct costs of producing the lamps average $144 each. Each lamp requires 12 labour hours and 2 machine hours. ∙ Indirect manufacturing costs are estimated at $160,000 per year. ∙ Customer service expenses average $16 per lamp. ∙ Current sales are expected to be 2,000 units of each lamp pattern. Each lamp sells for $224. ∙ Sales units equal production units each year. Required: a. What are the estimated life-cycle revenues? b. What is the estimated life-cycle operating income if the product life cycle is one year? Answer: a. Estimated life-cycle revenues: (2,000 × 2 patterns per year × $224 per lamp) $896,000 × 6 years $5,376,000 b. Annual revenues (2,000 × $224 × 2) $896,000 Setup costs ($11,200 × 2) Development costs Direct manufacturing costs (2,000 × $144 × 2) Indirect manufacturing costs Customer service costs ($16 × 2,000 lamps × 2) Estimated life-cycle operating income for the first year
$22,400 48,000 576,000 160,000 64,000
870,400 $25,600
Diff: 2 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-6
33) Beaverbrook, Inc., is in the process of evaluating a new product using the following information: ∙ A new transformer has two production runs each year, each with $10,000 in setup costs. ∙ The new transformer incurred $30,000 in development costs and is expected to be produced over the next three years. ∙ Direct costs of producing the transformers are $40,000 per run of 5,000 transformers each. ∙ Indirect manufacturing costs charged to each run are $45,000. ∙ Destination charges for each transformer average $1.00. ∙ Customer service expenses average $0.20 per transformer. ∙ The transformers are selling for $25 the first year and will increase by $3 each year thereafter. ∙ Sales units equal production units each year. Required: a. What are the estimated life-cycle revenues? b. What is the estimated life-cycle operating income if the product life cycle is one year? Answer: a. Life-cycle revenues: First year (5,000 × 2 runs × $25) Second year (5,000 × 2 × $28) Third year (5,000 × 2 × $31) Total b.
$250,000 280,000 310,000 $840,000
Life-cycle operating income for year one:
Sales (5,000 units × 2 runs × $25) Development costs Setup costs (2 × $10,000) Direct manufacturing costs (2 × $40,000) Indirect manufacturing costs (2 × $45,000) Destination charges ($1.00 × 10,000) Customer service ($0.20 × 10,000)
$250,000 $30,000 20,000 80,000 90,000 10,000 2,000
Estimated life-cycle operating income for the first year:
232,000 $ 18,000
Diff: 2 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-6
34) Grace Greeting Cards Incorporated is starting a new business venture and are in the process of evaluating its product lines. Information for one new product, traditional parchment grade cards, is as follows: ∙ Sixteen times each year, a new card design will be put into production. Each new design will require $600 in setup costs. ∙ The parchment grade card product line incurred $75,000 in development costs and is expected to be produced over the next four years. ∙ Direct costs of producing the designs average $0.50 each. ∙ Indirect manufacturing costs are estimated at $50,000 per year. ∙ Customer service expenses average $0.10 per card. ∙ Current sales are expected to be 2,500 units of each card design. Each card sells for $3.50. ∙ Sales units equal production units each year. Required: a. What are the estimated life-cycle revenues? b. What is the estimated life-cycle operating income if the product life cycle is one year? c. What is the estimated life-cycle operating income per year for the years after the first year if all of the development costs are charged to the first year? d. What is the total estimated life-cycle operating income?
Answer: a. Estimated life-cycle revenues: (2,500 × 16 designs per year × $3.50 per card sold)
$140,000 × 4 years $560,000
b. Annual revenues (2,500 × $3.50 × 16) Development costs Setup costs ($600 × 16) Direct manufacturing costs (2,500 × $0.50 × 16) Indirect manufacturing costs Customer service costs ($0.10 × 2,500 cards × 16)
$140,000 $75,000 9,600 20,000 50,000 4,000
158,600
Estimated life-cycle operating income (loss) for the first year
$(18,600)
c. Annual revenues (2,500 × $3.50 × 16)
$140,000
Setup costs ($600 × 16) Direct manufacturing costs (2,500 × $0.50 × 16) Indirect manufacturing costs Customer service costs ($0.10 × 2,500 cards × 16)
$9,600 20,000 50,000 4,000
83,600
Estimated life-cycle operating income (loss) per year
$56,400
d. Estimated life-cycle operating income for all four years (3 × $56,400 - $18,600)
$150,600
Diff: 2 Type: SA CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-6
35) Ski Vallet provides materials that let people teach themselves how to snow ski. It has six different skill-level programs. Each one includes visual and audio learning aids along with a workbook that can be submitted to the company for grading and evaluation purposes, if the person so desires. The accounting system of Ski Vallet is very traditional in its reporting functions with the calendar year being the company's fiscal year. It does include an abundance of information that can be used for various reporting purposes. The company has found that any new idea soon runs its course with an effective life of about three years. Therefore, the company is always in the development stage of some new program. Program development requires experts in the area to provide the know-how of the item being developed and a development team that puts together the video, audio, and workbook materials. The actual costs of reproducing the packages is relatively cheap when compared to the development costs. Required: How might product-life-cycle reporting aid the company in improving its overall operations? Answer: Because the product cycle for Ski Vallet extends over several traditional accounting periods, it is critical for the company to consider a reporting concept that evaluates each one of its products during its entire life cycle. Reporting procedures that highlight an entire life cycle can include items for overall profitability, and which products might be repeated in a few years. With a large portion of their expenses in the development area, life cycle reporting can assist in predicting the sales needs for the entire life of a product. It is probably more important for the company to evaluate itself over a product basis rather than year-to-year. Life cycle reporting would allow the company to compare products to each other rather than just comparing one year to the next. Diff: 2 Type: ES CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 13-6
36) What advice would you give a company to avoid the appearance of predatory pricing? Answer: Useful advice for a company to avoid the appearance of predatory pricing would be (1) Collect data and keep detailed records of variable costs for all value chain functions; and (2) Review all proposed prices below variable cost in advance, with a presumption that claims of predatory intent would occur. Diff: 2 Type: ES CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 13-6
37) Under section 50(1) of the Competition Act companies cannot engage in price discrimination between two customers with the intent to reduce or obstruct competition among customers. Provide the four key elements of the price discrimination laws in Canada. Answer: 1. They apply to manufacturers, not service providers. 2. Different pricing to different customers is not an offence unless there is intent to obstruct competition among customers. 3. Different pricing to different customers on the basis of different costs of production is not an offence. 4. Illegality hinges on the intent to obstruct or destroy competition when a manufacturer engages in price discrimination. Diff: 3 Type: ES CPA Competencies: Chapter 13 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 13-6
Cost Accounting: A Managerial Emphasis - Cdn. Ed., 9e (Datar) Chapter 14 Strategy, Balanced Scorecard, and Profitability Analysis 14.1 Explain how the relative strength of competitive forces help managers identify strategic alternatives. 1) Strategies have been classified in many different ways, but what is common is to set the business within its external environment. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-1
2) Cost leadership is an organization's ability to offer products or services that are perceived by its own customers as being superior and unique relative to those of its competitors. Answer: FALSE Explanation: Price differentiation is an organization's ability to offer products or services that are perceived by its own customers as being superior and unique relative to those of its competitors. Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-1
3) Which of the following statements best defines strategy? A) Strategy describes how an organization can create value for its customers while differentiating itself from its competitors. B) Strategy is an organization's ability to achieve lower costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost control. C) Strategy is an organization's ability to offer products or services its customers perceive to be superior and unique relative to the products or services of its competitors. D) Strategy describes how an organization motivates its employees to work for more hours without any increase in their wages. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-1
4) Which of the following statements best defines a product differentiation strategy? A) It describes how an organization can increase its customer base by differentiating its product prices from its competitors. B) It is an organization's ability to achieve lower costs relative to its competitors through productivity and efficiency improvements, elimination of waste, and tight cost control. C) It describes how an organization can decrease product prices by differentiating its raw materials from its competitors. D) It is an organization's ability to offer products or services its customers perceive to be superior and unique relative to the products or services of its competitors. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-1
5) ________ has/have been classified in many ways, but what is common is to set the business within its external environment. A) Strategies B) Planning C) Competitors D) Bargaining power of input suppliers E) Cost Leadership Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-1
6) Which of the following is NOT a force that shapes an organization's competitive environment? A) competitors B) equivalent products C) bargaining power of customers D) government regulation E) potential entrants into the market Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-1
7) According to Michael Porter which of the following is a force that shapes an organization's competitive environment? A) investors B) potential entrants into the market C) lenders D) research and development E) bankers Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-1
8) ________ is an organization's ability to offer products or services that are perceived by its customers as being superior and unique relative to those of its competitors. A) Strategy B) Product differentiation C) Cost leadership D) The balanced scorecard E) Cost differentiation Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-1
9) ________ is an organization's ability to achieve low costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost control. A) Strategy B) Product differentiation C) Cost leadership D) The balanced scorecard E) Product leadership Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-1
10) An organization that is using the product differentiation approach would A) focus on tight cost control. B) carefully cultivate its brands. C) provide products that are similar to competitors. D) invest more in productivity enhancements than R&D. E) recognize that demand is more price sensitive than if using a cost leadership approach. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-1
11) An organization that is using the cost leadership approach would A) incur costs for innovative R&D. B) provide products at a higher price but with lower costs than its competitors. C) focus on productivity through efficiency improvements. D) bring products to market rapidly. E) use a cost plus rather than a target pricing policy. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-1
Answer the following questions using the information below: Stewart Corporation plans to grow by offering a sound system, the SS3000, that is superior and unique from the competition. Stewart believes that putting additional resources into R&D and staying ahead of the competition with technological innovations is critical to implementing its strategy. 12) Stewart's strategy is A) product differentiation. B) downsizing. C) reengineering. D) cost leadership. E) salability. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-1
13) Identify and explain Porter's Five Forces model. Answer: Porter identified five competitive forces that all corporations face and argued that understanding each of these five forces was key to successful strategic decisions. Understanding the five forces will determine the level of competitive rivalry in the business environment and enable allow companies to best exploit their core competencies to outperform the competition. The five forces are: 1. Threat of existing competitors. Is the environment highly competitive? This tends to lower revenues. 2. Threat of potential new entrants. Are there technological or investment barriers to entry? Are profits sufficiently high to attract new entrants? Low barriers to entry tend to lower revenues. 3. Threat of substitute products. Availability of substitute products increases the competitive environment and lower revenue. 4. Bargaining power of customers. Do customers have monopoly power? Can they successfully negotiate lower prices? 5. Bargaining power of suppliers. In monopoly or oligopoly environments the suppliers have high power. These environments tend to increase the cost of supplies. Diff: 2 Type: ES CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-1
14) Explain the product differentiation and the cost leadership strategies. Answer: Product differentiation is an organization's ability to offer products or services perceived by its customers to be superior and unique relative to the products or services of its competitors. Cost leadership is an organization's ability to achieve lower costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost control. Diff: 2 Type: ES CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-1
15) Red Deer Corporation is reviewing its business strategy. The first step for Red Deer is to evaluate the competitive environment. You have been hired to help the company go through the strategy formulation process. Required: To perform the analysis of competitive rivalry, describe what areas Red Deer should focus on and give at least one example of how Red Deer can effectively deal with each area. Answer: The industry analysis is composed of five areas: 1. Competitors - How competitive is the industry for Red Deer's particular product? It can differentiate the product to reduce competition. 2. Potential entrants to the market - How easy is it for new competitors to join the market? Create barriers to entry, such as high capital requirements. 3. Equivalent products - Is there a substitute product available? Make continuous product improvements to reduce the likelihood of equivalent products. 4. Bargaining power of customers - How many suppliers can customers access? Try to negotiate longterm purchase agreements. 5. Bargaining power of input suppliers - How many raw material vendors are there? Try to find alternative suppliers and negotiate the best price for raw materials. Diff: 3 Type: ES CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-1
14.2 Understand reengineering. 1) Strategy requires integration of product and process development. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-2
2) To achieve a cost leadership strategy companies may need to improve their internal production processes to increase yield. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-2
3) Reengineering is the fundamental rethinking and redesign of business processes to achieve improvements in critical measures of performance such as cost, quality, service, speed, and customer satisfaction. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-2
4) Reengineering benefits are most significant when they focus on one business function rather than crossing functional lines of the business process. Answer: FALSE Explanation: Reengineering benefits are most significant when they cut across functional lines to focus on the entire business process. Diff: 2 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-2
5) Successful reengineering efforts generally involve changing the roles and responsibilities of employees. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-2
6) In general, profit potential increases with greater competition, stronger potential entrants, products that are similar, and tougher customers and suppliers. Answer: FALSE Explanation: In general, profit potential decreases with greater competition, stronger potential entrants, products that are similar, and tougher customers and suppliers. Diff: 2 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-2
7) ________ is the fundamental rethinking and redesign of business processes to achieve improvements in critical measures of performance such as cost, quality, service, speed, and customer satisfaction. A) Strategy B) Customer perspective C) Learning and growth perspective D) Reengineering E) Product differentiation Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-2
8) Which of the following efforts would most likely yield the greatest re-engineering benefits? A) focusing on a single activity to determine if it is necessary B) decreasing the quantity of output produced to increase total factor productivity C) increasing the costs of all inputs used to increase total factor productivity D) focusing on entire processes and elimination of unnecessary activities and tasks Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-2
9) Successful reengineering involves all of the following EXCEPT A) cutting across functional lines to focus on the entire business process. B) redefining the roles and responsibilities of employees. C) using information technology. D) entering new geographic markets. E) improving customer satisfaction. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-2
10) What is reengineering? Can you contrast a reengineering approach to change with a Kaizen approach to change? Answer: Reengineering is the rethinking of business processes, such as the order delivery process, to improve critical performance measures such as cost, quality, or customer satisfaction. It can be contrasted to a Kaizen approach to change in that reengineering is most often a sudden, drastic change, while a Kaizen approach involves small, incremental but continual improvements. Diff: 2 Type: ES CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-2
14.3 Understand the four perspectives of the balanced scorecard. 1) The accounting scorecard translates an organization's mission and strategy into a comprehensive set of performance measures that provides the framework for implementing its strategy. Answer: FALSE Explanation: The balanced scorecard translates an organization's mission and strategy into a comprehensive set of performance measures that provides the framework for implementing its strategy. Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-3
2) The internal business process perspective focuses on internal operations that further both the customer perspective by creating value for customers and the financial perspective by increasing shareholder wealth. Answer: TRUE Explanation: Internal business process perspective focuses on internal operations that further both the customer perspective by creating value for customers and the financial perspective by increasing shareholder wealth. Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-3
3) Learning and growth perspective identifies the capabilities in which the organization must excel to achieve superior internal processes that create value for customers and shareholders. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-3
4) When implementing a balanced scorecard, one should assume the cause-and-effect linkage to be precise. Answer: FALSE Explanation: When implementing a balanced scorecard, one should not assume the cause-and-effect linkage to be precise. Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-3
5) Employee satisfaction is a measure of the internal business process perspective of the balanced scorecard. Answer: FALSE Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-3
6) Which of the following is NOT correct about the balanced scorecard? A) The profits and value created for shareholders are perspectives revealed on a balance scorecard. B) The nonfinancial and operational indicators are reported on a balance scorecard. C) The balanced scorecard reveals information about the success of the company in its target market. D) The balance scorecard increases managements emphasis on short-term results. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-3
7) ________ translates an organization's mission and strategy into a comprehensive set of performance measures that provides the framework for implementing its strategy. A) Corporate vision B) Product differentiation C) Cost leadership D) The balanced scorecard E) Planning Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-3
8) The return-on-investment ratio is an example of a scorecard measure under the A) internal business process. B) customer perspective. C) financial perspective. D) learning and growth perspective. E) manufacturing perspective. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
9) The number of complaints about the company's product is a potential measure of the A) financial perspective. B) shareholder value. C) internal business process. D) learning and growth perspective. E) customer perspective. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
10) Manufacturing cycle efficiency is a potential measure of the A) financial perspective. B) customer perspective. C) internal business process perspective. D) learning and growth perspective. E) real-time feedback capacity. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
11) Surveys of employee satisfaction is a potential measure of the A) financial perspective. B) customer perspective. C) internal business process perspective. D) learning and growth perspective. E) shareholder value. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
Use the information below to answer the following question(s). Following a strategy of product differentiation, Cold Lake Company makes a high-end appliance, AP15. Cold Lake Company presents the following data for years 1 and 2.
Units of AP15 produced and sold Selling price Direct materials (square metres) Direct materials costs per square metre Manufacturing capacity for AP15 (units) Total manufacturing conversion costs Manufacturing conversion costs (per unit of capacity) Selling and customer-service capacity (customers) Total selling and customer-service costs Cost per customer of selling and customer-service capacity
Year 1 Year 2 20,000 21,000 $200 $220 60,000 61,500 $20 $22 25,000 25,000 $1,000,000 $1,100,000 $40 $44 60 58 $360,000 $362,500 $6,000
$6,250
Cold Lake Company produces no defective units, but it wants to reduce direct materials usage per unit of AP15 in year 2. Manufacturing conversion costs in each year depend on production capacity, defined in terms of AP15 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Neither conversion costs nor customer-service costs are affected by changes in actual volume. Cold Lake Company has 46 customers in year 1 and 50 customers in year 2. The industry market size for high-end appliances increased 5% from year 1 to year 2. 12) Referring to Cold Lake Company, which of the following is a measure of the financial perspective? A) reengineering process B) market share in the high-end appliance market C) order delivery time D) production cycle time E) operating income growth from charging higher margins Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
13) Referring to Cold Lake Company, which of the following is a measure of the customer perspective? A) return on investment B) market share in the high-end appliance market C) development of new products or services D) production cycle time E) revenue growth Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
14) Referring to Cold Lake Company, which of the following is a measure of the internal business process perspective? A) return on investment B) market share in the high-end appliance market C) timely delivery D) production cycle time E) number of employees trained in quality management Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
15) Referring to Cold Lake Company, which of the following is an objective of the learning and growth perspective? A) increase return on investment B) increase market share in the high-end appliance market C) improve order delivery time D) development of new products or services E) increase customer satisfaction Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
Use the information below to answer the following question(s). Following a strategy of product differentiation, Fanshawe Company makes a high-end appliance called the XX 300. Fanshawe Company presents the following data for years 1 and 2.
Units of XX 300 produced and sold Selling price Direct materials (litres) Direct materials costs per litre Manufacturing capacity for XX 300 (units) Total manufacturing conversion costs Manufacturing conversion costs (per unit of capacity) Selling and customer-service capacity (customers) Total selling and customer-service costs Cost per customer of selling and customer-service capacity
Year 1 10,000 $100 30,000 $15 12,500 $250,000 $20 30 $90,000
Year 2 10,800 $115 31,900 $16 12,500 $275,000 $22 29 $90,625
$3,000
$3,120
Fanshawe Company produces no defective units, but it wants to reduce direct materials usage per unit of XX 300 in year 2. Manufacturing conversion costs in each year depend on production capacity, defined in terms of XX 300 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Neither conversion costs nor customer-service costs are affected by changes in actual volume. Fanshawe Company has 23 customers in year 1 and 25 customers in year 2. The industry market size for high-end appliances increased 5% from year 1 to year 2. 16) Referring to Fanshawe Company, which of the following is a measure of the financial perspective? A) order delivery time B) reengineering C) operating income growth from charging higher margins for XX 300 D) improving manufacturing processes E) market share in the high-end appliance market Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
17) Referring to Fanshawe Company, which of the following is a measure of the customer perspective? A) operating income growth from charging higher margins for XX 300 B) yield C) production cycle time D) improving manufacturing processes E) customer satisfaction rating Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
18) Referring to Fanshawe Company, which of the following is a measure of the internal business process perspective? A) operating income growth from charging higher margins for XX 300 B) market share in the high-end appliance market C) production cycle time D) number of employees trained in quality management E) real-time customer feedback Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
19) Referring to Fanshawe Company, which of the following is a measure of the learning and growth perspective? A) operating income growth from charging higher margins for XX 300 B) market share in the high-end appliance market C) order delivery time D) number of employees trained in quality management E) customer satisfaction Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
20) The purpose of the balanced scorecard is BEST described as helping an organization A) develop customer relations. B) mobilize employee skills for continuous improvements in processing capabilities, quality, and response times. C) introduce innovative products and services desired by target customers. D) translate an organization's mission and strategy into a set of performance measures that help to implement the strategy. E) develop supplier relations. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
21) Measures of the balanced scorecard's financial perspective include all of the following EXCEPT A) operating income. B) customer satisfaction. C) gross profit percentage. D) cost reductions. E) return on investment. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
22) Measures of the balanced scorecard's customer perspective include all of the following EXCEPT A) market share. B) customer satisfaction. C) number of new customers. D) employee training on new products. E) number of repeat customers. Answer: D Diff: 3 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-3
23) Measures of the balanced scorecard's internal business process perspective include all of the following EXCEPT A) operating capabilities. B) number of new products. C) employee turnover rates. D) defect rates. E) production cycle time. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
24) Which of the following is NOT true of a good balanced scorecard? A) It tells the story of a company's strategy by articulating a sequence of cause-and-effect relationships. B) It helps to communicate corporate strategy to all members of the organization. C) It identifies all measures, whether significant or small, that help to implement strategy. D) It uses nonfinancial measures to serve as leading indicators of future financial performance. E) It incorporates both financial and nonfinancial measures. Answer: C Diff: 3 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
25) Which of the following is a feature of a good balanced scorecard? A) It tells the story of a company's strategy by articulating costs along the value chain. B) It helps to communicate the strategy to all members of the organization by translating the strategy into a coherent and linked set of understandable and measurable operational targets. C) The scorecard measures match those of other companies. D) It provides cause-and-effect linkages that are precise. E) The scorecard contains dozens of different measures across many different categories. Answer: B Diff: 3 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
Answer the following questions using the information below: Ontario Corporation manufactures water toys. It plans to grow by producing high-quality water toys at a low cost that are delivered in a timely manner. There are a number of other manufacturers who produce similar water toys. Ontario believes that continuously improving its manufacturing processes are critical to implementing its strategy. 26) To execute the company strategy, measures on the balanced scorecard would most likely include the ________. A) number of process improvements B) price premium earned C) market share D) the amount invested in new product features E) employee satisfaction Answer: A Diff: 3 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
27) Wondergardens Ltd. operates amusement parks similar to those such as Six Flags, Universal Studios, Disneyland etc. Wondergardens' mission is to provide high quality family entertainment that exceed guests' expectations and will create lifelong memories. To achieve this goal, Wondergardens strives to provide safe, clean, friendly family environments at reasonable prices. In addition to the amusement parks, the company operates a community outreach program. Through volunteerism, it offers educational and recreational programs (e.g. after school programs for children and teenagers, employment related training for adults) and special events at its facilities. Wondergardens' president, Roland Coaster, has asked you to lead a team of employees in developing a balanced scorecard for its parks. Required: For each balanced scorecard perspective identify two measures of performance that relate to Wondergardens' key success factors. Answer: This is intended to be an open ended question and individual responses should be evaluated on their own merit. A good answer will identify relevant quantifiable performance measures and clearly link these to the mission. Some possible answers include: Financial Perspective: Any traditional financial measures (such as stock price, profit margins, etc.) may be used since this is a corporation that needs to provide returns to its shareholders. Because the company has established "reasonable prices" as part of its mission, it may measure its admission fees relative to its competitors. Customer Perspective: Customer satisfaction would be of paramount importance. The company should survey its guests to include measures of satisfaction. Specifically it should question the customers about the cleanliness of its grounds, and its ranking of expectations (i.e. did your recent visit Meet, Exceed, Fall Below expectations?). Surveys would be tabulated and scored and a target set. (i.e. 75% "exceed" rating). The company could also measure number of repeat customers which would suggest that customers enjoyed their experiences. Internal Business Processes Perspective: Recommended measures might include number of new attractions, average wait time for attractions. New attractions would not only draw in customers but contribute to exceeding expectations and creating memories. Shorter wait times also directly link to customer satisfaction. Learning & Growth: Since the company is involved in outreach activities, it may wish to measure the percentage of employees who volunteer in these programs. Percentage or number of employees trained is another measure that can be considered. Diff: 3 Type: ES CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-3
28) Delta Corporation plans to grow by offering a computer monitor, the CM3000 that is superior and
unique from the competition. Delta believes that putting additional resources into R&D and staying ahead of the competition with technological innovations are critical to implementing its strategy. Required: a. Is Delta's strategy one of product differentiation or cost leadership? Explain briefly. b. Identify at least one key measure for each balanced scorecard perspective. Answer: a. Delta's strategy is one of product differentiation because the company plans to offer a product that is superior and unique from the competition. b. The company's balanced scorecard should describe the product differentiation strategy. Key elements should include: Financial perspective: operating income, ROI, and so forth Customer perspective: market share in the high-end monitor market, customer satisfaction, and # of new customers Internal business process perspective: manufacturing quality, new product features added, order delivery time, development time for new features, improvements in manufacturing technologies Learning and growth perspective: employee education and skill levels, and employee satisfaction, investment in information technology Diff: 3 Type: ES CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
29) Maloney Corporation manufactures plastic water bottles. It plans to grow by producing high-quality water bottles at a low cost that are delivered in a timely manner. There are a number of other manufacturers who produce similar water bottles. Maloney believes that continuously improving its manufacturing processes and having satisfied employees are critical to implementing its strategy. Required: a. Is Maloney's strategy one of product differentiation or cost leadership? Explain briefly. b. Identify at least one key measure for each balanced scorecard perspective. Answer: a. Maloney's strategy is one of cost leadership because there are a number of other manufacturers who produce similar water bottles. To succeed, Maloney will have to achieve lower costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost controls. b. The company's balanced scorecard should describe the product differentiation strategy. Key elements should include: Financial perspective: operating income growth from productivity gains and revenue growth from the ability to lower prices Customer perspective: growth in market share, new customers, customer responsiveness, and customer satisfaction Internal business process perspective: yield, time to complete customer jobs, order delivery time, cost per order Learning and growth perspective: employee education and skill levels, and employee satisfaction, investment in information technology Diff: 2 Type: ES CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-1; 14-4
30) What is the primary purpose of the balanced scorecard? Answer: The primary purpose of the balanced scorecard is to translate an organization's mission and strategy into a set of performance measures that put that strategy into action with clearly-stated objectives, measures, targets, and initiatives. Diff: 2 Type: ES CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-3
31) What are the four key perspectives in the balanced scorecard? Answer: The four key perspectives in the balanced scorecard are a. the financial perspective, b. the customer perspective, c. the internal business processes perspective, and d. the learning and growth perspective. Diff: 1 Type: ES CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-3
Match each of the following balanced scorecard measures with the appropriate perspective. A) customer perspective B) financial perspective C) learning and growth perspective D) internal business process perspective 32) service response time Diff: 2 Type: MA CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
33) market share Diff: 2 Type: MA CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
34) gross margin percentage Diff: 2 Type: MA CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
35) defect rates Diff: 2 Type: MA CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
36) customer satisfaction Diff: 2 Type: MA CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
37) information system availability Diff: 2 Type: MA CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
38) new product development time Diff: 2 Type: MA CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
39) return on investment Diff: 2 Type: MA CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
40) employee training hours Diff: 2 Type: MA CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
41) manufacturing cycle time Diff: 2 Type: MA CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-3
Answers: 32) D 33) A 34) B 35) D 36) A 37) D 38) D 39) B 40) C 41) D
14.4 Evaluate strategic success at implementing a cost leadership strategy using balanced scorecard measures. 1) The growth component measures the increase in revenues minus the increase in costs from selling more units of a product. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-4
2) The productivity component measures the reduction in costs attributable to a reduction in the quantity of inputs used in year 2 relative to the quantity of inputs that would have been used in year 1 to produce the year 2 output. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-4
3) To evaluate the success of its strategy, a company can subdivide the change in costs into growth, pricerecovery and productivity components. Answer: FALSE Explanation: To evaluate the success of its strategy, a company can subdivide the change in operating income into growth, price-recovery and productivity components. Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-4
4) The productivity component of operating income focuses exclusively on revenues. Answer: FALSE Explanation: The productivity component of operating income focuses exclusively on costs. Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-4
5) The price-recovery component measures the increase in operating income from selling more units of a product. Answer: FALSE Explanation: The growth component measures the increase in operating income from selling more units of a product. Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-4
6) Companies that have been successful at cost leadership will show large favorable price-recovery and growth components when analyzing profitability. Answer: FALSE Explanation: Companies that have successfully differentiated their products will show large favorable price-recovery and growth components when analyzing profitability. Diff: 3 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-4
7) The price-recovery component of a change in operating income from one year to the next measures the increase in operating income from selling more units of the product. Answer: FALSE Explanation: The growth component of a change in operating income from one year to the next measures the increase in operating income from selling more units of the product. Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-4
8) The price-recovery component of a change in operating income measures the effect of price changes on revenues and costs. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-4
9) Unused capacity is the amount of productive capacity available over and above the productive capacity employed to meet customer demand in the current period. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-4
10) The growth component of a change in operating income measures the effect of price changes on revenues and costs. Answer: FALSE Explanation: The price-recovery component of a change in operating income measures the effect of price changes on revenues and costs. Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-4
11) Which component of strategy measures the changes in operating income attributed solely to an increase in the quantity of output between Year 1 and Year 2? A) the growth component B) the price-recovery component C) the productivity component D) the cost leadership component Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-4
Use the information below to answer the following question(s). Following a strategy of product differentiation, Cold Lake Company makes a high-end appliance, AP15. Cold Lake Company presents the following data for years 1 and 2.
Units of AP15 produced and sold Selling price Direct materials (square metres) Direct materials costs per square metre Manufacturing capacity for AP15 (units) Total manufacturing conversion costs Manufacturing conversion costs (per unit of capacity) Selling and customer-service capacity (customers) Total selling and customer-service costs Cost per customer of selling and customer-service capacity
Year 1 Year 2 20,000 21,000 $200 $220 60,000 61,500 $20 $22 25,000 25,000 $1,000,000 $1,100,000 $40 $44 60 58 $360,000 $362,500 $6,000
$6,250
Cold Lake Company produces no defective units, but it wants to reduce direct materials usage per unit of AP15 in year 2. Manufacturing conversion costs in each year depend on production capacity, defined in terms of AP15 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Neither conversion costs nor customer-service costs are affected by changes in actual volume. Cold Lake Company has 46 customers in year 1 and 50 customers in year 2. The industry market size for high-end appliances increased 5% from year 1 to year 2. 12) What is the Cold Lake Company's operating income for year 1? A) $4,000,000 B) $804,500 C) $1,240,000 D) $1,240,500 E) $1,440,000 Answer: E Explanation: ($200 × 20,000) - (($20 × 60,000) + ($40 × 25,000) + ($6,000 × 60)) = $1,440,000 Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
13) What is the Cold Lake Company's operating income in Year 2? A) $1,804,500 B) $1,440,000 C) $4,620,000 D) $200,000 E) $188,000 Answer: A Explanation: ($220 × 21,000) - (($22 × 61,500) + ($44 × 25,000) + ($6,250 × 58)) = $1,804,500 Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
14) What is the Cold Lake Company's change in operating income from year 1 to year 2? A) $620,000 favourable B) $364,500 unfavourable C) $364,500 favourable D) $200,000 favourable E) $200,000 unfavourable Answer: C Explanation: $1,440,000 - $1,804,500 = $364,500 (F) Diff: 3 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
15) What is the Cold Lake Company's revenue effect of growth component? A) $440,000 favourable B) $400,000 unfavourable C) $400,000 favourable D) $200,000 favourable E) $220,000 favourable Answer: D Explanation: (21,000 - 20,000) × $200 = $200,000 (F) Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
16) What is the Cold Lake Company's cost effect of growth component? A) $60,000 unfavourable B) $30,000 favourable C) $60,000 favourable D) $200,000 favourable E) $30,000 unfavourable Answer: A Explanation: ((63,000 - 60,000) × $20) + ((25,000 - 25,000) × $40) + ((60 - 60) × $6,000) = $60,000 (U) 21,000 × 60,000/20,000 = 63,000 units of input Diff: 3 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
17) What is the Cold Lake Company's net increase in operating income as a result of the growth component? A) $340,000 unfavourable B) $140,000 favourable C) $160,000 favourable D) $190,000 favourable E) $250,000 unfavourable Answer: B Explanation: $200,000 (F) + $60,000 (U) = $140,000 (F) Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
18) What is the Cold Lake Company's revenue effect of price-recovery component? A) $400,000 favourable B) $220,000 unfavourable C) $400,000 unfavourable D) $420,000 unfavourable E) $420,000 favourable Answer: E Explanation: ($220 - $200) × 21,000 = $420,000 (F) Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
19) What is the Cold Lake Company's cost effect of price-recovery component? A) $126,000 favourable B) $126,000 unfavourable C) $241,000 unfavourable D) $420,000 favourable E) $238,000 unfavourable Answer: C Explanation: (($22 - $20) × 63,000) + (($44 - $40) × 25,000) + (($6,250 - $6,000) × 60) = $126,000 + $100,000 + $15,000 = $241,000 (U) Diff: 3 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
20) What is the Cold Lake Company's net increase in operating income as a result of the price-recovery component? A) $179,000 favourable B) $179,000 unfavourable C) $182,000 unfavourable D) $20,000 favourable E) $20,000 unfavourable Answer: A Explanation: $420,000 (F) + $241,000 (U) = $179,000 (F) Diff: 3 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
21) What is the Cold Lake Company's productivity component of change in operating income? A) $33,000 favourable B) $45,500 favourable C) $33,000 unfavourable D) $45,500 unfavourable E) $20,500 unfavourable Answer: B Explanation: ((61,500 - 63,000) × $22) + ((25,000 - 25,000) × $40) + ((58 - 60) × $6,250) = $45,500 (F) Diff: 3 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
Use the information below to answer the following question(s). Following a strategy of product differentiation, Fanshawe Company makes a high-end appliance called the XX 300. Fanshawe Company presents the following data for years 1 and 2.
Units of XX 300 produced and sold Selling price Direct materials (litres) Direct materials costs per litre Manufacturing capacity for XX 300 (units) Total manufacturing conversion costs Manufacturing conversion costs (per unit of capacity) Selling and customer-service capacity (customers) Total selling and customer-service costs Cost per customer of selling and customer-service capacity
Year 1 10,000 $100 30,000 $15 12,500 $250,000 $20 30 $90,000
Year 2 10,800 $115 31,900 $16 12,500 $275,000 $22 29 $90,625
$3,000
$3,120
Fanshawe Company produces no defective units, but it wants to reduce direct materials usage per unit of XX 300 in year 2. Manufacturing conversion costs in each year depend on production capacity, defined in terms of XX 300 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Neither conversion costs nor customer-service costs are affected by changes in actual volume. Fanshawe Company has 23 customers in year 1 and 25 customers in year 2. The industry market size for high-end appliances increased 5% from year 1 to year 2. 22) What is the Fanshawe Company's operating income for year 1? A) $210,000 B) $366,120 C) $1,000,000 D) $260,000 E) $231,000 Answer: A Explanation: ($100 × 10,000) - (($15 × 30,000) + ($20 × 12,500) + ($3,000 × 30)) = $210,000 Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
23) What is the Fanshawe Company's operating income in year 2? A) $378,600 B) $366,120 C) $1,242,000 D) $403,520 E) $210,000 Answer: B Explanation: ($115 × 10,800) - (($16 × 31,900) + ($22 × 12,500) + ($3,120 × 29)) = $366,120 Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
24) What is the Fanshawe Company's change in operating income from year 1 to year 2? A) $147,600 favourable B) $143,520 favourable C) $156,120 favourable D) $156,120 unfavourable E) $242,000 favourable Answer: C Explanation: $366,120 - $210,000 = $156,120 (F) Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
25) What is the Fanshawe Company's revenue effect of growth component? A) $92,000 favourable B) $92,000 unfavourable C) $80,000 unfavourable D) $162,000 favourable E) $80,000 favourable Answer: E Explanation: (10,800 - 10,000) × $100 = $80,000 (F) Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
26) What is the Fanshawe Company's cost effect of growth component? A) $7,500 favourable B) $28,500 favourable C) $7,500 unfavourable D) $28,500 unfavourable E) $30,000 favourable Answer: C Explanation: ((32,400 - 31,900) × $15) + ((12,500 - 12,500) × $20) + ((30 - 30) × $3,120) = $7,500 (U) Diff: 3 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
27) What is the Fanshawe Company's net increase in operating income as a result of the growth component? A) $72,500 unfavourable B) $72,500 favourable C) $51,500 favourable D) $99,500 unfavourable E) $99,500 favourable Answer: B Explanation: $80,000 (F) + $7,500 (U) = $72,500 (F) Diff: 3 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
28) What is the Fanshawe Company's revenue effect of price-recovery component? A) $54,000 favourable B) $162,000 favourable C) $54,000 unfavourable D) $92,000 favourable E) $50,000 unfavourable Answer: B Explanation: ($115 - $100) × 10,800 = $162,000 (F) Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
29) What is the Fanshawe Company's cost effect of price-recovery component? A) $61,000 favourable B) $60,850 unfavourable C) $60,100 favourable D) $60,100 unfavourable E) $61,000 unfavourable Answer: E Explanation: (($16 - $15) × 32,400) + (($22 - $20) × 12,500) + (($3,120 - $3,000) × 30) = $32,400 + $25,000 + $3,600 = $61,000 (U) Diff: 3 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
30) What is the Fanshawe Company's net increase in operating income as a result of the price-recovery component? A) $101,000 unfavourable B) $101,000 favourable C) $6,100 favourable D) $2,700 unfavourable E) $6,100 unfavourable Answer: B Explanation: $162,000 (F) + $61,000 (U) = $101,000 (F) Diff: 3 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
31) What is the Fanshawe Company's productivity component of change in operating income? A) $31,620 favourable B) $11,120 favourable C) $11,120 unfavourable D) $33,520 favourable E) $33,520 unfavourable Answer: B Explanation: ((31,900- 32,400) × $16) + ((12,500 - 12,500) × $22) + ((29 - 30) × $3,120) = ($8,000) + $0 + ($3,120) = $11,120 (F) Diff: 3 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
32) ________ measures the reduction in costs attributable to a reduction in the quantity of inputs used in year two relative to the quantity of inputs that would have been used in year one to produce the year two output. A) The growth component B) The price-recovery component C) The productivity component D) The cost leadership component E) The strategy component Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-4
33) ________ measures the changes in operating income attributed solely to an increase in the quantity of output between years one and two. A) The growth component B) The price-recovery component C) The productivity component D) The cost leadership component E) The strategy component Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-4
34) ________ measures the change in operating income attributable solely to changes in a company's profit margins between years one and two. A) The growth component B) The price-recovery component C) The productivity component D) The cost leadership component E) The strategy component Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-4
35) Successful implementation of a cost leadership strategy will result in A) large favorable growth and price-recovery components. B) large favorable price-recovery and productivity components. C) large favorable productivity and growth components. D) only a large favorable growth component. E) a price-recovery component greater than a growth component. Answer: C Diff: 3 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-4
36) Successful implementation of a product differentiation strategy will result in A) a large favorable growth and price-recovery components. B) a large favorable price-recovery and productivity components. C) a large favorable productivity and growth components. D) only a large favorable growth component. E) a price-recovery component greater than a growth component. Answer: A Diff: 3 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-4
Answer the following questions using the information below: British Columbia Company makes a household appliance with the model number X800. The goal for Year 2 is to reduce direct materials usage per unit. No defective units are currently produced. Manufacturing conversion costs depend on production capacity, defined in terms of X800 units that can be produced. The industry market size for appliances increased 5% from Year 1 to Year 2. The following additional data are available for Years 1 and 2:
Units of X800 produced and sold Selling price Direct materials (square metres) Direct material costs per square metre Manufacturing capacity for X800 (units) Total conversion costs Conversion costs per unit of capacity
Year 1 10,000 $100 30,000 $10 12,500 $250,000 $20
Year 2 10,500 $95 29,000 $11 12,000 $240,000 $20
37) What is the British Columbia Company's revenue effect of the growth component? A) $2,500 U B) $52,500 U C) $47,500 F D) $50,000 F E) $55,000 F Answer: D Explanation: (10,500 - 10,000) × $100 = $50,000 F Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
38) What is the British Columbia Company's cost effect of the growth component for direct materials? A) $15,000 U B) $10,000 U C) $10,000 F D) $16,500 F E) $7,500 F Answer: A Explanation: 30,000/10,000 units = 3 sq metres per unit 500 additional units × 3 sq metres = 1,500 additional square metres 1,500 additional sq metres × $10 per sq ft = $15,000 U OR 30,000 × 10,500/10,000 = 31,500; (31,500 - 30,000) × $10 = $15,000 U Diff: 3 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
39) What is the British Columbia Company's cost effect of the growth component for conversion costs? A) $12,500 U B) $0 C) $10,000 U D) $10,000 F E) $12,500 F Answer: D Explanation: (12,500 - 12,000) × $20 = 10,000 F Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
Answer the following questions using the information below: One of the makeup kit models that Tiegs Corporation produces is targeted at professional women. The goal for Year 2 is to reduce direct materials usage per unit. No defective units are currently produced. Manufacturing conversion costs depend on production capacity defined in terms of makeup kits that can be produced. The industry market size for makeup kits increased 5% from Year 1 to Year 2. The following additional data are available for Years 1 and 2:
Makeup kits produced and sold Selling price Direct materials (kilograms) Direct material costs per kilogram Manufacturing capacity (kits) Total conversion costs Conversion costs per unit of capacity
Year 1 850,000 $180 340,000 $50 1,000,000 $30,000,000 $30
Year 2 935,000 $175 364,650 $52 1,050,000 $34,650,000 $33
40) What is the Tiegs Corporation revenue effect of the growth component? A) $14,875,000 U B) $4,675,000 U C) $4,250,000 F D) $14,875,000 F E) $15,300,000 F Answer: E Explanation: (935,000 - 850,000) × $180 = $15,300,000 F Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
41) What is the Tiegs Corporation cost effect of the growth component for direct materials? A) $1,768,000 U B) $1,700,000 U C) $1,232,500 U D) $1,232,500 F E) $1,689,000 F Answer: B Explanation: 340,000 × 935/850 =374,000; (374,000 - 340,000) × $50 = $1,700,000 U Diff: 3 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
42) What is the Tiegs Corporation cost effect of the growth component for conversion costs? A) $1,500,000 U B) $0 C) $1,650,000 U D) $1,650,000 F E) $1,500,000 F Answer: A Explanation: (1,050,000 - 1,000,000) × $30 = $1,500,000 U Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
43) What is the Tiegs Corporation revenue effect of the price-recovery? A) $4,125,000 U B) $4,250,000 U C) $4,675,000 U D) $4,675,000 F E) $4,250,000 F Answer: C Explanation: ($175 - $180) × 935,000 = $4,675,000 U Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
Use the information below to answer the following question(s). Following a strategy of product differentiation, Despotovich Corporation makes a high-end Computer Monitor, CM12. Despotovich Corporation presents the following data for the years 1 and 2:
Units of CM12 produced and sold Selling price Direct materials (pounds) Direct materials costs per kilogram Manufacturing capacity for CM12 (units) Total manufacturing conversion costs Manufacturing conversion costs per unit of capacity Selling and customer-service capacity (customers) Total selling and customer-service costs Cost per customer of selling & customer-service capacity
Year 1 5,000 $400 15,000 $40 10,000 $500,000 $50 60 $180,000 $3,000
Year 2 5,500 $440 15,375 $44 10,000 $550,000 $55 58 $181,250 $3,125
Despotovich Corporation produces no defective units but it wants to reduce direct materials usage per unit of CM12 in Year 2. Manufacturing conversion costs in each year depend on production capacity defined in terms of CM12 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Neither conversion costs nor customer-service costs are affected by changes in actual volume. Despotovich Corporation has 46 customers in Year 1 and 50 customers in Year 2 . The industry market size for high-end computer monitors increased 5% from Year 1 to Year 2. Of the $40 increase in unit selling price, $10 was attributable to a general increase in prices. 44) Required: a. What is the operating income for Year 1? b. What is the operating income in Year 2? c. What is the change in operating income from Year 1 to Year 2? d. What amount is the revenue effect of growth component? e. What amount is the cost effect of growth component? f. What is the change in operating income as a result of the growth component? g. What amount is the revenue effect of price recovery component? h. What amount is the cost effect of price recovery component? i. What is the change in income as a result of the price recovery component? j. What is the amount of the productivity component? k. The change in operating income from cost leadership. l. The change in operating income due to industry wide effects. m. The effect of product differentiation on operating income and a summarization of the change in operating income between Year 1 and Year 2.
Answer: a. ($400 × 5,000) - (($40 × 15,000) + ($50 × 10,000) + ($3,000 × 60)) = $720,000 b. ($440 × 5,500) - (($44 × 15,375) + ($55 × 10,000) + ($3,125 × 58)) = $1,012,250 c. $1,012,250 - $720,000 = $292,250 (F) d. (5,500 - 5,000) × $400 = $200,000 (F) e. [((15,000/5,000) × 5,500 - 15,000) × $40] + [(10,000 - 10,000) × $50] + ((60 - 60) × $3,000) = $60,000 (U) f. $200,000 (F) + $60,000 (U) = $140,000 (F) g. ($440 - $400) × 5,500 = $220,000 (F) h. (($44 - $40) × 16,500) + (($55 - $50) × 10,000) + (($3,125 - $3,000) × 60) = $66,000 + $50,000 + $7,500 = $123,500 (U) i. $220,000 (F) + $123,500 (U) = $96,500 (F) j. ((15,375 - 16,500) × $44) + ((10,000 - 10,000) × $55) + ((58-60) × $3,125) = $55,750 (F) Reconciliation: $140,000 (F) + $96,500 (F) + $55,750 (F) = $292,250 (F) k. Change in operating income from cost leadership: Productivity component $55,750 (F) Mgmt. directed price increase ($30 × 5,500) 165,000 (F) Growth component mgmt. share ($140,000 (F) × (250/500)) 70,000 (F) Total $290,750 (F) l.
Change in operating income due to industry wide effects:
Growth in industry mkt. size ($140,000 (F) × (250/500)) General price increase ($10 × 5,500) Total
$70,000 (F) 55,000 (F) $125,000 (F)
m. Increase in mkt. prices of inputs (cost effect of price recovery $123,500 (U) Summarization of change in operating income: $290,750 (F) + $125,000 (F) + $123,500 (U) = $292,250 (F) Diff: 2 Type: SA CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
Use the information below to answer the following question(s). Following a strategy of product differentiation, Ernsting Ltd. makes high quality electronic components. Ernsting Ltd. presents the following data for the past two years relating to its XJ649 product.
Units of XJ649 produced and sold Selling price Direct materials (kilograms) Direct materials costs per kilogram Manufacturing capacity for XJ649 (units) Conversion costs Conversion costs per unit of capacity Selling and customer-service capacity (customers) Total selling and customer-service costs Selling and customer-service capacity cost per customer
Year 1 4,000 $800 10,400 $60 15,000 $1,350,000 $90 80 $760,000 $9,500
Year 2 4,320 $850 12,360 $64 15,000 $1,440,000 $96 78 $780,000 $10,000
Ernsting produces no defective units but it wants to reduce direct materials usage per unit in Year 2 . Manufacturing conversion costs in each year depend on production capacity defined in terms of units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Neither conversion costs nor customer-service costs are affected by changes in actual volume. Ernsting has 60 customers in Year 1 and 66 customers in Year 2. The industry market size for the product increased 6% from Year 1 to Year 2. Of the $50 increase in unit selling price, $30 is attributable to a general price increase. 45) Required: a. What is the operating income for Year 1? b. What is the operating income in Year 2? c. What is the change in operating income from Year 1 to Year 2? d. What amount is the revenue effect of the growth component? e. What amount is the cost effect of the growth component? f. What is the net effect on operating income as a result of the growth component? g. What amount is the revenue effect of the price-recovery component? h. What amount is the cost effect of the price-recovery component? i. What is the net effect on operating income as a result of the price-recovery component? j. What is the net effect on operating income as a result of the productivity component? k. The change in operating income from cost leadership. l. The change in operating income due to industry wide effects. m. The effect of product differentiation on operating income and a summarization of the change in operating income between Year 1 to Year 2. Answer: a. ($800 × 4,000) - [($60 × 10,400) + ($90 × 15,000) + ($9,500 × 80)] = $3,200,000 - $624,000 - $1,350,000 - $760,000 = $466,000 b.
($850 × 4,320) - [($64 × 12,360) + ($96 × 15,000) + ($10,000 × 78)] = $3,672,000 -$1,440,000 - $791,040 - $780,000 = $660,960
c.
$466,000- $660,960 = 194,960 (F)
d. (4,320 - 4,000) × $800 = $256,000 (F) e.
4,320 × 10,400/4,000 = 11,232; [11,232 - 10,400) × $60] + [(15,000 - 15,000) × $90] + [(80 - 80) × $6,000] = $49,920 (U)
f
$256,000 F + $49,920 U = 206,080 (F)
g.
($850 - $800) × 4,320 = $216,000 (F)
h.
4,320 × 10,400/4,000 = 11,232; [($64 - $60) × 11,232] + [($96 - $90) × 15,000] + [$10,000-$9,500) × 80] = $44,928 + $90,000 + $40,000 = $174,928(U)
i.
$216,000 F + $174,928 U = $41,072 (F)
j.
4,320 × 10,400/4,000 = 11,232; [(12,360 - 11,232) × $64] + [(15,000 - 15,000) × $96] + [(78 - 80) × $10,000] = $72,192 + $0 - $20,000 = $52,192 (U) Change in operating income from cost leadership:
k.
Productivity component Mgmt. directed price increase ($20 × 4,320) Growth component mgmt. share ($206,080 (F) × 80/320)) Total l.
$52,192 (U) 86,400 (F) 51,520 (F) $85,728 (F)
Change in operating income due to industry wide effects:
Growth in industry mkt. size ($206,080 (F) × (240/320)) General price increase ($30 × 4,320) Total
$154,560(F) 129,600 (F) $284,160 (F)
m. Increase in mkt. prices of inputs (cost effect of price recovery $174,928 (U) Summarization of change in operating income: $85,728 (F) + $284,160 (F) + $174,928 (U) = $194,960 (F) Diff: 2 Type: SA CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
Use the information below to answer the following question(s). Following a strategy of product differentiation, Instruments Inc. makes a hand held calculator, II400. Instruments Inc. presents the following data for the years 1 and 2: Year 1 Units of II400 produced and sold 50,000 Selling price $40 Direct materials (kilograms) 150,000 Direct materials costs per kilogram $4.00 Manufacturing capacity for II400 (units) 62,500 Total manufacturing conversion costs $500,000 Manufacturing conversion costs per unit of capacity $8.00 Selling and customer-service capacity (customers) 30 Total selling and customer-service costs $360,000 Cost per customer of selling & customer-service capacity $12,000
Year 2 52,500 $44 153,375 $4.40 62,500 $550,000 $8.80 29 $362,500 $12,500
Instruments Inc. produces no defective units but it wants to reduce direct materials usage per unit of II400 in year 2. Manufacturing conversion costs in each year depend on production capacity defined in terms of II400 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Neither conversion costs or customer-service costs are affected by changes in actual volume. Instruments Inc. has 23 customers in year 1 and 25 customers in year 2. The industry market size for hand held calculators increased 5% from year 1 to year 2. Of the $4 increase in unit selling price, $1 is due to a general increase in prices. 46) Required: a. What is the operating income for Year 1? b. What is the operating income in Year 2? c. What is the change in operating income from Year 1 to Year 2? d. What amount is the revenue effect of the growth component? e. What amount is the cost effect of the growth component? f. What is the net effect on operating income as a result of the growth component? g. What amount is the revenue effect of the price-recovery component? h. What amount is the cost effect of the price-recovery component? i. What is the net change in operating income as a result of the price-recovery component? j. What is the net effect on operating income as a result of the productivity component? a k. The change in operating income from cost leadership. l. The change in operating income due to industry wide effects. m. The effect of product differentiation on operating income and a summarization of the change in operating income between Year 1 to Year 2. Answer: a. ($40 × 50,000) - ($4 × 150,000) - ($8 × 62,500) - ($12,000 × 30) = $2,000,000 - $600,000 - $500,000 - $360,000 = $540,000 b.
($44 × 52,500) - ($4.40 × $153,375) - ($8.80 × 62,500) - ($12,500 × 29) = $2,310,000 - $674,850 - $550,000 - $362,500 = $722,650
c.
$722,650 - $540,000 = $182,650
d. (52,500-50,000) × $40 = $100,000 F e. (52,500 × 150,000/50,000) = 157,500 [(157,500-150,000) × $4] + [(62,500-62,500) × $8] + [(30-30) × $12,000] = $30,000U f. $100,000 F + $30,000 U = $70,000 F g.
($44 - $40) × 52,500 = $210,000 (F)
h.
(($4.40 - $4.00) × ((150,000/50,000) × 52,500)) + (($8.80 - $8.00) × 62,500) + (($12,500 - $12,000) × 30) = $128,000 (U)
i.
$210,000 (F) + $128,000 (U) = $82,000 (F)
j.
52,500 × 150,000/50,000 = 157,500; [(153,375-157,500) × $4.4] + [(62,500 -62,500) × $8.80] + [(29-30) × $12,500] = ($18,150) + $0 + ($12,500) = $30,650F
k.
Change in operating income from cost leadership:
Productivity component Mgmt. directed price increase ($3 × 52,500) Growth component mgmt. share ($70,000 (F) × 0/2,500)) Total l.
$30,650( F) 157,500 (F) 0 (F) $188,150 (F)
Change in operating income due to industry wide effects:
Growth in industry mkt. size ($70,000(F) × (2,500/2,500)) General price increase ($1 × 52,500) Total
$70,000(F) 52,500 (F) $122,500 (F)
m. Increase in mkt. prices of inputs (cost effect of price recovery) $128,000 (U) Summarization of change in operating income: $188,150 (F) +122,500(F) + $128,000 (U) = $182,650 (F) Diff: 2 Type: SA CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
Use the information below to answer the following question(s). Following a strategy of product differentiation, Electronics Inc. makes a hand held calculator, II300. Electronics Inc. presents the following data for the years 1 and 2: Year 1 Units of II300 produced and sold 50,000 Selling price $40 Direct materials (kilograms) 150,000 Direct materials costs per kilogram $6.00 Manufacturing capacity for II300 (units) 70,000 Total manufacturing conversion costs $560,000 Manufacturing conversion costs per unit of capacity $8.00 Selling and customer-service capacity (customers) 33 Total selling and customer-service costs $297,000 Cost per customer of selling & customer-service capacity $9,000
Year 2 55,000 $46 151,625 $6.50 70,000 $630,000 $9.00 31 $294,500 $9,500
Electronics Inc. produces no defective units but it wants to reduce direct materials usage per unit of II300 in year 2. Manufacturing conversion costs in each year depend on production capacity defined in terms of II300 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Neither conversion costs or customerservice costs are affected by changes in actual volume. Electronics Inc. has 23 customers in year 1 and 25 customers in year 2. The industry market size for hand held calculators increased 5% from year 1 to year 2. Of the $6 increase in unit selling price, $2 is due to a general increase in prices. 47) Required: a. What is the operating income for Year 1? b. What is the operating income in Year 2? c. What is the change in operating income from Year 1 to Year 2? d. What amount is the revenue effect of the growth component? e. What amount is the cost effect of the growth component? f. What is the net effect on operating income as a result of the growth component? g. What amount is the revenue effect of the price-recovery component? h. What amount is the cost effect of the price-recovery component? i. What is the net change in operating income as a result of the price-recovery component? j. What is the net effect on operating income as a result of the productivity component? k. The change in operating income from cost leadership. l. The change in operating income due to industry wide effects. m. The effect of product differentiation on operating income and a summarization of the change in operating income between Year 1 to Year 2. Answer: a. ($40 × 50,000) - ($6 × 150,000) - ($8 × 70,000) - ($9,000 × 33) = $2,000,000 - $900,000 - $560,000 - $297,000 = $243,000 b.
($46 × 55,000) - ($6.50 × $151,625) - ($9.00 ×70,000) - ($9,500 × 31) = $2,530,000 - $985,564 - 630,000 - $294,500 = $619,938
c.
$619,938 - $243,000 = $376,938
d. (55,000-50,000) × $40 = $200,000 F e. (55,000 × 150,000/50,000) = 165,000 [(165,000-150,000) × $6] + [70,000-70,000) × $8] + [(33-33) × $9,000] = $90,000 U f. $200,000 F + $90,000 U = $110,000 F g.
($46 - $40) × 55,000 = $330,000 (F)
h.
(($6.50 - $6.00) × ((150,000/50,000) × 55,000)) + (($9.00 - $8.00) × 70,000) + (($9,500 - $9,000) × 33) = $82,500 + $70,000 + $16,500 = $169,000 (U) $330,000 (F) + $169,000 (U) = $161,000 F
i. j.
55,000 × 150,000/50,000 = 165,000; [(151,625-165,000) × $6.50] + [70,000-70,000) × $ 9.00] + [(31-33) ×$9,500] = ($18,150) + $0 + ($12,500) = ($86,938) + $0 + ($19,000) = $105,938 F
k.
Change in operating income from cost leadership:
Productivity component Mgmt. directed price increase ($4 × 55,000) Growth component mgmt. share ($110,000 (F) × 2,500/5,000)) Total l.
$105,938 ( F) 220,000 (F) 55,000 (F) $380,938 (F)
Change in operating income due to industry wide effects:
Growth in industry mkt. size ($110,000(F) × (2,500/5,000)) General price increase ($2 × 55,000) Total
$55,000(F) 110,000 (F) $165,000 (F)
m. Increase in mkt. prices of inputs (cost effect of price recovery)
$169,000 (U)
Summarization of change in operating income: $380,938 (F) +165,000(F) + $169,000 (U) = 376,938 (F) Diff: 2 Type: SA CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-4
48) Describe three key components in doing a strategic analysis of operating income. Answer: The three key components in doing a strategic analysis of operating income include: a. the growth component, which measures the change in operating income attributable solely to an increase in the quantity of output sold from one year to the next. b. the price-recovery component, which measures the change in operating income attributable solely to changes in the prices of the inputs and the outputs from one year to the next. c. the productivity component, which measures the change in costs attributable to a change in the quantity of inputs used in the current year relative to the quantity of inputs that would have been used in the previous year to produce current year output. Diff: 2 Type: ES CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-4
49) An analysis of Louis Brown Corporation's operating income changes between year 1 and year 2 show the following: Operating income for Year 1 Add growth component Add price-recovery component Deduct productivity component Operating income for Year 2
$1,000,000 30,000 200,000 (10,000) $1,220,000
Required: Is Louis Brown's operating income gain consistent with the product differentiation or cost leadership strategy? Explain briefly. Answer: Louis Brown's operating income gain is consistent with the product differentiation strategy since the increase in operating income was driven by the $200,000 gain in the price-recovery component. It appears that Brown's superior quality stimulated slight growth and allowed it to charge a price premium for its products. Diff: 3 Type: ES CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-4
50) An analysis of Gardner Corporation's operating income changes between Year 1 and Year 2 show the
following: Operating income for Year 1 Add growth component Deduct price-recovery component Add productivity component Operating income for Year 2
$1,000,000 50,000 (30,000) 120,000 $1,140,000
Required: Is Gardner's operating income gain consistent with the product differentiation or cost leadership strategy? Explain briefly. Answer: Gardner's operating income gain is consistent with the cost leadership strategy because the increase in operating income was driven by the $120,000 gain in productivity. It appears that Gardner took advantage of its productivity gain to reduce prices and to fuel growth. Diff: 3 Type: ES CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-4
14.5 Analyze the results from specific productivity and capacity control strategies to achieve balanced scorecard expectations. 1) Engineered costs result specifically from a clear cause-and-effect relationship between output and the resources needed to produce that output. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-5
2) Discretionary costs arise from periodic (usually yearly) decisions regarding the maximum amount to be incurred. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-5
3) Uncertainty refers to the possibility that an actual amount will be equal to an expected amount. Answer: FALSE Explanation: Uncertainty refers to the possibility that an actual amount will deviate from an expected amount. Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-5
4) Downsizing is also called rightsizing. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-5
5) Downsizing is an integrated approach to configure processes, products, and people to by match costs to the activities that need to be performed, to operate efficiently and effectively, now and in the future. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-5
6) Productivity measures the relationship between actual inputs used (both quantities and costs) and standard outputs produced. Answer: FALSE Explanation: Productivity measures the relationship between actual inputs used (both quantities and costs) and actual outputs produced. Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-5
7) Partial productivity equals quantity of output produced divided by quantity of individual input used. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-5
8) Total factor productivity (TFP) is the ratio of the quantity of output produced to the costs of all inputs used, where the inputs are combined on the basis of current period prices. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-5
9) Although total factor productivity (TFP) measures are comprehensive, operations personnel find financial TFP measures more difficult to understand and less useful than physical partial productivity measures in performing their tasks. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-5
10) Research and development cost is an example of an engineered cost. Answer: FALSE Explanation: Research and development cost is an example of a discretionary cost. Diff: 2 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-5
11) One way to eliminate unused capacity is to downsize. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-5
12) Downsizing often means eliminating jobs, which can have an adverse effect on employee morale. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-5
13) Engineered costs differ from discretionary costs by the two key dimensions of: 1) type of process; and, 2) the level of uncertainty. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-5
14) Infrastructure costs are generally variable in nature. Answer: FALSE Explanation: These costs are general fixed costs because they are committed to and acquired before they are used to full capacity. Diff: 1 Type: TF CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-5
15) Which of the following BEST describes the effect of uncertainty? A) The higher the level of uncertainty about the relationship between resources used and outputs, the less likely a cause-and-effect relationship will exist. B) The higher the level of uncertainty about the relationship between resources used and outputs, the more likely a cause-and-effect relationship will exist. C) The higher the level of uncertainty about the relationship between resources used and outputs, the more likely the cost will classified as a discretionary cost. D) The higher the level of uncertainty about the relationship between resources used and outputs, the less likely the cost will classified as a discretionary cost. E) The higher the level of uncertainty about the relationship between resources used and outputs, the less likely a cause-and-effect relationship will exist, and the more likely the cost will classified as a discretionary cost. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-5
16) Unused capacity is difficult to determine for A) engineered costs. B) discretionary costs. C) both engineered and discretionary costs. D) costs with an observable cause and effect relationship. E) costs that do not deviate from expected amounts. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-5
17) The lower the inputs for a given set of outputs or the higher the outputs for a given set of inputs, the higher the level of A) standard costs. B) sales. C) productivity. D) labour costs. E) labour costs and productivity. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-5
18) Partial productivity multiplied by the quantity of input used results in A) expected production. B) budgeted output. C) quantity of output produced. D) a ratio. E) productivity. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-5
19) ________ measures the relationship between actual inputs used and actual outputs achieved. A) Total factor productivity B) Partial productivity C) Productivity D) Product yield variance E) Labour yield Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-5
20) The ratio of the quantity of output produced divided by the quantity of a single input used, is called A) total factor productivity. B) partial productivity. C) productivity. D) product yield variance. E) productivity variance. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-5
21) Melik Company provided the following information: Budgeted input Actual input Budgeted production Actual production
12,000 kilograms 15,000 litres 5,000 units 9,500 units
What is the partial productivity ratio? A) 0.64 units per kilogram B) 0.42 units per kilogram C) 2.40 units per kilogram D) 3.16 units per kilogram E) 0.80 units per kilogram Answer: A Explanation: PP = 9,500/15,000 = 0.64 units per kilogram Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-5
22) Which of the following statements is TRUE concerning productivity? A) The lower the partial productivity ratio, the greater the productivity. B) Productivity has increased when the partial productivity ratio is high. C) Prices of inputs are incorporated in the partial productivity ratio. D) The partial productivity ratio measures the number of outputs produced per multiple input. E) The partial productivity ratio measures the amount of a single output produced with multiple inputs. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-5
23) What is the direct manufacturing labour partial productivity, assuming 24,000 units were produced during the year and 80,000 direct manufacturing labour hours were used? A) 0.30 unit per direct manufacturing labour hour B) 0.50 unit per direct manufacturing labour hour C) 0.75 unit per direct manufacturing labour hour D) 4.00 unit per direct manufacturing labour hour E) 1.25 unit per direct manufacturing labour hour Answer: A Explanation: 24,000/80,000 = 0.3 Diff: 1 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-5
24) What is the direct manufacturing labour partial productivity, assuming 14,000 units were produced during the year and 40,000 direct manufacturing labour hours were used? A) 0.35 unit per direct manufacturing labour hour B) 0.50 unit per direct manufacturing labour hour C) 0.75 unit per direct manufacturing labour hour D) 4.00 unit per direct manufacturing labour hour E) 1.25 unit per direct manufacturing labour hour Answer: A Explanation: 14,000/40,000 = 0.35 Diff: 1 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-5
25) Which of the following statements is TRUE concerning productivity measures? A) Both the partial productivity and total factor productivity measures have the same weaknesses, but each has different strengths as a measure. B) Both the partial productivity and total factor productivity measures have the same strengths, but each has different weaknesses as a measure. C) Both the partial productivity and total factor productivity measures have the same strengths, and the same weaknesses as a measure. D) The weaknesses of the partial productivity measure are the strengths of the total factor productivity measure. E) The strengths and weakness in the measurements of the partial productivity measure are the strengths of the total factor productivity measures are completely unrelated to each other. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-5
26) Which of the following would result in an increase in total factor productivity, assuming all other variables are held constant? A) The quantity of outputs increases. B) The company uses more total inputs. C) The company uses lower quality inputs. D) Current technology becomes obsolete. E) Quantity of inputs increases and costs of inputs stays the same. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-5
27) Which of the following is a major advantage of total factor productivity? A) It measures the combined productivity of all inputs. B) The control operations personnel have over inputs. C) The control operations personnel have over outputs. D) The marketing mix determined by management. E) It is easy for operations personnel to understand. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-5
28) ________ is the ratio of the quantity of output produced to the costs of all inputs used, where the inputs are combined on the basis of current period prices. A) Total factor productivity B) Partial productivity C) Productivity D) Product yield variance E) Manufacturing conversion Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-5
29) A disadvantage of total factor productivity over partial productivity is that A) it focuses attention on a single input. B) it compares multiple physical inputs with outputs. C) the input is a fixed amount. D) operations personnel find financial measures more difficult to understand than physical measures. E) cause and effect relationships are more easily identified. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-5
30) Which of the following statements about productivity measures is TRUE? A) They may only be stated in terms of dollars. B) Total factor productivity explicitly considers gains from using fewer inputs, not from substituting inputs. C) Partial productivity measures allow managers to evaluate the effect of input substitutions on overall productivity. D) It is important to use the results as a starting point for analysis. E) The productivity measure may not be made for companies with multiple products. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-5
31) The average number of student credit hours taught per faculty member is an example of A) an expected performance measure. B) a budgeted productivity measure. C) a standard productivity measure. D) a partial productivity measure. E) a total factor productivity measure. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Understanding Objective: LO 14-5
32) Frazier Company provided the following information: Budgeted input Actual input Budgeted production Actual production
19,500 litres 17,400 litres 20,000 units 19,000 units
What is the partial productivity ratio? A) 0.94 unit per litre B) 1.03 units per litre C) 1.09 units per litre D) 0.98 units per litre E) 1.06 units per litre Answer: C Explanation: PP = 19,000/17,400 = 1.09 units per litre Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-5
33) Germaine Company provided the following information. Budgeted input Actual input Budgeted production Actual production
9,750 litres 8,650 litres 10,000 units 9,500 units
What is the partial productivity ratio? A) 0.97 unit per litre B) 1.02 units per litre C) 1.10 units per litre D) 1.12 units per litre E) 1.71 units per litre Answer: C Explanation: PP = 9,500/8,650 = 1.10 units per litre Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-5
34) Vinetta Ltd. provided the following information: Budgeted input Actual input Budgeted production Actual production
18,000 litres 16,200 litres 32,000 units 30,000 units
What is the partial productivity ratio? A) 1.85 unit per litre B) 1.74 units per litre C) 0.57 units per litre D) 0.56 units per litre E) 1.67 units per litre Answer: A Explanation: PP = 30,000/16,200 = 1.85 units per litre Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-5
35) Justine Ltd. provided the following information. Budgeted input Actual input Budgeted production Actual production
173,600 kilograms 180,000 kilograms 125,000 units 135,000 units
What is the partial productivity ratio? A) 0.72 unit per kilogram B) 0.75 units per kilogram C) 1.34 units per kilogram D) 1.12 units per kilogram E) 0.78 units per kilogram Answer: B Explanation: PP = 135,000/180,000 = 0.75 Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-5
36) Westcoast Ltd. provided the following information: Material input quantity - plastic Material input cost - plastic Material input quantity - paint Material input cost - paint Units produced Fully absorbed cost per unit Selling price per unit
173,600 kilograms $ 57,288 790 kilograms $ 7,200 115,700 units $2.00 $2.25
What is the total factor productivity ratio? A) 1.8:1 fully absorbed cost to material input costs B) 4:1 selling price to input cost C) 220:1 input cost (plastic kg.:paint kg.) D) 0.66 units per kilogram of input materials E) $1.79 units per dollar of input cost Answer: E Explanation: TFP = 115,700/($57,288 + $7,200) = $1.79 units per dollar of input cost Diff: 2 Type: MC CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-5
37) Power Company has been unhappy with the financial accounting variances that its cost accounting system has been producing, because its managers believe that there is more to evaluating an operation than just examining accounting numbers. Therefore, it has started gathering data to assist in the examination of nonfinancial results of operations. The following information relates to the manufacture of remote control units for televisions, radios, and stereo components.
Remote control units produced and sold Direct manufacture labour-hours Direct materials used (sets) Direct manufacture cost per hour Direct materials cost per set
Year 1 40,000 6,000 40,300 $18 $31
Year 2 50,000 6,600 50,250 $20 $32
Required: a. What is the partial productivity of direct materials for each year? b. What is the partial productivity of direct manufacturing labour for each year? c. Did each area improve between year 1 and year 2? Explain. d. What will be the projected direct material and labour needs for year 3 if remote control units increase by 6,000 units, assuming Power Company applies the constant returns to scale technology? Answer: a. Year 1 Partial prod. d. m. = 40,000/40,300 = 0.993 Year 2 Partial prod. d. m. = 50,000/50,250 = 0.995 b.
Year 1 Partial prod. d. m. l. = 40,000/6,000 = 6.67 Year 2 Partial prod. d. m. l. = 50,000/6,600 = 7.58
c.
Yes, both areas showed improvement because the ratios went up.
d. Production increase = 6,000/50,000 = 12 percent Projected direct material sets = 50,250 × 1.12 = 56,280 sets Projected direct mfg. labour = 6,600 × 1.12 = 7,392 hours Diff: 2 Type: SA CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-5
38) Electronics Inc. has been unhappy with the financial accounting variances that its cost accounting system has been producing, because its managers believe that there is more to evaluating an operation than just examining accounting numbers. Therefore, it has started gathering data to assist in the examination of nonfinancial results of operations. The following information relates to the manufacturing of remote control units for televisions, radios, and stereo components:
Remote control units produced and sold Direct manufacture labour-hours Direct materials used (sets) Direct manufacture cost per hour Direct materials cost per set
Year 1 20,000 3,000 20,200 $36 $62
Year 2 24,000 3,200 26,200 $40 $64
Required: a. What is the partial productivity of direct materials for each year? b. What is the partial productivity of direct manufacturing labour for each year? c. Did each area improve between year 1 and year 2? Explain. d. What will be the projected direct material and labour needs for year 3 if remote control units increase by 3,000 units, assuming Electronics, Inc. applies the constant returns to scale technology? Answer: a. Year 1 Partial prod. d. m. = 20,000/20,200 = 0.990 Year 2 Partial prod. d. m. = 24,000/26,200 = 0.916 b.
Year 1 Partial prod. d. m. l. = 20,000/3,000 = 6.67 Year 2 Partial prod. d. m. l. = 24,000/3,200 = 7.50
c.
No, materials went down, while labour improved.
d.
Production increase = 3,000/24,000 = 12.5 percent Projected direct material sets = 26,200 × 1.125 = 29,475 sets Projected direct mfg. labour = 3,200 × 1.125 = 3,600 hours
Diff: 3 Type: SA CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-5
39) Grader Company manufactures road graders. Because its managers all have engineering backgrounds, it prefers nonfinancial information for its decision-making models. Therefore, it requires that the accountants gather data to assist in the examination of nonfinancial results of operations. The following information relates to the manufacture of a mobile paver:
Units produced and sold Direct manufacture labour-hours Direct materials used (tonnes) Direct manufacture cost per hour Direct materials cost per tonne
Year 1 3,400 68,000 14,500 $21 $431
Year 2 2,800 57,600 12,200 $22 $443
Required: a. What is the partial productivity for direct materials for each year? b. What is the partial productivity for direct manufacturing labour for each year? c. What is the total factor productivity for each year? Answer: a. Year 1 Partial prod. d. m. = 3,400/14,500 = 0.234 Year 2 Partial prod. d. m. = 2,800/12,200 = 0.230 b.
Year 1 Year 2
Partial prod. d. m. l. = 3,400/68,000 = 0.050 Partial prod. d. m. l. = 2,800/57,600 = 0.049
c.
Year 1 Direct materials = 14,500 × $431 = $6,249,500 Direct mfg. labour = 68,000 × $21 = 1,428,000 Total $7,677,500 Year 2 Direct materials = 12,200 × $443 = $5,404,600 Direct mfg. Labour = 57,600 × $22 = 1,267,200 Total $6,671,800 Year 1
Total factor prod. = 3,400/$7,677,500 = 0.00044
Year 2
Total factor prod. = 2,800/$6,671,800 = 0.00042
Diff: 3 Type: SA CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-5
40) Lake Company manufactures small boats. Because its managers all have engineering backgrounds, they prefer nonfinancial information for their decision-making models. Therefore, they require the accountants gather data to assist in the examination of nonfinancial results of operations. The following information relates to the manufacture of a small boat.
Units produced and sold Direct manufacture labour-hours Direct materials used (tonnes) Direct manufacture cost per hour Direct materials cost per tonne
Year 1 1,700 35,000 7,000 $42 $700
Year 2 1,500 32,000 6,400 $44 $720
Required: a. What is the partial productivity for direct materials for each year? b. What is the partial productivity for direct manufacturing labour for each year? c. What is the total factor productivity for each year? Answer: a. Year 1 Partial prod. d. m. = 1,700/7,000 = 0.243 Year 2 Partial prod. d. m. = 1,500/6,400 = 0.234 b.
Year 1 Year 2
Partial prod. d. m. l. = 1,700/35,000 = 0.049 Partial prod. d. m. l. = 1,500/32,000 = 0.047
c.
Year 1 Direct materials = 7,000 × $700 = $4,900,000 Direct mfg. labour = 35,000 × $42 = 1,470,000 Total $6,370,000 Year 2 Direct materials = 6,400 × $720 = $4,608,000 Direct mfg. Labour = 32,000 × $44 = 1,408,000 Total $6,016,000 Year 1
Total factor prod. = 1,700/$6,370,000 = 0.00027
Year 2
Total factor prod. = 1,500/$6,016,000 = 0.00025
Diff: 3 Type: SA CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-5
41) Distance Company has been unhappy with the financial accounting variances that its cost accounting system has been producing, because its managers believe that there is more to evaluating an operation than just examining accounting numbers. Therefore, it has started gathering data to assist in the examination of nonfinancial results of operations. The following information relates to the manufacture of remote control units for televisions, radios, and stereo components: Year 1 Year 2 Remote control units produced and sold 80,000 100,000 Direct manufacture labour-hours 12,000 13,200 Direct materials used (sets) 80,600 100,500 Direct manufacture cost per hour $18 $20 Direct materials cost per set $31 $32 Required: a. What is the partial productivity of direct materials for each year? b. What is the partial productivity of direct manufacturing labour for each year? c. Did each area improve between Year 1 and Year 2? Explain. d. What will be the projected direct material and labour needs for Year 3 if remote control units increase by 12,000 units, assuming Distance Company applies the constant returns to scale technology? Answer: a. Year 1 Partial productivity of direct materials = 80,000/80,600 = 0.993 Year 2 Partial productivity of direct materials = 100,000/100,500 = 0.995 b.
Year 1 Partial productivity direct manufacturing labour = 80,000/12,000 = 6.67 Year 2 Partial productivity direct manufacturing labour = 100,000/13,200 = 7.58
c.
Yes, both areas showed improvement because the ratios went up.
d. Production increase = 12,000/100,000 = 12 percent Projected direct material sets = 100,500 × 1.12 = 112,560 sets Projected direct manufacturing labour = 13,200 × 1.12 = 14,784 hours Diff: 3 Type: SA CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-5
42) Following a strategy of product differentiation, Sting Corporation makes a high-end computer monitor, CM7. Sting Corporation presents the following data for the years 2018 and 2019: 2018 2019 Units of CM 7 produced and sold 5,000 Selling price $490 Direct materials (kilograms) 20,000 Direct materials costs per kilogram $30 Manufacturing capacity for CM7 (units) 10,000 Conversion costs $1,000,000 Conversion costs per unit of capacity $100 Selling and customer-service capacity (customers) 60 Total selling and customer-service costs $360,000 Selling and customer-service capacity cost per customer $6,000
5,500 $495 19,460 $34 8,000 $840,000 $105 56 $344,400 $6,150
Sting Corporation wants to reduce direct materials usage per unit of CM7 in 2019. Manufacturing conversion costs in each year depend on production capacity defined in terms of CM7 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Sting Corporation has 100 customers in 2018 and 115 customers in 2019. The industry market size for high-end computer monitors increased 5% from 2018 to 2019. Required: a. Calculate the effect on the change of operating income as a result of the productivity component. b. What is the partial productivity ratio for the direct materials for each year? (round to 4 decimal places) Give a plausible underlying reason for what may have caused the ratio to change. c. What is the total factor productivity for 2019 and the total factor productivity benchmark based on input costs that would have been used in 2018 to produce 2019 output?(round to 4 decimal places) d. Provide two key success factors, and a corresponding measure for each, that relate to Sting Corporation's internal business process balanced scorecard perspective.
Answer: a. 20,000 × (5,500/5,000) = 22,000;(19,460 - 22,000)x$34] + [8,000 - 10,000)x$105] + [56 - 60) × $6,150] = $ 320,960 F b.
PP 2018 = 5,000 units/20,000 kg. = 0.2500 PP 2019 = 5,500 units/19,460 kg. = 0.2826
Possible underlying reasons include: better quality materials resulting in fewer defects; improved quality control, and so forth. c.
TFP 2019 = 5,500 units/[(19,460 kg. × $34) + (8,000 units × $105) + (56 customers × $6,150)] = 0.0030
TFP benchmark = 5,500 units/[(22,000 kg. × $34) + (10,000 units × $105) + (60 customers × $6,150)] = 0.0025 d. KSF (measures) include: quality (defect rates), productivity (yield), on time delivery of inputs (time lost to stockouts), and so forth. Diff: 3 Type: SA CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Analyzing Objective: LO 14-5
43) Fairytale Weddings manufactures wedding dresses. The following information relates to the manufacture of gowns in its Perth plant: Year 1 Year 2 Units produced and sold 43,000 52,600 Direct manufacture labour-hours 22,000 26,000 Direct materials used (metres) 130,000 152,000 Direct manufacture labour cost per hour $16 $17 Direct materials cost per metre $10 $11 Required: Prepare an analysis of change in annual costs from year 1 to year 2 including direct materials, direct manufacturing labour, and total inputs.
Answer: Direct materials: Actual Year 1 costs: 130,000 × $10 = Year 1 input for year 2 output: 130,000 × 52,600/43,000 × $10 = Output adjustment
$1,300,000 1,590,233 $290,233 U
Year 1 input for Year 2 output: = Year 1 input with Year 2 costs: 130,000 × 52,600/43,000 × $11 = Input price change
$1,590,233 1,749,256 $159,023 U
Year 1 input with Year 2 costs: = Year 2 costs: 152,000 × $11 = Productivity change
$1,749,256 1,672,000 $77,256 F
Direct manufacturing labour: Actual Year 1 costs: 22,000 × $16 = Year 1 input for Year 2 output: 22,000 × 52,600/43,000 × $16 = Output adjustment
$352,000 430,586 $78,586 U
Year 1 input for Year 2 output: = Year 1 input with Year 2 costs: 22,000 × 52,600/43,000 × $17 = Input price change
$430,586 457,498 $26,912 U
Year 1 input with Year 2 costs: = Year 2 costs: 26,000 × $17 = Productivity change
$457,498 442,000 $15,498 F
All inputs: Output adjustment: $290,233 U + $78,586 U = Input price change: $159,023 U + $26,912 U = Productivity change: $77,256 F + $15,498 F =
$368,819 U $185,935 U $92,754 F
Diff: 3 Type: SA CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-5
44) Rocket Data Ltd. is an internet service provider. The company had 14,000,000 subscribers in 2019, and employed 18 customer service representatives. During 2019 each customer service representative worked 7 1/2 hours per day for 236 days at a fixed annual salary of $42,000. The company received 110,000 telephone calls from its customers in 2019 that lasted fifteen minutes on average. Required: Calculate the cost of unused customer service capacity in 2019 with the assumption that customer service costs are engineered costs. Answer: 1. Available customer capacity 7.5 hours per day × 236 days × 18 representatives = 31,860 hours 2. Customer service hours actually used 110,000 calls × 1/4 hour per call = 27,500 hours 3. Hours of unused customer service capacity 31,860 - 27,500 = 4,360 hours 4. Customer service cost per hour = $42,000/1,770 hours (7.5 hours per day × 236 days) = $23.73 5. Cost of unused customer service capacity = 4,360 hours × $23.73 per hour = $103,463 Diff: 3 Type: SA CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-5
45) Turtle Data Ltd. is an internet service provider. The company had 9,000,000 subscribers in 2019, and employed 12 customer service representatives. During 2019 each customer service representative worked 7 hours per day for 241 days at a fixed annual salary of $35,000. The company received 60,000 telephone calls from its customers in 2019 that lasted ten minutes on average. Required: Calculate the cost of unused customer service capacity in 2019 with the assumption that customer service costs are engineered costs. Answer: 1. Available customer capacity 7 hours per day × 241 days × 12 representatives = 20,244 hours 2. Customer service hours actually used 60,000 calls × 1/6 hour per call = 10,000 hours 3. Hours of unused customer service capacity 20,244 - 10,000 = 10,244 hours 4. Customer service cost per hour = $35,000/1,687 hours (7 hours per day × 241 days) = $20.75 5. Cost of unused customer service capacity = 10,244 hours × $20.75 per hour = $212,563 Diff: 3 Type: SA CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Applying Objective: LO 14-5
46) Ranger Electronics Ltd. manufactures a variety of high quality electronic components. Data from the last three months are presented below:
Direct materials partial productivity Overtime hours worked Defect rate On time delivery Set up time (average in hours) Number of machine breakdowns Downtime (hours) Number of products returned Throughput time (hours)
April 0.85 80 2.00% 98.0% 6.90 2 12.0 6 12.0
May 0.86 75 1.95% 98.3% 6.85 1 11.5 5 11.8
June 0.87 72 1.92% 98.0% 6.80 1 11.25 4 11.5
You are the new assistant controller for Ranger and the controller has asked you to review the performance over the last 3 months and write a summary analysis with your recommendations for follow up or further monitoring. In addition, the controller notes that the company, although it has many detailed performance measures, is considering implementing a balanced scorecard and asks you to identify the measures you think would be most appropriate to include in the balanced scorecard. Required: Evaluate the performance of Ranger Electronics over the 3 month period. Answer: Note responses may be in short formal report or memo format. This is an open ended question and student responses will vary. Instructors may wish to add details to guide students more in their analysis (for example, instructors may wish to advise students that the product mix remained constant over the 3 month period). Productivity Considerations: The plant's throughput time has improved from 12 hours to 11.5 hours. Setup time has also dropped from an average of 6.9 hours to 6.8 hours. This might indicate that the efficiency of the actual processing of products has improved, or it might indicate a different product mix in production with different average throughput time. Different types of production runs may necessitate different types of setups. If the product mix is constant, then this is an indicator of efficiency. Overtime hours have decreased which may be a result of overall volume of demand decreasing, or perhaps less urgency of demand (better planning? customer expectations for delivery?). The DM partial productivity has improved as the ratio of outputs produced to inputs used has increased. Downtime is down which may indicate efficient production scheduling, but could also be an indicator of product mix and customer demand. Quality Considerations: The company is performing well with respect to quality. The defect rate is down and the number of products returned has declined. In addition, machine breakdowns have declined. Downtime is down, this may be related to the lower breakdowns. Since the company is a manufacturer of high quality products, the quality dimension is important.
Customer Considerations: On time delivery is high at 98+%. It improved in May but fell back to April's level in June. Additional information would be useful to determine whether the 98% level is competitive for the industry. Again, the defect rate is down and the number of products returned has declined. However, we do not have information on total volumes of product sold, so it is not clear if the return RATE has changed. Financial Considerations: We do not have specific information on the financial dimensions of performance. However, high DM productivity, lower overtime, lower defects, lower returns, lower setup hours, lower throughput time, lower downtime and lower breakdowns are all indicators of improvements which would suggest favourable efficiency variances. We do not know the prices of the inputs though. Recommendations: Investigate causes for overtime. Although the hours are declining, overtime increases unit costs due to overtime premiums for labour. Is the overtime a result of heavy demand, poor production scheduling, shortage of raw materials? Is the on-time delivery rate consistent with industry expectations? Why was it higher in May and can this be replicated? Since the company is a manufacturer of high quality components, can the reporting be extended to include more aspects of quality reporting (prevention, appraisal, internal and external failure)? Balanced Scorecard Considerations: The important points for students to note are: 1. BSC should be linked to the company's mission. Since we do not have the mission statement, we are limited in our analysis; however, the quality dimension is important. Therefore # of returns would be an important measure. On time delivery may be important to customers, but perhaps there are other aspects of quality that are more important (service?). In the internal business processes dimension, defect rate is a measure directly linked to the quality dimension. There are quite a few productivity and measures that relate to the internal business processes. The company should select the ones that best link to its mission. As noted, financial measures are missing; cost of quality measures may be added. Learning and growth measures are also missing. Innovation measures (# of new products) likely link well to mission of quality. 2. The number of measures should be limited. While, for example, there are many internal business processes measures, not all of these measures should be elevated to the strategic level. 3. BSC should include several dimensions. Traditionally the four dimensions are Customer, Financial, Internal Business Processes and Learning & Growth. The performance measurement, for strategic BSC, needs to be broader. Diff: 3 Type: ES CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Analyzing Objective: Cumulative
47) Granger Electronics Ltd. manufactures a variety of high quality electronic components. Data from the last three months are presented below:
Direct materials partial productivity Overtime hours worked Defect rate On time delivery Set up time (average in hours) Number of machine breakdowns Downtime (hours) Number of products returned Throughput time (hours)
April 0.75 60 1.00% 97.0% 5.90 3 15.0 5 10.0
May 0.76 65 0.95% 97.3% 5.85 2 11.5 4 9.8
June 0.77 62 0.92% 97.0% 5.80 2 11.0 3 9.5
You are the new assistant controller for Granger and the controller has asked you to review the performance over the last 3 months and write a summary analysis with your recommendations for follow up or further monitoring. In addition, the controller notes that the company, although it has many detailed performance measures, is considering implementing a balanced scorecard and asks you to identify the measures you think would be most appropriate to include in the balanced scorecard. Required: Evaluate the performance of Granger Electronics over the 3 month period. Answer: Note responses may be in short formal report or memo format. This is an open ended question and student responses will vary. Instructors may wish to add details to guide students more in their analysis (for example, instructors may wish to advise students that the product mix remained constant over the 3 month period). Productivity Considerations: The plant's throughput time has improved from 10 hours to 9.5 hours. Setup time has also dropped from an average of 5.9 hours to 5.8 hours. This might indicate that the efficiency of the actual processing of products has improved, or it might indicate a different product mix in production with different average throughput time. Different types of production runs may necessitate different types of setups. If the product mix is constant, then this is an indicator of efficiency. Overtime hours have decreased which may be a result of overall volume of demand decreasing, or perhaps less urgency of demand (better planning? customer expectations for delivery?). The DM partial productivity has improved as the ratio of outputs produced to inputs used has increased. Downtime is down which may indicate efficient production scheduling, but could also be an indicator of product mix and customer demand. Quality Considerations: The company is performing well with respect to quality. The defect rate is down and the number of products returned has declined. In addition, machine breakdowns have declined. Downtime is down, this may be related to the lower breakdowns. Since the company is a manufacturer of high quality products, the quality dimension is important. Customer Considerations: On time delivery is high at 97+%. It improved in May but fell back to April's level in June. Additional information would be useful to determine whether the 97% level is competitive for the industry. Again, the defect rate is down and the number of products returned has declined. However, we do not have information on total volumes of product sold, so it is not clear if the return RATE has changed. Financial Considerations:
We do not have specific information on the financial dimensions of performance. However, high DM productivity, lower overtime, lower defects, lower returns, lower setup hours, lower throughput time, lower downtime and lower breakdowns are all indicators of improvements which would suggest favourable efficiency variances. We do not know the prices of the inputs though. Recommendations: Investigate causes for overtime. Although the hours are declining, overtime increases unit costs due to overtime premiums for labour. Is the overtime a result of heavy demand, poor production scheduling, shortage of raw materials? Is the on-time delivery rate consistent with industry expectations? Why was it higher in May and can this be replicated? Since the company is a manufacturer of high quality components, can the reporting be extended to include more aspects of quality reporting (prevention, appraisal, internal and external failure)? Balanced Scorecard Considerations: The important points for students to note are: 1. BSC should be linked to the company's mission. Since we do not have the mission statement, we are limited in our analysis; however, the quality dimension is important. Therefore # of returns would be an important measure. On time delivery may be important to customers, but perhaps there are other aspects of quality that are more important (service?). In the internal business processes dimension, defect rate is a measure directly linked to the quality dimension. There are quite a few productivity and measures that relate to the internal business processes. The company should select the ones that best link to its mission. As noted, financial measures are missing; cost of quality measures may be added. Learning and growth measures are also missing. Innovation measures (# of new products) likely link well to mission of quality. 2. The number of measures should be limited. While, for example, there are many internal business processes measures, not all of these measures should be elevated to the strategic level. 3. BSC should include several dimensions. Traditionally the four dimensions are Customer, Financial, Internal Business Processes and Learning & Growth. The performance measurement, for strategic BSC, needs to be broader. Diff: 3 Type: ES CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Analyzing Objective: Cumulative
48) Define engineered and discretionary costs and give two examples of each. Answer: An engineered cost results from a cause-and-effect relationship between the cost driver output and the resources used to produce that output. An example of an engineered cost would be direct materials in the production of products. Other examples of engineered costs might include shipping costs or electrical costs. A discretionary cost has two features. The first feature is that the cost arises from a periodic decision regarding the amount of cost to be incurred. The second feature is that no measurable cause-and-effect relationship exists between the output and the resources used. An example of a discretionary cost would be the cost of advertising for a product, the amount spent on researching new products, or employee training expenses. Diff: 2 Type: ES CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Remembering Objective: LO 14-5
49) Can a company identify unused capacity and, if so, how can unused capacity be managed? Answer: It is relatively easy for a company to recognize unused capacity for engineered costs, but it is more difficult for a company to recognize unused capacity for discretionary costs. Downsizing, or rightsizing, is an approach to managing unused capacity by matching costs to the activities that need to be performed. Diff: 2 Type: ES CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Analyzing Objective: LO 14-6
50) Ralph Company has been very aggressive in developing various types of financial and nonfinancial measurement schemes to help with the evaluation of its manufacturing processes. It appears that some of the managers are suboptimizing in that their decision processes are geared solely for their department's benefit, sometimes to the detriment of the organization as a whole. Required: What changes in the evaluation system could the company implement to help minimize the suboptimization of the managers' decision-making process? Answer: The company could implement a total factor productivity concept. Its major advantage is that it measures the combined productivity of all inputs to produce outputs and, therefore, explicitly evaluates substitution among inputs. For example, if buying a cheap material makes the cost of materials look favourable but causes more labour-hours, therefore causing labour costs to be unfavourable, suboptimization may be occurring. The total factor productivity takes into account both the materials costs and the labour costs and if they offset each other, that is fine, but if they do not offset, then the variance will be so noted. Diff: 2 Type: ES CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Analyzing Objective: LO 14-5
51) Total factor productivity (TFP) is easy to compute for a single-product company. When dealing with a multiproduct company, one of two adjustments must be made. What are these potential adjustments? Answer: One of the following two adjustments must be made in the TFP calculations: 1. Convert the outputs from physical measures to a dollar value common denominator, analogous to the multiple input case. 2. Allocate the input costs to the different outputs. This is appropriate when the inputs can be reasonably allocated to the different outputs. Diff: 2 Type: ES CPA Competencies: Chapter 14 3.4.1 Evaluates sources and drivers of revenue growth, 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues Skill: Analyzing Objective: LO 14-5
Cost Accounting: A Managerial Emphasis - Cdn. Ed., 9e (Datar) Chapter 15 Period Cost Allocation 15.1 Understand the four purposes for period cost allocation and the four criteria to justify the method chosen to allocate the non-manufacturing period costs. 1) The allocation of one particular cost must satisfy all four justifications of cost allocation. Answer: FALSE Explanation: Managers may incorporate one or more of the justifications for their decisions about the design of a costing system. Diff: 2 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-1
2) Indirect costs typically constitute a large percentage of the costs assigned to cost objects. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-1
3) Full product costing requires the recovery of all costs generated by all business functions in the value chain. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-1
4) The costs of designing and implementing sophisticated cost allocation systems are usually not very visible. Answer: FALSE Explanation: Time, aggravation, and money in changing the costing system are all too evident. Diff: 2 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-1
5) If one is willing to put in the time and expense, it is always possible to identify the specific cause-andeffect relationship needed for a cost allocation base. Answer: FALSE Diff: 2 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-1
6) Benefits from using a well-designed cost allocation system are more evident than the costs. Answer: FALSE Explanation: Time, aggravation, and money in changing the costing system are all too evident. The benefits are less evident. Diff: 2 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-1
7) One of the purposes of allocating indirect costs is to justify costs or compute reimbursement amounts. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-1
8) When using the causality criterion, cost drivers are selected based on a cause-and-effect relationship between the business functions. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-1
9) The ability-to-bear criterion is considered superior when the purpose of cost allocation is motivation. Answer: FALSE Explanation: The cause-and-effect or benefits-received criteria is considered superior when the purpose of cost allocation is motivation. Diff: 2 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-1
10) The narrower the scope of service provided by, for example, R&D, the more important it is to allocate costs proportionately to the benefits received by the internal users. Answer: FALSE Explanation: The broader the scope of service provided by, for example, R&D, the more important it is to allocate costs proportionately to the benefits received by the internal users. Diff: 2 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-1
11) To encourage the design of products that are simpler to manufacture or less costly to service, would be an example of which cost allocation purpose? A) to provide information for economic decisions B) to motivate managers and employees C) to determine employees' wages D) to measure income and assets for reporting to external parties E) to justify costs or compute reimbursements Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-1
12) Which of the following illustrates a purpose for allocating costs to cost objects? A) to provide information for economic decisions B) to reduce competition C) to determine employee benefit costs D) to defer income and reduce taxes payable E) to evaluate managers and employees Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-1
13) Deciding whether to make a component part or to purchase it, would be an example of which cost allocation purpose? A) to provide information for economic decisions B) to motivate managers C) to determine employee's wages D) to measure income and assets for reporting to external parties E) to motivate employees Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-1
14) For the economic decision purpose A) the costs in all six business functions should be included. B) costs for only one function is included. C) period costs are not allocated. D) costing is only related to product pricing. E) only inventoriable costs under ASPE/IFRS should be included. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-1
15) Which of the following criteria subsidizes poor performers at the expense of the best performers? A) ability to bear B) benefit received C) causality D) fairness and equity E) benefits expended Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-1
16) The belief that a corporate division with higher sales ought to be allocated more of the company's advertising costs because it must have derived more benefit from the expenditures than a division with lower sales, is an example of which criteria for cost allocation decisions? A) ability to bear B) benefits expended C) causality D) fairness and equity E) benefit received Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-1
17) Which of the following is NOT a common criteria used to guide decisions related to cost allocations? A) ability to bear B) benefit received C) causality D) fairness and equity E) stable market prices Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-1
18) Which of the following is the first step in the cost-allocation decision process? A) Calculate the cost-allocation rate for each indirect cost pool. B) Identify the purpose of the cost allocation. C) Identify the direct inputs that are already measured. D) Identify the relevant indirect costs included in the cost pool(s) or numerator(s). E) Analyze the alternatives and select the best one for the denominator. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-1
19) Which of the following is TRUE concerning cost allocation in a multi-product company? A) When the indirect costs are variable and each product is assembled sequentially, the causality criterion can guide the choice of a cost allocation base. B) When the indirect costs are fixed and each product is assembled sequentially, the causality criterion can guide the choice of a cost allocation base. C) When the indirect costs are variable and each product is not assembled sequentially, the causality criterion can guide the choice of a cost allocation base. D) When the indirect costs are fixed and each product is not assembled sequentially, the causality criterion can guide the choice of a cost allocation base. E) When the indirect costs are fixed and the products are produced jointly, it is possible to identify specific cause-and-effect relationships between work on an individual product and total costs incurred. Answer: A Diff: 3 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-1
20) Which purpose of cost allocation is used to encourage sales representatives to push high-margin products or services? A) to provide information for economic decisions B) to motivate managers and other employees C) to justify costs D) to measure income and assets for reporting to external parties E) to compute reimbursement Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-1
21) Which purpose of cost allocation is used to decide on the selling price for a customized product or service? A) to provide information for economic decisions B) to motivate managers and other employees C) to justify costs D) to measure income and assets for reporting to external parties E) to compute reimbursement Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-1
22) In a firm's value chain, downstream costs are categorized as ________. A) customer service costs B) production costs C) design costs D) manufacturing quality control costs E) research and development costs Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-1
23) In a firm's value chain, upstream costs are categorized as ________. A) customer service costs B) advertising costs C) design costs D) marketing costs E) distribution costs Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-1
24) Scarborough Sales, a real estate company specializing in apartment rentals and home sales, is having trouble gathering appropriate cost information for evaluating its operations. It owns several large apartment complexes and sells homes owned by builders or existing homeowners. As the company's new accountant, you define cost by major activity. You use this information for allocating costs to cost objects. Also, cost pools are created for appropriate cost allocations. The owner of the company is interested in exactly what you have done, and why it appears to be working so smoothly. Required: Briefly state the four purposes for allocating costs to cost objects and give two examples of how each can be used for the real estate company. Answer: The four purposes are: 1. To provide information for economic decisions 2. To motivate managers and employees 3. To justify costs or compute reimbursements 4. To measure income and assets for reporting to external parties Examples are: 1. a. Population growth in the market area b. To determine if the company needs to go into the commercial market 2. a. Provide sales incentives through commission rates and sales volume goals b. Reward employees for selling high margin properties 3. a. Limit employee expenses on home sales to some percentage of the selling price b. Provide sufficient customer services to attract new clients 4. a. Use of proper amortization methods for apartment buildings b. Properly accrue commissions at end of each accounting period Diff: 2 Type: ES CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-1
25) A company might choose to allocate corporate costs to various divisions within the company for what four purposes? Give an example of each. Answer: 1. To provide information for economic decisions, for example, allocating costs from all six value-chain functions to decide on the selling price of a customized product 2. To motivate managers and employees, for example, allocating corporate costs such as accounting support to division managers to discourage requesting a multitude of unnecessary financial reports 3. To justify costs or compute reimbursement, for example, to allocate fixed design and production costs when arriving at a fair price for a government contract 4. To measure income and assets for reporting to external parties, for example, allocating manufacturing overhead when costing inventories for financial statements presented in the company's annual report Note: Examples will vary. Diff: 2 Type: ES CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-1
26) An electronics manufacturer is trying to encourage its engineers to design simpler products so that overall costs are reduced. Required: Which of the value-chain function costs (R&D, design, production, marketing, distribution, customer service) should be included in product-cost estimates to achieve the above purpose? Why? Answer: All costs that are affected by the design should be included in the product cost estimate. These costs include the cost of design, production, distribution, and customer service. Diff: 2 Type: ES CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-1
27) List three benefits from the careful costing of combinations of quantities of products and services in bundled products. Answer: Any three of: 1. More accurate costing results in more accurate full product pricing. 2. Refined cost systems improve the budgeting process. 3. Feedback in the form of variance analysis indicates when business functions are consuming more resources than budgeted. 4. Understanding which product bundles are more or less profitable enables managers to select the most profitable from among existing opportunities. Diff: 2 Type: ES CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-1
For each item listed, select the appropriate purpose of cost allocation from the list below. A purpose may
be used more than once. A) To provide information for economic decisions B) To measure income and assets for reports to external parties C) To justify costs or compute reimbursement amounts D) To motivate managers and other employees 28) To cost a product at a fair price for government contracts Diff: 2 Type: MA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-1
29) To encourage simpler product design Diff: 2 Type: MA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-1
30) To decide on an appropriate selling price for a special-order product Diff: 2 Type: MA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-1
31) To cost inventories for reporting on a company's tax return Diff: 2 Type: MA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-1
32) To encourage the sales department to focus on high-margin products Diff: 2 Type: MA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-1
33) To evaluate a make or buy decision Diff: 2 Type: MA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-1
34) To cost inventories for the balance sheet Diff: 2 Type: MA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-1
35) To decide whether to add or delete a product line Diff: 2 Type: MA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-1
Answers: 28) C 29) D 30) A 31) B 32) D 33) A 34) B 35) A
15.2 Evaluate and select between the single- and dual-rate cost methods to apply period costs of support departments. 1) The single-rate method is when all indirect costs are combined in one cost pool and allocated to cost objects via a single rate per unit. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-2
2) One of the important aspects about the dual-rate method is that it allows managers to see how variable and fixed costs behave differently. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-2
3) The dual-rate cost allocation method classifies costs into two pools, a budgeted cost pool and an actual cost pool. Answer: FALSE Explanation: The dual-rate cost allocation method classifies costs into two pools, a variable cost pool and a fixed cost pool. Diff: 1 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-2
4) The single-rate method makes a distinction between fixed and variable costs. Answer: FALSE Explanation: The single-rate method makes no distinction between fixed and variable costs. Diff: 1 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-2
5) Using the single-rate method transforms the fixed costs per hour into a variable cost to users of that facility. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-2
6) The single-rate cost allocation method provides better information for decision making than the dualrate method. Answer: FALSE Explanation: The dual-rate cost allocation method provides better information for decision making than the single-rate method. Diff: 2 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-2
7) An advantage of the single-rate method is that it is easier and always the most accurate cost-allocation choice. Answer: FALSE Explanation: The single-rate method is the easiest cost allocation method, but it is the least accurate cost allocation choice. Diff: 2 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-2
8) The use of budget capacity in the denominator rate for a fixed cost pool is preferable as it reduces the ability of managers to manipulate the allocation rate. Answer: FALSE Explanation: The use of practical capacity does not burden user departments with the cost of idle capacity and therefore reduces the incentive to over estimate budgeted hours. Diff: 3 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-2
9) The standard cost method uses budgeted cost driver use to determine the overhead allocation rate. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-2
10) The method that allocates costs in each cost pool using the same rate per unit is known as the A) incremental cost allocation method. B) reciprocal cost allocation method. C) single-rate cost allocation method. D) dual-rate cost allocation method. E) homogeneous cost allocation method. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-2
11) Benefits of the single-rate method include A) the low cost of implementation. B) fixed costs that are transformed into variable costs for user decision making. C) signals regarding how variable and fixed costs behave differently. D) information that leads to outsourcing decisions that benefit the organization as a whole. E) there is a stronger cause and effect relationship. Answer: A Diff: 3 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-2
12) Benefits of the dual-rate method include A) variable costs that are transformed into fixed costs for user decision making. B) the low cost of implementation. C) avoidance of expensive analysis for categorizing costs as either fixed or variable. D) information that leads to outsourcing decisions that benefit the organization as a whole. E) increased costs of implementation. Answer: D Diff: 3 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-2
13) Under which of the following methods of cost allocation is there NO distinction between fixed and variable costs? A) fixed method B) dual-rate method C) homogeneous method D) standard cost method E) single-rate method Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-2
14) Which cost allocation method differentiates between variable and fixed costs? A) dual-rate method B) heterogeneous method C) single-rate method D) variable method E) fixed rate method Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-2
15) Which of the following could be described as a department that adds value to a product or service, which is observable by a customer? A) a personnel department B) an assigned department C) a support department D) a service department E) an operating department Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-2
16) Which of the following does NOT apply to support departments? A) A support department is an operating department. B) Support departments create special accounting problems when they provide reciprocal support to each other. C) An example of a support department would be a personnel department. D) To obtain accurate product costs requires the inclusion of support department costs. E) Direct support costs are always traced, indirect support department costs are allocated. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-2
17) Resource consumption accounting (RCA) employs an allocation procedure akin to a dual-rate system. For each cost/resource pool, cost assignment rates A) for fixed costs are based on actual quantity, while rates for variable costs are based on budgeted quantities. B) for fixed costs are based on practical capacity supplied, while rates for variable costs are based on actual quantities. C) for fixed and variable costs are based on actual output quantities. D) for fixed and variable costs are based on budgeted quantities. E) for fixed costs are based on practical capacity supplied, while rates for variable costs are based on budgeted quantities. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-2
Use the information below to answer the following question(s). Data Source Media manufactures cassettes and CDs in separate divisions utilizing one plant location. The following data have been prepared for review. Fixed operation costs Practical capacity Budgeted usage: Cassette Division CD Division Budgeted variable cost per hour
$550,000 1,250 hours 1,000 hours 175 hours $600 per hour
18) What is the total cost per hour of use for the Cassette Division assuming budgeted usage is the allocation base and a single-rate method is used? A) $1,050.00 B) $600.00 C) $1068.09 D) $382.98 E) $360.00 Answer: C Explanation: Cost per hour = [($550,000/1,175) + $600] = $1068.09 = $982.98 per hour used Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2
19) What is the total cost per hour of use for the CD Division assuming the budgeted rate is used for variable costs and practical capacity is the allocation base for fixed costs? A) $315.79 B) $1050.00 C) $924.00 D) $1040.00 E) $360.00 Answer: D Explanation: ($550,000/1,250 hours) + $600 = $1040.00 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2
Use the information below to answer the following question(s). General Media manufactures cassettes and CDs in separate divisions utilizing one plant location. The following data have been prepared for review. Fixed operation costs Practical capacity Budgeted usage: Cassette Division CD Division Budgeted variable cost per hour
$950,000 2,500 hours 2,000 hours 350 hours $400 per hour
20) What is the fixed cost per year and the variable cost per hour, respectively, for the General Media Cassette Division using the dual-rate method, assuming that the allocation bases are capacity for fixed costs and budgeted capacity for variable costs? A) $720,000 and $360 B) $760,000 and $400 C) $765,958 rounded and $400 D) $765,958 rounded and $360 E) $900,000 and $400 Answer: B Explanation: Fixed cost per year = ($950,000/2,500 hours) × 2,000 hours = $760,000 Variable cost per hour = $400 per hour used Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2
21) What are the fixed cost per year and the variable cost per hour for the General Media CD Division if the dual-rate method is used? Assume that the allocation bases are budgeted usage for fixed costs and for variable costs. A) $100,270 and $480 B) $126,000 and $400 C) $134,043 rounded and $480 D) $141,489 rounded and $400 E) $900,000 and $400 Answer: D Explanation: Fixed cost per year = [(350/2,350) × 950,000] = $141,489 Variable cost per hour = $400 per hour used Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2
22) What is the allocated cost to the two General Media divisions, respectively, if the single rate is $1,000? Assume that the Cassette and CD Divisions used 1,750 and 200 hours, respectively. A) $807,692 rounded and $92,308 rounded B) $900,000 and $200,000 C) $1,750,000 and $200,000 D) $2,800,000 and $320,000 E) $900,000 and $320,000 Answer: C Explanation: Cassette: 1,750 × $1,000 = $1,750,000 CD: 200 × $1,000 = $200,000 Diff: 1 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2
23) What is the allocated cost to the two General Media divisions, respectively, if budgeted usage is the base for fixed costs and actual usage is the base for variable costs? (Use the dual-rate method.) Assume that the Cassette and CD Divisions used 1,750 and 200 hours, respectively. A) $1,050,000; $120,000 B) $1,787,240; $204,256 C) $1,508,511; $221,489 D) $2,000,126; $294,112 E) $1,787,240; $254,043 Answer: C Explanation: Cassette: ($950,000 × (2,000/2,350)) + (1,750 × $400) = $1,508,511 CD: ($950,000 × (350/2,350)) + (200 × $400) = $221,489 Diff: 3 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2
Answer the following question(s) using the information below: The Mississauga Corporation has a central copying facility. The copying facility has only two users, the Marketing Department and the Operations Department. The following data apply to the coming budget year: Budgeted costs of operating the copying facility for 200,000 to 300,000 copies: Fixed costs per year Variable costs Budgeted long-run usage in copies per year: Marketing Department Operations Department
$30,000 3 cents (.03) per copy 60,000 copies 190,000 copies
Budgeted amounts are used to calculate the allocation rates. Actual usage for the year by the Marketing Department was 40,000 copies and by the Operations Department was 180,000 copies. 24) If a single-rate cost allocation method is used, what amount of copying facility costs will be budgeted for the Marketing Department? A) $9,000 B) $1,800 C) $7,200 D) $28,500 E) $24,600 Answer: A Explanation: [(60,000/(60,000 + 190,000)) × $30,000] + (60,000 × $0.03) = $7,200 + $1,800 = $9,000 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2
25) If a single-rate cost allocation method is used, what amount of copying facility costs will be allocated to the Marketing Department? Assume actual usage is used to allocate copying costs. A) $8,400 B) $9,000 C) $6,000 D) $4,800 E) $6,655 Answer: C Explanation: $30,000+ ((190,000 + 60,000) × $0.03) = $37,500 $37,500/250,000 copies = $0.15 per copy × 40,000 = $6,000 Diff: 3 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2
26) If a dual-rate cost allocation method is used, what amount of copying facility costs will be budgeted for the Operations Department? A) $28,500 B) $28,200 C) $30,245 D) $29,945 E) $24,600 Answer: A Explanation: [(190,000/(60,000 + 190,000)) × $30,000] + (190,000 × $0.03) = $28,500 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2
27) If a dual-rate cost allocation method is used, what amount of copying facility costs will be allocated to the Operations Department? Assume budgeted usage is used to allocate fixed copying costs and actual usage is used to allocate variable copying costs. A) $30,245 B) $29,945 C) $28,500 D) $28,200 E) $24,600 Answer: D Explanation: [(190,000/(60,000 + 190,000)) × $30,000] + (180,000 × $0.03) = $28,200 Diff: 3 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2
Answer the following question(s) using the information below:
The Fancy Flier Airplane Corporation has a central materials laboratory. The laboratory has only two users, the Large Plane Department and the Small Plane Department. The following data apply to the coming budget year: Budgeted costs of operating the materials laboratory for 10,000 to 20,000 technician hours per year: Fixed costs per year Variable costs Budgeted long-run usage in hours per year: Large Plane Department Small Plane Department
$600,000 $80 per technician hour 9,000 technician hours 7,000 technician hours
Budgeted amounts are used to calculate the allocation rates. Actual usage for the year by the Large Plane Department was 6,000 technician hours and by the Small Plane Department was 6,500 technician hours. 28) If a single-rate cost allocation method is used, what is the allocation rate per hour used? A) $80.00 B) $117.50 C) $146.67 D) $100.00 E) $128.00 Answer: B Explanation: ($600,000 + (16,000 hours × $80))/16,000 hours = $117.50/per hour used Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2
29) If a dual-rate cost allocation method is used, what amount of materials laboratory costs will be budgeted for the Large Plane Department? A) $1,057,500 B) $822,500 C) $1,880,000 D) $1,600,000 E) $982,500 Answer: A Explanation: [(9,000/(9,000 +7,000)) × $600,000] + (9,000 × $80) = $1,057,500 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2
30) If a single-rate cost allocation method is used, what amount of materials laboratory costs will be allocated to the Large Plane Department? Assume actual usage is used to allocate copying costs.
A) $1,057,500 B) $822,500 C) $763,750 D) $705,000 E) $1,476,923 Answer: D Explanation: $600,000 + ((9,000 + 7,000) × $80) = $1,880,000 $1,880,000/16,000 hours = $117.50 per hour × 6,000 = $705,000 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2
31) If a dual-rate cost allocation method is used, what amount of materials laboratory costs will be allocated to the Large Plane Department? Assume budgeted usage is used to allocate fixed materials laboratory costs and actual usage is used to allocate variable materials laboratory costs. A) $782,500 B) $817,500 C) $822,500 D) $705,000 E) $996,923 Answer: B Explanation: [(9,000/(9,000 +7,000)) × $600,000] + (6,000 × $80) = $817,500 Diff: 3 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2
32) If a dual-rate cost allocation method is used, what amount of materials laboratory costs will be budgeted for the Small Plane Department? A) $1,057,500 B) $763,750 C) $705,000 D) $822,500 E) $897,500 Answer: D Explanation: [(7,000/(9,000 +7,000)) × $600,000] + (7,000 × $80) = $822,500 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2
33) If a dual-rate cost allocation method is used, what amount of materials laboratory costs will be allocated to the Small Plane Department? Assume budgeted usage is used to allocate materials laboratory costs and actual usage is used to allocate variable materials laboratory costs.
A) $822,500 B) $782,500 C) $817,500 D) $763,750 E) $832,000 Answer: B Explanation: [(7,000/(9,000 +7,000)) × $600,000] + (6,500 × $80) = $782,500 Diff: 3 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2
Answer the following questions using the information below: The Charmatz Corporation has a central copying facility. The copying facility has only two users, the Marketing Department and the Operations Department. The following data apply to the coming budget year: Budgeted costs of operating the copying facility for 400,000 to 600,000 copies: Fixed costs per year Variable costs Budgeted long-run usage in copies per year: Marketing Department Operations Department
$60,000 3 cents (.03) 120,000 380,000
per copy copies copies
Budgeted amounts are used to calculate the allocation rates. Actual usage for the year by the Marketing Department was 80,000 copies and by the Operations Department was 360,000 copies. 34) If a single-rate cost allocation method is used, what amount of copying facility costs will be budgeted for the Marketing Department? A) $18,000 B) $3,600 C) $14,400 D) $16,800 Answer: A Explanation: [(120,000/(120,000 + 380,000)) × $60,000] + (120,000 × $0.03) = $18,000 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2
35) If a single-rate cost allocation method is used, what amount of copying facility costs will be allocated to the Marketing Department? Assume actual usage is used to allocate copying costs. A) $16,800
B) $18,000 C) $12,000 D) $9,600 Answer: C Explanation: $60,000 + ((120,000 + 380,000) × $0.03) = $75,000 $75,000/500,000 copies = $0.15 per copy × 80,000 = $12,000 Diff: 3 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2
36) If a dual-rate cost-allocation method is used, what amount of copying facility costs will be budgeted for the Operations Department? A) $57,000 B) $56,400 C) $60,490 D) $59,890 Answer: A Explanation: [(380,000)/(120,000 + 380,000)) × $60,000] + (380,000 × $0.03) = $57,000 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2
37) If a dual-rate cost-allocation method is used, what amount of copying facility costs will be allocated to the Operations Department? Assume budgeted usage is used to allocate fixed copying costs and actual usage is used to allocate variable copying costs. A) $60,490 B) $59,890 C) $57,000 D) $56,400 Answer: D Explanation: [(380,000)/(120,000 + 380,000)) × $60,000] + (360,000 × $0.03) = 56,400 Diff: 3 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2
38) Which of the following departments is least likely to be a support department for a boat manufacturing company? A) personnel B) moulding and assembly C) data processing D) accounting E) purchasing Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-2
39) AAA Fence Company manufactures wireless and aluminium fences in a common manufacturing facility. The company has become aware of unusual discrepancies in the costs of its products which management cannot explain. It seems that the sales and related production of wireless fences are in a very consistent growth market and are easily predicted. However, the sales and related production of aluminium fences are very erratic. Management does not understand why the costs per unit of wireless fences change when the production level seldom changes. Required: a. After some investigation you determine that for the last two quarters, the common fixed cost of the manufacturing operation has been $800,000. For the first quarter 12,000 wireless and 13,000 aluminium units were produced, respectively. For the second quarter, 12,000 wireless and 8,000 aluminium units were produced, respectively. What were the total cost per product and the cost per unit of each product in each quarter when production units is the allocation basis? b. After studying the results of the above computations you decide to use the company's average quarterly production of 12,000 wireless and 10,500 aluminium units as the allocation base, respectively. What are the total cost per product and the cost per unit per quarter for each product when average production is used? c. Which allocation base do you recommend, and why?
Answer: a. First quarter: Wireless Fence: Allocated costs: $800,000 × 12,000/25,000 = $384,000 Cost per unit: $384,000/12,000 = $32.00 Aluminium Fence: Allocated costs: $800,000 × 13,000/25,000 = $416,000 Cost per unit: $416,000/13,000 = $32.00 Second quarter: Wireless Fence: Allocated costs: $800,000 × 12,000/20,000 = $480,000 Cost per unit: $480,000/12,000 = $40.00 Aluminium Fence: Allocated costs: $800,000 × 8,000/20,000 = $320,000 Cost per unit: $320,000/8,000 = $40.00 b. Average method, all quarters: Wireless Fence: Allocated costs: $800,000 × 12,000/22,500 = $426,667 Cost per unit: $426,667/12,000 = $35.56 Aluminium Fence: Allocated costs: $800,000 × 10,500/22,500 = $373,333 Cost per unit: $373,333/10,500 = $35.56 c. Approach in part b is better because it eliminates the short-run fluctuations of fences and provides management with a consistent cost pattern. Diff: 2 Type: SA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2
40) The fixed costs of operating the maintenance facility of General Hospital are $4,500,000 annually. Variable costs are incurred at the rate of $30 per maintenance-hour. The facility averages 40,000 maintenance-hours a year. Budgeted and actual hours per user for the year are as follows:
Building and grounds Operating and emergency Patient care Administration Total
Budgeted hours 10,000 8,000 21,000 1,000 40,000
Actual hours 12,000 8,000 22,000 1,200 43,200
Assume that budgeted maintenance-hours are used to calculate the allocation rates. Required: a. If a single-rate cost allocation method is used, what amount of maintenance cost will be budgeted for each department? b. If a single-rate cost allocation method is used, what amount of maintenance cost will be allocated to each department based on actual usage? c. If a dual-rate cost allocation method is used, what amount of maintenance cost will be budgeted for each department? d. If a dual-rate cost allocation method is used, what amount of maintenance cost will be allocated to each department based on budgeted usage for fixed operating costs and actual usage for variable operating costs? Answer: a. Total costs + $4,500,000 + ($30 × 40,000) = $5,700,000 Single rate = $5,700,000/40,000 mh = $142.50 per maintenance-hour Single-rate budgeted amounts: Building and grounds $142.50 × 10,000 = $1,425,000 Operating and emergency $142.50 × 8,000 = $1,140,000 Patient care $142.50 × 21,000 = $2,992,500 Administration $142.50 × 1,000 = $142,500 b.
Total costs + $4,500,000 + ($30 × 40,000) = $5,700,000 Single rate = $5,700,000/40,000 mh = $142.50 per maintenance-hour Single-rate allocated amounts: Building and grounds $142.50 × 12,000 = $1,710,000 Operating and emergency $142.50 × 8,000 = $1,140,000 Patient care $142.50 × 22,000 = $3,135,000 Administration $142.50 × 1,200 = $171,000
c.
Dual-rate budgeted amounts: Building and grounds: Fixed ($4,500,000 × 10/40) Variable ($30 × 10,000) Total Operating and emergency: Fixed ($4,500,000 × 8/40) Variable ($30 × 8,000) Total Patient care: Fixed ($4,500,000 × 21/40) Variable ($30 × 21,000) Total Administration: Fixed ($4,500,000 × 1/40) Variable ($30 × 1,000) Total
$1,125,000 300,000 $1,425,000 $900,000 240,000 $1,140,000 $2,362,500 630,000 $2,992,500 $112,500 30,000 $142,500
d. Dual-rate allocated amounts: Building and grounds: Fixed ($4,500,000 × 10/40) Variable ($30 × 12,000) Total
$1,125,000 360,000 $1,485,000
Operating and emergency: Fixed ($4,500,000 × 8/40) Variable ($30 × 8,000) Total
$900,000 240,000 $1,140,000
Patient care: Fixed ($4,500,000 × 21/40) Variable ($30 × 22,000) Total
$2,362,500 660,000 $3,022,500
Administration: Fixed ($4,500,000 × 1/40) Variable ($30 × 1,200) Total
$112,500 36,000 $148,500
Diff: 2 Type: SA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2
41) The Alex Miller Corporation operates one central plant that has two divisions, the Flashlight Division and the Lamp Division. The following data apply to the coming budget year: Budgeted costs of the operating the plant for 10,000 to 20,000 hours: Fixed operating costs per year Variable operating costs Practical capacity Budgeted long-run usage per year: Lamp Division 800 hours × 12 months = Flashlight Division 450 hours × 12 months =
$240,000 $10 per hour 20,000 hours per year 9,600 hours per year 5,400 hours per year
Assume that practical capacity is used to calculate the allocation rates. Further assume that actual usage of the Lamp Division was 700 hours and the Flashlight Division was 400 hours for the month of June. Required: a. If a single-rate cost allocation method is used, what amount of operating costs will be budgeted for the Lamp Division each month? For the Flashlight Division each month? b. For the month of June, if a single-rate cost allocation method is used, what amount of cost will be allocated to the Lamp Division? To the Flashlight Division? Assume actual usage is used to allocate operating costs. c. If a dual-rate cost allocation method is used, what amount of operating costs will be budgeted for the Lamp Division each month? For the Flashlight Division each month? d. For the month of June, if a dual-rate cost allocation method is used, what amount of cost will be allocated to the Lamp Division? To the Flashlight Division? Assume budgeted usage is used to allocate fixed operating costs and actual usage is used to allocate variable operating costs.
Answer: a. Fixed costs $240,000/20,000 practical capacity hours = $12/hour Single-rate cost-allocation = $12 + $10 = $22 per hour Lamp Division 800 × $22/hour = $17,600 per month Flashlight Division 450 × $22/hour = $9,900 per month b.
Lamp Division Flashlight Division
700 × $22/hour = 400 × $22/hour =
c.
Fixed costs $240,000/20,000 practical capacity hours = $12/hour Budgeted costs — Lamp Division (800 × $12/hour) + (800 × $10/hour) = $17,600 per month Budgeted costs — Flashlight Division (450 × $12/hour) + (450 × $10/hour) = $9,900 per month
d. Allocated costs for June — Lamp Division (800 × $12/hour) + (700 × $10/hour) = Allocated costs for June — Flashlight Division (450 × $12/hour) + (400 × $10/hour) =
$15,400 per month $8,800 per month
$16,600 per month $9,400 per month
Diff: 2 Type: SA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Analyzing Objective: LO 15-2
42) The Eco-Garden Corporation operates one central plant that has two divisions, the Lawnmower Division and the Weedwacker Division. The following data apply to the coming budget year: Budgeted costs of the operating the plant for 4,000 to 8,000 hours: Fixed operating costs per year Variable operating costs Practical capacity Budgeted long-run usage per year: Lawnmower Division 325 hours × 12 months = Weedwacker Division 150 hours × 12 months =
$280,000 $15 per hour 7,000 hours per year 3,900 hours per year 1,800 hours per year
Assume that practical capacity is used to calculate the allocation rates. Further assume that actual usage of the Lawnmower Division was 350 hours and the Weedwacker Division was 200 hours for the month of June. Required: a. If a single-rate cost allocation method is used, what amount of operating costs will be budgeted for the Lawnmower Division each month? For the Weedwacker Division each month? b. For the month of June, if a single-rate cost allocation method is used, what amount of cost will be allocated to the Lawnmower Division? To the Weedwacker Division? Assume actual usage is used to allocate operating costs. c. If a dual-rate cost allocation method is used, what amount of operating costs will be budgeted for the Lawnmower Division each month? For the Weedwacker Division each month? d. For the month of June, if a dual-rate cost allocation method is used, what amount of cost will be allocated to the Lawnmower Division? To the Weedwacker Division? Assume budgeted usage is used to allocate fixed operating costs and actual usage is used to allocate variable operating costs.
Answer: a. Fixed costs $280,000/7,000 practical capacity hours = $40/hour Single-rate cost-allocation = $40 + $15 = $55 per hour Lawnmower Division 325 × $55/hour = $17,875 per month Weedwacker Division 150 × $55/hour = $8,250 per month b.
Lawnmower Division Weedwacker Division
350 × $55/hour = 200 × $55/hour =
c.
Fixed costs $280,000/7,000 practical capacity hours = $40/hour Budgeted costs — Lawnmower Division (325 × $40/hour) + (325 × $15/hour) = $17,875 per month Budgeted costs — Weedwacker Division (150 × $40/hour) + (150 × $15/hour) = $8,250 per month
d. Allocated costs for June — Lawnmower Division (325 × $40/hour) + (350 × $15/hour) = Allocated costs for June — Weedwacker Division (150 × $40/hour) + (200 × $15/hour) =
$19,250 per month $11,000 per month
$18,250 per month $9,000 per month
Diff: 2 Type: SA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Analyzing Objective: LO 15-2
43) The Rapid Recycling Inc. operates one central plant that has two divisions, the Residential Division and the Commercial Division. The following data apply to the coming budget year: Budgeted costs of the operating the plant for 4,000 to 8,000 hours: Fixed operating costs per year Variable operating costs Practical capacity Budgeted long-run usage per year: Residential Division 360 hours × 12 months = Commercial Division 240 hours × 12 months =
$252,000 $80 per hour 7,200 hours per year 4,320 hours per year 2,880 hours per year
Assume that practical capacity is used to calculate the allocation rates. Further assume that actual usage of the Residential Division was 410 hours and the Commercial Division was 190 hours for the month of June. Required: a. If a single-rate cost allocation method is used, what amount of operating costs will be budgeted for the Residential Division each month? For the Commercial Division each month? b. For the month of June, if a single-rate cost allocation method is used, what amount of cost will be allocated to the Residential Division? To the Commercial Division? Assume actual usage is used to allocate operating costs. c. If a dual-rate cost allocation method is used, what amount of operating costs will be budgeted for the Residential Division each month? For the Commercial Division each month? d. For the month of June, if a dual-rate cost allocation method is used, what amount of cost will be allocated to the Residential Division? To the Commercial Division? Assume budgeted usage is used to allocate fixed operating costs and actual usage is used to allocate variable operating costs.
Answer: a. Fixed costs $252,000/7,200 practical capacity hours = $35/hour Single-rate cost-allocation = $35 + $80 = $115 per hour Residential Division 360 × $115/hour = $41,400 per month Commercial Division 240 × $115/hour = $27,600 per month b.
Residential Division Commercial Division
410 × $115/hour = 190 × $115/hour =
c.
Fixed costs $252,000/7,200 practical capacity hours = $35/hour Budgeted costs — Residential Division (360 × $35/hour) + (360 × $80/hour) = $41,400 per month Budgeted costs — Commercial Division (240 × $35/hour) + (240 × $80/hour) = $27,600 per month
d. Allocated costs for June — Residential Division (360 × $35/hour) + (410 × $80/hour) = Allocated costs for June — Commercial Division (240 × $35/hour) + (190 × $80/hour) =
$47,150 per month $21,850 per month
$45,400 per month $23,600 per month
Diff: 2 Type: SA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Analyzing Objective: LO 15-2
For each of the following cost pools select an appropriate allocation base from the list below if the overall cost object is to assign costs to production departments. Each base can be used only once. Assume a manufacturing company. A) Hours of operation by production department. B) Machine hours by department. C) Indirect labour hours per department. D) Hours of computer use per month per department. E) Number of employees per department. F) Operations costs of each department. 44) Vice-president of finance's office expenses. Diff: 1 Type: MA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2
45) Computer operations used in conjunction with manufacturing. Diff: 1 Type: MA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2
46) Personnel department. Diff: 1 Type: MA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2
47) Manufacturing machinery cost. Diff: 1 Type: MA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2
48) Energy costs. Diff: 1 Type: MA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2
Answers: 44) F 45) D 46) E 47) B 48) A
15.3 Analyze how the selection of the single- or dual-cost allocation rate affects the calculation of the efficiency variance. 1) The user department is responsible for any unfavourable cost variances during the budgeting period if budgeted prices and quantities are used for cost allocation. Answer: FALSE Diff: 2 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-3
2) User departments will be able to determine their allocated costs for each category in advance if budgeted usage is the allocation base. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-3
3) A budgeted rate helps to motivate the manager of a support department. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-3
4) A support department adds value directly to a product or service, which is observable by the customer. Answer: FALSE Diff: 1 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-3
5) When budgeted cost allocation rates are used, managers of the supplier division are motivated to improve efficiency. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-3
6) When budgeted cost allocation rates are used, variations in actual usage by one division affect the costs allocated to other divisions.
Answer: FALSE Explanation: When actual cost-allocations rates are used, variations in actual usage by one division affect the costs allocated to other divisions. Diff: 2 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-3
7) When actual cost allocation rates are used, managers of the supplier division are motivated to improve efficiency. Answer: FALSE Explanation: When budgeted cost-allocation rates are used, managers of the supplier division are motivated to improve efficiency. Diff: 2 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-3
8) When choosing between using budgeted rates, and actual rates, which of the following is TRUE? A) Actual rates let users know in advance what their costs are. B) When budgeted rates are used, users must wait till the end of the budget period to know what their costs are. C) With actual rates, a support department, rather than a user department, bears the risk of unfavourable cost variances. D) Budgeted rates based on user department estimates may lead to outsourcing needed work, rather than relying on an internal support department. E) Budgeted rates may help the manager of a support department to improve efficiency. Answer: E Diff: 3 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-3
9) Fixed cost allocation rates should be determined using A) past production capacity. B) short-term average usage. C) short-term expected usage. D) long-term expected usage. E) actual usage. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-3
Use the information below to answer the following question(s). Infinity Warehouse Fitness Equipment incurred $80,000 of common fixed costs and $120,000 of common variable costs. Data are provided below for the capacity allowed and the capacity used.
Department Barbell Department Sauna Department
Capacity Available in Hours 500 300
Capacity Used in Hours 400 400
For both departments, common fixed costs are to be allocated on the basis of capacity available and common variable costs are to be allocated on the basis of capacity used. 10) The fixed and variable costs allocated to the Barbell Department are ________. A) $50,000 and $75,000, respectively B) $50,000 and $60,000, respectively C) $30,000 and $75,000, respectively D) $30,000 and $60,000, respectively E) $30,000 and $50,000, respectively Answer: B Explanation: Barbell: [(500/(300 + 500)) × $80,000] = $50,000 fixed cost [(400/(400 + 400)) × $120,000] = $60,000 variable cost Diff: 1 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-3
11) The fixed and variable costs allocated to the Sauna Department are ________. A) $50,000 and $75,000, respectively B) $50,000 and $60,000, respectively C) $30,000 and $75,000, respectively D) $30,000 and $50,000, respectively E) $30,000 and $60,000, respectively Answer: E Explanation: Sauna: [(300/(300 + 500)) × $80,000] = $30,000 fixed cost [(400/(400 + 400)) × $120,000] = $60,000 variable cost Diff: 1 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-3
12) Assuming that fixed and variable costs are allocated according to capacity used, the fixed and variable costs allocated to the Barbell Department will be ________. A) $30,000 and $50,000, respectively B) $30,000 and $60,000, respectively C) $30,000 and $75,000, respectively D) $40,000 and $60,000, respectively E) $60,000 and $40,000, respectively Answer: D Explanation: Barbell: (400/800) × $80,000 = $40,000 fixed cost (400/800) × $120,000 = $60,000 variable cost Diff: 1 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-3
13) Consider the following information attributed to the material management department: Budgeted usage of materials-handling labour hours 3,500 Budgeted cost pools: Fixed costs $154,000 Variable costs $126,000 (3500 hours × $36 per hour) The company uses the single-rate method to allocate support costs to the Machining and Assembly Departments. Assuming that the actual hours tracked in the Machining and Assembly department are 500 for the month, what would the allocation rate be and how much cost would be allocated to the Machining and Assembly Department for the operations of the month? (Round final answers to the nearest dollar.) A) $80 an hour for a total of $40,000 B) $36 an hour for a total of $40,000 C) $36 an hour for a total of $18,000 D) $560 an hour for a total of $80 Answer: A Explanation: Fixed costs per hour: $154,000 / 3,500 = $44 per hour Allocation rate: $36 + $44 = $80 per hour Cost allocated to department: $80 per hour x 500 hours = $40,000 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-3
Use the information below to answer the following question(s). Infinity Warehouse Fitness Equipment incurred $80,000 of common fixed costs and $120,000 of common variable costs. Data are provided below for the capacity allowed and the capacity used.
Department Barbell Department Sauna Department
Capacity Available in Hours 500 300
Capacity Used in Hours 400 400
For both departments, common fixed costs are to be allocated on the basis of capacity available and common variable costs are to be allocated on the basis of capacity used. 14) Assuming that that fixed and variable costs are allocated according to capacity used, the fixed and variable costs allocated to the Sauna Department will be ________. A) $30,000 and $50,000, respectively B) $30,000 and $60,000, respectively C) $30,000 and $75,000, respectively D) $40,000 and $60,000, respectively E) $60,000 and $40,000, respectively Answer: D Explanation: Sauna: (400/800) × $80,000 = $40,000 fixed cost (400/800) × $120,000 = $60,000 variable cost Diff: 1 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-3
Use the information below to answer the following question(s). Half-Price Rentals Ltd. incurred $60,000 of common fixed costs and $90,000 of common variable costs. Data are provided below for the capacity allowed and the capacity used. Capacity Department Available in Hours Tools Department 3,600 Equipment Department 1,800
Capacity Used in Hours 3,200 1,800
For both departments, common fixed costs are to be allocated on the basis of capacity available and common variable costs are to be allocated on the basis of capacity used. 15) The fixed and variable costs allocated to the Tools Department are ________. A) $20,000 and $32,400, respectively B) $60,000 and $90,000, respectively C) $31,756 and $45,000, respectively D) $40,000 and $57,600, respectively E) $30,000 and $45,000, respectively Answer: D Explanation: Tools: [(3,600/(3,600 +1,800)) × $60,000] = $40,000 fixed cost [(3,200/(3,200 + 1,800)) × $90,000] = $57,600 variable cost Diff: 1 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-3
16) The fixed and variable costs allocated to the Equipment Department are ________. A) $20,000 and $32,400, respectively B) $60,000 and $90,000, respectively C) $31,756 and $45,000, respectively D) $40,000 and $57,600, respectively E) $30,000 and $45,000, respectively Answer: A Explanation: Equipment: [(1,800/(3,600 +1,800)) × $60,000] = $20,000 fixed cost [(1,800/(3,200 + 1,800)) × $90,000] = $32,400 variable cost Diff: 1 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-3
17) An advantage to using budgeted usage, rather than actual usage, for the allocation base is that A) ASPE/IFRS requires it for comparability to previous years. B) variable costs are lower. C) management does not have to be accountable for actual costs since the system only deals with budgeted costs. D) it is consistent with a short-run time horizon. E) user divisions will know their allocated costs in advance. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-3
18) When budgeted cost-allocations rates are used ________. A) user departments are not informed about the charges until the end of the period, which makes decision making during the period difficult B) user departments can determine the amount of service to request and, if allowed, can determine whether to use an internal or external resource C) user divisions pay for costs that exceed budgeted amounts D) user divisions pay for inefficiencies of the supplier department Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-3
19) A disadvantage of allocating fixed costs using a budgeted rate and actual usage is that A) supplying division managers may be tempted underestimate usage when budgeting unit costs. B) the allocation would capture the cause-and-effect relationship. C) variation in usage will result in variances that need to be managed. D) changes in one department's usage should not affect another department's allocation. E) some organizations offer rewards to managers who make accurate forecasts. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-3
20) To discourage unnecessary use of a support department, management might A) not allocate any support department costs to user departments. B) allocate support department costs based upon user department usage. C) allocate a fixed amount of support department costs to each department regardless of use. D) issue memos on useful services provided by the support department. E) allocate only variable costs based on budgeted usage. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-3
21) The costs of unused capacity are highlighted when A) actual usage based allocations are used. B) budgeted usage allocations are used. C) practical capacity based allocations are used. D) the dual-rate cost allocation method allocates fixed costs based on actual usage. E) variable cost variances are evaluated. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-3
22) Infiniti Company's power plant provides electricity for its two operating departments, A and B. The year 2021 budget for the power plant shows: Budgeted fixed costs Budgeted variable costs per kilowatt hour (kwh)
$80,000 $0.15
Additional data for 2021:
Department A Department B
Budget (kwh) 240,000 160,000
Actual (kwh) 215,000 195,000
Actual power plant costs: fixed $92,000, variable $88,000 Budgeted rates are used in the allocation of electricity cost. Required: a. Compute the power plant costs allocated to A and B using the single-rate method with budgeted usage as the allocation base. b. Compute the power plant costs allocated to A and B using the dual-rate method with actual usage as the allocation base for variable costs and budgeted usage as the allocation base for fixed costs. c. From the standpoint of Departments A and B, what are the two main benefits of the dual-rate method? Answer: Budgeted fixed rate = $80,000/(240,000 + 160,000) = $0.20 per kwh a.
Total costs allocated to A Total costs allocated to B
= 240,000 × $0.35 = $84,000 = 160,000 × $0.35 = $56,000
b.
Allocated to Department A: Fixed costs = 240,000 × $0.20 = Variable costs = 215,000 × $0.15 =
Allocated to Department B: Fixed costs = 160,000 × $0.20 = Variable costs = 195,000 × $0.15 =
$ 48,000 32,250 $ 80,250
$ 32,000 29,250 $ 61,250
c. First, costs allocated to each department are not affected by the kwh usage of the other department. Second, inefficiencies in the power plant are not charged to Departments A and B. Diff: 2 Type: SA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-3
23) London Company's power plant provides electricity for its two operating departments, A and B. The
year 2021 budget for the power plant shows: Budgeted fixed costs Budgeted variable costs per kilowatt hour (kwh)
$107,200 $0.05
Additional data for 2021:
Department A Department B
Budget (kwh) 490,000 180,000
Actual (kwh) 525,000 165,000
Actual power plant costs: fixed $132,000, variable $41,400 Budgeted rates are used in the allocation of electricity cost. Required: a. Compute the power plant costs allocated to A and B using the single-rate method with budgeted usage as the allocation base. b. Compute the power plant costs allocated to A and B using the dual-rate method with actual usage as the allocation base for variable costs and budgeted usage as the allocation base for fixed costs. c. From the standpoint of Departments A and B, what are the two main benefits of the dual-rate method? d. Calculate the variable overhead efficiency variances for each department. Who would be the appropriate person(s) to provide information on the causes of these variances?
Answer: Budgeted fixed rate = $107,200/(490,000 + 180,000) = $0.16 per kwh a.
Total costs allocated to A Total costs allocated to B
= 490,000 × $0.21 = $102,900 = 180,000 × $0.21 = $ 37,800
b.
Allocated to Department A: Fixed costs = 490,000 × $0.16 = Variable costs = 525,000 × $0.05 =
Allocated to Department B: Fixed costs = 180,000 × $0.16 = Variable costs = 165,000 × $0.05 =
$ 78,400 26,250 $104,650
$ 28,800 8,250 $ 37,050
c. First, costs allocated to each department are not affected by the kwh usage of the other department. Second, inefficiencies in the power plant are not charged to Departments A and B. d. VO rate variance Dept. A: VO rate variance Dept. B:
(490,000 kwh - 525,000 kwh) × $ 0.05 = $1,750 U (180,000 kwh - 165,000 kwh) × $0.05 = $ 750 F
The department managers will likely be the most appropriate persons to provide information regarding the causes of these variances. Diff: 2 Type: SA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-3; 8-2
24) The cost of operating the quality control department of Ames Manufacturing includes $608,000 of fixed costs and $400,000 of variable costs. The department normally budgets 21,000 inspection hours a year. Two departments receive quality control checks, fabrication and assembly. Fabrication is budgeted at 12,000 hours a year, while assembly is budgeted the remainder. Required: a. In July, fabrication used 1,000 inspection hours and assembly used 800 hours. How much did each department receive in quality control costs assuming a single-rate is used based on budgeted hours? b. In August, fabrication used 1,200 inspection hours and assembly used 900 hours. How much did each department receive in quality control costs assuming a dual-rate is used with budgeted usage for fixed costs and actual usage for variable costs? c. Which method seems more appropriate in this case? Explain. Answer: a. Total costs = $608,000 + $400,000 = $1,008,000 Overhead rate = $1,008,000/21,000 = $48 per inspection hour used Fabrication charge = $48 × (12,000/12) = $48,000 Assembly charge = $48 × (9,000/12) = $36,000 b.
Fixed rate = $608,000/21,000 = $28.95 Variable rate = $400,000/21,000 = $19.05 Fabrication charge: Fixed ($28.95 × (12,000/12)) $28,950 Variable ($19.05 × 1,200) 22,860 Total $51,810 Assembly charge: Fixed ($28.95 × (9,000/12)) Variable ($19.05 × 900) Total
c.
$21,713 17,145 $38,858
The dual-rate method is more appropriate because fixed costs are capacity costs and as such are not affected by inspection hours within a relevant range.
Diff: 2 Type: SA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2; 15-3
25) The cost of operating the Human Resources department of Happytime Foods Inc. includes $216,000 of fixed costs and $57,600 of variable costs. The department normally budgets 7,200 human resource hours a year. Two departments receive human resource support, Production and Sales. Production is budgeted at 5,040 hours a year, while Sales is budgeted the remainder. Required: a. In July, Production used 600 human resource hours and Sales used 200 hours. How much did each department receive in human resource costs assuming a single-rate is used based on budgeted hours? b. In August, Production used 500 human resource hours and Sales used 200 hours. How much did each department receive in human resource costs assuming a dual-rate is used with budgeted usage for fixed costs and actual usage for variable costs? c. Which method seems more appropriate in this case? Explain. Answer: a. Total costs = $216,000 + $57,600 = $273,600 Overhead rate = $273,600/7,200 hours = $38 per HR hour used Production charge = $38 × (5,040/12) = $15,960 Sales charge = $38 × (2,160/12) = $6,840 b.
c.
Fixed rate = $216,000/7,200 hours = $30.00 Variable rate = $57,600/7,200 hours = $8.00 Production charge: Fixed ($30.00 × (5,040/12) Variable ($8.00 × 500) Total
$12,600 4,000 $16,600
Sales charge: Fixed ($30.00 × (2,160/12)) Variable ($8.00 × 200) Total
$5,400 1,600 $7,000
The dual-rate method is more appropriate because fixed costs are capacity costs and as such are not affected by human resource hours within a relevant range.
Diff: 2 Type: SA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2; 15-3
26) Marvelous Motors is a small motor supply outlet that sells motors to companies that make various small motorized appliances. The fixed operating costs of the company are $300,000 per year. The controlling shareholder, interested in product profitability and pricing, wants all costs allocated to the motors and wants to review the company status on a quarterly basis. The shareholder is trying to determine whether the costs should be allocated each quarter based on the 25% of the annual fixed operating costs ($75,000) or by using an annual forecast budget to allocate the costs. The following information is provided for the operations of the company: Forecast Actual Sales for First Quarter 5,000 4,850 Sales for Second Quarter 8,000 7,900 Sales for Third Quarter 8,000 8,125 Sales for Fourth Quarter 3,000 3,125 Required: a. What amount of fixed operating costs are assigned to each motor by quarter when actual sales are used as the allocation base and $75,000 is allocated? b. How much fixed cost is recovered each quarter under requirement a.? c. What amount of fixed operating costs are assigned to each motor by quarter when forecast sales are used as the allocation base and the rate is calculated annually as part of the budgetary process? d. How much fixed cost is recovered each quarter under requirement c.? e. Which method seems more appropriate in this case? Explain.
Answer: a. Rate per unit using Actual Sales by Quarter: Q1 $75,000/4,850 = $15.46 per motor Q2 $75,000/7,900 = $9.49 per motor Q3 $75,000/8,125 = $9.23 per motor Q4 $75,000/3,125 = $24.00 per motor b. c.
$75,000 cost is recovered each quarter = $300,000 cost recovered over the year Quarterly Cost Recovery using Annual Forecast of Sales: Forecast Sales for the year = 5,000 + 8,000 + 8,000 + 3,000 = 24,000 Rate per motor = $300,000/24,000 = $12.50 per motor
d. Quarterly Cost Recovery using Annual Forecast of Sales as the allocation basis: Q1 4,850 × $12.50 = $60,625 Q2 7,900 × $12.50 = $98,750 Q3 8,125 × $12.50 = $101,563 Q4 3,125 × $12.50 = $39,062 = $300,000 cost recovered over the year e. The budgeted rate based on an annualized forecast of sales is more appropriate to use. The fluctuations in sales was predictable and using actual quantities per quarter to calculate the cost recovery rates would distort the objective of assigning appropriate costs to the units. There would be uncertainty in interpretation of why one quarter has a very high rate per unit and another quarter has a very low rate per unit if the actual quarters fixed costs were spread to the actual units sold each quarter. Diff: 2 Type: SA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-3
27) Blaster Drive-In is a fast-food restaurant that sells burgers and hot dogs in a 1950s environment. The fixed operating costs of the company are $5,000 per month. The controlling shareholder, interested in product profitability and pricing, wants all costs allocated to the burgers and hot dogs. The following information is provided for the operations of the company:
Sales for January Sales for February
Burgers 4,000 6,400
Hot Dogs 2,400 2,400
Required: a. What amount of fixed operating costs is assigned to the burgers and hot dogs when actual sales are used as the allocation base for January? For February? b. Hot dog sales for January and February remained constant. Did the amount of fixed operating costs allocated to hot dogs also remain constant for January and February? Explain why or why not. Comment on any other observations. Answer: a. January sales: Burgers $5,000 × 4,000/(4,000 + 2,400) = $3,125 Hot dogs $5,000 × 2,400/6,400 = $1,875 February sales: Burgers Hot dogs
$5,000 × 6,400/(6,400 + 2,400) = $3,636.36 $5,000 × 2,400/(6,400 + 2,400) = $1,363.64
b. Even though hot dog sales remained constant for both months, the allocation of fixed operating costs decreased by more than $500. The reason is that fixed overhead costs are allocated based on actual sales. The dollar amount is fixed, and since burger sales increased, more of the fixed costs were allocated to the burgers. Another observation is that burger sales increased by more than 50% from January to February, while the fixed operating costs assigned to burgers increased by only 16%. Diff: 2 Type: SA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-3
28) Should a company allocate its corporate costs to divisions? Answer: Some companies allocate all corporate costs to divisions because corporate costs are incurred to support division activities. Allocating all corporate costs motivates division managers to examine how corporate costs are planned and controlled. Also, companies that want to calculate the full cost of products in order to make some economic decision must allocate corporate costs to indirect-cost pools of divisions. Some companies do not allocate corporate costs to divisions because these costs are not controllable by division managers. Particularly if performance evaluations are based on these allocations, a company will often not choose to allocate certain corporate costs that are not perceived as being controllable by division management. Other companies allocate only those corporate costs, such as corporate human resources, that are widely perceived as either causally related to division activities or provide explicit benefits to divisions. Diff: 2 Type: ES CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-3
29) Van Meter Company has substantial fluctuations in its production costs because of the seasonality of figs. Most fig growers have two crops a year, one in June and one in August. However, the company has been importing figs from southern hemisphere countries, which extends the supply to the months of December and February. Required: What would you recommend as the monthly allocation base for the service departments of Van Meter Company? State your assumed cost object. A conceptual answer is required, not an example, such as cartons of figs. Answer: The cost object probably should be department costs, but not on a monthly basis. The company should use a long-term budget amount for the base that is selected. Neither an actual amount nor an estimated budgeted monthly amount will provide the company with reliable allocation amounts because of the variability in the supply of the figs available for production. With long-term budgeted usage, the user departments will know their allocated costs in advance and this should help them in their planning of activities. The variable cost base should also be considered from a long-term perspective to avoid the seasonal fluctuations. Diff: 3 Type: ES CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Analyzing Objective: LO 15-3
30) Brandy has been manager of the downtown branch of General Bank for several years. During this time she has received very good annual evaluations for her management of the branch. However, during the current year (it is now July) she has been upset with the monthly performance report generated by the budgeting department at the home office. Her branch has been making steady progress with controlled growth during the year and she knows of no reason why the report has such widely fluctuating variances. One item that she suspects is causing some of the problem is that most of the costs of the bank are fixed, with each branch getting an allocation of home office expenses each month. The bank also has some branches which are fast growing and some of which are having operating difficulties. Required: From the information presented, what do you suggest as a possible cause of the reporting problems? Answer: The probable cause of the variations in reporting is the growth fluctuations of the other branches. When fixed costs are involved in the allocation process, one unit receiving the allocation can have changes even when it does not change itself. This is caused by the other branches causing changes in the allocation base thereby causing everyone to receive different allocation amounts, even those who do not have changes in their base. The bank is probably using actual performance as the allocation base rather than a budgeted base for each month which itself is based on long-term performance. Diff: 3 Type: ES CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Analyzing Objective: LO 15-3
31) Why do organizations use budgeted rates instead of actual rates to allocate the costs of support departments to each other and to user departments and divisions? Explain. Answer: The method of using actual rates based on costs realized during the period imposes a level of uncertainty on the user departments. When allocations are made using budgeted rates, managers of departments to which costs are allocated know with certainty the rates to be used in that budgetary period. Users can determine the amount of service to request. Budgeted rates also help motivate the manager of the support department to improve efficiency. The supplier department bears the risk of unfavorable variances and is aware of factors which may be causing negative variances. In cases where the support department's costs are out of control of the support department manager, the uncontrollable factors can be identified and the supplier department can either be relieved of responsibility for those specific factors or there can be a risk sharing agreement negotiated between the support department and the user departments. Diff: 2 Type: ES CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-3
15.4 Evaluate and select among the direct, step-down, and reciprocal methods of allocating support division costs to production divisions. 1) The direct allocation method ignores any services rendered between support departments. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-4
2) The step-down allocation method allows partial recognition of services rendered by support departments to other support departments. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-4
3) The reciprocal allocation method does not incorporate interdepartmental relationships fully into the support department cost allocations. Answer: FALSE Diff: 1 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-4
4) The direct allocation method provides key information for outsourcing decisions regarding support services. Answer: FALSE Explanation: Complete reciprocal costs of a support department provide key information for outsourcing decisions regarding support services. The direct allocation method does not provide this information. Diff: 3 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-4
5) The step-down method allocates support department costs to other support departments and to operating departments in a sequential manner. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-4
6) The reciprocal method of support department cost allocation is the most precise method and therefore is widely adopted. Answer: FALSE Explanation: The reciprocal method of support department cost allocation is the most precise method but is not often used due to many managers finding it difficult to understand; and, in some cases the results don't differ materially from the other methods. Diff: 2 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-4
7) To discourage excessive use of a support department, management might A) not allocate any costs of the support departments. B) allocate costs based on user department usage. C) allocate a fixed amount to each department regardless of use. D) expense fixed costs of support departments directly to the income statement. E) create special accounting records for the support department. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-4
8) The method that allocates each department's budgeted costs to operating departments only is called the ________. A) direct method B) step-down method C) reciprocal method D) sequential method Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-4
9) Which of the following methods of allocating support department costs is both simple and intuitive?
A) linear equation method B) step-down method C) hybrid method D) reciprocal method E) direct allocation method Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-4
Use the information below to answer the following question(s). Joe's Tire Company has two support departments, Personnel and Maintenance. The Maintenance Department costs of $80,000 are allocated on the basis of standard service hours used. The Personnel Department costs of $20,000 are allocated based on the number of employees. Costs of Departments A and B are $40,000 and $60,000, respectively. Data on standard service hours and number of employees are as follows:
Standard service hours used Number of employees
Maintenance Dept. 200 10
Personnel Dept. 200 20
Production Dept. A 240 40
Production Dept. B 160 120
10) How much of the cost of the Maintenance Department is allocated to Department B using the direct method? A) $16,000 B) $12,800 C) $32,000 D) $24,000 E) $60,000 Answer: C Explanation: [(160/(160 + 240)) × $80,000] = $32,000 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
11) How much of the cost of the Personnel Department is allocated to Department B using the direct method? A) $8,000 B) $15,000 C) $5,000 D) $12,632 E) $60,000 Answer: B Explanation: [(120/160) × $20,000] = $15,000 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
12) How much of the cost of the Personnel Department is allocated to Department A using the direct method? A) $5,000 B) $15,000 C) $4,211 D) $12,632 E) $40,000 Answer: A Explanation: [(40/160 × $20,000] = $5,000 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
13) What is the cost of the Maintenance Department allocated to Department B using the step-down method if the support department with the highest percentage of interdepartmental service to the other support department is allocated first? A) $16,000 B) $21,333 C) $12,800 D) $32,000 E) $48,000 Answer: B Explanation: Maintenance provided to Personnel: 200/600 = .333 Personnel provided to Maintenance: 10/170 = .059 Dept. B: 160/600 × $80,000 = $21,333 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
14) What is the cost allocated from the Maintenance Department to Department A using the step-down method if the Personnel Department is allocated first? A) $48,000 B) $48,706 C) $5,000 D) $12,000 E) $14,118 Answer: B Explanation: Personnel cost allocated to Maintenance (10/170) × $20,000 = $1,176 Maintenance allocated to Dept A ($80,000 + $1,176) × (240/400) = $48,706 Diff: 3 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
15) What is the cost of the support departments allocated to Department B using the step-down method if the support department with the highest percentage of interdepartmental service to the other support department is allocated first? A) $43,660 B) $21,333 C) $53,412 D) $46,588 E) $ 56,313 Answer: E Explanation: Maintenance provided to Personnel: 200/600 = .333 Personnel provided to Maintenance: 10/170 = .059 Maintenance to Personnel
.333 × $80,000 =
Maintenance to Dept B 160/600 × $80,000 Personnel to Dept B ($20,000 + $26,640) × (120/160)
$ 26,640 $ 21,333 34,980 $ 56,313
Diff: 3 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
16) What is the cost of the support departments allocated to Department A using the step-down method if the Personnel Department is allocated first? A) $53,412 B) $43,660 C) $46,640 D) $46,588 E) $56,313 Answer: A Explanation: Personnel cost allocated to Maintenance (10/170) × $20,000 = $1,176 Personnel cost allocated to Dept A $20,000 × 40/170 = $ 4,706 Maintenance cost allocated to Dept A ($1,176 + $80,000) × (240/400) = 48,706 $ 53,412 Diff: 3 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
17) Which method allocates costs by explicitly including the mutual services rendered among all support departments? A) the direct allocation method B) the interdepartmental method C) the reciprocal allocation method D) the step-down method E) the incremental method Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-4
18) Managers of supplier departments ________. A) view the budgeted rates positively if unfavorable cost variances occur due to price decreases outside of their control B) view the budgeted rates negatively if favorable cost variances occur due to price decreases outside of their control C) view the budgeted rates negatively if unfavorable cost variances occur due to price increases outside of their control D) view the budgeted rates negatively if unfavorable cost variances occur due to price decreases outside of their control Answer: C Diff: 3 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-4
19) Which of the following describes the complete reciprocated cost? A) It only includes the actual incurred cost of the operations department. B) It only includes the actual incurred cost of the support department. C) It is always larger than actual cost of the support departments. D) It is always less than actual cost. E) It is equal to the actual cost of the support departments. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-4
Use the information below to answer the following question(s). The owner of Hi-Tech Fiberglass Fabricators Inc. is interested in using the reciprocal allocation method. The following data from operations were collected for analysis. Budgeted manufacturing overhead costs: Plant Maintenance Data Processing Machining Capping
PM (Support Dept.) DP (Support Dept.) M (Operating Dept.) C (Operating Dept.)
$350,000 $75,000 $225,000 $125,000
Service furnished: By Plant Maintenance (budgeted labour hours) Data Processing 3,500 Machining 5,000 Capping 8,200 By Data Processing (budgeted computer time) Plant Maintenance 600 Machining 3,500 Capping 600 20) Which of the following linear equations would represent the complete reciprocated cost of the Data Processing department? A) DP = $75,000 + (600/4,700)PM B) DP = $75,000 + (3,500/16,700)PM C) DP = $75,000 × (600/4,800) + $350,000 × (3,340/16,700) D) PM = $350,000 + (600/16,700)DP E) PM = $75,000 × (600/4,700) + $350,000 × (3,340/16,700) Answer: B Explanation: PM = $350,000 + (600/4,700)DP DP = $75,000 + (3,500/16,700)PM Diff: 3 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
21) What is the complete reciprocated cost of the Data Processing and the Plant Maintenance, respectively? A) $90,000 and $393,750 B) $118,750 and $365,000 C) $122,971 and $375,773 D) $152,432 and $375,773 E) $152,432 and $369,459 Answer: E Explanation: PM = $350,000 + (600/4,700) × [$75,000 + (3,500/16,700)PM] PM = $350,000 + $9,574 + 0.026755PM 0.973245PM = $359,574 PM = $369,459 DP = $75,000 + 3,500/16,700($369,459) DP = $152,432 Diff: 3 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
22) What is the Machining Department's allocation of both service departments respectively if their complete reciprocated cost were $375,000 for Plant Maintenance and $100,000 for Data Processing? A) $112,275 and $74,468 B) $131,250 and $84,375 C) $281,250 and $12,500 D) $337,500 and $200,000 E) $337,500 and $12,500 Answer: A Explanation: Machining: PM = (5,000/16,700) × $375,000 = $112,275 DP = (3,500/4,700) × $100,000 = $74,468 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
23) What is the Capping Department's total cost if both service departments are allocated using the complete reciprocated cost method and their costs for the year were $375,000 for Plant Maintenance and $100,000 for Data Processing? A) $412,766 B) $321,898 C) $196,898 D) $191,053 E) $184,132 Answer: B Explanation: Capping: PM = (8,200/16,700) × $375,000 = $184,132 DP = (600/4,700) × $100,000 = $12,766 Total costs = $184,132 + $12,766 + $125,000 = $321,898 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
24) Which method allows for partial recognition of the services rendered by support departments to other support departments? A) the direct allocation method B) the single-step allocation method C) the reciprocal allocation method D) the dual-rate method E) the step-down allocation method Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
25) Which of the following is a valid conclusion, in comparing the three allocation methods? A) The reciprocal method is conceptually inferior. B) The direct method is viewed as too complex by most organizations. C) The step-down method is viewed as too complex by most organizations. D) Many managers find the step-down method too simple. E) Many managers find the reciprocal method difficult to understand. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-4
26) The step-down allocation method A) typically begins with the support department that provides the highest percentage of its total services to other support departments. B) recognizes the total amount of services that support departments provide to each other. C) allocates complete reciprocated costs. D) offers key input for outsourcing decisions. E) allocates support department costs to production departments only. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-4
Answer the following question(s) using the information below: Betty's Book and Music Store has two service departments, Warehouse and Data Centre. Warehouse Department costs of $175,000 are allocated on the basis of budgeted warehouse-hours. Data Centre Department costs of $75,000 are allocated based on the number of computer log-on hours. The costs of operating departments Music and Books are $125,000 and $150,000, respectively. Data on budgeted warehouse-hours and number of computer log-on hours are as follows: Production Support Departments Departments Warehouse Data Centre Music Books Department Department Budgeted costs $175,000 $75,000 $125,000 $150,000 Budgeted warehouse-hours NA 250 500 750 Number of computer hours 100 NA 400 50 27) Using the direct method, what amount of Warehouse Department costs will be allocated to Department Books? A) $70,000 B) $105,000 C) $75,000 D) $87,500 E) $30,000 Answer: B Explanation: 750/(500 + 750) × $175,000 = $105,000 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
28) Using the direct method, what amount of Data Centre Department costs will be allocated to Department Music? A) $75,000 B) $33,333 C) $41,667 D) $30,000 E) $97,222 Answer: B Explanation: 400/(400 + 500) × $75,000 = $33,333 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
29) Using the step-down method, what amount of Data Centre Department cost will be allocated to the Warehouse Department if the service department with the highest percentage of interdepartmental support service is allocated first? (Round up) A) $25,000 B) $75,000 C) $7,500 D) $0 E) $17,500 Answer: D Explanation: Warehouse provided to Data Centre: 250/(250 + 500 + 750) = .167 Data Centre provided to Warehouse: 100/(100 + 400 + 500) = .100 Warehouse provides the greatest amount of service to support departments, so it is allocated first. Therefore, there will be no cost from the Data Centre allocated to the Warehouse department. Diff: 3 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
30) Using the step-down method, what amount of Warehouse Department cost will be allocated to Music Department if the service department with the highest percentage of interdepartmental support service is allocated first? (Round up) A) $58,333 B) $116,667 C) $60,833 D) $121,667 E) $0 Answer: A Explanation: Warehouse provided to Data Centre: 250/(250 + 500 + 750) = .167 Data Centre provided to Warehouse: 100/(100 + 400 + 500) = .100 Warehouse provides the greatest amount of service to support departments, so it is allocated first. Dept Music: 500/(250 + 500 + 750) × $175,000 = $58,333 Diff: 3 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
31) Using the step-down method, what amount of Data Centre Department cost will be allocated to Department Music if the service department with the highest percentage of interdepartmental support service is allocated first? (Round up) A) $58,671 B) $33,333 C) $46,296 D) $41,667 E) $0 Answer: C Explanation: Warehouse provided to Data Centre: 250/(250 + 500 + 750) = .167 Data Centre provided to Warehouse: 100/(100 + 400 + 500) = .100 Warehouse provides the greatest amount of service to support departments, so it is allocated first. Data Centre gets costs from Warehouse = .167 × ($175,000) = $29,167 Data Centre total costs are now = $75,000 + $29,167 = $104,167 Allocation of Data Centre to Music = (400/(400+500))× $104,167 = $46,296 Diff: 3 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
Answer the following questions using the information below: Jake's Battery Company has two service departments, Maintenance and Personnel. Maintenance Department costs of $320,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $80,000 are allocated based on the number of employees. The costs of operating departments A and B are $160,000 and $240,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows:
Budgeted costs Budgeted maintenance-hours Number of employees
Support Departments Maintenance Personnel Department Department $320,000 $80,000 NA 800 40 NA
Production Departments A
B
$160,000 $240,000 960 640 160 48
32) Using the direct method, what amount of Maintenance Department costs will be allocated to Department B? A) $96,000 B) $128,000 C) $156,000 D) $192,000 Answer: B Explanation: 640/(640 + 960) × $320,000 = $128,000 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
33) Using the direct method, what amount of Personnel Department costs will be allocated to Department B? A) $20,000 B) $32,000 C) $48,000 D) $60,000 Answer: D Explanation: 480/640 × $80,000 = $60,000 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
34) Using the step-down method, what amount of Maintenance Department cost will be allocated to Department B if the service department with the highest percentage of interdepartmental support service is allocated first? (Round up) A) $64,000 B) $85,333 C) $114,667 D) $128,000 Answer: B Explanation: Maintenance provided to Personnel: 800/(800 + 960 + 640) = .333 Personnel provided to Maintenance: 40/(40 + 160 + 480) = .059 Maintenance provides the greatest amount of service to support departments, so it is allocated first. Dept B: 640/2,400 × $320,000 = $85,333 Diff: 3 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
35) Using the step-down method, what amount of Maintenance Department cost will be allocated to Department A if the service department with the highest percentage of interdepartmental support service is allocated first? (Round up) A) $64,000 B) $85,333 C) $114,667 D) $128,000 Answer: D Explanation: Maintenance provided to Personnel: 800/(800 + 960 + 640) = .333 Personnel provided to Maintenance: 40/(40 + 160 + 480) = .059 Maintenance provides the greatest amount of service to support departments, so it is allocated first. Dept A: 960/(800 + 960 + 640) × $320,000 = $128,000 Diff: 3 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
Answer the following question(s) using the information below. Joanne, owner of Automated Fabric, Inc., is interested in using the reciprocal allocation method. The following data from operations were collected for analysis: Budgeted manufacturing overhead costs: Maintenance M (Support Dept) Personnel P (Support Dept) Weaving W (Weaving Dept) Colourizing C (Colourizing Dept) Services furnished: By Maintenance (budgeted labour-hours): to Personnel to Weaving to Colourizing By Personnel (Number of employees serviced): Plant Maintenance Weaving Colourizing
$150,000 $80,000 $325,000 $175,000
500 3,500 2,000 5 15 10
36) Which of the following linear equations represents the complete reciprocated cost of the Personnel Department? A) P = $150,000 - $80,000 (500/6,000) M B) P = (500/6,000) M C) P = $80,000 + (500/6,000) M D) P = $80,000 E) P = $150,000 + (500/6,000) M Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
37) What is the complete reciprocated cost of the Maintenance Department? A) $165,634 B) $163,333 C) $150,000 D) $0 E) $93,803 Answer: A Explanation: P = $80,000 + (500/6,000) M M = $150,000 + (5/30) P M = $150,000 + (5/30) × [$80,000 +( 500/6,000) M] M = $150,000 + $13,333 + (.013889) M 0.986111 M = $163,333 M = $165,634 Diff: 3 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
38) What is the complete reciprocated cost of the Personnel Department? A) $92,500 B) $93,803 C) $80,000 D) $105,000 E) $165,634 Answer: B Explanation: P = $80,000 + (500/6,000) M M = $150,000 + (5/30) P M = $150,000 + (5/30) × [$80,000 +( 500/6,000) M] M = $150,000 + $13,333 + (.013889) M 0.986111 M = $163,333 M = $165,634 P = $80,000 + (500/6,000) M P = $80,000 + (500/6,000) ($165,634) P = $93,803 Diff: 3 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
39) Seacrest Corp. allocates support department overhead costs to operating departments X and Y by means of the reciprocal allocation method. Information for the current month is as follows:
Overhead Costs Services provided from departments above: A B X Y
Support Departments A B $20,000 $10,000
20% 40% 40% 100%
10% 30% 60% 100%
Required: Provide the linear equation that represents the complete reciprocated cost of Support Department A. Answer: A = $20,000 + 0.10B The equation must include A's owns costs plus its percentage of B's services, which is 10%. Diff: 2 Type: SA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
40) Rainier Manufacturing Company uses the step-down method for allocating its support department costs to operating departments. The overhead costs of support Department A are to be allocated first, followed by the costs of B, and then those of C. The distribution of services is as follows: Service Supplied by A B C
Support Departments A B C 10% 50% 40% 15% 25% 25% -
Operating Departments X Y 20% 20% 30% 15% 20% 30%
Required: a. Calculate the percentage of B's costs that should be allocated to Y. b. Calculate the percentage of C's costs that should be allocated to B. Answer: a. Department A's costs have already been allocated, so its usage of B's services (40%) should be disregarded in answering the question: 0.15/(0.15 + 0.30 + 0.15) = 0.15/0.60 = 0.25, or 25%. Note that the sequence of allocating the costs of the support departments in the question is consistent with the popular step-down sequence based on the percentage of a support department's total services rendered to other support departments.
Order of Allocation 1st A 2nd B 3rd C
% of a Support Department's Total Services Rendered to other Support Departments 10% to B + 50% to C = 60% 40% to A + 15% to C = 55% 25% to A + 25% to B = 50%
b. Once a support department's costs are allocated under the step-down method, it receives no further allocation. Diff: 2 Type: SA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
41) Krum Lawn Equipment has five departments, of which Casting and Finishing are producing departments. Maintenance, Product Movement, and Inspection are service departments. The distribution of the service departments is as follows: Service Costs
Services provided to:
Maintenance Product movement Inspection
Maint. $84,000 160,000 38,000
Prod. Move. 5% 10% 15
Insp. 25% 5 5
Cast. 50% 45 20
Finish. 20% 40 60
Required: Use the direct method to allocate the service departments' costs. Prepare a schedule showing the total costs allocated to each department. Answer: Casting Finishing Maintenance $84,000 × 50/70 $60,000 $84,000 × 20/70 $24,000 Product movement $160,000 × 45/85 $160,000 × 40/85 Inspection $38,000 × 20/80 $38,000 × 60/80 Total
84,706 75,294
9,500 $154,206
28,500 $127,794
Diff: 2 Type: SA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
42) Broadway Department Store allocates the Personnel and Payroll Department's costs to the sales departments of Shoes, Automotive, and Clothing. Personnel and Payroll also provide services to each other. Personnel costs are allocated by number of employees, and payroll costs are allocated by gross payroll dollars. Costs and other information for January were as follows:
Current costs Gross payroll Number of employees
Personnel $13,800 $3,000 5
Payroll $6,400 $1,500 3
Shoes $24,400 $5,600 8
Automotive $40,000 $8,700 15
Clothing $31,500 $4,050 4
Required: Prepare a schedule, which includes the total cost of operating the sales departments for January. Allocate service costs using the step-down method with the sequence of allocation based on highest percentage support concept. Answer: Personnel cost to payroll = 3/30 = 10% Payroll cost to personnel = $3,000/$21,350 = 14.1% Allocate payroll first because it serves personnel 14.1% versus 10% for personnel's service to payroll.
Current costs Payroll: $3,000/$21,350 $5,600/$21,350 $8,700/$21,350 $4,050/$21,350 Personnel: 8/27 15/27 4/27 Totals
Personnel $13,800
Payroll $6,400 (6,400)
Shoes $24,400
Auto $40,000
Clothing $31,500
899 1,679 2,608 1,214 (14,699) 4,355 8,166 $0
$0
$30,434
$50,774
2,178 $34,892
Diff: 3 Type: SA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
43) Campaign Printing has two service departments, S1 and S2, and two production departments, P1 and P2. The data for April were as follows:
From: S1 S2 P1 P2
Dept. Costs $90,000 60,000 360,000 520,000
S1 20%
Provided to: S2 P1 10% 40% 55%
P2 50% 25%
Required: a. Set up algebraic equations in linear equation form for the service and production departments. b. Using the reciprocal method determine the reciprocated cost for each service department and allocate the reciprocated costs of each service department to the production departments. Answer: a. S1 = $90,000 + 0.20(S2) P1 = $360,000 + 0.40(S1) + 0.55(S2) S2 = $60,000 + 0.10(S1) P2 = $520,000 + 0.50(S1) + 0.25(S2) b. S1 = $90,000 + [0.20 × ($60,000 + 0.10(S1))] S1 = $90,000 + $12,000 + .02(S1) .98(S1) = $102,000 S1 = $104,082 S2 = $60,000 + (0.10 × $104,082) = $70,408 P1 = $360,000 + (0.40 × $104,082) + (0.55 × $70,408) = $440,357 P2 = 520,000 + (0.50 × $104,082) + (0.25 × $70,408) = $589,643 Diff: 3 Type: SA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
44) Holiday Printing has two service departments, S1 and S2, and two production departments, P1 and P2. The data for June were as follows:
From: S1 S2 P1 P2
Dept. Costs 75,000 100,000 425,000 545,000
S1 20%
Provided to: S2 P1 25% 35% 30%
P2 40% 50%
Required: a. Set up algebraic equations in linear equation form for the service and production departments. b. Using the reciprocal method determine the reciprocated cost for each service department and allocate the reciprocated costs of each service department to the production departments. Answer: a. S1 = $75,000 + 0.25(S2) P1 = $425,000 + 0.35(S1) + 0.30(S2) S2 = $100,000 + 0.20(S1) P2 = $545,000 + 0.40(S1) + 0.50(S2) b. S1 = $75,000 + [0.25 × ($100,000 + 0.20(S1))] S1 = $75,000 + $25,000 + .05(S1) .95(S1) = $100,000 S1 = $105,263 S2 = $100,000 + (0.20 × $105,263) = $121,053 P1 = $425,000 + (0.35 × $105,263) + (0.30 × $121,053) = $498,158 P2 = $545,000 + (0.40 × $105,263) + (0.50 × $121,053) = $647,632 Diff: 3 Type: SA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
45) Gotham University offers only high-tech graduate-level programs. Gotham has two principal operating departments, Engineering and Computer Sciences, and two support departments, Facility and Technology Maintenance and Enrollment Services. The base used to allocate facility and technology maintenance is budgeted total maintenance hours. The base used to allocate enrollment services is number of credit hours for a department. The Facility and Technology Maintenance budget is $350,000, while the Enrollment Services budget is $950,000. The following chart summarizes budgeted amounts and allocation-base amounts used by each department:
Budget F&T Maintenance $350,000 (in hours) Enrollment Service $950,000 (in credit hrs)
Services Provided: (Annually) Computer F&T Enrollment Engineering Sciences Maintenance Service 2,000
5,000
Zero
1,000
24,000
36,000
2,000
Zero
Required: Use the direct method to allocate support costs to each of the two principal operating departments, Engineering and Computer Sciences. Prepare a schedule showing the support costs allocated to each department. Answer: Computer Engineering Science F&T Maintenance $350,000 × 2/7 = $100,000 $350,000 × 5/7 = $250,000 Enrollment Service $950,000 × 24/60 = $380,000 $950,000 × 36/60 = $570,000 Total $480,000 $820,000 Diff: 2 Type: SA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
46) Gotham University offers only high-tech graduate-level programs. Gotham has two principal operating departments, Engineering and Computer Sciences, and two support departments, Facility and Technology Maintenance and Enrollment Services. The base used to allocate facility and technology maintenance is budgeted total maintenance hours. The base used to allocate enrollment services is number of credit hours for a department. The Facility and Technology Maintenance budget is $350,000, while the Enrollment Services budget is $950,000. The following chart summarizes budgeted amounts and allocation-base amounts used by each department:
Budget F&T Maintenance $350,000 (in hours) Enrollment Service $950,000 (in credit hrs)
Services Provided: (Annually) Computer F&T Enrollment Engineering Sciences Maintenance Service 1,000
2,000
Zero
5,000
24,000
36,000
2,000
Zero
Required: Prepare a schedule which allocates service department costs using the step-down method with the sequence of allocation based on the highest-percentage support concept. Compute the total amount of support costs allocated to each of the two principal operating departments, Engineering and Computer Sciences.
Answer: F&T Maintenance provided to enrollment services = 5,000/8,000 Enrollment services provided to maintenance = 2,000/62,000 F&T Maintenance provides the greatest amount of service to support departments, so it is allocated first. F&T Maintenance $350,000 to Enrollment Services = $350,000 × 5/8 = $218,750 to Engineering = $350,000 × 1/8 = $ 43,750 to Computer Science = $350,000 × 2/8 = $ 87,500 Enrollment Service costs of $950,000 + $218,750 = $1,168,750 are allocated to Engineering and Computer Science to Engineering = $1,168,750 × 24/60 = $467,500 to Computer Science = $1,168,750 × 36/60 = $701,250 F&T Maintenance $350,000 ($350,000) $0 Totals
Enrollment Engineering Service $950,000 $218,750 $ 43,750 ($1,168,750) $467,500 $0 $511,250
Computer Science $ 87,500 $701,250 $788,750
Diff: 3 Type: SA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
47) Landmark Systems Inc. designs and manufactures global positioning navigation systems for allterrain vehicles and water craft. It has two support departments: Design and Engineering; and, two production departments, Vehicle Systems and Water Craft Systems. The budgeted level of service relationships at the start of the year was:
Design Supplied by: Design Engineering
Used by: Engineering Vehicles 0.10
0.05
0.40 0.35
Water Craft 0.50 0.60
Landmark Systems Inc. collects fixed costs and variable costs of each support department in separate pools. The budgeted costs for the year were:
Design Engineering
Fixed-Cost Pools $800,000 $2,200,000
Variable-Cost Pools $960,000 $2,500,000
Support department pools are combined BY COST BEHAVIOR for allocation purposes. Production statistics (actual) are as follows:
Design hours Engineering hours Units produced
Vehicles 9,000 25,600 45,000
Water Craft 12,800 19,400 28,000
Required: a. Allocate the support department FIXED costs using the dual-rate method. The company policy is to use design and engineering hours as the allocation base for variable costs; and, units produced for fixed costs. (round to the nearest cent) b. Allocate the support department FIXED costs using the reciprocal method. c. Which method is preferable? Justify your answer.
Answer: a. Dual-rate method FC Pool ($800,000 + $2,200,000)/(45,000 + 28,000) = $41.10 Vehicles 45,000 × $41.10 = $1,849,500 Water Craft 28,000 × $41.10 = 1,150,800 $3,000,300 b.
Reciprocal method E = D = E = E = 0.995E E = E = D = D =
$2,200,000 +0.10D $800,000 + 0.05E $2,200,000 + 0.10 ($800,000 + 0.05E) $2,280,000 + 0.005E = $2,280,000 $2,596,000 ÷ 0.995 $2,291,457 $800,000 + 0.05($2,291,457) $914,573
FC Pool Design (0.10, 0.40, 0.50) Engineering (0.05, 0.35, 0.60)
Design $800,000 (914,573)
Engineering $2,200,000 91,457
Vehicles
Water Craft
$365,829
$457,287
114,573 $0
(2,291,457) $0
802,010 $1,167,839
1,374,874 $1,832,161
c. Reciprocal method advantage: considers support department services provided to each other. Dual rate method advantage: easier to understand. Diff: 3 Type: SA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2; 15-4
48) Landmark Systems Inc. designs and manufactures global positioning navigation systems for allterrain vehicles and water craft. It has two support departments: Design and Engineering; and, two production departments, Vehicle Systems and Water Craft Systems. The budgeted level of service relationships at the start of the year was:
Design Supplied by: Design Engineering
Used by: Engineering Vehicles 0.10
0.05
0.40 0.35
Water Craft 0.50 0.60
Landmark Systems Inc. collects fixed costs and variable costs of each support department in separate pools. The budgeted costs for the year were:
Design Engineering
Fixed-Cost Pools $800,000 $2,200,000
Variable-Cost Pools $960,000 $2,500,000
Support department pools are combined BY COST BEHAVIOR for allocation purposes. Production statistics (actual) are as follows:
Design hours Engineering hours Units produced
Vehicles 9,000 25,600 45,000
Water Craft 12,800 19,400 28,000
Required: a. Allocate the support department VARIABLE costs using the dual-rate method. The company policy is to use design and engineering hours as the allocation base for variable costs; and, units produced for fixed costs. (round to the nearest cent) b. Allocate the support department VARIABLE costs using the reciprocal method. c. Comment on the effect from combining the variable cost pools as opposed to considering them separately when applying the allocation methods.
Answer: a. Dual-rate method VC Pool ($960,000 + $2,500,000)/(9,000 + 12,800 + 25,600 + 19,400) = $51.80 Vehicles (9,000 + 25,600) × $51.80 = $1,172,280 Water Craft (12,800 + 19,400) × $51.80 = 1,667,960 $3,460,240 b.
Reciprocal method E = $2,500,000 +0.10D D = $960,000 + 0.05E E = $2,500,000 + 0.10 ($960,000 + 0.05E) E = $2,596,000 + 0.005E 0.995E = $2,596,000 E = $2,596,000 ÷ 0.995 E = $2,609,045 D = $960,000 + 0.05($2,609,045) D = $1,090,452
VC Pool Design (0.10, 0.40, 0.50) Engineering (0.05, 0.35, 0.60)
Design $960,000 (1,090,452)
Engineering $2,500,000 109,045
Vehicles
Water Craft
$436,181
$545,226
130,452 $0
(2,609,045) $0
913,166 $1,349,347
1,565,427 $2,110,653
c. Combining the variable costs pools eliminates the ability to differentiate the cost allocation that results from the vehicles and water craft using support department costs in different proportions. Diff: 3 Type: SA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-2; 15-4
49) The manager of the Finishing Department is concerned about how the costs of service departments are being assigned to the Mixing Department. He knows that his department uses support activities entirely different from the other production departments. As a matter of fact, when something goes wrong in the Mixing Department the entire plant has to stop production because of the critical nature of the chemical processing in that department. Several support departments, such as maintenance and clean-up stop whatever they are doing and come to help the Mixing Department. However, it appears that the Mixing Department is not assigned any additional support costs because all support costs are assigned on the basis of actual outputs. Required: Explain the methods available for the allocation of costs from one department to another. Which method would you recommend for this company and why? Answer: The single-rate method groups all costs into one cost pool and allocates them to cost objects using one rate from the single allocation base. The dual-rate method groups costs into separate cost pools, each of which may be allocated on a different base. The most common differentiation is between fixed and variable costs. This company needs to use a dual method so that the extra time of Department 41 can be isolated and charged to it. This would still allow the other departments to share in the overall fixed costs of the emergency situation services without having to bear the variable costs of the repairs and clean-up. Another aspect of cost allocation to be considered is the use of the direct, step-down, and reciprocal methods. Especially, the reciprocal method might reduce some of the problems being encountered. Diff: 2 Type: ES CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-4
15.5 Analyze cost allocation procedures to apply common costs and justify contractual reimbursement terms. 1) The incremental common cost allocation method requires that one user be viewed as primary and other users as incremental. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-5
2) Allowable cost is the cost that the parties to a contract agree to exclude from reimbursed costs. Answer: FALSE Explanation: An allowable cost is a cost that the contract parties agree to include in the costs to be reimbursed. Diff: 1 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-5
3) The stand-alone method of allocating common costs emphasizes fairness and equity among users. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-5
4) Under the incremental method, the first incremental user usually receives the highest allocation of the common costs. Answer: FALSE Explanation: Under the incremental method of allocating common costs, the primary user receives the highest allocation of the common costs. Diff: 1 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-5
5) Without explicit written cost-plus contracts, producer costs can be passed on to the buyer. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-5
6) If the government wants to contract a very large scale project with significant uncertainty about what the final cost will be, often a cost-plus contract is awarded to attract qualified contractors who may otherwise not be willing to accept the risks inherent in a guaranteed bid price. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-5
7) The second-ranked cost object is termed the incremental party and is allocated a proportionate share of common costs based on revenue. Answer: FALSE Explanation: The second-ranked cost object is termed the incremental party and is allocated the additional cost that arises from there being two users instead of only the primary user. Diff: 1 Type: TF CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-5
8) Which of the following terms describes a cost of operating a facility, operation, activity area, or like cost object that is shared by two or more users? A) common cost B) direct cost C) fixed cost D) varying cost E) sunk cost Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-5
9) Two entities, Alpha Company and Beta Company, share a common warehouse facility. Total costs for the facility are budgeted at $2,000,000. Accountants have estimated that if Alpha Company did not use the facility, the cost incurred would be reduced by 30 percent. What amount of the budgeted cost should be allocated, respectively, to Alpha and Beta if the incremental allocation method is used? Assume that Beta is the primary party. A) $0; $1,400,000 B) $0; $2,000,000 C) $1,400,000; $600,000 D) $700,000; $1,300,000 E) $600,000; $1,400,000 Answer: E Explanation: Alpha: 0.3 × $2,000,000 = $600,000 Beta: 0.7 × $2,000,000 = $1,400,000 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-5
10) Cutler Hammer currently utilizes a manufacturing facility for $200,000 per year. The facility is used at 70 percent capacity. The shipping department has proposed a plan in which it would utilize the other 30 percent plant capacity for the company's shipping plus handling the shipping of several nearby businesses. The company's consulting firm estimated that the overall costs of maintaining the space would increase by 12 percent. The shipping manager is interested in the amount that would be allocated under the incremental method. A) $70,000 B) $60,000 C) $84,000 D) $67,200 E) $24,000 Answer: E Explanation: $200,000 + (0.12 × $200,000) = $224,000; Incremental= $224,000 - $200,000 = $24,000 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-5
11) Peterborough Controls Ltd. currently utilizes a manufacturing facility for $250,000 per year. The facility is used at 75 percent capacity. The shipping department has proposed a plan in which it would utilize the other 25 percent plant capacity for the company's shipping plus handling the shipping of several nearby businesses. The company's consulting firm estimated that the overall costs of maintaining the space would increase by 10 percent. The shipping manager is interested in the amount that would be allocated under the incremental method. A) $70,000 B) $68,750 C) $62,500 D) $25,000 E) $24,000 Answer: D Explanation: $250,000 + (0.10 × $250,000) = $275,000; Incremental= $275,000 - $250,000 = $25,000 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-5
12) Smith Company and Jones Company currently share an employee dining facility. Jones Company employs fewer people and believes that they should not be required to pay one-half of the $300,000 costs incurred for the facility. An independent consulting firm stipulated that Smith Company could receive the same services for $150,000 while Jones's employees could receive comparable services for $100,000. What will be Jones's allocated cost if the stand-alone method is used? A) $83,333 B) $100,000 C) $120,000 D) $150,000 E) $180,000 Answer: C Explanation: Stand-alone = ($100,000/$250,000) × $300,000 = $120,000 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-5
13) Two entities, Burch Company and Carey Company, share a common warehouse facility. Total costs for the facility are budgeted at $1,000,000. Accountants have estimated that if Burch Company did not use the facility the cost incurred would be reduced by 30 percent. What amount of the budgeted cost should be allocated, respectively, to Burch and Carey if the incremental allocation method is used? A) $0; $700,000 B) $0; $1,000,000 C) $198,000; $802,000 D) $300,000; $700,000 E) $700,000; $300,000 Answer: D Explanation: Burch: 0.30 × $1,000,000 = $300,000 Carey: 0.70 × $1,000,000 = $700,000 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-5
14) Under the stand-alone method of allocating common costs A) a ranking is used to allocate costs among the users. B) disputes can arise over who is the primary user. C) each party bears a proportionate share of the total costs in relation to their individual stand-alone costs. D) an incentive is created to be the first-ranked user. E) the parties are interested in being viewed as primary users. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-5
15) Under the incremental method of allocating common costs A) the parties are interested in being viewed as primary users. B) each party bears a proportionate share of the total costs in relation to their individual stand-alone costs. C) fairness and equity are emphasized. D) there is a disincentive to be titled the primary user. E) no ranking of users is required. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 15-5
Answer the following question(s) using the information below:
The Sturgeon Bay Corporation currently uses a manufacturing facility costing $400,000 per year; 80% of the facility's capacity is currently being used. A start-up business has proposed a plan that would utilize the other 20% of the facility and increase the overall costs of maintaining the space by 5%. 16) If the stand-alone method were used, what amount of cost would be allocated to the start-up business? A) $20,000 B) $100,000 C) $80,000 D) $84,000 E) $67,200 Answer: D Explanation: $400,000 × 1.05 = $420,000; $420,000 × .2 = $84,000 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-5
17) If the incremental method were used, what amount of cost would be allocated to the start-up business? A) $20,000 B) $100,000 C) $80,000 D) $84,000 E) $21,000 Answer: A Explanation: $400,000 × 0.05 = $20,000 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-5
Answer the following questions using the information below: The Salmon Bay Corporation currently uses a manufacturing facility costing $200,000 per year; 80% of the facility's capacity is currently being used. A start-up business has proposed a plan that would utilize the other 20% of the facility and increase the overall costs of maintaining the space by 5%. 18) If the stand-alone method were used, what amount of cost would be allocated to the start-up business? A) $40,000 B) $50,000 C) $10,000 D) $42,000 Answer: D Explanation: $200,000 × 1.05 = $210,000; $210,000 ×.2 = $42,000 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-5
19) If the incremental method were used, what amount of cost would be allocated to the start-up business? A) $10,000 B) $50,000 C) $40,000 D) $42,000 Answer: A Explanation: $200,000 × 0.05 = $10,000 Diff: 2 Type: MC CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-5
20) Hunt Company and Indio Company are noncompeting lines of business and use a common database for marketing purposes. The variable costs associated with accessing the database are readily identifiable and kept in separate cost pools that are charged to each user. The fixed costs of maintaining the database, however, cannot be identified by user on a cause-and-effect basis. These fixed costs for the next year are budgeted at $55,000. If Hunt does not use the database, the fixed costs to Indio are $48,000. An outside vendor offers to provide Hunt access to a comparable database for a fixed fee fo $60,000 per year plus variable costs of accessing the database. The same vendor offers to provide Indio access to that database for a fixed fee of $20,000 per year plus variable costs of accessing the database. Required: Compute how much of the $55,000 fixed costs of maintaining the database are charged to by each user: a. Under the stand-alone allocation method. b. Under the incremental allocation method, assuming Hunt Company is regarded as the primary user. Answer: a. Total individual stand-alone costs = $60,000 + $20,000 = $80,000 Allocated to Hunt = ($60,000/$80,000) × $55,000 = $41,250 Allocated to Indio = ($20,000/$80,000) × $55,000 = $13,750 b. Hunt, the primary party, bears $48,000. Indio, the incremental party, bears $55,000 - 48,000 = $7,000 Diff: 2 Type: SA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-5
21) The Maintenance Department has been servicing Gizmo Production for four years. Beginning next year, the company is adding a Scrap-Processing Department to recycle the materials from Gizmo Production. As a result, maintenance costs are expected to increase from $480,000 per year to $500,000 per year. The Scrap-Processing Department will use 25% of the maintenance efforts. Required: a. Using the stand-alone cost-allocation method, identify the amount of maintenance cost that will be allocated to Gizmo Production and the Scrap-Processing Department next year. b. Using the incremental cost-allocation method, identify the amount of maintenance cost that will be allocated to Gizmo Production and the Scrap-Processing Department next year. Answer: a. Gizmo Production = $500,000 × 0.75 = $375,000 Scrap-Processing Department = $500,000 × 0.25 = $125,000 b.
Gizmo Production would receive $480,000. Scrap-Processing Department would receive $20,000, the incremental amount
Diff: 2 Type: SA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-5
22) Alpha Roofing Ltd. and Beta Roofing Ltd. are each owned by the Thompson brothers, Ned and Ralph. Alpha does mostly residential buildings and Beta focuses on the commercial building market. Currently each lease a conveyor belt that moves roofing materials from the ground to the roof for $30 per hour. Alpha Roofing requires approximately 1,200 hours per year; and, Beta Roofing 600 hours per year. They are considering purchasing a conveyor belt that has an estimated hourly cost of $20 over its' useful life. Required: a. Using the stand-alone cost-allocation method, identify the amount of conveyor belt cost that will be allocated to each of the companies next year. b. Using the incremental cost-allocation method, identify the amount of conveyor belt cost that will be allocated to each of the companies next year assuming that Apha is the primary party. Answer: a. Alpha = [(1,200/(1,200 + 600)] × (1,800 × $20) = $24,000 Beta = [(600/(1,200 + 600)] × (1,800 × $20) = $12,000 b. Alpha = 1,200 × $30 = $36,000 Beta = $36,000 - $36,000 = $0 Diff: 2 Type: SA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-5
23) John Ebert, a graduating student at a university in Calgary, received an invitation to visit a prospective employer in Halifax. A few days later, he received an invitation from a prospective employer in Toronto. He decided to combine his visits, travelling from Calgary to Halifax, Halifax to Toronto, and Toronto to Calgary. Ebert received job offers from both companies. On his return, he decided to accept the offer in Toronto. He was puzzled as to how to allocate his travel costs between the two employers. He gathered the following data: Regular Round-Trip Fares with No Stopovers Calgary to Halifax $1,500 Calgary to Toronto $1,200 Ebert paid $1,900 for his three-leg flight (Calgary to Halifax, Halifax to Toronto, Toronto to Calgary). In addition, he paid $30 for a limousine from his home to Calgary Airport and another $30 for a limousine from Calgary Airport to his home when he returned. Required: a. Allocate the $1,900 airfare between the employers in Halifax and Toronto using both the stand-alone and incremental methods? b. How would you allocate the $60 limousine fare?
Answer: 1. Allocation of the $1,900 airfare: Alternative approaches include: a. The stand-alone cost allocation method. This method would allocate the air fare on the basis of each user's percentage of the total of the individual stand-alone costs: Halifax employer $1,500/($1,500 + $1,200) × $1,900 = Toronto employer $1,200/($1,500 + $1,200) × $1,900 =
$1,056 844 $1,900 Advocates of this method often emphasize an equity or fairness rationale. b. The incremental cost allocation method. This requires the choice of a primary party and an incremental party. If the Halifax employer is the primary party, the allocation would be: Halifax employer $1,500 Toronto employer 400 $1,900 One rationale is Ernst was planning to make the Halifax trip and the Toronto stop was added subsequently. Some students have suggested allocating as much as possible to the Halifax employer since Ernst was not joining them. If the Toronto employer is the primary party, the allocation would be: Toronto employer $1,200 Halifax employer 700 $1,900 One rationale is that the Toronto employer is the successful recruiter and presumably receives more benefits from the recruiting expenditures. 2. A simple approach is to split the $60 equally between the two employers. The limousine costs at the Vancouver end are not a function of distance traveled on the plane. Another approach is to add the $60 to the $1,900 and repeat requirement 1: a. Stand-alone cost allocation: Halifax employer = $1,084; Toronto employer = $876. b. Incremental cost allocation: Halifax employer primary = $1,560; Toronto employer = $400 Toronto employer primary = $1,260; Halifax employer = $700 Diff: 2 Type: SA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-5
24) The Product Data Center has been servicing the Struble Production Casting Department for five years. Beginning next year, the company is adding a Production Molding Department to compliment the materials produced by the Struble Production Casting Department. As a result, data center costs are expected to increase from $700,000 per year to $800,000 per year. The Production Molding Department will use 20% of the data center efforts. Required: a. Using the stand-alone cost-allocation method, identify the amount of data center cost that will be allocated to Struble Production Casting and the Production Molding Department next year. b. Using the incremental cost allocation method, identify the amount of data center cost that will be allocated to Struble Production Casting and the Production Molding Department next year. Answer: a. Struble Production Casting Department = $800,000 × 0.80 = $640,000 Production Molding = $800,000 × 0.20 = $160,000 b. Struble Production Casting Department would receive $700,000. Production Molding Department would receive $100,000, the incremental amount. Diff: 2 Type: SA CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 15-5
25) John Peters is drafting the provisions of a cost-plus contract and is concerned with ironing out any possible misunderstandings during the life of the contract. What advice can you provide to reduce contract disputes over reimbursement amounts based on costs? Answer: Disputes can be reduced by making the cost allocation rules as explicit as possible and in writing. These rules should include details such as the allowable cost items, the acceptable cost-allocation bases, and how differences between budgeted and actual costs are to be accounted for. Diff: 2 Type: ES CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-5
26) What is a "common cost"? What are two methods that a manager can use to allocate common costs to two or more users? Answer: A common cost is the costs of a cost object that is shared by two or more users. Two ways to allocate common costs would be the stand-alone method and the incremental method. The stand-alone method uses information pertaining to each user of the cost object to determine the cost allocation weights. The incremental method ranks individual users of the cost object and allocates common costs first to the primary user, and then to the other incremental users. Diff: 2 Type: ES CPA Competencies: Chapter 15 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 15-5
Cost Accounting: A Managerial Emphasis - Cdn. Ed., 9e (Datar) Chapter 16 Cost Allocation: Joint Products and Byproducts 16.1 Distinguish among different types of saleable products, scrap and toxic waste. 1) Joint costs are incurred beyond the splitoff point and are assignable to individual products. Answer: FALSE Explanation: Separable costs are the costs incurred beyond the splitoff point. Diff: 1 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-1
2) A byproduct has a minimal sales value. Answer: FALSE Explanation: Scrap has minimal sales value. Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-1
3) Scrap frequently has a zero sales value. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-1
4) There are no logical reasons for allocating joint costs. Answer: FALSE Explanation: Reasons include calculation of inventoriable costs, reimbursement under contracts, etc. Diff: 1 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-1
5) Separable costs are assignable after the splitoff point. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-1
6) Separable costs include manufacturing costs only. Answer: FALSE Explanation: Separable costs include manufacturing, marketing, distribution, and other costs. Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-1
7) The costs of production that yield multiple products simultaneously are known as joint costs. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-1
8) The juncture in a joint production process when two products become separable is the byproduct point. Answer: FALSE Explanation: The juncture in a joint production process when two products become separable is the splitoff point. Diff: 1 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-1
9) The products of a joint production process that have low total sales values compared with the total sales value of the main product are called joint products. Answer: FALSE Explanation: They are called byproducts. Diff: 1 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-1
10) If the value of a byproduct rises significantly, it could also be viewed as a joint product. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
11) All products yielded from joint product processing have some positive value to the firm. Answer: FALSE Explanation: Not all products yielded from joint product processing have some positive value to the firm. Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-1
12) What type of cost is the result of an event that results in multiple products simultaneously? A) byproduct cost B) joint cost C) main cost D) separable cost E) splitoff cost Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-1
13) Costs which are assignable beyond the splitoff point at which individual products emerge are called A) byproduct cost. B) joint cost. C) main cost. D) separable cost. E) splitoff costs. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-1
14) When a single manufacturing process yields two products, one of which has a relatively high sales value compared to the other, the two products are respectively known as A) joint products and byproducts. B) joint products and scrap. C) main products and byproducts. D) main products and joint products. E) byproducts and scrap. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-1
15) Byproducts and scrap are differentiated by A) number of units per processing period. B) weight or volume of outputs per period. C) management preference only. D) the amount of sales value per unit. E) the amount of costs assigned to each unit. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-1
16) Which of the following is FALSE concerning manufacturing of joint products and joint costing? A) The number of outputs produced may exceed the number of products. B) An output from the process may be recycled without any value being added by its production. C) Some outputs from a joint process have no value and are not recognized in the accounting system. D) The physical quantity of outputs not recognized in the accounting system, can exceed the quantities of outputs that recognized in the accounting system. E) Joint processes always yield either scrap or byproducts. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
17) All of the following changes may indicate a change in product classification of a manufacturing process which has a splitoff point EXCEPT A) scrap items increase in sales value. B) a main product becomes a joint product. C) a main product becomes technologically obsolete. D) a byproduct loses its market due to a new invention. E) a byproduct increases in market value. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
18) Products with a zero sales value are known as A) scrap. B) main products. C) joint products. D) byproducts. E) separable products. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-1
19) Which of the following statements is TRUE regarding main products, byproducts, and scrap? A) Product classifications do not change over the short-run. B) Product classifications do not change over the long-run. C) Product classifications may change over time. D) The cause-and-effect criterion determines the classification. E) The distinctions between main products, byproducts, and scrap are well-established in practice. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
20) Which of the following is NOT a reason to allocate joint cost? A) rate regulation requirements, if applicable B) cost of goods sold computations C) insurance settlement cost information requirements D) customer profitability analysis E) cause-and-effect analysis Answer: E Diff: 3 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
21) Assigning joint costs when only a portion of a business's products are sold to a single customer is an example of which of the following? A) inventory costing for external financial statements B) customer profitability analysis C) rate regulation requirements D) price regulation E) cost reimbursement Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-1
22) A business which enters into a contract to purchase a product (or products) and will compensate the manufacturer under a cost reimbursement formula, should take an active part in the determination of how joint costs are allocated because A) it is important in the understanding of the cause-and-effect relationship. B) if the manufacturer successfully allocates a large portion of its costs to these products then it will be able to sell its other nonreimbursed products at lower prices. C) the ASPE/IFRS requires the business to participate in the cost allocation process. D) they are used in the calculation of the suppliers inventoriable costs. E) sales discounts often depend on joint cost allocation amounts. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
23) Which of the following is NOT a reason underlying the importance of allocations for inventory costing and cost of goods sold computations? A) Inventory costing is essential for proper balance sheet presentation. B) Divisional profitability may affect compensation for divisional managers. C) Cost of goods sold is an important component in the determination of net income. D) The information may be required for insurance settlement or litigation. E) Sell work-in -process or process further decisions prior to the splitoff point. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
24) Which of the following is TRUE regarding the costs of toxic waste disposal, reclamation, and remediation that result from joint production processing? A) Toxic waste costs are treated in the same manner byproduct costs. B) Disposal costs should be expensed, other costs charged to cost of goods sold. C) The costs should be valued in inventory at net realizable value. D) Toxic waste costs are a life-cycle cost that should be added to joint production costs prior to allocation. E) All toxic waste costs should be expensed as do not form part of the product. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
Match each of the following costs with the appropriate joint production process cost classification. A) joint cost B) separable cost 25) Cost of processing crude oil in a gasoline refinery. Diff: 1 Type: MA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
26) Cost of processing timber (trees) at a sawmill. Diff: 1 Type: MA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
27) Cost of processing lumber into different lengths and sizes at a sawmill. Diff: 1 Type: MA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
28) Cost of raw tomato processing, tomatoes are to be used for different soups in a soup plant. Diff: 1 Type: MA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
29) Cost of canning soup in a soup plant. Diff: 1 Type: MA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
30) Cost of refining gasoline for use in automobiles. Diff: 1 Type: MA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
31) Cost of moulding plastic for use in making different toys on an assembly line. Diff: 1 Type: MA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
32) Cost of processing water into different sized bottles for human consumption. Diff: 1 Type: MA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
33) Cost of processing pulp into paper. Diff: 1 Type: MA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
Answers: 25) A 26) A 27) B 28) A 29) B 30) B 31) B 32) B 33) B
Match each of the following costs with the appropriate joint production process cost classification. A) byproduct B) joint product C) main product D) scrap 34) Bones from a butcher shop Diff: 1 CPA Competencies: Type: MA Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
35) Sawdust from a sawmill Diff: 1 Type: MA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
36) Sawdust from a furniture manufacturer Diff: 1 Type: MA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
37) Fuel oil from petroleum processing Diff: 1 Type: MA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
38) Salt from a salt works process Diff: 1 Type: MA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
39) Broth from cooking food Diff: 1 Type: MA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
40) Raw milk for dairy processing Diff: 1 Type: MA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
41) Skim milk from dairy processing Diff: 1 Type: MA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
Answers: 34) D 35) A 36) D 37) B 38) C 39) A 40) B 41) B
42) In each of the following industries, identify possible joint (or severable) products at the splitoff point. a. Coal b. Petroleum c. Dairy d. Lamb e. Lumber f. Cocoa Beans g. Christmas Trees h. Salt i. Cowhide Answer: a. Coke, Gas, Benzole, Tar, Ammonia b. Crude Oil, Gas, Raw LPG c. Milk, Butter, Cheese, Ice Cream, Skim Milk d. Lamb Cuts, Tripe, Hides, Bones, Fat e. Board, Newsprint, Shavings, Chips, etc. f. Cocoa Butter, Cocoa Powder, Cocoa Shells g. Christmas Trees, Wreaths, Decorations h. Hydrogen, Chlorine, Caustic Soda i. Leather, Suede, Chew Toys Diff: 2 Type: ES CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
43) List three reasons why we allocate joint costs to individual products or services. Give an example of when the particular cost allocation reason would come into use. Answer: a. For inventory costing, and cost of goods sold computations for financial accounting purposes. Example: Cost of goods sold and ending inventory valuation is necessary for reports to shareholders and for the inland revenue service. b. For internal costing and cost of goods sold computations for internal reporting purposes. Example: These computations are necessary for division profitability analysis. c. Reimbursement under contracts. Example: A firm produces multiple products or services—and uses the same resources and facilities to produce the products or services. But not all the firm's products are under the contract. The firm must allocate the cost of these shared facilities or resources to reflect the portion used by the product under the contract. d. Insurance settlement computations. Example: Where a business with multiple products or services claim losses under an insurance policy and wants to calculate the loss. The insurance company and the insured must agree on the value of the loss. e. Rate regulation. When companies are subject to rate regulation, the allocation of joint costs can be a significant factor in determining the regulated rates. Example: Crude oil and natural gas are produced out of a common well. Diff: 1 Type: ES CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-1
44) What are a joint cost and a splitoff point? Answer: A joint cost is the cost of a single production process that yields multiple products simultaneously. The splitoff point is the juncture in a joint production process when the products become separately identifiable. Diff: 2 Type: ES CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
45) Explain the difference between a joint product and a byproduct. Can a byproduct ever become a joint product? Answer: The differentiating factor between a joint product and a byproduct is the sales value at the splitoff point. Joint products have high total sales value at the splitoff point. A byproduct has a low total sales value at the splitoff point. Products can change from byproducts to joint products when their total sales values increase significantly. Diff: 2 Type: ES CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
46) What are separable costs?
Answer: Separable costs are costs incurred beyond the split-off point on identifiable products. Diff: 1 Type: ES CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-1
47) Golden Company uses one raw material, gold ore, for all its products. It spends considerable time getting the gold from the ore before it starts the actual processing of the finished products, rings, lockets, etc. Traditionally, the company made one product at a time and charged the product with all costs of production, from ore to final inspection. However, in recent months the cost accounting reports have been somewhat disturbing to management. It seems that some of the finished products are costing more than they should, even to the point of approaching their retail value. It has been noted by the accounting manager that this problem began when the company started buying ore from different parts of the world, some of which requires difficult extraction methods. Required: Can you explain how the company might change its accounting system to better reflect the reporting problems? Are there other problems with the purchasing area? Answer: It appears that the company needs to start assigning all extraction costs to a joint cost category. It is unfair that the finished products receive a high cost simply because a certain batch of ore was very expensive to run through the extraction process when the next finished products were produced from gold that was easy to extract. If all extraction costs are considered joint, then each finished product would share in the average cost of extraction, rather than being charged with the cost of a specific batch. This should result in costs that are more reflective of the product's actual cost. Additional problems may be with the purchasing department. The accounting may help highlight the problem but does not pinpoint the actual problem. Maybe they should buy refined gold or else hire experts in the minerals area as part of the purchasing team. Diff: 2 Type: ES CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-1
48) How should toxic waste be accounted for? Answer: Toxic waste has negative revenue and should be added to the joint costs of production prior to allocation to main, joint or byproducts. Diff: 2 Type: ES CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-1
16.2 Analyze the physical measure and sales value at splitoff methods to allocate joint costs.
1) The cause-and-effect criterion is not present when joint costing is used. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-2
2) It is easier to cost inventory if the joint products are sold before the splitoff point without further processing. Answer: FALSE Explanation: There is not basis for allocation. Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-2
3) The sales value at splitoff method allocates joint costs according to each product's value, at the splitoff point, of the total production in the accounting period of each product. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-2
4) The sales value at splitoff method can be used to value inventory as well as determining cost of goods sold. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-2
5) One problem with the physical measure method of allocation is that the physical weights used for allocating joint costs may have no relation to the product's ability to produce revenue. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-2
6) A major deficiency of the sales value at splitoff method is that this method does not allow management to obtain individual product costs and gross margin information. Answer: FALSE
Explanation: The sales value at splitoff method enables the accountant to obtain individual product costs and gross margins. Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-2
7) An advantage of the physical-measure method is that obtaining physical measures for all products is an easy task. Answer: FALSE Explanation: For some products such as gas, obtaining physical measures is difficult. Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-2
8) Under the benefits-received criterion, the physical measures method is less desirable that the sales value at splitoff method. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-2
9) Which of the following statements is TRUE in regard to the cause-and-effect relationship between allocated joint costs and individual products? A) A high individual product value results in a high level of joint costs. B) A low individual product value results in a low level of joint costs. C) A high individual product value results in a low level of joint costs. D) The cause-and-effect relationship depends on the relative costs to be incurred after splitoff. E) There is no cause-and-effect relationship. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-2
Use the information below to answer the following question(s). Raynor Manufacturing purchases trees from Tree Nursery and processes them up to the splitoff point, where two products (paper and pencil casings) are obtained. The products are then sold to an independent company that markets and distributes them to retail outlets. The following information was collected for the month of October. Trees processed: 50 trees (yield is 30,000 sheets of paper and 30,000 pencil casings and no scrap) Production: paper pencil casings
30,000 sheets 30,000
Sales: paper pencil casings
29,000 at $0.04 per page 30,000 at $0.10 per casing
Cost of purchasing 50 trees and processing them up to the splitoff point to yield 30,000 sheets of paper and 30,000 pencil casings is $1,500. Raynor Manufacturing's accounting department reported no beginning inventories; however, ending inventory amounts reflected 1,000 sheets of paper in stock. 10) What is the paper's sales value at the splitoff point? A) $120 B) $1,160 C) $1,200 D) $1,950 E) $3,000 Answer: C Explanation: Paper: 30,000 sheets × $0.04 = $1,200.00 Diff: 1 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
11) What are the pencil casings' sales value at the split-off point? A) $300 B) $1,480 C) $3,000 D) $3,750 E) $4,500 Answer: C Explanation: Pencils: 30,000 casings × $0.10 = $3,000.00 Diff: 1 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-2
12) What are the paper's and the pencil's approximate weighted cost proportions using the sales value at splitoff method, respectively? A) 28.57% and 71.43% B) 33.33% and 66.67% C) 40% and 60% D) 49.00% and 51.00% E) 50.00% and 50.00% Answer: A Explanation: $1,200 + 3,000 = $4,200; $1,200/$4,200 = 28.57%; $3,000/$4,200 = 71.43% Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
13) What are the approximate joint costs assigned to the paper ending inventory if joint costs are allocated using the sales value at splitoff method? A) $14.29 B) $50.00 C) $428.55 D) $435.00 E) $750.00 Answer: A Explanation: 28.57% × $1,500 × 1,000/30,000 = $14.29 Diff: 3 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
14) What is the approximate cost assigned to the pencil casings if joint costs are allocated using the sales value at splitoff method? A) $750 B) $765 C) $1,005 D) $1,071 E) $1,500 Answer: D Explanation: 71.43% × $1,500 = $1,071.45 Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
15) What is the paper's production approximate cost per unit if the sales value at splitoff method is used? A) $0.0143 B) $0.0150 C) $0.0250 D) $0.0259 E) $0.0300 Answer: A Explanation: $429/30,000 sheets = $0.0143 Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
16) What is the approximate production cost per unit for each pencil casing if the sales value at splitoff method is used? A) $0.0250 B) $0.0255 C) $0.0335 D) $0.0357 E) $0.0533 Answer: D Explanation: $1,071/30,000 casings = $0.0357 Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
17) Two finished products, [A & B], are sold for $16 a unit and $24 a unit, respectively. Each product can also be sold at the splitoff point. Product A can be sold for $10 and Product B for $8. Joint costs for the two products totalled $8,000 for January for 600 units of A and 500 units of B. What are the respective joint costs assigned to each unit of products A and B if the sales value at splitoff method is used? A) $5.92 and $8.88 B) $6.40 and $14.40 C) $6.40 and $9.10 D) $8.00 and $9.10 E) $8.00 and $6.40 Answer: E Explanation: Total splitoff market value = (600 × $10) + (500 × $8) = $10,000 Product A = $6,000/$10,000 × $8,000 = $4,800/600 = $8.00 Product B = $4,000/$10,000 × $8,000 = $3,200/500 = $6.40 Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
18) Which method allocates joint costs on the basis of each product's relative sales value at the splitoff point? A) the constant gross margin percentage NRV method B) the estimated net realizable value method C) the physical measure method D) the sales value at splitoff method E) the splitoff method Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-2
Use the information below to answer the following question(s). Chem Manufacturing Company processes direct materials up to the splitoff point, where two products (X and Y) are obtained and sold. The following information was collected for the month of November. Direct materials processed: 10,000 litres (10,000 litres yield 9,500 litres of good product and 500 litres of shrinkage) Production: Sales:
X 5,000 litres X 4,750 at $150 per litre
Y 4,500 litres Y 4,000 at $100 per litre
The cost of purchasing 10,000 litres of direct materials and processing it up to the splitoff point to yield a total of 9,500 litres of good products was $975,000. The beginning inventories totalled 50 litres for X and 25 litres for Y. Ending inventory amounts reflected 300 litres of product X and 525 litres of product Y. October costs were per unit were the same as November. 19) What are the respective physical volume proportions for products X and Y? A) 55.00% and 45.00% B) 54.00% and 46.00% C) 52.63% and 47.37% D) 47.37% and 53.63% E) 36.36 % and 63.64% Answer: C Explanation: X: 5,000/9,500 = 52.63% Y: 4,500/9,500 = 47.37% Diff: 1 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-2
20) What is the approximate portion of the joint costs that should be allocated to products X and Y, respectively, using a physical volume measure? A) $461,858 and $513,142 B) $487,500 and $487,500 C) $513,142 and $461,858 D) $529,285 and $445,715 E) $530,000 and $470,000 Answer: C Explanation: X: 52.63% × $975,000 = $513,142 (depends on rounding) Could be $513,158 Y: 47.37% × $975,000 = $461,858 (depends on rounding) Could be $461,842 Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-2
21) What is Product X's approximate production cost per unit using the physical volume method?
A) $0.10 B) $10.23 C) $53.15 D) $55.00 E) $102.63 Answer: E Explanation: $513,142/5,000 litres = $102.63 Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-2
22) What is the approximate amount of joint costs in Product Y's ending inventory if the physical volume method is used and the company uses the FIFO inventory method? A) $50,917 B) $53,883 C) $60,145 D) $60,285 E) $67,358 Answer: B Explanation: $975,000 × 4,500/9,500 = $461,842; $461,842/4,500 litres = $102.63 × 525 = $53,883 Diff: 3 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Analyzing Objective: LO 16-2
23) What is product Y's approximate joint production cost if the sales value at splitoff point method is used? A) $365,625 B) $419,250 C) $458,250 D) $600,000 E) $609,375 Answer: A Explanation: Total value = (5,000 × $150) + (4,500 × $100) = $1,200,000 Product Y percentage = $450,000/$1,200,000 = 0.375 Cost allocated = $975,000 × 0.375 = $365,625 Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-2
24) What is product X's approximate gross margin percentage using the physical volume method? A) 30% B) 32% C) 33% D) 35% E) 38% Answer: B Explanation: Sales (4,750 × $150) $712,500 Cost of goods sold: 4,750 × $513,142/5,000 487,485 Gross margin $225,015 Gross margin percentage $225,015/$712,500 = 31.58% Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
25) What method is used when joint costs are allocated according to each item's relative proportion of weight at the splitoff point? A) direct proportion method B) proportional value method C) physical measure method D) weighted sales value method E) constant margin method Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-2
26) An advantage of the sales value at splitoff method is A) the fact that it can be supported subjectively. B) the fact that only a few assumptions are required beyond the splitoff point. C) the fact that there may not be a ready market at the splitoff point. D) it always yields the same results as the gross margin percentage method. E) the cost allocation base is well understood. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-2
27) If joint products end up with the same gross margin percentage, which of the following is TRUE? A) The cost allocation method assigned the same cost per unit to each product. B) The physical measure method must have been used. C) The gross margin percentage NRV method must have been used. D) The estimated net realizable method must have been used. E) If all products are sold at the splitoff point, and there were no opening inventories, the sales value at splitoff method could have been used. Answer: E Diff: 3 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-2
28) Which of the following is FALSE concerning the physical measure method? A) Technical personnel outside of accounting may be required in the joint costing determinations. B) Using the benefits-received criterion, the physical measure method less preferred than the sales at splitoff method. C) The physical measure may not reflect each individual product's ability to generate revenues. D) Using a common physical measure can result in the product with the lowest revenue-producing power having the most costs assigned to it. E) It results in a constant gross margin for all products. Answer: E Diff: 3 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-2
29) In rate regulation settings, which method is usually preferred over the sales value method? A) constant gross margin percentage NRV method B) estimated net realizable method C) physical measure method D) sales value at splitoff method E) rate regulation method Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-2
30) Advantages of the sales value at splitoff method include all of the following EXCEPT A) it does not presuppose an exact number of subsequent steps for further processing. B) it uses a meaningful denominator. C) there is no anticipation of subsequent management decisions. D) it is simple. E) the allocation of joint costs could lead managers to make poor decisions. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-2
31) The Arvid Corporation manufactures widgets, gizmos, and turnbols from a joint process. May production is 4,000 widgets; 7,000 gizmos; and 8,000 turnbols. Respective per unit selling prices at splitoff are $15, $10, and $5. Joint costs up to the splitoff point are $75,000. If joint costs are allocated based upon the sales value at splitoff, what amount of joint costs will be allocated to the widgets? A) $30,882 B) $26,471 C) $17,647 D) $28,125 E) $60,000 Answer: B Explanation: $15 × 4,000 = $60,000 $10 × 7,000 = $70,000 $5 × 8,000 = $40,000 Total = $170,000 $60,000/$170,000 × $75,000 = $26,471 Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
32) Product X is sold for $8 a unit and Product Y is sold for $12 a unit. Each product can also be sold at the splitoff point. Product X can be sold for $5 and Product Y for $4. Joint costs for the two products totaled $4,000 for January for 600 units of X and 500 units of Y. What are the respective joint costs assigned to each unit of products X and Y if the sales value at splitoff method is used? A) $2.96 and $4.44 B) $4.00 and $4.55 C) $4.00 and $3.20 D) $4.55 and $4.55 E) $3.20 and $4.00 Answer: C Explanation: Total splitoff market value = (600 × $5) + (500 × $4) = $5,000 Product X = $3,000/$5,000 × $4,000 = $2,400/600 = $4.00 Product Y = $2,000/$5,000 × $4,000 = $1,600/500 = $3.20 Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
Answer the following question(s) using the information below. The Oxnard Corporation processes a liquid component up to the splitoff point where two products, Mr. DirtOut and Mr. SinkClean, are produced and sold. There was no beginning inventory. The following material was collected for the month of January:
Production:
Mr. DirtOut Mr. SinkClean
147,500 litres 95,000 litres
Sales:
Mr. DirtOut Mr. SinkClean
140,500 at $110 per litre 91,000 at $100 per litre
The cost of purchasing 250,000 litres of direct materials and processing it up to the splitoff point to yield a total of 242,500 litres of good product was $380,000. 33) What are the physical volume proportions to allocate joint costs for Mr. DirtOut and Mr. SinkClean, respectively? A) 59.00% and 41.00% B) 60.82% and 39.18% C) 39.18% and 60.82% D) 59.79% and 40.21% E) 41.00% and 59.00% Answer: B Explanation: Mr. DirtOut: 147,500/242,500 = 60.82% Mr. SinkClean: 95,000/242,500 = 39.18% Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
34) When using a physical volume measure, what is the approximate amount of joint costs that will be allocated to Mr. DirtOut and Mr. SinkClean? A) $231,116 and $148,884 B) $224,200 and $155,800 C) $227,202 and $152,798 D) $155,800 and $224,200 E) $148,884 and $231,116 Answer: A Explanation: $380,000 × (147,500/242,500) = $231,116; $380,000 × (95,000/242,500) = $148,884 Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
35) When using the physical measures method, what is Mr. DirtOut's approximate production cost per
unit? A) $1.52 B) $1.54 C) $1.57 D) $1.61 E) $1.01 Answer: C Explanation: [$380,000 × (147,500/242,500)]/147,500 = $1.57 Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
Answer the following question(s) using the information below: The Morton Company processes unprocessed goat milk up to the splitoff point where two products, condensed goat milk and skim goat milk result. The following information was collected for the month of October:
Production:
condensed goat milk skim goat milk
26,100 litres 32,400 litres
Sales:
condensed goat milk skim goat milk
$3.50 per litre $2.50 per litre
The costs of purchasing the 65,000 litres of unprocessed goat milk and processing it up to the splitoff point to yield a total of 58,500 litres of salable product was $72,240. There were no inventory balances of either product. Condensed goat milk may be processed further to yield 19,500 litres (the remainder is shrinkage) of a medicinal milk product, Xyla, for an additional processing cost of $3 per usable litre. Xyla can be sold for $18 per litre. Skim goat milk can be processed further to yield 28,100 litres of skim goat ice cream, for an additional processing cost per usable litre of $2.50. The product can be sold for $9 per litre. There are no beginning and ending inventory balances.
36) Using the sales value at splitoff method, what is the gross margin percentage for condensed goat milk at the splitoff point? A) 21.1% B) 55.1% C) 58.1% D) 38.2% E) 41.9% Answer: C Explanation: Condensed Goat Milk Skim Goat Milk Total Revenues 26,100 × $3.50 = $91,350 32,400 × $2.50 = $81,000 $172,350 Percentage $91,350/$172,350 = 0.53 $81,000/$172,350 = 0.47 Joint costs allocated Gross margin GM percentage
$72,240 × .53 = $38,287
$72,240 × .47 = $33,953
$53,063
$47,047
$53,063/$91,350 = 0.581
$47,047/$81,000 = 0.581
Diff: 3 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Analyzing Objective: LO 16-2
37) Using the sales value at splitoff method, what is the gross margin percentage for skim goat milk at the splitoff point? A) 21.1% B) 55.1% C) 58.1% D) 38.2% E) 41.9% Answer: C Explanation: Condensed Goat Milk Skim Goat Milk Total Revenues 26,100 × $3.50 = $91,350 32,400 × $2.50 = $81,000 $172,350 Percentage $91,350/$172,350 = 0.53 $81,000/$172,350 = 0.47 Joint costs allocated Gross margin GM percentage
$72,240 × .53 = $38,287
$72,240 × .47 = $33,953
$53,063
$47,047
$53,063/$91,350 = 0.581
$47,047/$81,000 = 0.581
Diff: 3 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Analyzing Objective: LO 16-2
Use the information below to answer the following question(s). Cranbrook Chemical Ltd. manufactures two industrial compounds. In the month of May, 15,000 litres of direct material costing $160,000 were processed at a cost of $400,000. The joint process yielded 16,000 containers of a compound known as Jarlon and 4,000 containers of a compound known as Kharton. The respective selling prices of Jarlon and Kharton are $38 and $58. Both products may be processed further. Jarlon may be processed into Jaxton at an incremental cost of $8 per jar of the final product while Kharton may be processed into Kraxton at an additional cost of $32 per jar of the final product. The volume of jars of the final product are: 12,000 and 3,000 for Jaxton and Kraxton respectively. The selling price of Jaxton is $48 per jar. The selling price of Kraxton is $102 per jar. 38) Using the sales value at splitoff method, the percentage weightings for joint cost allocations for Jarlon and Kharton respectively are A) 27.62% and 72.38%. B) 80.00% and 20.00%. C) 39.58% and 60.42%. D) 72.38% and 27.62%. E) 60.42% and 39.58%. Answer: D Explanation: Jarlon sales value at splitoff = 16,000 @ $38 = $608,000 Kharton sales value at splitoff = 4,000 @ $58 = $232,000 J = 608/[608+232] = 72.38%; K = 232/[608+232] = 27.62% Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
39) Using the physical measures method, the weightings for joint cost allocations for Jarlon and Kharton respectively are A) 27.62% and 72.38%. B) 80.00% and 20.00%. C) 39.58% and 60.42%. D) 72.38% and 27.62%. E) 60.42% and 39.58%. Answer: B Explanation: Jarlon = 16,000/[16,000 + 4,000] = 80%; Kharton = 4,000/[16,000 + 4,000] = 20% Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
40) Using the sales value at splitoff method, the joint costs allocated to Jarlon would be A) $289,520. B) $115,808. C) $405,328. D) $110,480. E) $154,672. Answer: C Explanation: $608,000/$840,000 = 72.38%; 72.38% × [$160,000 + $400,000] = $405,328 Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
41) Using the sales value at splitoff method, the joint costs allocated to Kharton would be A) $289,520. B) $115,808. C) $110,480. D) $154,672. E) $405,328. Answer: D Explanation: Jarlon sales value at splitoff = 16,000 @ $38 = $608,000 Kharton sales value at splitoff = 4,000 @ $58 = $232,000 J = 608/[608 + 232] = 72.38%; K = 232/[608 + 232] = 27.62% 27.62% × [$160,000 + $400,000] = $154,672 Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
42) Using the physical measures method, the joint costs allocated to Jarlon would be A) $320,000. B) $112,000. C) $405,328. D) $448,000. E) $289,520 Answer: D Explanation: Jarlon = 16,000/[16,000 + 4,000] = 80%; Kharton = 4,000/[16,000 + 4,000] 80% × [$160,000 + $400,000] = $448,000 Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
43) Using the physical measures method, the joint costs allocated to Kharton would be A) $320,000. B) $112,000. C) $154,672. D) $448,000. E) $110,480. Answer: B Explanation: Jarlon = 16,000/[16,000 + 4,000] = 80%; Kharton = 4,000/[16,000 + 4,000] 20% × [$160,000 + $400,000] = $112,000 Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
44) Assuming Cranbrook uses the sales value at splitoff method and 2,000 containers of Jarlon and 75 containers of Kharton are unsold at the end of the period, Cranbrook would report ending inventory of A) $38,272. B) $56,598. C) $53,560. D) $79,240. E) $58,100. Answer: C Explanation: Jarlon sales value at splitoff = 16,000 @ $38 = $608,000 Kharton sales value at splitoff = 4,000 @ $58 = $232,000 J = 608/[608 + 232] = 72.38%; K = 232/[608 + 232] = 27.62% Joint costs allocated are $405,328 and $154,672 for J and K respectively Unit costs are $405,328/16,000 = $25.33 for J Units costs are $154,672/4,000 = $38.67 for K Ending inventory = [$25.33 × 2,000] + [$38.67 × 75] = $50,660 + $2,900 = $53,560 Diff: 3 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Analyzing Objective: LO 16-2
45) Assuming Cranbrook uses the physical measures method and 2,000 containers of Jarlon and 75 containers of Kharton are unsold at the end of the period, Cranbrook would report cost of goods sold of A) $58,100. B) $506,400. C) $358,500. D) $143,400. E) $501,900. Answer: E Explanation: Jarlon = 16,000/[16,000 + 4,000] = 80%; Kharton = 4,000/[16,000 + 4,000] = 20% 80% × [$160,000 + $400,000] = $448,000 for Jarlon $448,000/16,000 = $28 per container 16,000 - 2,000 = 14,000 units sold of J; 4,000 - 75 = 3,925 units sold of K 20% 8 $560,000 = $112,000 for Kharton $112,000/4,000 = $28 per container Total Cost of goods sold = [14,000 units × $28] + [3,925 × $28] = $501,900 Diff: 3 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Analyzing Objective: LO 16-2
Use the information below to answer the following question(s): Yip Manufacturing purchases trees from Cheney Lumber and processes them up to the splitoff point where two products (paper and pencil casings) are obtained. The products are then sold to an independent company that markets and distributes them to retail outlets. The following information was collected for the month of May: Trees processed:
100 trees (yield is 70,000 sheets of paper and 60,000 pencil casings and no scrap)
Production:
paper pencil casings
70,000 sheets 60,000
Sales:
paper pencil casings
68,000 at $0.04 per page 60,000 at $0.10 per casing
The cost of purchasing 100 trees and processing them up to the splitoff point to yield 70,000 sheets of paper and 60,000 pencil casings is $3,000. Yip's Manufacturing's accounting department reported no beginning inventories and an ending inventory of 2,000 sheets of paper. 46) What are the paper's and the pencils' approximate weighted cost proportions using the sales value at splitoff method, respectively? A) 50.00% and 50.00% B) 33.33% and 66.67% C) 31.82% and 68.18% D) 54.00% and 46.00% E) 53.00% and 47.00% Answer: C Explanation: (70,000 × $0.04) + (60,000 × $0.10) = $8,800 $2,800/$8,800 = 31.82% $6,000/$8,800 = 68.18% Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
47) If the sales value at splitoff method is used, what are the approximate joint costs assigned to ending inventory for paper? A) $28.58 B) $27.27 C) $954.60 D) $32.19 E) $762.90 Answer: B Explanation: Paper: 70,000 sheets × $0.04 = $2,800.00 Pencil casings: 60,000 casings × $0.10 = $6,000.00 $2,800/($2,800 + $6,000) = 31.82% 31.82% × $3,000 × 2,000/70,000 = $27.27 Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
48) If the sales value at splitoff method is used, what is the approximate production cost for each pencil casing? A) $0.0398 B) $0.0299 C) $0.05 D) $0.0419 E) $0.0341 Answer: E Explanation: Paper: 70,000 sheets × $0.04 = $2,800.00 Pencil casings: 60,000 casings × $0.10 = $6,000.00 $6,000/($2,800 + $6,000) × $3,000 = $2,045.45 $2,045.45/60,000 casings = $0.0341 Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
Answer the following questions using the information below: Yakima Manufacturing purchases trees from Cheney Lumber and processes them up to the splitoff point where two products (paper and pencil casings) are obtained. The products are then sold to an independent company that markets and distributes them to retail outlets. The following information was collected for the month of November: Trees processed:
100 trees (yield is 60,000 sheets of paper and 60,000 pencil casings and no scrap)
Production:
paper pencil casings
60,000 sheets 60,000
Sales:
paper pencil casings
58,000 at $0.04 per page 60,000 at $0.10 per casing
The cost of purchasing 100 trees and processing them up to the splitoff point to yield 60,000 sheets of paper and 60,000 pencil casings is $3,000. Yakima's accounting department reported no beginning inventories and an ending inventory of 2,000 sheets of paper. 49) If the sales value at splitoff method is used, what are the approximate joint costs assigned to ending inventory for paper? A) $28.58 B) $100.00 C) $870.00 D) $1,500.00 E) $80.00 Answer: A Explanation: Paper: 60,000 sheets × $0.04 = $2,400.00 Pencil casings: 60,000 casings × $0.10 = $6,000.00 $2,400/($2,400 + $6,000) = 28.57% 28.57% × $3,000 × 2,000/60,000 = $28.58 Diff: 3 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Analyzing Objective: LO 16-2
50) If the sales value at splitoff method is used, what is the approximate production cost for each pencil casing? A) $0.0250 B) $0.0255 C) $0.0335 D) $0.0357 E) $0.0422 Answer: D Explanation: Paper: 60,000 sheets × $0.04 = $2,400.00 $6,000/($2,400 + $6,000) × $3,000 = $2,142 $2,142/60,000 casings = $0.0357 Diff: 3 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
Use the information below to answer the following questions: Argon Manufacturing Company processes direct materials up to the splitoff point where two products (U and V) are obtained and sold. The following information was collected for last quarter of the calendar year: Direct materials processed: 20,000 gallons (20,000 gallons yield 19,000 gallons of good product and 1,000 gallons of shrinkage) Production:
U V
10,000 gallons 9,000 gallons
Sales:
U V
9,500 at $150 per gallon 8,000 at $100 per gallon
The cost of purchasing 20,000 gallons of direct materials and processing it up to the splitoff point to yield a total of 19,000 gallons of good products was $1,950,000. Beginning inventories totaled 100 gallons for U and 50 gallons for V. Ending inventory amounts reflected 600 gallons of Product U and 1,050 gallons of Product V. October costs per unit were the same as November. 51) What are the physical-volume proportions for products U and V, respectively? A) 47.37% and 53.63% B) 55.00% and 45.00% C) 52.63% and 47.37% D) 54.00% and 46.00% E) 46.00% and 54.00% Answer: C Explanation: U: 10,000/(10,000 + 9,000) = 52.63% V: 9,000/(10,000 + 9,000) = 47.37% Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
52) What is the joint cost allocation to product U using the sales value at splitoff method? A) $1,218,750 B) $731,250 C) $1,248,876 D) $701,124 E) $1,026,285 Answer: A Explanation: U: (10,000 × $150)/[(10,000 × $150) + (9,000 × $100)] × $1,950,000 = $1,218,750 Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
53) Sweet Sugar Company processes sugar beets into three products. During April the joint costs of processing were $240,000. Production and sales value information for the month were as follows: Sales Value at Units Splitoff Separable Product Produced Sales Value Costs Sugar 12,000 $80,000 $24,000 Sugar syrup 8,000 $70,000 $64,000 Fructose syrup 4,000 $50,000 $32,000 Required: 1. Determine the amount of joint cost allocated to each product if the physical measure method is used. 2. Determine the amount of joint cost allocated to each product if the net realizable value method is used. Round to the nearest thousand. Answer: Product Units Produced Percent Joint cost allocated Sugar 12,000 50% × $240,000 $120,000 Sugar syrup 8,000 33.3% × 240,000 80,000 Fructose syrup 4,000 16.7%× 240,000 40,000 Total $24,000 100% $240,000 Product Sugar Sugar syrup Fructose syrup Total
Units Produced $56,000 6,000 18,000 $80,000
Percent Joint cost allocated 70.0% × $240,000 $168,000 7.5% × 240,000 18,000 22.5%× 240,000 54,000 100% $240,000
Diff: 2 Type: SA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2; 16-3
54) Sweet Sugar Company processes sugar beets into three products. During April the joint costs of processing were $240,000. Production and sales value information for the month were as follows: Sales Value at Units Splitoff Separable Product Produced Sales Value Costs Sugar 12,000 $80,000 $24,000 Sugar syrup 8,000 $70,000 $64,000 Fructose syrup 4,000 $50,000 $32,000 Required: Determine the amount of joint cost allocated to each product if the sales value at splitoff method is used. Answer: Product Units Sales Value Percent Joint cost allocated Sugar 12,000 $80,000 40% × $240,000 $96,000 Sugar syrup 8,000 70,000 35 × 240,000 84,000 Fructose syrup 4,000 50,000 25 × 240,000 60,000 Total $200,000 100% $240,000 Diff: 2 Type: SA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
55) Peachland Fruit Ltd. harvests blueberries. After harvest, the company sells some berries fresh, freezes others, and processes some into juice. During the summer the joint costs of processing the berry products were $620,000. Any separable costs for each product are negligible and are not traced. There were no beginning or ending inventories for the summer. Production and sales value information for the summer were as follows: Sales Value at Product Units splitoff Point Juice 200,000 litres $6 per litre Fresh 300,000 kilograms $8 per kilogram Frozen 400,000 kilograms $5 per kilogram Required: Determine the amount allocated to each product if the sales value at splitoff method is used and compute the cost per case for each product. Answer: Product Calculation SV Percentage Allocation Juice 200,000 @ $6 $1,200,000 21.43% $132,866 Fresh 300,000 @ $8 2,400,000 42.86% $265,732 Frozen 400,000 @ $5 2,000,000 35.71% $221,402 Totals $5,600,000 100.00% $620,000 Product Juice Fresh Frozen
Costs per unit $132,866/200,000 litres = $0.66/litre $265,732/300,000 kilograms = $0.89/kilogram $221,402/400,000 kilograms = $0.55/kilogram
Diff: 2 Type: SA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
56) BC Lumber processes timber into four products. During January the joint costs of processing were $280,000. There was no beginning inventory at the beginning of the month. Production and sales value information for the month were as follows: Sales Value at Product 2 × 4's 2 × 6's 4 × 4's slabs
Boardmetres 6,000,000 3,000,000 2,000,000 1,000,000
splitoff Point $0.30 per boardmetre 0.40 per boardmetre 0.45 per boardmetre 0.10 per boardmetre
Ending Inventory 500,000 boardmetre 250,000 boardmetre 100,000 boardmetre 50,000 boardmetre
Required: Determine the value of ending inventory if the sales value at splitoff method is used for product costing. Round to 3 decimal places when necessary. Answer: Product Boardmetres Sales value % Joint Cost Allocated 2 × 4's 6,000,000 $1,800,000 45.0% × 280,000 = $126,000 2 × 6's 3,000,000 1,200,000 30.0% × 280,000 = 84,000 4 × 4's 2,000,000 900,000 22.5% × 280,000 = 63,000 slabs 1,000,000 100,000 2.5% × 280,000 = 7,000 Totals 12,000,000 $4,000,000 100.0% $280,000 Product 2 × 4's 2 × 6's 4 × 4's slabs
Fraction of prod. in inventory 500,000/6,000,000 × $126,000 = 250,000/3,000,000 × 84,000 = 100,000/2,000,000 × 63,000 = 50,000/1,000,000 × 7,000 = Total
Allocated Inventory value $10,500 7,000 3,150 350 $21,000
Diff: 3 Type: SA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
57) BC Lumber processes timber into four products. During January the joint costs of processing were $280,000. There was no beginning inventory at the beginning of the month. Production and sales value information for the month were as follows: Sales Value at Product 2 × 4's 2 × 6's 4 × 4's slabs
Boardmetres 6,000,000 3,000,000 2,000,000 1,000,000
splitoff Point $0.30 per boardmetre 0.40 per boardmetre 0.45 per boardmetre 0.10 per boardmetre
Ending Inventory 500,000 boardmetre 250,000 boardmetre 100,000 boardmetre 50,000 boardmetre
Required: Determine the value of ending inventory if the physical measures method is used for product costing. Round to 3 decimal places when necessary. Answer: Product Boardmetres Weighting % Joint Cost Allocated 2 × 4's 6,000,000 6,000/12,000 50.0% × 280,000 = $140,000 2 × 6's 3,000,000 3,000/12,000 25.0% × 280,000 = 70,000 4 × 4's 2,000,000 2,000/12,000 16.67% × 280,000 = 46,676 slabs 1,000,000 1,000/12,000 8.33% × 280,000 = 23,324 Totals 12,000,000 100.0% $280,000 Product 2 × 4's 2 × 6's 4 × 4's slabs
Fraction of prod. in inventory 500,000/6,000,000 × $140,000 = 250,000/3,000,000 × 70,000 = 100,000/2,000,000 × 46,676 = 50,000/1,000,000 × 23,324 = Total
Allocated Inventory value $11,667 5,833 2,334 1,166 $21,000
Diff: 3 Type: SA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
58) CSI Chemical, Inc. processes pine rosin into three products; turpentine, paint thinner, and spot remover. During May the joint costs of processing were $240,000. Production and sales value information for the month were as follows: Product Turpentine Paint thinner Spot remover
Units Produced 3,000 litres 3,000 litres 1,500 litres
Sales Value at Splitoff Point $30,000 25,000 12,500
Required: Determine the amount of joint cost allocated to each product if the physical measure method is used. Answer: Product Units produced Percentage Joint costs Allocated Turpentine 3,000 litres 40% × $240,000 = $96,000 Paint thinner 3,000 litres 40% × $240,000 = 96,000 Spot remover 1,500 litres 20% × $240,000 = 48,000 Totals 7,500 litres 100% $240,000 Diff: 2 Type: SA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
59) CSI Chemical, Inc. processes pine rosin into three products; turpentine, paint thinner, and spot remover. During May the joint costs of processing were $240,000. Production and sales value information for the month were as follows: Product Turpentine Paint thinner Spot remover
Units Produced 3,000 litres 3,000 litres 1,500 litres
Sales Value at splitoff Point $30,000 25,000 12,500
Required: Determine the amount of joint cost allocated to each product if the sales value at splitoff method is used. Answer: Product Sales Value Percentage Joint costs Allocated Turpentine $30,000 44.44% × $240,000 = $106,667 Paint thinner $25,000 37.04% × $240,000 = 88,889 Spot remover $12,500 18.52% × $240,000 = 44,444 Totals $67,500 100% $240,000 Explanation: Note solution shows full percentage decimal places i.e. $30/67.5 × $240,000 = $106,667 If two decimal places are used for percentages, the numbers are $106,656, $88,896 and $44,448. Diff: 2 Type: SA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2
60) List the reasons that the sales value at splitoff method of joint cost allocation should be used.
Answer: 1. Measurement of the value of the joint products at splitoff - Sales value at splitoff is the best measure of the benefits received as a result of joint processing. 2. No anticipation of subsequent management decisions - This method does not require information on processing steps after splitoff. 3. Availability of a common basis to allocate joint costs to products - Revenue is the common basis to allocate costs. 4. Simplicity - It is the simplest method compared to the NRV and constant gross margin percentage NRV methods. Diff: 2 Type: ES CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-2
61) Wharf Fisheries processes many of its seafood items to the demands of its largest customers, most of which are large retail distributors. To keep the accounting system simple it has always assigned cost by the weight of the finished product. However, with increased competition it has had to watch its prices closely and in recent years several items have incurred zero profit margins. After several weeks of investigation, your consulting firm has found that while weight is important in processing of seafood, numerous items have very distinct processing steps and some items are processed through more steps than others. Required: Based on the findings of your consulting firm, what changes might you recommend to the company in the way of cost allocation among its products? Answer: Recommendations might include, among others, some of the following: a. Categorize the fishing expeditions as joint costs, especially if multiple items are caught. b. Categorize all processing activities where multiple items are processed as joint costs. c. For those processes that are unique to only one product, or a set of products, use separable cost categories. d. Choose something other than weight. Select one of the value methods of assigning the costs. e. Carefully separate main products from byproducts in the costing system. f. Do not allocate the joint costs for internal decisions. Diff: 3 Type: ES CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Analyzing Objective: LO 16-2
62) Paragon University operates an extensive and an expensive registration, testing, and counselling centre, through which all students are required to pass through when they enter the university. The registration effort's costs (for the most part) are almost impossible to allocate based upon which students require time, effort, etc. The cost of this centre is approximately 15% of the total costs of Paragon. This department engages in no other activities than the registration of students. Paragon is interested in determining the profitability of the three technical departments it operates. Paragon has the perception that some departments are more profitable than others, and it would like to determine an appropriate method of allocating the costs of this registration centre.
Required: Recommend to Paragon University a method (or methods) of allocating the costs of registration to the three departments. Answer: The joint costs of the registration effort could be allocated based on physical volume or the sales (tuition) dollars of each department. Volume: Allocating on volume would be based not upon physical measures, but upon the number of credit hours each of the three departments offer each semester. If the ratio of credit hours for the three departments were 25%, 45%, and 30% then the costs would be allocated based upon these ratios. Sales Dollars: It is possible that some departments charge more per credit hour than others. In this case it might be appropriate to allocate the costs based upon the total tuition revenues of each department. Diff: 3 Type: ES CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Analyzing Objective: LO 16-2
16.3 Analyze the two methods to use when there is no sales value at the splitoff point. 1) The method of allocating joint product costs is an important guide for other management decisions. Answer: FALSE Explanation: Not true as joint costs do not have a cause and effect relationship to separable products. Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-3
2) The estimated net realizable value method allocates joint costs on the basis of the expected final sales value in the ordinary course of business, less the expected separable costs of production and marketing of the total production for the period. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-3
3) The net realizable value method can be used for products for which there may not be any market price available at splitoff. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-3
4) Net realizable value generally means expected sales value plus expected separable costs. Answer: FALSE Explanation: Net realizable value is expected sales value minus expected separable costs. Diff: 1 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-3
5) A company can alter its total gross margin through its selection of joint cost allocation methods. Answer: FALSE Explanation: Individual product margins are affected, not the total company. Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-3
6) The net realizable value method is generally used for products or services that are processed and after splitoff additional value is added to the product and a selling price can be determined. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-3
7) The constant gross margin percentage method differs from market based joint cost allocation method (sales value at splitoff and estimated net realizable value) since no account is taken of profits earned before or after the splitoff point when allocating joint costs. Answer: FALSE Explanation: The constant gross margin percentage method takes account of the profits earned before or after the splitoff when allocating joint costs. Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-3
8) A criticism of the practice of carrying inventories at estimated net realizable values is that this practice recognizes income before sales are made. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-3
9) The constant gross margin percentage of NRV method allocates joint costs to joint products in such a way that the gross margin on each joint product is the same as it was in the previous year. Answer: FALSE Explanation: The constant gross margin percentage of NRV method allocates joint costs to joint products in such a way that the overall gross margin percentage is identical for the individual products. Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-3
10) All of the following methods may be used to allocate joint costs EXCEPT the A) constant gross margin percentage NRV method. B) estimated net realizable value method. C) present value allocation method. D) sales value at splitoff method. E) physical measure method. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-3
11) Which of the following is NOT a strategy for costing inventory when joint-cost circumstances are involved? A) Allocate costs according to the market selling price. B) Allocate costs based on constant gross margin. C) Allocate costs according to a predetermined physical measure. D) Use the estimated net realizable value. E) Allocate costs according to the amount in the respective cost pools. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-3
12) The decision of whether to process products beyond the splitoff process should be based on which of the following? A) revenue analysis B) relevant cost analysis C) production cost analysis D) gross margin analysis E) incremental operating income attainable beyond the splitoff point Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-3
13) The estimated net realizable method allocates joint costs on the basis of A) expected final sales value less separable costs of production and marketing. B) value added after the splitoff point. C) sales value less value added after the splitoff point. D) revenue less all direct manufacturing costs after splitoff point. E) relative numbers of physical units of each product. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-3
Use the information below to answer the following question(s). Beverage Drink Company processes direct materials up to the splitoff point, where two products, A and B, are obtained. The following information was collected for the month of July: Direct materials processed: 2,500 litres (with 20 percent shrinkage) Production:
A B
1,500 litres 500 litres
Unit sales value at splitoff:
A B
$15.00 per litre $10.00 per litre
Cost of purchasing 2,500 litres of direct materials and processing it up to the splitoff point to yield a total of 2,000 litres of good products was $4,500. There were no inventory balances of A and B. Product A may be processed further to yield 1,375 litres of Product Z5 for an additional processing cost of $150. Product Z5 is sold for $25.00 per litre. There was no beginning inventory and ending inventory was 125 litres. Product B may be processed further to yield 375 litres of Product W3 for an additional processing cost of $275. Product W3 is sold for $30.00 per litre. There was no beginning inventory and ending inventory was 25 litres. 14) What are the expected final sales values of production if Product Z5 and Product W3 are produced? A) $11,250 and $34,375 B) $22,500 and $5,000 C) $31,250 and $10,500 D) $34,375 and $10,500 E) $34,375 and $11,250 Answer: E Explanation: Z5 = 1,375 litres × $25 = $34,375 W3 = 375 litres × $30 = $11,250 Diff: 1 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-3
15) What is Product Z5's estimated net realizable value? A) $11,100 B) $22,350 C) $34,225 D) $34,375 E) $34,525 Answer: C Explanation: $34,375 - $150 = $34,225 Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-3
16) What is Product Z5's and Product W3's respective production cost per unit, assuming the company allocates joint costs on the basis of net realizable value? A) $2.05 and $3.88 B) $2.42 and $2.78 C) $2.49 and $2.88 D) $2.60 and $3.61 E) $2.86 and $3.68 Answer: D Explanation: Weight (34,225/45,200) = 76% (10,975/45,200) = 24% Joint Cost: 0.76 × $4,500 = $3,420 0.24 × $4,500 = $1,080 Prod. Cost/unit: [($3,420 + 150)/1,375] = $2.60 [($1,080 + 275)/375] = $3.61 Diff: 3 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-3
17) Which of the following methods allocates joint costs according to the appraised final sales value in the ordinary course of business less the appraised separable costs of production and marketing? A) constant gross margin percentage NRV method B) estimated net realizable method C) physical measure method D) sales value at splitoff method E) splitoff appraisal method Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-3
18) Which of the following joint cost allocation methods calculates expected profits before any costs are allocated? A) sales value at splitoff method B) physical measure method C) expected profits method D) estimated net realizable method E) constant gross margin percentage of NRV method Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-3
19) All of the following statements about the constant gross margin percentage of net realizable method are true EXCEPT A) all products have equal gross margin percentages. B) it is based on a tenuous underlying assumption. C) the gross margin percentage remains the same regardless of the different amounts of separable costs. D) the gross margin is calculated by deducting all separable costs from revenue. E) some products may receive negative allocations of joint costs. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-3
20) Which of the following statements is TRUE concerning the practice of carrying inventories at NRV? A) It is an inevitable result of joint cost allocation. B) It results for the NRV method of joint cost allocation. C) It results from the constant gross margin of NRV method. D) It is a widely accepted practice. E) It results in income recognition before sales are made. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-3
Answer the following question(s) using the information below: The Morton Company processes unprocessed goat milk up to the splitoff point where two products, condensed goat milk and skim goat milk result. The following information was collected for the month of October:
Production:
condensed goat milk skim goat milk
26,100 litres 32,400 litres
Sales:
condensed goat milk skim goat milk
$3.50 per litre $2.50 per litre
The costs of purchasing the 65,000 litres of unprocessed goat milk and processing it up to the splitoff point to yield a total of 58,500 litres of salable product was $72,240. There were no inventory balances of either product. Condensed goat milk may be processed further to yield 19,500 litres (the remainder is shrinkage) of a medicinal milk product, Xyla, for an additional processing cost of $3 per usable litre. Xyla can be sold for $18 per litre. Skim goat milk can be processed further to yield 28,100 litres of skim goat ice cream, for an additional processing cost per usable litre of $2.50. The product can be sold for $9 per litre. There are no beginning and ending inventory balances.
21) What is the estimated net realizable value of Xyla at the splitoff point? A) $182,650 B) $252,900 C) $292,500 D) $351,000 E) $280,750 Answer: C Explanation: Xyla Skim Goat Total Sales 19,500 × $18 = $351,000 28,100 × $9 = $252,900 $603,900 Less: Sep cost 19,500 × $3 = $58,500 28,100 × $2.50 = $70,250 Est. NRV $292,500 $182,650 $475,150 Weighting .6156 .3844 Jt costs $72,240 × .6156 = $44,471 $72,240 × .3844 = $27,769 allocated Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-3
22) What is the estimated net realizable value of the skim goat ice cream at the splitoff point? A) $182,650 B) $252,900 C) $110,200 D) $85,450 E) $194,400 Answer: A Explanation: XYLA Skim Goat Total Sales 19,500 × $18 = $351,000 28,100 × $9 = $252,900 $603,900 Less: Sep cost 19,500 × $3 = $58,500 28,100 × $2.50 = $70,250 Est. NRV $292,500 $182,650 $475,150 Weighting .6156 .3844 Jt costs $72,240 × .6156 = $44,471 $72,240 × .3844 = $27,769 allocated Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-3
23) Using estimated net realizable value, what amount of the $72,240 of joint costs would be allocated Xyla and the skim goat ice cream? A) $41,971 and $30,269 B) $44,471 and $27,769 C) $32,796 and $39,444 D) $36,120 and $36,120 E) $39,444 and $32,796 Answer: B Explanation: XYLA Skim Goat Total Sales 19,500 × $18 = $351,000 28,100 × $9 = $252,900 $603,900 Less: Sep cost 19,500 × $3 = $58,500 28,100 × $2.50 = $70,250 Est. NRV $292,500 $182,650 $475,150 Weighting .6156 .3844 Jt costs $72,240 × .6156 = $44,471 $72,240 × .3844 = $27,769 allocated Diff: 3 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-3
24) The constant gross margin percentage NRV method of joint cost allocation A) involves allocating costs in such a way that maintaining the same gross margin percentage for each product that was obtained in prior years. B) involves allocating costs in such a way that the overall gross margin percentage is identical for the individual products. C) is the same as the estimated NRV method. D) is the same as the sales value at splitoff method. E) will result in different gross margins for each product. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-3
25) Which method of allocating costs would be used if the selling prices of all products at the splitoff point are unavailable? A) sales value at splitoff method B) NRV method C) physical measures method D) net margin method E) reciprocal method Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-3
26) What is the reason that accountants do not like to carry inventory at net realizable value? A) it is the most difficult costing method B) income is recognized after the sale is complete C) income is recognized before sales are made D) it is never acceptable to the taxing authorities E) it is more difficult to count the inventory when carrying cost is different than purchase cost Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-3
Use the information below to answer the following question(s). Cranbrook Chemical Ltd. manufactures two industrial compounds. In the month of May, 15,000 litres of direct material costing $160,000 were processed at a cost of $400,000. The joint process yielded 16,000 containers of a compound known as Jarlon and 4,000 containers of a compound known as Kharton. The respective selling prices of Jarlon and Kharton are $38 and $58. Both products may be processed further. Jarlon may be processed into Jaxton at an incremental cost of $8 per jar of the final product while Kharton may be processed into Kraxton at an additional cost of $32 per jar of the final product. The volume of jars of the final product are: 12,000 and 3,000 for Jaxton and Kraxton respectively. The selling price of Jaxton is $48 per jar. The selling price of Kraxton is $102 per jar. 27) Using the NRV method, the amount of joint costs allocated to Jaxton is A) $170,408. B) $278,280. C) $121,720. D) $389,592. E) $111,312. Answer: D Explanation: Jaxton net realizable value = [12,000 × $48] - [12,000 × $8] = $480,000 Kraxton net realizable value = [3,000 × $102] - [3,000 × $32] = $210,000 J proportion = $480,000/[$480,000 + $210,000] = 69.57% K proportion = $210,000/[$480,000 + $210,000] = 30.43% Joint costs allocated to J = .6957 × $560,000 = $389,592 Joint costs allocated to K = .3043 × $560,000 = $170,408 Diff: 3 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-3
28) Using the NRV method, the amount of joint costs allocated to Kraxton is A) $170,408. B) $278,280. C) $121,720. D) $389,592. E) $111,312. Answer: A Explanation: Jaxton net realizable value = [12,000 × $48] - [12,000 × $8] = $480,000 Kraxton net realizable value = [3,000 × $102] - [3,000 × $32] = $210,000 J proportion = $480,000/[$480,000 + $210,000] = 69.57% K proportion = $210,000/[$480,000 + $210,000] = 30.43% Joint costs allocated to J = .6957 × $560,000 = $389,592 Joint costs allocated to K = .3043 × $560,000 = $170,408 Diff: 3 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-3
29) The incremental benefit or (loss) of processing Jarlon into Jaxton is A) $480,000. B) ($128,000). C) $64,000. D) ($96,000). E) ($32,000). Answer: B Explanation: Incremental Revenues: [12,000 × $48] - [16,000 × $38] = $576,000 - $608,000 = ($32,000) Incremental Costs: [12,000 × $8] = $96,000 Company loses $32,000 + $96,000 = $128,000 Diff: 3 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Analyzing Objective: LO 16-3
30) The incremental benefit or (loss) of processing Kharton into Kraxton is A) $74,000. B) $22,000. C) ($22,000). D) ($96,000). E) $170,000. Answer: C Explanation: Incremental Revenues: [3,000 × $102] - [4,000 × $58] = $306,000 - $232,000 = $74,000 Incremental Costs: [3,000 × $32] = ($96,000) Company loses $74,000 - $96,000 = ($22,000) Diff: 3 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Analyzing Objective: LO 16-3
Use the information below to answer the following question(s): Orange Paper Company processes wood pulp into two products. During February the joint costs of processing were $156,000. Production and sales value information for the month were as follows:
Product Paper Cardboard
Kilograms Produced 180,000 132,000
Sales Value at splitoff Point $30,000 20,000
Separable Costs $232,000 277,000
Paper sells for $2.85 a kilogram and cardboard sells for $3.90 a kilogram. There were no beginning inventories for April but ending inventories totalled 15,000 kilograms for paper and 18,000 kilograms for cardboard. 31) How much of the Orange Paper Company joint costs should be allocated to the cardboard using the net realizable value method based on total production? A) $78,000 B) $62,400 C) $93,600 D) $84,240 E) $71,760 Answer: E Explanation: Joint cost allocated: NRV paper = (180,000 × $2.85) - $232,000 = NRV cardboard = (132,000 × $3.90) - $277,000 = Total
$ 281,000 237,800 $518,800
Joint cost allocated to paper = $156,000 × 0.54 = Joint cost allocated to cardboard = $156,000 × 0.46 = Total
$ 84,240 71,760 $156,000
54% 46%
Diff: 3 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-3
32) How much of the Orange Paper Company joint costs should be allocated to the paper using the net realizable value method based on total production? A) $78,000 B) $62,400 C) $93,600 D) $84,240 E) $71,760 Answer: D Explanation: Joint cost allocated: NRV paper = (180,000 × $2.85) - $232,000 = NRV cardboard = (132,000 × $3.90) - $277,000 = Total
$ 281,000 237,800 $518,800
Joint cost allocated to paper = $156,000 × 0.54 = Joint cost allocated to cardboard = $156,000 × 0.46 = Total
$ 84,240 71,760 $156,000
54% 46%
Diff: 3 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-3
33) What will be the total incremental benefit or (loss) from all potential sales of processing the paper beyond the splitoff point? A) $251,000 B) $281,000 C) $513,000 D) $311,000 E) $232,000 Answer: A Explanation: Incremental Revenues: [180,000 × $2.85] - $30,000 - $232,000 = $251,000 Diff: 3 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Analyzing Objective: LO 16-3
34) What will be the total incremental benefit or (loss) from all potential sales of processing the cardboard beyond the splitoff point? A) $257,800 B) $237,800 C) $217,800 D) $311,000 E) $277,000 Answer: C Explanation: Incremental Revenues: (132,000 × $3.90) - $20,000 - $277,000 = $217,800 Diff: 3 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Analyzing Objective: LO 16-3
35) Blue Paper Company processes wood pulp into two products. During January the joint costs of processing were $144,000. Production and sales value information for the month were as follows:
Product Paper Cardboard
Kilograms Produced 130,000 108,000
Sales Value at splitoff Point $80,000 70,000
Separable Costs $224,000 264,000
Paper sells for $2.75 a kilogram and cardboard sells for $3.50 a kilogram. There were no beginning inventories for January but ending inventories totalled 10,000 kilograms for paper and 12,000 kilograms for cardboard. Required: Prepare a product line income statement in gross margin format. Joint costs are allocated using the net realizable value method assuming all available product is sold. Answer: Paper Cardboard Totals Sales $330,000 $336,000 $666,000 Cost of goods sold 278,548 293,547 572,095 Gross margin $51,452 $42,453 $93,905 Joint cost allocated: NRV paper = (130,000 × $2.75) - $224,000 = NRV cardboard = (108,000 × $3.50) - $264,000 = Total Joint cost allocated to paper = $144,000 × 0.54 = Joint cost allocated to cardboard = $144,000 × 0.46 = Total
$ 133,500 114,000 $247,500
54% 46%
$ 77,760 66,240 $144,000
Cost of goods sold: Paper = [($77,760 + $224,000)/130,000 kg.] × (130,000 kg. - 10,000 kg.) = $ 278,548 Cardboard = [($66,240 + $264,000)/108,000 kg.] × (108,000 kg. - 12,000 kg) = $ 293,547 Diff: 3 Type: SA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Analyzing Objective: LO 16-3
36) Red Paper Company processes wood pulp into two products. During March the joint costs of processing were $144,000. Production and sales value information for the month were as follows:
Product Paper Cardboard
Kilograms Produced 130,000 108,000
Sales Value at splitoff Point $80,000 70,000
Separable Costs $224,000 264,000
Paper sells for $2.75 a kilogram and cardboard sells for $3.50 a kilogram. There were no beginning inventories for March but ending inventories totalled 10,000 kilograms for paper and 12,000 kilograms for cardboard. Required: Prepare a product line income statement assuming that joint costs are allocated on the constant gross margin percentage method based on total production. Present production costs and separable costs individually. Answer: Paper Cardboard Totals Sales $330,000 $336,000 $666,000 Produced but not sold 27,500 42,000 69,500 Total sales value $357,500 $378,000 $735,500 Separable costs 224,000 264,000 488,000 Contribution margin $133,500 $114,000 $247,500 Joint costs 144,000 Gross margin $103,500 Gross margin % = $103,500/$735,500 = 14.072% Paper Cardboard Totals Sales $330,000 $336,000 $666,000 Cost of goods sold: Production costs (plugged) 76,793 54,051 130,844 Separable costs 206,769 234,667 441,436 Gross margin @ 14.072% $ 46,438 $ 47,282 $ 93,720 Separable costs: Paper = ($224,000/130,000 kg.) × (130,000 kg. - 10,000 kg.) = Cardboard = ($264,000/108,000 kg.) × (108,000 kg. - 12,000 kg.) =
$206,769 $ 234,667
Diff: 3 Type: SA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Analyzing Objective: LO 16-3
37) Orange Paper Company processes wood pulp into two products. During April the joint costs of processing were $132,000. Production and sales value information for the month were as follows:
Product Paper Cardboard
Kilograms Produced 135,000 98,000
Sales Value at splitoff Point $55,000 40,000
Separable Costs $217,000 259,000
Paper sells for $2.65 a kilogram and cardboard sells for $3.40 a kilogram. There were no beginning or ending inventories for April. Required: 1. Determine the amounts to be allocated to each product using the: a. estimated net realizable value method b. sales value at splitoff method 2. If the cardboard is sold at the splitoff point then the post splitoff factory capacity can be renovated and leased for the year. The cost of the renovation is budgeted at $125,000 and the annual lease revenue will be $165,000. Determine if it is more profitable for the cardboard to be sold at the splitoff point or at the end of production. Answer: 1 (a) NRV method joint cost allocated: NRV paper = (135,000 × $2.65) - $217,000 = $ 140,750 65% NRV cardboard = (98,000 × $3.40) - $259,000 = 74,200 35% Total $214,950 Joint cost allocated to paper = $132,000 × 0.65 = Joint cost allocated to cardboard = $132,000 × 0.35 = Total
$ 85,800 46,200 $132,000
1(b) Sales value at splitoff method joint cost allocated: Paper = [$55,000/($55,000 + $40,000)] × $132,000 = Cardboard = [$40,000/($55,000 + $40,000)] × $132,000 =
$ 76,421
2. Sell or process further Sales value at splitoff Net lease ($165,000 - $125,000)
NRV cardboard = (98,000 × $3.40) - $259,000 =
55,579 $132,000
$40,000 40,000 $80,000 $ 74,200
Therefore, sell at the splitoff point. Diff: 3 Type: SA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Analyzing Objective: LO 16-2; 16-3; 11-2
38) Purple Paper Company processes wood pulp into two products. During July the joint costs of
processing were $50,000. Production and sales value information for the month were as follows:
Product Paper Cardboard
Kilograms Produced 125,000 96,000
Sales Value at splitoff Point $63,000 46,000
Separable Costs $221,000 262,000
Paper sells for $2.71 a kilogram and cardboard sells for $3.10 a kilogram. There were no beginning or ending inventories for July. Required: 1. Determine the amounts to be allocated to each product using the: a. constant gross margin percentage of NRV method b. physical measure method 2. Should management process these products beyond the splitoff point? Justify your answer. Also comment on how this decision would be affected by the results of the expected profits using the constant gross margin percentage of NRV and physical measure methods.
Answer: 1. (a) Constant gross margin method joint cost allocated: Paper Cardboard Sales $338,750 $297,600 Separable costs 221,000 262,000 Contribution margin $117,750 $35,600 Joint costs Gross margin Gross margin % = $103,350/$636,350 = 16.241%
Sales Deduct gross margin Separable costs Joint cost allocated
Paper $338,750 55,017 221,000 $ 62,733
Cardboard $297,600 48,333 262,000 $ (12,733)
1. (b)Physical measures method joint cost allocated: Paper = [125,000/(125,000 + 96,000)] × $50,000 = Cardboard = [96,000/(125,000 + 96,000)] × $50,000 =
Totals $636,350 483,000 $153,350 50,000 $103,350
Totals $636,350 103,350 483,000 $ 50,000
$ 28,281 21,719 $ 50,000
2. The paper product has a post splitoff CM of $117,750 which is greater than the $63,000 sales value at the splitoff point so processing should continue. The $35,600 contribution margin for the cardboard is less than the $46,000 sales value at the splitoff point so further processing will result in less profit. Using the constant gross margin method management will decide to continue processing because both products show a gross margin of 16.241%. Using the physical measures method the budgeted paper profit is ($117,750 - $28,281 = $89,469); and, the budgeted cardboard profit is ($35,600 - $21,719 = #13,881, so management will decide to continue processing. Diff: 3 Type: SA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Analyzing Objective: LO 16-2; 16-3; 16-4
39) Red Sauce Canning Company processes tomatoes into catsup, tomato juice, and canned tomatoes. During the summer the joint costs of processing the tomatoes were $420,000. There was no beginning or ending inventories for the summer. Production and sales value information for the summer were as follows:
Product Catsup Juice Canned
Cases 100,000 150,000 200,000
Sales Value at splitoff Point $6 per case 8 per case 5 per case
Separable Costs $3.00 per case 5.00 per case 2.50 per case
Selling Price $28 per case 25 per case 10 per case
Required: Determine the amount allocated to each product if the estimated net realizable value method is used and compute the cost per case for each product. Answer: Product Expected value Separable Net value Percentage Catsup $2,800,000 $300,000 $2,500,000 35.71% Juice 3,750,000 750,000 3,000,000 42.86 Canned 2,000,000 500,000 1,500,000 21.43 Totals $7,000,000 100.00% Product Catsup Juice Canned
Joint Costs $420,000 = 420,000 = 420,000 =
Allocated Separable Product costs $149,982 + $300,000 = $449,982 180,012 + 750,000 = 930,012 90,006 + 500,000 = 590,006
Catsup cost per case = $449,982/100,000 = $4.50 Juice cost per case = $930,012/150,000 = $6.20 Canned cost per case = $590,006/200,000 = $2.95 Diff: 3 Type: SA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-3
40) AllCanada Wire Products processes copper into wire. It makes 12 gauge and 14 gauge wire. During April the joint costs of processing the aluminium were $365,000. There were no beginning or ending inventories for the month. Production and sales value information for the month were as follows: Product 14 gauge 16 gauge
Feet 200,000 600,000
Separable Costs $0.20 per metre 0.30 per metre
Selling Price $0.90 per metre 1.00 per metre
Required: Determine the amount of joint costs allocated to each product if the constant gross margin percentage of NRV method is used. Answer: Expected sales: 14 gauge 200,000 × $0.90 $180,000 16 gauge 600,000 × $1.00 600,000 Total sales 780,000 Costs: Joint $365,000 14 gauge (200,000 × $0.20) 40,000 16 gauge (600,000 × $0.30) 180,000 585,000 Gross margin $195,000 gross margin percentage $195,000/$780,000 = 0.25
Sales Less gross margin (0.25) Cost of goods sold Separable costs Joint costs allocated
14 gauge $180,000 45,000 $135,000 40,000 $95,000
16 gauge $600,000 150,000 $450,000 180,000 $270,000
Totals $780,000 195,000 $585,000 220,000 $365,000
Diff: 3 Type: SA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-3
41) Favata Corporation processes a single material into three separate products A, B, and C . During September, the joint costs of processing were $600,000. Production and sales value information for the month were as follows: Product
Units Produced
A B C
20,000 30,000 25,000
Final Sales Value per Unit $25 30 24
Separable Costs $250,000 500,000 250,000
Required: Determine the amount of joint cost allocated to each product if the constant gross margin percentage of NRV method is used. Answer: The gross margin percentage is 20% ($2,000,000 - $1,600,000)/$2,000,000
Product A B C Total
Total Less Final Sales Less Gross Production Separable Joint Costs Value Margin Costs Costs Allocated $500,000 $100,000 $400,000 $250,000 $150,000 900,000 180,000 720,000 500,000 220,000 600,000 120,000 480,000 250,000 230,000 2,000,000 400,000 1,600,000 $1,000,000 600,000
Diff: 2 Type: SA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Analyzing Objective: LO 16-3
42) Juno Ltd. manufactures three separate products Q, R, and S from a joint production process . During March, the joint costs of processing were $875,000. Production and sales value information for the month were as follows:
Product Q R S
Final Sales Units Produced Value per Unit 42,000 $18 68,000 32 35,000 26
Separable Costs $190,000 720,000 210,000
Required: Determine the amount of joint cost allocated to each product if the constant gross margin percentage NRV method is used. Answer: The gross margin percentage is 48.07391% ($3,842,000 - $875,000 - $1,120,000)/$3,842,000 = $1,847/$3,842
Product Q R S Total
Total Less Final Sales Less Gross Production Separable Joint Costs Value Margin Costs Costs Allocated $756,000 $363,439 $392,561 $190,000 $202,56 $2,176,000 $1,046,088 $1,129,91 720,000 409,91 $910,000 $437,47 472,527 210,000 262,527 $3,842,000 400,000 1,995,000 $1.120,000 875,000
Diff: 2 Type: SA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Analyzing Objective: LO 16-3
43) Calamata Corporation processes a single material into three separate products A, B, and C. During September, the joint costs of processing were $300,000. Production and sales value information for the month were as follows: Product
Units Produced A B C
10,000 15,000 12,500
Final Sales Value per Unit $25 30 24
Separable Costs $125,000 250,000 125,000
Required: Determine the amount of joint cost allocated to each product if the constant gross margin percentage of NRV method is used. Answer: The gross margin percentage is 20% ($1,000,000 - $800,000)/$1,000,000 Total Final Sales Less Gross Production Less Separable Joint Costs Product Value Margin Costs Costs Allocated A $ 250,000 $50,000 $ 200,000 $ 125,000 $ 75,000 B 450,000 90,000 360,000 250,000 110,000 C 300,000 60,000 240,000 125,000 115,000 Total 1,000,000 200,000 800,000 $ 500,000 300,000 Diff: 2 Type: SA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-3
44) Santos Corporation processes a single material into three separate products X, Y, and Z. During November, the joint costs of processing were $100,000. Production and sales value information for the month were as follows: Product
Units Produced X Y Z
14,000 14,000 20,000
Final Sales Value per Unit $9 $11 $6
Separable Costs $55,000 85,000 60,000
Required: Determine the amount of joint cost allocated to each product if the constant gross margin percentage of NRV method is used. Answer: The gross margin percentage is 25% ($400,000 - $300,000)/$400,000 Total Final Sales Less Gross Production Less Separable Joint Costs Product Value Margin Costs Costs Allocated X $ 126,000 $ 31,500 $ 94,500 $ 55,000 $ 39,500 Y 154,000 38,500 115,500 85,000 30,500 Z 120,000 30,000 90,000 60,000 30,000 Total $ 400,000 $ 100,000 $ 300,000 $ 200,000 100,000 Diff: 2 Type: SA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-3
45) What are the four methods of allocating joint costs to individual products? Which of these methods is preferred, and what are two advantages of this method? Answer: The four methods of allocating joint costs to individual products are: the sales-value at splitoff method, estimated net realizable value (NRV) method, the constant gross margin percentage NRV, and physical measures methods. Of these methods, the sales-value at splitoff method is preferred when market prices are available, because it is consistent with the benefits-received criterion, it does not depend or anticipate further managerial decisions on further processing, and it is relatively simple. Diff: 2 Type: ES CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-3
46) For each of the following methods of allocating joint costs, give a positive or a negative aspect of selecting each one to allocate joint costs. a. sales value at splitoff b. estimated net realizable value method c. the constant gross margin method d. a physical measure such as volume Answer: a. Positive: Costs are allocated to products in proportion to their potential revenues. This is a fairly simple method to implement. Negative: We use the sales value of the entire production of the accounting period. b. Positive: It can be used when the market prices of the products are not known or available. Negative: It can be very complex in operations with multiple products and multiple splitoff points. c. Positive: Account is taken of the profits earned either before or after the splitoff point when allocating the joint costs. Negative: The assumption is made that all have the same ratio of cost to sales value. This is likely not true. d. Positive: It is fairly simple to use. Negative: It has no relationship to the revenue-producing power of individual products. Diff: 3 Type: ES CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-2; 16-3
16.4 Understand the irrelevance of joint costs in the "sell or process further" decision. 1) The amount of the joint costs is an important factor when considering to sell a product at the splitoff point or process it further. Answer: FALSE Explanation: When a product is an inevitable result of a joint process, the decision to further process should not be influenced by either the size fo the total joint costs, or by the portion of joint costs allocated to particular products. Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-4
2) All separable costs in joint cost allocations are always incremental costs. Answer: FALSE Explanation: Some of the separable costs may be fixed and therefore not incremental. Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-4
3) When a product is the result of a joint process, the decision to process the product past the splitoff
point further should be influenced by the A) total amount of the joint costs. B) portion of the joint costs allocated to the individual products. C) extra revenue earned past the splitoff point. D) extra net operating income earned past the splitoff point. E) joint costs allocated under the NRV method. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-4
4) Salt Island Pottery Ltd. manufactures two products, bowls and plates, from a joint process. Bowls are allocated $5,000 of the total joint costs of $25,000. There are 1,500 bowls produced and 1,500 plates produced each year. Bowls can be sold at the split-off point for $12 per unit, or they can be processed further into a deluxe bowl for additional processing costs of $5,000 and sold for $16 for each deluxe bowl. By how much will operating income change if the company chooses to process deluxe bowls? A) $1,000 net increase in operating income B) $1,000 net decrease in operating income C) $19,000 net increase in operating income D) $14,000 net increase in operating income E) $4,000 net decrease in operating income Answer: A Explanation: Selling Price × Units $16.00 × 1500 = $24,000 less Additional cost 5,000 Profit 19,000 Less split-off point sales $12 × 1,500 = 18,000 Net increase $1,000 Diff: 3 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-4
5) Brittany Furniture manufactures two products, pillows and cushions, from a joint process. Pillows are allocated $7,000 of the total joint costs of $25,000. There are 2,500 pillows produced and 2,500 cushions produced each year. Pillows can be sold at the split-off point for $12 per unit, or they can be processed further into a deluxe pillow for additional processing costs of $8,000 and sold for $16 for each deluxe pillow. By how much will operating income change if the company chooses to process deluxe pillows? A) $32,000 net increase in operating income B) $23,000 net increase in operating income C) $2,000 net increase in operating income D) $30,000 net increase in operating income E) $3,000 net decrease in operating income Answer: C Explanation: Selling Price × Units $16.00 × 2,500 = $40,000 less Additional cost 8,000 Profit $32,000 Less split-off point sales $12 × 2,500 = 30,000 Net increase $2,000 Diff: 3 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-4
6) North York Statue Company makes miniature Mountie statues from cast iron. Sales total 40,000 units a year and the company is operating at full capacity. The statues are finished either rough or polished, with an average demand of 60 percent rough and 40 percent polished. Iron ingots, the direct material, costs $6 per kilogram. Processing costs are $200 to convert 20 kilograms into 40 statues; polishing adds $3 per statue. Rough statues are sold for $15 each and polished statues can be sold for $18 or engraved for an additional cost of $5. Engraved statues can then be sold for $30. Required: Determine if the engraving process is cost effective. Answer: ($30 - $18) - $5 = $7 incremental margin
Sales Cost of sales: Materials ($6 × 20)/40 Conversion $200/40 Engraving Contribution margin
Rough $15.00
Polished $18.00
$3.00 5.00
$3.00 8.00
$7.00
$7.00
Engraved $30.00 $3.00 8.00 5.00 $14.00
Diff: 2 Type: SA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-4
7) The Organic Milk Company produces three products from a joint processes using whole milk: butter, cheese, and cream. The joint costs amount to $24,000 per batch of output. Each batch totals 50,000 litres: 25% butter, 25% cheese, 50% cream. All products are processed further without gain or loss in volume. Separable costs are butter, $0.50 per litre; cheese, $2.00 per litre; cream, $0.25 per litre. The selling prices per litre are respectively: $3.50, $6.00, $4.00. Required: 1. How much joint cost per batch should be allocated to cream, assuming that joint costs are allocated on a physical measure basis? 2. If joint costs are assigned on a net realizable value basis, how much joint cost should be allocated to cheese? 3. An organic grocer has offered to buy all of the cheese produced at $5.50 per litre. Traditionally 90% of the cheese production is sold. How much better or worse off financially is the company from accepting this offer? Answer: 1. $24,000 × 50% = $12,000 2. NRV calculations: Butter = $3.50 - $0.50 = $3.00 × 12,500 litres = $37,500 Cheese = $6.00 - $2.00 = $4.00 × 12,500 litres = $50,000 Cream = $4.00 - $0.25 = $3.75 × 25,000 litres = $93,750 $181,250 Allocated (50,000/181,250) × $24,000 = $6,620.69 3. ($5.50 - (90% × $6.00)) × 12,500 litres = $1,250 better off Diff: 2 Type: SA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-4
16.5 Identify the strategic implications of a decision to implement one joint cost allocation method. 1) Different joint cost allocation methods will result in different product margin percentages for the individual products. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-5
2) If managers make processing or selling decisions using incremental revenue/incremental cost approach, which of the following statements is TRUE? A) The resulting budgeted product-line income statement under the sales value at splitoff method, will show each product to have a positive operating income. B) The resulting budgeted product-line income statement under the physical measure method, will show each product to have a positive operating income. C) The resulting budgeted product-line income statement under the constant gross margin NRV method, will show each product to have a positive (or zero) operating income. D) Estimated net realizable method the resulting budgeted product-line income statement under the estimated NRV method, will show each product to have a zero operating income. E) The resulting budgeted product-line income statement under the sales value at splitoff method, will show each product to have a negative operating income. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-5
3) The selection of a joint cost allocation method assists managers in which of the following decisions? A) allocating inventoriable costs B) total cost minimization C) joint costs minimization D) adding or dropping a product line E) sell or process further Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-5
4) Framingham Ltd. produces three products out of a common process. The company currently uses the physical measures method to allocate joint costs to the three product lines: Leonid (L), Madagascar, (M) and Napoleon (N). The manager of the Napoleon product line is particularly disgruntled. He believes that his product line is allocated a disproportionate share of joint costs. In a recent managers' meeting, he argued that the company should consider using sales value as splitoff as the joint cost allocation method. He stated that his product is sold in a highly competitive market and increasing price is not an option. The manager of the Leonid product line disagreed strongly. He stated that all products are sold in a competitive market place and that allocating joint costs on physical measures was simple and easily verifiable. The manager of the Madagascar product line sat quietly through the meeting and she did not seem to favour one method over the other. As the assistant controller, you were asked by the controller to look into the concerns of the product line managers. The following additional information is available: Product Line Physical Volume Unit Selling Price Leonid 10,000 units $79.20 Madagascar 12,000 units $36.00 Napoleon 18,000 units $20.00 Joint costs for the company are $950,000. Required: As the assistant controller, prepare a report to the controller. Answer: The instruction in the required is deliberately non-directive. Instructors may choose to include additional instructions. In this case we have a situation where the physical measures method, because it is based on the volume of units, allocates most of the joint costs to the Napoleon line, despite its relatively low selling price and hence sales value. The Napoleon manager would prefer to see an "ability to bear" criterion used; this would result in lower joint cost allocations to his division and higher joint cost allocations to the Leonid product line. Although the Leonid product line has 44% fewer units than the Napoleon product line [(8,000)/18,000], its sales value is 2.2 times [$792,000/$360,000] higher.
We have no information to indicate why the physical measures method was selected by this company, perhaps it was because of its simplicity and verifiability. Perhaps the market prices of products fluctuate and the physical measures method has more stability. The following tables present the joint cost allocations and the gross margin percentage calculations for the three product lines under each of the methods. Joint cost allocation under the physical measures method. Product Line Physical Volume Percentage Joint Costs Allocated Leonid 10,000 units 25% $237,500 Madagascar 12,000 units 30% $285,000 Napoleon 18,000 units 45% $427,500 Totals 40,000 units 100% $950,000 Gross margins: L: $792,000 - $237,500 = $554,500 GM% = $554,500/$792,000 = 70% M: $432,000 - $285,000 = $147,000 GM% = $147,000/$432,000 = 34% N: $360,000 - $427,500 = ($67,500) GM% = ($67,500)/$360,000 = (18.75%) Joint cost allocation under the sales value at splitoff method. Product Line Sales Value Percentage Joint Costs Allocated Leonid 10,000 × $79.20 = $792,000 50.00% $475,000 Madagascar 12.000 × $36.00 = $432,000 27.27% $259,065 Napoleon 18,000 × $20.00 = $360,000 22.73% $215,935 Totals $1,584,000 100.00% $950,000 L: $792,000 - $475,000 = $317,000 GM% =317,0000/$792,000 = 40% M: $432,000 - $259,065 = $72,935 GM% = $172,935/$432,00 = 40% N: $360,000 - $215,935 = $144,065 GM% = $144,065/$360,000 =40% From the gross margin calculations, we can see why the Napoleon manager does not favour the current system. His product line is showing a loss. Issues that students can raise in responding to this open ended question include: Criteria for allocation (Chapters 14 & 15) Purposes of the cost allocation (Chapters 14 & 15) Links to budgeting and performance evaluation and reward systems (Chapters 6 & 24, primary) Target costing and pricing (Chapter 12) Diff: 3 Type: SA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Analyzing Objective: LO 16-5
16.6 Account for byproducts using two different methods. 1) Byproducts are recognized in the general ledger either at the time of production or at the time of sale. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-6
2) Processes that yield joint products always yield byproducts as well. Answer: FALSE Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-6
3) Byproduct revenues appear in the income statement as a cost increase to the main product and as a separate item of expense. Answer: FALSE Explanation: ...or as a revenue item on the income statement Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-6
4) Recognition of byproducts in the financial statements at the time of sale usually occurs when the dollar amounts of the byproducts are immaterial. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-6
5) A sound reason for reporting revenue from byproducts as an income statement item at the time of sale is to lessen the chance of managers managing reported earnings. Answer: FALSE Explanation: This method makes it easier for managers to time earnings since they can time the sale of products and give earnings a boost. Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-6
6) A byproduct is one or more products of a joint production process that have low total sales value compared to the total sales value of the main product or joint products. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-6
7) The production method of accounting for byproducts recognizes byproducts in the financial statements at the time when production is completed. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 16-6
8) Recognizing byproduct cost at the time of sale is based on the matching principle. Answer: FALSE Explanation: By product costs are not recognized in the accounts when the sales method is used. Diff: 2 Type: TF CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-6
Use the information below to answer the following question(s). Troy Company processes 15,000 litres of direct materials to produce two products, Product X and Product Y. Product X, a byproduct, sells for $4 per litre, and Product Y, the main product, sells for $50 per litre. The following information is for August:
Product X: Product Y:
Production 4,375 10,000
Sales 4,000 9,625
Beginning Inventory 0 125
Ending Inventory 375 500
The manufacturing costs totalled $95,000. 9) How much is the ending inventory for the byproduct if byproducts are recognized in the general ledger when production is completed? A) $0 B) $1,500 C) $14,375 D) $16,000 E) $17,500 Answer: B Explanation: 375 litres × $4 = $1,500 Diff: 3 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-6
10) How much is the ending inventory reduction for the byproduct if byproducts are recognized in the general ledger at the point of sale? A) $0 B) $563 C) $1,500 D) $16,000 E) $17,500 Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-6
11) What is the net effect to the income statement for the sale of byproduct, if byproducts are recognized at the point of sale? A) $0 B) $1,500 C) $16,000 D) $17,500 E) $20,000 Answer: C Explanation: 4,000 litres × $4 = $16,000 Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-6
12) What is the net effect to the income statement for the recognition of the byproduct, if byproducts are recognized when production is completed, and the company uses FIFO? A) $17,500 B) $16,000 C) $16,844 D) $17,300 E) $16,625 Answer: E Explanation: (4,375 × $4)/10,000 = $1.75 per unit Current production sold assuming FIFO = 9,625 - 125 = 9,500 Byproduct revenue recognized as reduction to cost of goods sold = 9,500 × $1.75 = $16,625 Diff: 3 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Analyzing Objective: LO 16-6
13) Which of the following entries is the initial entry to recognize a byproduct in the general ledger, based on the accounting method of recognizing byproducts at the time of production? A) byproduct inventory 500 work in process 500 B) work in process 500 byproduct inventory
500
C) byproduct inventory 500 cost of goods sold
500
D) cost of goods sold 500 byproduct inventory
500
E) byproduct inventory 500 revenue
500
Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-6
14) Which statement is NOT true regarding the sales method of accounting for byproducts? A) The method makes no journal entries until the byproduct is sold. B) This method is the preferred method because of the matching principle. C) Revenues of the byproduct can be recorded in the income statement as revenue. D) Revenues of the byproduct are not recorded at the time of production. E) No value is attached to the byproduct inventory. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-6
15) BC Lumber Company prepares lumber for companies who manufacture furniture. The main product is finished lumber with a byproduct of wood shavings. The byproduct is sold to plywood manufacturers. For July, the manufacturing process incurred $332,000 in total costs. Eighty thousand board feet of lumber were produced and sold along with 6,800 pounds of shavings. The finished lumber sold for $6.00 per board foot and the shavings sold for $0.60 a pound. There were no beginning or ending inventories. Required: Prepare an income statement showing the byproduct (1) as a cost reduction during production, and (2) as a revenue item when sold. Answer: Cost reduction Revenue when produced when sold Sales: Lumber $480,000 Shavings $480,000 4,080 Total Sales: $480,000 484,080 Cost of Goods Sold: Total manufacturing costs $332,000 $332,000 Byproduct 4,080 0 Total COGS 327,920 332,000 Gross Margin $152,080 $152,080 Diff: 2 Type: SA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-6
16) Ontario Lumber Company prepares lumber for companies who manufacture furniture. The main product is finished lumber with a byproduct of wood shavings. The byproduct is sold to plywood manufacturers. For July the manufacturing process incurred $166,000 in total costs. Eighty thousand board metres of lumber were produced and sold along with 6,800 kilograms of shavings. The finished lumber sold for $3.00 per board metre and the shavings sold for $0.30 a kilogram. There were no beginning or ending inventories. Required: Prepare an income statement showing the byproduct (1) as a cost reduction during production and (2) as a revenue item when sold. Answer: Cost reduction Revenue when produced when sold Sales: Lumber $240,000 $240,000 Shavings n/a 2,040 Total sales $240,000 $242,040 Cost of goods sold: Total manufacturing costs $166,000 $166,000 Byproduct 2,040 n/a 163,960 Gross margin $76,040 $76,040 Diff: 2 Type: SA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-6
17) Trundle Ltd. produces two main products, J and K; and, a byproduct, L. There were no beginning inventories. During April, it incurred $275,000 of joint costs, which are allocated to main products using the physical output method. Additional information follows:
Product J K L
Units Produced 12,000 18,000 6,000
Units Sold 9,600 15,300 5,200
Unit Sales Price $22 38 3
Required: Assuming Trundle recognizes byproduct revenue at the time of sale, what is the total value of ending inventory? Answer: Byproduct revenue = 5,200 × $3 = $15,600 Joint costs to be allocated = $275,000 J proportion = 12,000/[12,000 + 18,000] = 40% K proportion = 18,000/[12,000 + 18,000] = 60% Joints costs allocated to J and K respectively = $110,00 and $165,000 Ending inventory of J: 2,400/12,000 × $110,000 = $22,000 Ending Inventory of K = 2,700/18,000 × $165,000 = $24,750 Total ending inventory = $22,000 + $24,750 = $46,750. Diff: 2 Type: SA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2; 16-6
18) Trundle Ltd. produces two main products, J and K; and, a byproduct, L. There were no beginning inventories. During April, it incurred $275,000 of joint costs, which are allocated to main products using the physical output method. Additional information follows:
Product J K L
Units Produced 12,000 18,000 6,000
Units Sold 9,600 15,300 5,200
Unit Sales Price $22 38 3
Required: Assuming Trundle recognizes byproduct revenue at the time of production, what is the total value of ending inventory? Answer: Byproduct revenue = 6,000 × $3 = $18,000 Net joint costs to be allocated = $275,000 - $18,000 = $257,000 J proportion = 12,000/[12,000 + 18,000] = 40% K proportion = 18,000/[12,000 + 18,000] = 60% Joints costs allocated to J and K respectively = $102,800 and $154,200 Ending inventory of J: 2,400/12,000 × $102,800 = $20,560 Ending Inventory of K = 2,700/18,000 × $154,200 = $23,130 Total ending inventory = $20,560 + $23,130 = $43,690 Diff: 2 Type: SA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-2; 16-6
19) Helen Company processes 30,000 litres of direct materials to produce two products, Zander and Ifso. Zander, a byproduct, sells for $5 per litre, and Ifso, the main product, sells for $70 per litre. The following information is for July:
Zander Ifso
Production 5,500 11,000
Beginning Inventory 0 250
Sales 4,950 10,600
Ending Inventory 550 650
The manufacturing costs totalled $145,000; beginning inventory $3,000. Required: 1. Prepare a July income statement assuming that Helen Company recognizes the byproduct net realizable value when production is completed. The company uses FIFO for the inventory flow assumption. 2. Prepare the journal entry to record the byproduct sales. Answer: 1. Income statement Sales (10,600 × $70) Cost of goods sold: Beg. inventory Manufacturing costs Byproduct NRV (5,500 × $5) Cost of goods available End. inventory (650 × $10.68) Cost of goods sold Gross margin
$ 742,000 $
3,000 145,000 ( 27,500) $ 120,500 ( 6,942) 113,558 $ 628,442
Ending inventory cost per unit assuming FIFO = ($145,000 - $27,500)/11,000 = $10.68 2. Journal entry Dr. Cash or A/R (4,950 × $5) Cr. Byproduct inventory
24,750 24,750
Diff: 3 Type: SA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-6
20) Helen Company processes 30,000 litres of direct materials to produce two products, Zander and Ifso. Zander, a byproduct, sells for $5 per litre, and Ifso, the main product, sells for $70 per litre. The following information is for July:
Zander Ifso
Production 5,500 11,000
Beginning Inventory 0 250
Sales 4,950 10,600
Ending Inventory 550 650
The manufacturing costs totalled $145,000; beginning inventory $3,000. Required: 1. Prepare a July income statement assuming that Helen Company recognizes the byproduct revenue at the time of sale. The company uses FIFO for the inventory flow assumption. 2. Prepare the journal entry to record the byproduct sales. Answer: 1. Income statement Info sales (10,600 × $70) Zander sales (4,950 × $5) Total sales Cost of goods sold: Beg. inventory Manufacturing costs Cost of goods available End. inventory (650 × $13.18) Cost of goods sold Gross margin
$ 742,000 24,750 $ 766,750 $
3,000 145,000 $ 148,000 ( 8,567) 139,433 $ 627,317
Ending inventory cost per unit assuming FIFO = $145,000/11,000 = $13.18 2. Journal entry Dr. Cash or A/R (4,950 × $5) Cr. Byproduct sales revenue
24,750 24,750
Diff: 3 Type: SA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-6
21) Cando Company processes 40,000 litres of direct materials to produce two products, Bilgot and Camdee. Bilgot, a byproduct, sells for $9 per litre, and Camdee, the main product, sells for $50 per litre. The following information is for July:
Bilgot Camdee
Production 8,700 25,500
Beginning Inventory 0 300
Sales 8,000 24,900
Ending Inventory 700 900
The manufacturing costs totalled $260,000; beginning inventory $3,200. Required: 1. Prepare a July income statement assuming that Helen Company recognizes the byproduct revenue at the time of sale. The company uses FIFO for the inventory flow assumption. 2. Prepare the journal entry to record the byproduct sales. Answer: 1. Income statement Info sales (24,900 × $50) Zander sales (8,000 × $9) Total sales Cost of goods sold: Beg. inventory Manufacturing costs Cost of goods available End. inventory (900 × $10.20) Cost of goods sold Gross margin
$ 1,245,000 72,000 $ 1,317,000 $
3,200 260,000 $ 263,200 ( 9,180) 254,020 $1,062,980
Ending inventory cost per unit assuming FIFO = $260,000/25,500 = 10.20 2. Journal entry Dr. Cash or A/R (8,000 × $9) Cr. Byproduct sales revenue
72,000 72,000
Diff: 3 Type: SA CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 16-6
22) Land and Sea Corporation processes frozen chicken. The company has not been pleased with its profit margin per product because it appears that the high value items have too few costs assigned to them while the low value items have too many costs assigned to them. The processing results in several products, the primary one of which is frozen small hens. Other products include frozen parts such as wings and legs, byproducts such as skin and bones, and unused scrap items. Required: What may be the cost assignment problem if a key consideration is the value of the products being sold? Answer: First, the company needs to consider whether the byproducts are being treated as products, rather than byproducts. For the most part, byproducts should not be assigned costs. The revenue from the byproducts should be used as either minor sales categories or else as offsets to processing costs. A second consideration is the method used to assign the costs. It is possible that some physical measure (weight) is being used, in which case the parts items and the byproducts may weigh as much as the primary product. It may be necessary to evaluate the various methods of allocation and select the one with which management feels is best for decision making. Diff: 3 Type: ES CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Analyzing Objective: LO 16-6
23) Explain the difference between a joint product and a byproduct. Can a byproduct ever become a joint product? Answer: The differentiating factor between a joint product and a byproduct is the sales value at the splitoff point. Joint products have high total sales value at the splitoff point. A byproduct has a low total sales value at the splitoff point. Products can change from byproducts to joint products when their total sales values increase significantly. Diff: 2 Type: ES CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-6
24) Distinguish between the two principal methods of accounting for byproducts, the production byproduct method and the sale byproduct method. Briefly discuss the relative merits (or lack thereof) of each. Answer: a. Production byproduct method. This method recognizes byproducts in the financial statements at the time their production is completed. The estimated net realizable value from the byproduct produced is offset against the costs of the main (or joint) products, and it is reported in the balance sheet as inventory. Accounting entries are made and the byproducts are reported in the balance sheet at their selling price. b. Sale byproduct method. This method delays recognition of the byproducts until the time of their sale. Revenues could be recorded in one accounting period, while the expense in an earlier period. Companies may find it necessary to keep an inventory of the byproduct processing costs in a separate account until the byproducts are sold. This practice can be rationalized on the grounds that the dollar amounts of byproducts are immaterial. But managers can use this method to manage reported earnings by timing when they sell byproducts. Diff: 3 Type: ES CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-6
25) What are the two methods to account for byproducts. Which is the more appropriate method to use and why? Answer: The two methods are the production method and the sales method. The production method recognizes byproducts in the financial statements at the time production is completed. The sales method delays recognition of byproducts until the time of sale. The production method is the appropriate method to use because it is consistent with the matching principle. If the sales method were used, the byproduct cost recognition could be delayed for several periods until the inventory is sold. Diff: 2 Type: ES CPA Competencies: Chapter 16 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 16-6
Cost Accounting: A Managerial Emphasis - Cdn. Ed., 9e (Datar) Chapter 17 Revenue and Customer Profitability Analysis 17.1 Select a method and allocate revenue from a product bundle to its distinct components. 1) Revenue allocation occurs where revenues can be identified with an individual product (service, customer, and so on) in an economically feasible (cost-effective) way. Answer: FALSE Explanation: Revenue allocation occurs when revenues must be assigned to distinct types of sales, but it is not economically feasible to trace the revenue. Diff: 1 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-1
2) Revenue tracing results in a more accurate assignment of revenues to products, than does revenue allocation. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-1
3) A bundled product is a package of two or more products or services, sold for a single price, where the individual components of the bundle may also be sold as separate items, each with their own stand-alone prices. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for ohperational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-1
4) The stand-alone revenue allocation method pertains to products that cannot be bundled together. Answer: FALSE Explanation: The stand-alone revenue allocation method is a weighted-average method that uses product specific information about bundled products. Diff: 1 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-1
5) An example of a bundled product is when a resort hotel charges a single price for lodging, food, and recreational activities. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-1
6) Revenue allocation is required to determine the profitability of individual items within a bundled product. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-1
7) The stand-alone method may use selling price or unit costs to allocate revenues. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-1
8) Under the incremental revenue allocation method, there is an incentive to be the first-ranked user. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-1
9) It is most appropriate to base revenue allocation on the number of physical units when individual products in the bundle are of unequal value. Answer: FALSE Explanation: Revenue allocation based on the number of physical units is only appropriate when individual products in the bundle are of equal value. Diff: 2 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-1
10) When allocating the revenues between a bundled product offering, there are only two methods which can be used: 1) the stand-alone revenue-method and 2) the incremental revenue-allocation method. Answer: FALSE Explanation: Although those are the formula-based methods, it is possible for management judgement to be used in issuing revenue-allocation weights. Diff: 1 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-1
11) The stand-alone revenue allocation method is a weighted-average method. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-1
12) The incremental revenue-allocation method uses product specific information pertaining to products in the bundle to determine the weights used to allocate the bundled revenues to those individual products. Answer: FALSE Explanation: The incremental revenue allocation method ranks the individual products in a bundle then uses this ranking to allocate the bundled revenues to these individual products. Diff: 1 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-1
13) The first-ranked product is termed the incremental product in the incremental revenue-allocation method. Answer: FALSE Explanation: The first-ranked product is term the primary product. Diff: 1 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-1
14) The ranking of products with regard to the incremental revenue allocation method can only be done by top management. Answer: FALSE Explanation: Customer surveys, internal data on stand-alone performance, and management knowledge are all ways that can be used to determine ranking. Diff: 1 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-1
15) What is the name of a cost of production process that yields multiple products simultaneously? A) byproduct B) joint C) main D) separable Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-1
16) ________ is a package of two or more products or services, sold for a single price, where the individual components of the package may also be sold as separate items, each with their own standalone price. A) A revenue product B) A byproduct C) A bundled product D) A joint product E) A product package Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-1
17) ________ occurs where revenues, related but not traceable to individual products (service, customer, and so on), are assigned to those individual products. A) Revenue tracing B) Revenue allocation C) A bundled product D) Joint product costing E) Revenue shedding Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-1
18) Which of the following statements is TRUE? A) Joint product allocation results in more accurate assignment of revenues to products than does revenue allocation. B) Revenue allocation results in more accurate assignment of revenues to products than does revenue tracing. C) Revenue tracing results in more accurate assignment of revenues to products than does revenue allocation. D) Revenue allocation results in more accurate assignment of revenues to products than does joint product allocation. E) Joint product allocation results in more accurate assignment of revenues to products than does revenue tracing. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-1
19) Which of the following statements is TRUE? A) The two main classes of revenue allocation methods are the step-up method and the incremental method. B) The stand-alone revenue allocation method ranks the individual products in a bundle and then uses this ranking to allocate the bundled revenues to these individual products. C) A bundled product is a package of two or more products or services, sold for multiple prices. D) The issues discussed with revenue tracing and sales returns apply to cost tracing. E) The two main classes of revenue allocation methods are the stand-alone method and the incremental method. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-1
20) ________ uses product specific information pertaining to products in the bundle to determine the weights used to allocate the bundled revenues to those individual products. A) The stand-alone revenue allocation method B) The averaging approach C) The incremental revenue allocation method D) The joint production costing method E) The weighted-averaging approach Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-1
21) ________ ranks the individual products in a bundle and then uses this ranking to allocate the bundled revenues to these individual products. A) The stand-alone revenue allocation method B) The averaging approach C) The incremental revenue allocation method D) The joint production costing method E) The weighted averaging approach Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-1
Use the information below to answer the following question(s). Amr's Video Game Outlet encounters revenue-allocation decisions with its bundled product sales. Here, two or more of the video games are sold as a single package. Managers at Amr's are keenly interested in individual product-profitability figures. Information pertaining to its three bundled products and the stand-alone prices of its individual products is as follows: Stand-Alone Sales Price Package Package 1 Package 2 Package 3
Game A $25 $25 $25
Game B $30 N/A $30
Game C N/A $45 $45
Packaged Price $44 $56 $76
The unit manufacturing costs are $3.60, $4.00, and $5.00 for games A, B, and C, respectively. 22) Calculate the allocation of packaged price for Game A in Package 1, using selling prices as the base. A) $14.00 B) $20.00 C) $30.00 D) $25.00 E) $35.00 Answer: B Explanation: [$25/($25 + $30)] × $44 = $20 Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-1
23) Calculate the allocation of packaged price for Game A in Package 3, using selling prices as the base. A) $34.20 B) $30.00 C) $25.00 D) $22.80 E) $19.00 Answer: E Explanation: [$25/($25 + $30 + 45)] × $76 = $19 Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-1
24) Calculate the revenue allocation for Game A in Package 1, using physical units as the base.
A) $12.57 B) $14.67 C) $20.84 D) $22.00 E) $23.16 Answer: D Explanation: [1/(1 + 1)] × $44 = $22 Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-1
25) Calculate the allocation of packaged price for Game A in Package 1, using unit costs as the base. A) $12.57 B) $13.97 C) $20.84 D) $22.00 E) $23.16 Answer: C Explanation: [$3.60/($3.60 + $4.00)] × $44 = $20.84 Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-1
26) To give more weight to the product that most likely drives the sales of the bundled product, the revenue allocation should be weighted using A) selling prices. B) unit costs. C) physical units. D) stand-alone product revenues. E) total product costs. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-1
Answer the following question(s) using the information below:
Alberta's Educational Software Outlet sells two or more of its video games as a single package. Managers are keenly interested in individual product profitability figures. Information pertaining to three bundled products and the stand-alone prices is as follows:
Reading Fun Math Fun Analysis
Stand-Alone Selling Price $100 $120 $180
Cost
Package
$47.20 $88.00 $110.00
1. Reading Fun & Math Fun 2. Reading Fun & Analysis 3. All three
Packaged Price $176 $224 $304
Assume Reading Fun is the primary product, followed by Math Fun and Analysis. 27) Using the stand-alone method with selling price as the weight for revenue allocation, what amount of revenue will be allocated to Reading Fun in the first package (Reading Fun & Math Fun)? A) $80 B) $44 C) $38 D) $50 E) $22 Answer: A Explanation: [$100/($100 + $120)] × $176 = $80 Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-1
28) Using the incremental method for revenue allocation, what amount of revenue will be allocated to Reading Fun in the first package (Reading Fun & Math Fun)? A) $40 B) $44 C) $38 D) $100 E) $28 Answer: D Explanation: $100 since Reading Fun is the primary product Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-1
29) Using the stand-alone method with selling price as the weight for revenue allocation, what amount of revenue will be allocated to Math Fun in the package that contains all three products? A) $48.25
B) $60.00 C) $91.20 D) $50.67 E) $33.60 Answer: C Explanation: [$120/($100 + $120 + $180)] × $304 = $91.20 Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-1
30) Using the incremental method, what amount of revenue will be allocated to Math Fun in the package that contains all three products? A) $48.25 B) $120.00 C) $45.60 D) $50.67 E) $90.00 Answer: B Explanation: $304 - $100 primary product = $204 revenues remaining to be allocated to other products; $120 since there are revenues remaining to cover the selling price of Reading Fun, the first incremental product. Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-1
Answer the following questions using the information below: Buzz's Educational Software Outlet sells two or more of its video games as a single package. Managers are keenly interested in individual product profitability figures. Information pertaining to three bundled products and the stand-alone prices is as follows:
Reading Fun Math Fun Analysis
Stand-Alone Selling Price $12.50 $15.00 $22.50
Cost
Package
$3.60 $4.00 $5.00
1. Reading Fun & Math Fun 2. Reading Fun & Analysis 3. All three
Packaged Price $22 $28 $38
31) Using the stand-alone method with selling price as the weight for revenue allocation, what amount of revenue will be allocated to Reading Fun in the first package (Reading Fun & Math Fun)? A) $10 B) $22 C) $19 D) $25 Answer: A Explanation: [$12.50/($12.50 + $15.00)] × $22 = $10 Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-1
32) Using the incremental method, what amount of revenue will be allocated to Math Fun in the package that contains all three products? A) $24.12 B) $15.00 C) $22.80 D) $25.33 Answer: B Explanation: $38 - $12.50 primary product = $25.50 revenues remaining to be allocated to other products; $15 since there are revenues remaining to cover the selling price of Reading Fun, the first incremental product. Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-1
Answer the following question(s) using the information below: Five Appliances Store sells a refrigerator and a freezer as a single package for $1,000. Other data are in the chart below.
Selling price Manufacturing cost per unit Stand-alone product revenues
Refrigerator $825 $620 $1,225,000
Full-size Freezer Packaged Price $375 $1,000 $180 $775,000
33) Using the stand-alone method with selling price as the weight for revenue allocation, what amount will be allocated to the refrigerator? A) $500.00 B) $825.00 C) $687.50 D) $625.00 E) $375.00 Answer: C Explanation: Refrigerator $825/($825 + $375) × $1,000 = $687.50 Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-1
34) Using the stand-alone method with stand-alone product revenues as the weight for revenue allocation, what amount will be allocated to the refrigerator? A) $687.50 B) $612.50 C) $625.00 D) $825.00 E) $505.31 Answer: B Explanation: Refrigerator $1,225,000/($1,225,000 + $775,000) × $1,000 = $612.50 Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-1
35) Using the stand-alone method with manufacturing cost per unit as the weight for revenue allocation, what amount will be allocated to the refrigerator? A) $500.00 B) $612.50 C) $620.00 D) $775.00 E) $687.50 Answer: D Explanation: Refrigerator $620/($620 + $180) × $1,000 = $775 Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-1
36) Using the stand-alone method with physical units as the weight for revenue allocation, what amount will be allocated to the refrigerator? A) $500.00 B) $20.00 C) $775.00 D) $825.00 E) $687.50 Answer: A Explanation: (1/2) × $1,000 = $500 Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-1
37) Give examples of bundled products for each of the following industries: a. Resort hotel b. Bank c. Restaurant d. Computer store e. Gasoline service station/convenience store f. Software manufacturer Answer: a. Hotel room plus meals, free drinks, use of athletic facilities, morning newspaper b. Checking account, safe deposit box, wire transfers, certified checks, travelers checks c. Fixed-price meal includes a beverage, appetizer, entree, and dessert d. Computer, keyboard, monitor, printer, software, 1-year contract for the repair and maintenance of the computer e. Gasoline, car wash, coffee f. Two (or more) software products Diff: 1 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-1
38) Max's DVD Store encounters revenue allocation decisions with its bundled product sales. Here, two or more of the DVDs are sold as a single package. Managers at Max's are keenly interested in individual product profitability figures. Information pertaining to its three bundled products and the stand-alone selling prices of its individual products is as follows:
New Releases Older Releases Classics
Stand-Alone Selling Price $45 $30 $24
Cost $22.00 $11.50 $11.25
Packaged Package Price New & Old $60 New & Classics $51 All three $75
Required: a. With selling prices as the weights, allocate the $75 packaged price of "All Three" to the three videos using the stand-alone revenue allocation method. b. Allocate the $75 packaged price of "All Three" to the three types of videos using the incremental revenue allocation method. Assume New Releases is the primary product, followed by Older Releases and Classics. Answer: a. New $45 + Older $30 + Classics $24 = $99.00 New $45/$99 × $75 Old $30/$99 × $75 Classics $24/$99 × $75 Total
= = =
$34.09 $22.73 $18.18 $75.00
b. Product Revenue Allocated New Releases $45 Older Releases $30 Classics $0 Total revenue allocated $75
Revenue Remaining to Be Allocated $75 -45 = $30 $75 - $45 - $30 = $0 none
Diff: 2 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-1
39) Manny's DVD Store encounters revenue allocation decisions with its bundled product sales. Here, two or more of the DVDs are sold as a single package. Managers at Max's are keenly interested in individual product profitability figures. Information pertaining to its three bundled products and the stand-alone selling prices of its individual products is as follows:
New Releases Older Releases Classics
Stand-Alone Selling Price $15 $10 $8
Cost $2.00 $1.50 $1.25
Packaged Package Price New & Old $20 New & Classics $17 All three $25
Required: a. With cost as the weights, allocate the $17 packaged price of "New & Classics" using the stand-alone revenue allocation method. b. Allocate the $17 packaged price of "New & Classics" using the incremental revenue allocation method. Assume New Releases is the primary product, followed by Older Releases, and then Classics. Answer: a. New $2.00 + Classics $1.25 = $3.25 New $2.00/$3.25 × $17 = Classics $1.25/$3.25 × $17 = Total
$10.46 6.54 $17.00
b. Revenue Remaining Product Revenue Allocated to Be Allocated New Releases $15 $17 - $15 = $2 Older Releases n/a n/a Classics $2 $2 < $8 Total revenue allocated $17 Diff: 2 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-1
40) Roper's Cablevision encounters revenue allocation decisions with its bundled product sales. Two or more of its services are sold as a single package. Managers at Roper's are keenly interested in individual product profitability figures. Information pertaining to its three bundled products and the stand-alone prices of its individual products is as follows: Stand-Alone Sales Price Package Basic Sports Sp. & Lifestyle $20 Sports & Classics 20 All three 20
Lifestyle $15 N/A 15
Packaged TV Classics Price N/A $30 $15 30 15 40
The unit variable costs are estimated at $4.00, $3.00, and $2.50 for Sports, Lifestyle, and TV Classics, respectively. Basic Sports is considered to be the primary product, Lifestyle the first incremental, and TV Classics the second incremental . Required: a. Allocate the bundled revenue to each product in the 'Sports & Classics' bundle, using selling prices as the base. b. What is the allocated revenue to the Sports in each bundle, using the incremental revenue allocation method? Answer: a. Sports [($20/$35) × $30] = $17.14 TV Classics [($15/$35) × $30] = $12.86 b. Since the bundled price exceeds the stand-alone price, the full stand-alone price is allocated to the Sports in each bundle. Therefore, $20 in each bundle. Diff: 2 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-1
41) Software For You encounters revenue allocation decisions with its bundled product sales. Two or more units of the software are sold as a single package. Managers at Software For You are keenly interested in individual product profitability figures. Information pertaining to its three bundled products and the stand-alone selling prices of its individual products is as follows:
Word Processing (WP) Spreadsheet (SS) Accounting Software (AS)
Stand-Alone Selling Price
Packaged Price
Cost
Package
$125
$18
WP & SS
$220
$150
$20
WP & AS
$280
$225
$25
All three
$380
Required: a. Using the stand-alone revenue allocation method, allocate the $380 packaged price of "All Three" to the three software products 1. with selling prices as the weights. 2. based on physical units. b. Allocate the $380 packaged price of "All Three" to the three software products using the incremental revenue allocation method. Assume Word Processing is the primary product, followed by Spreadsheet, and then Accounting Software. Answer: a1. WP $125/$500 × $380 = $95 SS $150/$500 × $380 = $114 AS $225/$500 × $380 = $171 Total $380 a2. 1/(1+ 1 + 1) × $380 = $126.67 per software package b. Product Revenue Allocated WP $125 SS $150 AS $105 Total revenue allocated $380
Revenue Remaining to Be Allocated $380 - 125 = $255 $380 - $125 - $150 = $105 none
Diff: 2 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-1
42) Software For You encounters revenue allocation decisions with its bundled product sales. Two or more of the programs are sold as a single package. Managers at Software For You are keenly interested in individual product profitability figures. Information pertaining to its three bundled products and the stand-alone prices of its individual products is as follows:
Package Package A Package B Package C
Stand-Alone Sales Price Word SpreadAccounting Processing Sheet Software (WP) (SS) (AS) $125 $150 N/A 125 N/A $225 125 150 225
Package Price $220 280 380
The unit inventory costs is $18, $20, and $25 for WP, SS, and AS, respectively. Assume AS is the primary product, followed by SS, then WP. Required: Allocate the bundle revenue to each product in Package C, using inventory unit costs as the weighting factor. Answer: WP [(18/63) × 380 = $108.57 SS [(20/63) × 380 = $120.63 AS [(25/63) × 380 = $150.79 Diff: 2 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-1
43) Boston Photography Ltd. sells cameras and related equipment. It often packages these into bundles for sale to consumers. Currently it is offering the following package deal: a camera, a photo printer, and a camera accessory pack that includes battery recharger, case and various lens adapters. The package deal is selling for $740. The individual prices and costs of these components are as follows: Component Camera Printer Accessory Pack
Selling Price $450 $250 $200
Unit Cost $350 $150 $75
Required: Allocate the revenue among the products under each of the following: a. Unit selling prices b. Unit costs c. Physical units Answer: a. total SP = $450 + $250 + $200 = $900 The allocations would be: $450/$900 × $740 or $370 to the Camera $250/$900 × $740 or $206 to the Printer $200/$900 × $740 or $164 to the Accessory Pack b.
total costs = $350 + $150 + $75 = $575 The allocations would be: $350/$575 × $740 or $450 to the Camera $150/$575 × $740 or $193 to the Printer $75/$575 × $740 or $97 to the Accessory Pack
c.
Based on 3 physical individual unit products in the package, each product would be allocated 1/3 of $740 or $246.67 (rounded).
Diff: 2 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-1
44) Hudson Photography Ltd. sells cameras and related equipment. It often packages these into bundles for sale to consumers. Currently it is offering the following package deal: a camera, a photo printer, and a camera accessory pack that includes battery recharger, case, and various lens adapters. The package deal is selling for $690. The individual prices and costs of these components are as follows: Component Camera Printer Accessory Pack
Selling Price $500 $140 $90
Unit Cost $375 $90 $45
Required: Allocate the revenue among the products under each of the following: a. Unit selling prices b. Unit costs c. Physical units Answer: a. total SP = $500 + $140 + $90 = $730 The allocations would be: $500/$730 × $690 or $472.60 to the Camera $140/$730 × $690 or $132.33 to the Printer $90/$730 × $690 or $85.07 to the Accessory Pack b.
total costs = $375 + $90 + $45 = $510 The allocations would be: $375/$510 × $690 or $507.35 to the Camera $90/$510 × $690 or $121.76 to the Printer $45/$510 × $690 or $60.88 to the Accessory Pack
c.
Based on 3 physical individual unit products in the package, each product would be allocated 1/3 of $690 or $230.
Diff: 2 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-1
45) Why would businesses want to sell bundled products? What benefits, if any, are there for the consumer? Answer: Businesses seek to sell bundled products as a means of increasing total revenues and spreading fixed costs across a larger dollar amount of revenues. The result is usually an increase in overall corporate profitability. For a company to sell more goods, customers must believe that they are getting value for their money. Receiving additional goods or services for what is likely only a marginal increase in price over the price of the primary product could entice consumers to buy the bundled package rather than forgoing the purchase altogether. While not strictly a bundled product, an automobile provides a good example. Car dealers sell cars that are "loaded with options." The price is less than the basic car with the options added separately. Consumers believe they are getting a benefit even though the car might have more options than they would have purchased. The manufacturer has greater revenue than would be the case without the "bundle." A benefit for the consumer is an extra product for only a marginal increase in price that is probably less than the separate price of the products. Diff: 2 Type: ES CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-1
46) Describe and discuss the two methods of allocating the revenues of a bundled package to the individual products in that package. Describe any special problems associated with the method. Answer: The stand-alone method allocates bundled revenues using 4 alternative bases: (1) individual product unit selling price (revenues), (2) individual product unit costs, or (3) number of units, (4) physical measures. It is preferable to allocate common revenues based on unit revenues, since this best reflects customers' willingness to pay for the different products. However, if the products are never sold separately, unit selling prices are unavailable, revenues may be allocated based on unit costs (which should be available in the firm's accounting records), or simply the number of units, or on physical measures. The incremental revenue allocation method parallels the incremental method for allocation of common costs. However, in the common cost situation, no one wants their product to be identified as the primary user, since the primary user is charged the bulk of the cost. In contrast, for revenue allocation, everyone wants their product to be identified as the primary product, as that product will be allocated the bulk of revenues. Diff: 2 Type: ES CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-1
47) Under the stand-alone method, which weights better capture the benefits received by customers who purchase a bundled product? Answer: Four types of weights for the stand-alone allocation method are selling prices, stand-alone product revenues, unit costs, and physical units. Selling prices and stand-alone product revenues better capture the benefits received by customers who purchase a bundled product. Diff: 2 Type: ES CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-1
17.2 Apply an activity-based costing (ABC) system to allocate costs when the customer is the cost object. 1) A customer cost hierarchy categorizes costs related to customers into different cost pools on the basis of using only one cost driver. Answer: FALSE Explanation: A customer cost hierarchy categorizes costs related to customers into different cost pools using different drivers. Diff: 1 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-2
2) An activity-based costing system may focus on customers rather than products. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-2
3) A customer cost hierarchy may include customer -sustaining costs. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-2
4) A customer cost hierarchy may include distribution-channel costs. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-2
5) The cost of visiting customers is an example of a customer output unit-level cost. Answer: FALSE Explanation: The cost of visiting customers is an example of a customer-sustaining cost. Diff: 2 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-2
6) In general, distribution-channel costs are more easily influenced by customer actions than customer batch-level costs. Answer: FALSE Explanation: In general, customer batch-level costs are more easily influenced by customer actions than distribution-channel costs. Diff: 3 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-2
7) If one of four distribution channels is discontinued, corporate-sustaining costs such as general administration costs will most likely be reduced by 25%. Answer: FALSE Explanation: If one of four distribution channels is discontinued, corporate-sustaining costs such as general administration costs will most likely not be affected. Diff: 3 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-2
8) To more accurately assess customer profitability, corporate-sustaining costs should be allocated. Answer: FALSE Explanation: The allocation of corporate-sustaining costs serves no useful purpose in assessing customer profitability, decision making, performance evaluation, or motivation. Diff: 3 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-2
9) It is common to find that a small number of customers generate a high percentage of operating income. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-2
10) Costs incurred to process orders would MOST likely be classified as a A) customer output unit-level cost. B) customer batch-level cost. C) customer-sustaining cost. D) corporate-sustaining cost. E) distribution-channel cost. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-2
11) Top management and general administration costs would MOST likely be classified as a A) customer output unit-level cost. B) customer batch-level cost. C) customer-sustaining cost. D) corporate-sustaining cost. E) distribution-channel cost. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-2
12) The cost of visiting customers would MOST likely be classified as a A) customer output unit-level cost. B) customer batch-level cost. C) customer-sustaining cost. D) corporate-sustaining cost. E) distribution-channel cost. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-2
13) Costs incurred to handle each unit sold would MOST likely be classified as a A) customer output unit-level cost. B) customer batch-level cost. C) customer-sustaining cost. D) corporate-sustaining cost. E) distribution-channel cost. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-2
14) The cost of the manager of a retail distribution channel would MOST likely be classified as a A) customer-sustaining cost. B) distribution-channel cost. C) customer batch-level cost. D) corporate-sustaining cost. E) customer output unit-level cost. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-2
15) Which item is NOT a category in the customer cost hierarchy? A) customer output unit-level costs B) customer batch-level costs C) distribution-channel costs D) corporate-sustaining costs E) product-sustaining cost Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-2
16) ________ categorizes costs related to customers into different cost pools on the basis of either different classes of cost drivers or different degrees of difficulty in determining the cause-and-effect (or benefitsreceived) relationships. A) Customer profitability analysis B) Customer revenues C) Customer cost hierarchy D) Price discounting E) Customer allocation Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-2
17) 24-hour customer service not traceable to an individual customer is an example of what type of cost? A) corporate-sustaining costs B) distribution-channel costs C) customer-sustaining costs D) customer specific costs E) warranty costs Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-2
18) The president's salary, interest on corporate debt and corporate donations are all examples of what type of costs? A) customer support costs B) corporate-sustaining costs C) customer specific costs D) distribution-channel costs E) sales costs Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-2
19) ABC systems use the concept of a ________ to identify the cost drivers that best demonstrate the cause-and-effect relationship between each activity and the costs in the related cost pool. A) cost hierarchy B) cost pool C) cost allocation D) cost driver Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-2
20) New Brunswick Ltd. is reviewing two of its customers using ABC analysis. It has identified the following customer related activities and their rates: Activity Sales Order processing Product handling Special shipping
Cost Driver # of visits # of orders # of units # of shipments
Rate $450 $125 $12 $500
The company has the following information regarding Enbright Ltd. and Jackson Inc.: Activity # of visits # of orders Product handling Special shipping
Enbright Ltd. 9 18 650 15
Jackson Inc. 6 24 380 30
Sales for Enbright and Jackson are $280,000 and $148,000 respectively. The cost of goods sold on these sales are the same at 52%. Required: Using Customer ABC Analysis, analyze the relative profitability of Enbright and Jackson.
Answer: The customer related costs for each of the two customers are summarized below: Enbright Ltd. Enbright Ltd. Jackson Inc. Jackson Inc. 9 visits × $450 $4,050 6 visits × $450 $2,700 18 orders × $125 $2,250 24 orders × $125 $3,000 650 units × $12 $7,800 380 units × $12 $4,560 15 shipments × $500 $7,500 30 shipments × $500 $15,000 Total customer hierarchy costs for Enbright are $21,600 and for Jackson, total costs are $25,260. Activity Sales Cost of goods sold @ 52% Customer hierarchy costs Customer margin
Enbright Ltd. $280,000 $145,600 $21,600 $112,800
Jackson Inc. $148,000 $76,960 $25,260 $45,780
Enbright Ltd. has a customer margin of 40% ($112,800/$280,000), while Jackson Inc. has a margin of 31% ($45,780/$148,000). In analyzing the costs within the hierarchy, we see that Jackson requires more shipments and more orders for fewer units. Although Jackson does have fewer visits (6 vs. 9), when we compare the visits to either revenues ($280,000/9 = $31,111 sales revenue per visit for Enbright vs. $148,000/6 = $24,667 for Jackson) or units sold (650/9 = 72 per visit for Enbright vs 380/6 = 63 for Jackson) we can see that Jackson requires more resources to service. Diff: 3 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-2
21) Nova Scotia Ltd. is reviewing two of its customers using ABC analysis. It has identified the following customer related activities and their rates: Activity Sales Order processing Product handling Special shipping
Cost Driver # of visits # of orders # of units # of shipments
Rate $250 $65 $18 $490
The company has the following information regarding Ecobright Ltd. and Samson Inc.: Activity # of visits # of orders Product handling Special shipping
Ecobright Ltd. 12 25 540 14
Samson Inc. 8 36 330 29
Sales for Ecobright and Samson are $285,000 and $146,000 respectively. The cost of goods sold on these sales are the same at 48%. Required: Using Customer ABC Analysis, analyze the relative profitability of Ecobright and Samson.
Answer: The customer related costs for each of the two customers are summarized below: Ecobright Ltd. Ecobright Ltd. Samson Inc. Samson Inc. 12 visits × $250 $3,000 8 visits × $250 $2,000 25 orders × $65 $1,625 36 orders × $65 $2,340 540 units × $18 $9,720 330 units × $18 $5,940 14 shipments × $490 $6,860 29 shipments × $490 $14,210 Total customer hierarchy costs for Ecobright are $21,600 and for Samson, total costs are $25,260. Activity Sales Cost of goods sold @ 48% Customer hierarchy costs Customer margin
Ecobright Ltd. $285,000 $136,800 $21,205 $126,995
Samson Inc. $146,000 $70,080 $24,490 $51,430
Ecobright Ltd. has a customer margin of 45% ($126,995/$285,000), while Samson Inc. has a margin of 35% ($51,430/$146,000). In analyzing the costs within the hierarchy, we see that Samson requires more shipments and more orders for fewer units. Although Samson does have fewer visits (8 vs. 12), when we compare the visits to either revenues ($285,000/12 = $23,750 sales revenue per visit for Ecobright vs. $146,000/8 = $18,250 for Samson) or handling costs as a percentage of revenue ($9,720/$285,000 = 3.4% for Ecobright vs. $5,940/$146,000 = 4.1% for Samson) we can see that Samson requires more resources to service. Diff: 3 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-2
22) Manitoba Industries collects information on two customers for the past year:
Revenues Cost of goods sold Number of in-stock orders Number of out-of-stock orders
Langley Supply $1,492,000 $1,164,000 14 12
Soldar Inc. $640,000 $486,000 4 24
Manitoba estimates the following activity-based costs: Cost of processing and delivering an in-stock order Cost of processing and delivering an out-of-stock order
$1,200 $3,500
An in-stock order is an order for which all the items included are in inventory at the time the order is received. Required: Compute the customer specific contribution of each customer for the year using: a. 16% of revenues as the allocation rate for customer-related costs. b. The activity-based costing approach. Answer: a. Langley Soldar Revenues $1,492,000 $640,000 Costs: Cost of goods sold 1,164,000 486,000 Customer-related costs, 16% of revenues 238,720 102,400 Total costs 1,402,720 588,400 Customer specific contribution $89,280 $51,600 b. Revenues Costs: Cost of goods sold In-stock costs 14 × $1,200; 4 × $1,200 Out-of-stock costs 12 × $3,500; 24 × $3,500 Total Costs Customer specific contribution
Langley $1,492,000
Soldar $640,000
1,164,000
486,000
16,800
4,800
42,000 1,222,800 $269,200
84,000 574,800 $65,200
Diff: 3 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-2
23) Quebec Ltd. is a company that manufactures climbing rope for mountaineering and rescue operations. They sell various types of rope to four distributors: Alpine Adventures Corporation (AAC), Mountain Supply Coop (MSC), Bigfoot Safety Supply Ltd. (BSS), Elite Mountain Equipment (EME). Currently, Quebec Ltd. does not charge extra fees for any order and delivery related costs. The company president, Rolf Resche, wants an ABC customer analysis done to determine if a change in pricing policy is warranted. The customer-level cost driver rates are: Order taking Product handling Delivery by ground Delivery by air freight Rush order extra cost
$32 5 1 15 45
per order per thousand metres per kilometre per order (delivery to air freight company) per order
Rope costs $2 per metre to produce and sells for an average price of $3 per metre in units of 100 metres. The following table presents customer metrics:
Total # of units sold Number of orders Ground delivery kilometres Air freight deliveries Number of rush orders
AAC 2,500 1,250 6,250 1,125 100
MSC 8,000 3,000 15,000 2,700 100
BSS 4,000 4,500
EME 500 500
4,500 4,500
500 500
Required: Prepare a customer profitability report for the president using ABC analysis. Present the profit as a percentage of sales for each customer at the end of the report.
Answer: AAC
MSC
BSS
EME
Metres purchased
250,000
800,000
400,000
50,000
Number of orders
1,250
3,000
4,500
500
Ground delivery kilometres
6,250
15,000
Air freight deliveries
1,125
2,700
4,500
500
Number of rush orders
100
100
4,500
500
$ 750,000
$ 2,400,000
$ 1,200,000
$ 150,000
Cost of goods sold
500,000
1,600,000
800,000
100,000
Order taking
40,000
96,000
144,000
16,000
Product handling
1,250
4,000
2,000
250
Delivery by ground
6,250
15,000
-
-
Delivery by air freight
16,875
40,500
67,500
7,500
Rush order extra cost
4,500
4,500
202,500
22,500
1,760,000
1,216,000
640,000 $
(16,000)
146,250 $ 3,750
27%
-1%
3%
Revenue Customer costs:
Total customer costs Customer profit Profit as a percentage of sales
568,875 $ 181,125 $ 24%
Diff: 3 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-2
24) List at least three different levels of costs in a customer-cost hierarchy and an example of each. Answer: List any three of the following: 1. Customer output unit-level costs, product-handling costs of each product sold 2. Customer batch-level costs, order processing costs incurred 3. Customer-sustaining costs, costs of visits to the customer 4. Distribution-channel costs, a particular distribution channel manager's salary 5. Corporate-sustaining costs, costs of top management Note: Examples will vary. Diff: 2 Type: ES CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-2
17.3 Calculate and interpret four levels of contribution margin variance analyses. 1) The static-budget variance for revenues is the difference between the actual revenues and the budgeted revenues from the static budget. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-3
2) The sales-mix variance is the difference between two amounts: (1) the budgeted amount based on actual quantities sold of all products and the budgeted mix, and (2) the amount in the static budget. Answer: FALSE Explanation: Difference between: (1) actual qty. × actual mix; and, (2) the actual qty. × budgeted sales mix Diff: 3 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-3
3) The sales-quantity variance can be unfavourable if both the market-share and market-size variances are favourable. Answer: FALSE Explanation: Both favourable; or, if one unfavourable then the other must be favourable in a greater amount. Diff: 2 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-3
4) The sales-volume variance is favourable assuming the sales-mix variance and the sales-quantity variances are favourable. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-3
5) The market-size variance is the difference between two amounts: (1) the budgeted amount at budgeted mix based on the actual market size in units and the actual market share, and (2) the budgeted amount at budgeted mix based on actual market size in units and the budgeted market share. Answer: FALSE Explanation: (1) the budgeted amount based on actual market size in units, budgeted market share, and budgeted CM; (2) the static-budget amount based on the budgeted market size in units, budgeted market share, and budgeted CM Diff: 3 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-3
6) Additional insight can be gained by separating the sales-mix variance into the flexible-budget variance and the sales-volume variance. Answer: FALSE Explanation: Additional insight can be gained by separating the static-budget variance into the flexiblebudget variance and the sales-volume variance. Diff: 2 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-3
7) A favorable total sales-mix variance arises when the actual sales-mix percentage for the higher contribution margin products is less than the budgeted sales-mix percentage. Answer: FALSE Explanation: A favorable sales-mix variance arises when the actual sales-mix percentage for the higher contribution margin products exceeds the budgeted sales-mix percentage. Diff: 3 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-3
8) A composite unit is a hypothetical unit with weights based on the mix of individual units. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-3
9) The sales-mix variance is calculated using the budgeted contribution margin per composite unit of the sales mix. Answer: FALSE Explanation: The market-share and market-size variances are calculated using the budgeted CM per composite unit Diff: 2 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-3
10) The sales-quantity variance is favorable when budgeted unit sales exceed actual unit sales. Answer: FALSE Explanation: The sales-quantity variance is unfavorable when budgeted unit sales exceed actual unit sales. Diff: 1 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-3
11) The market-share variance is caused solely by the actual market share being different than the budgeted market share. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-3
12) A favorable market-size variance results with a decrease in market size. Answer: FALSE Explanation: A favorable market-size variance results with an increase in market size. Diff: 1 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-3
13) A difficulty with the market-share and market-size variances is that accurate measures of market share and market size often do not exist. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-3
14) Some companies place more emphasis on the market-share variance than the market-size variance when evaluating their managers. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-3
15) Unfavourable variances reveal not only what occurred but how it occurred. Answer: FALSE Explanation: The unfavourable variances have only revealed what occurred, not how it occurred. Diff: 2 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-3
16) Which of the following is one of the items that are important to managers when analyzing salesvolume variance information? A) the static-budget variance B) the flexible-budget variance C) direct materials price variance D) the sales-mix variance E) direct labour efficiency variance Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-3
17) Which of the following is NOT a sales related variance? A) sales-volume variance B) sales-quantity variance C) market-size variance D) direct materials yield variance E) market-share variance Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-3
18) Which of the following statements is TRUE of the methods for allocating joint costs? A) The constant gross-margin percentage method results in the same joint production cost per unit for all products. B) The estimated net realizable value method results in the same gross margin percentage for all products. C) The present value allocation method is the least preferred method due to its complex calculations. D) The sales value at the split-off method uses the sales value of the entire production of the accounting period to allocate costs. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-3
19) The sales-volume variance plus or minus the static budget amount results in A) the fixed-budget amount. B) the flexible-budget amount. C) an unfavourable/favourable variance. D) the variable-budget amount. E) a static budget variance. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-3
Use the information below to answer the following question(s). Best Tea Products (BTP) has an exclusive contract with Tea Distributors. Two brands of teas are imported, Strong and Mild, and sold to retail outlets. The monthly budget for the contract is based on a combination of last year's performance, a forecast of general industry sales, and the company's expected share of the Canadian market for imported tea. The following information is provided for the month of May:
Price per kg Variable cost /kg Cont. margin Sales (in kg)
Budgeted BudgetedM Strong ild $2.00 $3.00 1.00 1.50 $1.00 $1.50 2,000
1,500
Actual Strong Actual Mild $2.50 $2.50 1.00 2.00 $1.50 $0.50 1,700
1,800
Budgeted fixed costs are $1,750. Actual fixed costs are $2,000. 20) What is the static budget variance (contribution margin) for Mild Tea? A) $2,250 U B) $2,250 F C) $900 U D) $1,350 F E) $1,350 U Answer: E Explanation: [$0.50 × 1,800] - [$1.50 × 1,500] = $900 - $2,250 = $1,350 U Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
21) What is the BTP sales-volume variance (contribution margin) for Strong tea? A) $600 favourable B) $600 unfavourable C) $900 favourable D) $900 unfavourable E) $300 unfavourable Answer: E Explanation: [1,700 - 2,000] × $1.00 = $300 U Diff: 3 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
22) What is the BTP total static-budget variance for revenues? A) $50 favourable B) $250 favourable C) $50 unfavourable D) $250 unfavourable E) $800 unfavourable Answer: B Explanation: [(1,800 × $2.50) + (1,700 × $2.50)] - [(1,500 × $3.00) + (2,000 × $2.00)] = $250 favourable Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
23) What is the BTP total flexible-budget variance for revenues? A) $50 favourable B) $50 unfavourable C) $900 favourable D) $800 favourable E) $250 unfavourable Answer: B Explanation: [(1,800 × $2.50) + (1,700 × $2.50)] - [(1,800 × $3.00) + (1,700 × $2.00)] = $50 unfavourable Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
24) What is the BTP total sales-volume variance (contribution margin) for May? A) $300 favourable B) $300 unfavourable C) $150 favourable D) $150 unfavourable E) $750 unfavourable Answer: C Explanation: Strong = (1,700 - 2,000) × $1.00 = $300 U Mild = (1,800 - 1,500) × $1.50 = $450 F Total = $150 F Diff: 3 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
25) What is the BTP total sales-quantity variance for revenues? A) $0 B) $150.00 unfavourable C) $150.00 favourable D) $300.00 unfavourable E) $450.00 favourable Answer: A Explanation: Strong (3,500 - 3,500) × 2,000/3,500 × $2 $0 Mild (3,500 - 3,500) × 1,500/3,500 × $3 0 $0 Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
26) What is the BTP total sales-mix variance for contribution margin? A) $0 B) $150 unfavourable C) $150 favourable D) $300 favourable E) $450 favourable Answer: C Explanation: Strong (3,500 × (1,700/3,500 - 2,000/3,500)) × $1.00 $300 U Mild (3,500 × (1,800/3,500 - 1,500/3,500)) × $1.50 $450 F $150 F Diff: 3 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
27) If the market-size variance is $650 F, the sales-mix variance is $500 F, the flexible budget variance is $9,250 F, and the static budget variance is $8,000 U, which of the following is TRUE? A) The market-share variance is $18,400 U. B) The sales-volume variance is $17,250 F. C) The sales-quantity variance is $18,400 U. D) The sales-volume variance is $17,750 U. E) The market-share variance is $17,250 U. Answer: A Explanation: Sales Volume Var = $9,250 F + $8,000 U = $17,250 U Sales Quantity Var. = $17,250 U + $500 F = $17,750 U Market Share Var. = $17,750 U + $650 F = $18,400 U Diff: 3 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
28) Fresh Bread Company sells a special mix of wheat bread. If the expected output equals the actual output, the sales-volume variance A) will be negative. B) will be positive. C) will be favourable. D) will be unfavourable. E) will be zero. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-3
29) The difference between (the budgeted contribution margin for the budgeted sales mix and budgeted volume) and (the budgeted contribution margin for the budgeted sales mix and the actual volume) is the A) sales-mix variance. B) sales-quantity variance. C) sales-volume variance. D) market-size variance. E) market-share variance. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-3
30) The sales-volume variance for revenue is the A) (actual sales quantity in units divided by budgeted individual product selling price per unit) times (budgeted sales quantity in units). B) (budgeted contribution margin per unit) times (actual unit sales plus static budget unit sales). C) (actual sales quantity in units plus budgeted sales quantity in units) divided by (budgeted individual product selling price per unit). D) (budgeted sales quantity in units divided by budgeted individual selling price per unit) times (actual sales quantity in units). E) (budgeted individual product selling price per unit) times (actual sales quantity in units less budgeted sales quantity in units). Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-3
31) A company sells two products: radios and speakers. The expected sales for radios were 1,500 units; 2,000 were sold. The budgeted selling price for radios was $15.00; however, the actual selling price was $13.00. The expected sales for speakers were 4,600 units; 5,000 were sold. The budgeted selling price for speakers was $7.50; however, the actual selling price was $9.00. Budgeted and actual variable costs were $4.00 per unit for the radios and $2.00 per unit for the speakers. What is the contribution margin salesvolume variance for the period? A) $2,200 unfavourable B) $2,200 favourable C) $4,500 favourable D) $7,700 favourable E) $7,700 unfavourable Answer: D Explanation: [(2,000 × $11) + (5,000 × $5.50)] - [(1,500 × $11) + (4,600 × $5.50)] = $7,700 F Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
32) The sales-quantity variance arises because A) the mix of individual products actually sold differs from the budgeted mix. B) the total quantity of units actually sold differs from the static budget. C) the total quantity of units expected to be sold differs from the static budget. D) the mix of budgeted products sold differs from the actual product mix. E) the budgeted sales in units cannot be achieved unless the price is decreased. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-3
33) Which of the following actually calculates the sales-quantity variance? A) (actual units of all products sold) times (actual sales mix percentage minus budgeted sales mix percentage) times (budgeted contribution margin per unit) B) (actual sales quantity in units minus static-budget sales quantity in units) times (budgeted contribution margin per unit) C) (actual units of all products sold minus budgeted units of all products sold) times (budgeted sales-mix percentage) times (budgeted contribution margin per unit) D) (actual units of all products sold minus budgeted units of all products sold) times (budgeted sales-mix percentage) times (actual contribution margin per unit) E) (actual units of all products sold) times (actual sales mix percentage minus budgeted sales mix percentage) times (actual contribution margin per unit) Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-3
34) Metal Cabinet Company manufactures two and four drawer filing cabinets. The actual units sold (5,000) equalled the expected units to be sold for both products. The four drawer cabinets constitute 66 percent of the budgeted sales mix. The budgeted selling price is $30 for four drawer cabinets and $15 for two drawer cabinets. What is the sales-quantity variance? A) $0 B) $25,500 C) $49,500 D) $99,000 E) $101,500 Answer: A Explanation: zero as actual units sold equals budgeted units sold Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
Use the information below to answer the following question(s). Teddy Bear Company sold a total of 30,000 stuffed tigers and lions. During August, the following information was gathered:
Actual selling price Budgeted selling price Actual sales mix Budgeted sales mix Actual variable costs Budgeted variable costs Budgeted unit sales
Tigers $7.50 $5.50 69% 75% $5.00 $4.75 30,000
Lions $10.50 $10.50 31% 25% $6.50 $7.25 10,000
35) What is the Teddy Bear Company's total sales-mix variance? A) $21,600 favourable B) $13,750 favourable C) $13,750 unfavourable D) $4,500 unfavourable E) $4,500 favourable Answer: E Explanation: BCM for Tigers = $5.50 - $4.75 = $0.75 BCM for Lions = $10.50 - $7.25 = $3.25 Tigers [(30,000 × (.69 - .75)) × $0.75 = $1,350 U Lions [(30,000 × (.31 - .25)) × $3.25 = 5,850 F $4,500 F Diff: 3 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
36) What is the Teddy Bear Company's total sales-quantity variance? A) $21,600 favourable B) $13,750 favourable C) $13,750 unfavourable D) $4,500 favourable E) $4,500 unfavourable Answer: C Explanation: [(30,000 × 75% × $0.75) + (30,000 × 25% × $3.25)] - [(40,000 × 75% × $0.75) + (40,000 × 25% × $3.25)] = $13,750 U Diff: 3 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
37) What is the Teddy Bear Company's total sales-volume variance? A) $9,250 favourable B) $9,250 unfavourable C) $26,100 favourable D) $7,850 unfavourable E) $7,850 favourable Answer: B Explanation: [(20,700 × $0.75) + (9,300 × $3.25)] - [(30,000 × $0.75) + (10,000 × $3.25)] = $9,250 U Diff: 3 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
38) When the actual mix of products sold shifts in favour of the high-contribution-margin product A) the total sales-mix variance is unfavourable. B) the total sales-mix variance is favourable. C) the total sales-volume variance is unfavourable. D) the total sales-volume variance is favourable. E) the total sales volume is more favourable (or less unfavourable). Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-3
39) A company sells three different types of satellite dishes in Ontario, but sells only (type 1) in Alberta.
Available data are that the budgeted sales mix percentage in Ontario is .35 (type 1), and .25 (type 2). The contribution margins per unit are $200 (1), $120 (2), and $140(3). Required: Calculate the budgeted contribution margin per composite unit for the budgeted mix for Ontario and Alberta respectively. A) $156 and $70 B) $156 and $114 C) $156 and $200 D) $114 and $70 E) They are the same in both provinces. Answer: C Explanation: For Ontario [35% × $200] + [25% × $120] + [40% × $140] = $70 + $30 + $56 = $156; $200 × 1.00 = $200 for Alberta Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
40) The (the difference between the actual market size in units and the budgeted market size in units) times (the budgeted market share) times (budgeted contribution margin per composite unit for the budgeted mix) is called the A) budgeted market-size variance. B) budgeted market-share variance. C) market-share variance. D) market-size variance. E) sales quantity variance. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-3
Use the information below to answer the following question(s). Nova Scotia Company manufactures remote control devices for electronic equipment. The following information was collected during June: Actual market size (units) Budgeted market size (units) Actual market share Budgeted market share Budgeted selling price Actual selling price Budgeted cont. margin per unit Actual cont. margin per unit
20,000 22,500 34% 32% $12.00 $10.50 $4.00 $3.00
41) What is the company's market-share variance? A) $1,600 unfavourable B) $1,600 favourable C) $2,560 favourable D) $1,200 unfavourable E) $1,200 favourable Answer: B Explanation: 20,000 × (.34 - .32) × $4.00 = $1,600 F Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
42) What is the company's market-size variance? A) $4,800 favourable B) $3,200 favourable C) $2,400 favourable D) $2,400 unfavourable E) $3,200 unfavourable Answer: E Explanation: (20,000 - 22,500) × .32 × $4.00 = $3,200 U Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
Answer the following question(s) using the information below: Western Company manufactures remote control devices for garage doors. The following information was collected during June: Actual market size (units) Actual market share Actual average selling price Budgeted market size (units) Budgeted market share Budgeted average selling price Budgeted contribution margin per composite unit for budgeted mix
10,000 32% $10.00 11,000 30% $11.00 $5.00
43) What is the Western Company's market-size variance? A) $500 U B) $1,500 U C) $1,600 F D) $1,000 F E) $1,500 F Answer: B Explanation: (10,000 - 11,000) × 0.30 × $5 = $1,500 U Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 17-3
44) What is the Western Company's market-share variance? A) $1,000 F B) $1,100 F C) $500 U D) $1,500 U E) $1,000 U Answer: A Explanation: 10,000 × (0.32 - 0.30) × $5 = $1,000 F Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 17-3
45) What is the Western Company's sales-quantity variance? A) $1,500 U B) $1,000 F C) $500 U D) $2,500 U E) $500 F Answer: C Explanation: (10,000 - 11,000) × 0.30 × $5 = $1,500 U 10,000 × (0.32 - 0.30) × $5 = $1,000 F $1,500 U + $1,000 F = $500 U Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
46) If the market-size variance is $400 U and the sales-mix variance is $700 F, and the market share variance is $300 F, we know that which of the following is TRUE? A) The sales-quantity variance is $100 F. B) The market-share variance is $300 F. C) The sales-quantity variance is $100 U, and the sales volume variance is $600 F. D) The sales-volume variance is $600 U. E) The sales-volume variance is $600 F, and the sales-quantity variance is $100 F. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
Answer the following questions using the information below: The Golden Appliance Manufacturing Corporation manufactures two vacuum cleaners, the Standard and the Super. The following information was gathered about the two products:
Budgeted sales in units Budgeted selling price Budgeted contribution margin per unit Actual sales in units Actual selling price Actual contribution margin per unit
Standard 3,200 $600 $420 3,500 $650 $450
Super 800 $1,700 $1,100 1,500 $1,680 $990
47) What are the budgeted sales-mix percentages for the Standard and Super vacuum cleaners, respectively? A) 0.80 and 0.20 B) 0.70 and 0.30 C) 0.20 and 0.80 D) 0.30 and 0.70 Answer: A Explanation: 3,200/(3,200 + 800) = 0.80 and 800/(3,200 + 800) = 0.20 Diff: 1 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
48) What is the total sales-volume variance in terms of the contribution margin? A) $216,000 unfavourable B) $216,000 favourable C) $556,000 favourable D) $896,000 favourable Answer: D Explanation: Standard = (3,500 - 3,200) × $420 = $ 126,000 F Super = (1,500 - 800) × $1,100 = 770,000 F $896,000 F Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
49) What is the total sales-quantity variance in terms of the contribution margin? A) $220,000 favourable B) $340,000 favourable C) $556,000 favourable D) $896,000 favourable Answer: C Explanation: Standard = (5,000 - 4,000) × .8 × $420 = $336,000 F Super = (5,000 - 4,000) × .2 × $1,100 = 220,000 F $556,000 F Diff: 3 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
50) What is the total sales-mix variance in terms of the contribution margin? A) $220,000 favourable B) $340,000 favourable C) $556,000 favourable D) $896,000 favourable Answer: B Explanation: Standard = 5,000 × (.7 - .8) × $420 = $210,000 U Super = 5,000 × (.3 - .2) × $1,100 = $550,000 F $340,000 F Diff: 3 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
Answer the following questions using the information below: The Sasita Corporation manufactures two types of vacuum cleaners, the Zenith for commercial building use and the House-Helper for residences. Budgeted and actual operating data for the year 2019 were as follows: Static Budget Number sold Contribution margin
Zenith 5,000 $1,500,000
House-Helper 20,000 $3,000,000
Total 25,000 $4,500,000
Actual Results Number sold Contribution margin
Zenith 4,000 $1,280,000
House-Helper 28,000 $3,920,000
Total 32,000 $5,200,000
Prior to the beginning of the year, a consulting firm estimated the total volume for vacuum cleaners of the Zenith and House-Helper category to be 250,000 units, but actual industry volume was 256,000 units. 51) What is the contribution margin for the flexible budget? A) $1,200,000 B) $4,200,000 C) $5,200,000 D) $5,400,000 E) $5,900,000 Answer: D Explanation: Budgeted contribution margin per unit: Zenith = $1,500,000/5,000 = $300 House-Helper = $3,000,000/20,000 = $150 Flexible-budget contribution margin: 4,000 × $300 = $1,200,000 28,000 × $150 = 4,200,000 $5,400,000 Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
52) What is the total static-budget variance in terms of the contribution margin? A) $900,000 F B) $700,000 F C) $200,000 U D) $360,000 U E) $500,000 F Answer: B Explanation: $700,000 favorable = $4,500,000 - $5,200,000 Diff: 1 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
53) What is the total flexible-budget variance in terms of the contribution margin? A) $900,000 F B) $700,000 F C) $200,000 U D) $360,000 U E) $500,000 F Answer: C Explanation: Budgeted contribution margin per unit: Zenith = $1,500,000/5,000 = $300 House-Helper = $3,000,000/20,000 = $150 Flexible-budget contribution margin: 4,000 × $300 = $1,200,000 28,000 × $150 = 4,200,000 $5,400,000 $200,000 U = $5,400,000 - $5,200,000 Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
54) What is the total sales-volume variance in terms of the contribution margin? A) $900,000 F B) $1,260,000 F C) $200,000 U D) $360,000 U E) $400,000 F Answer: A Explanation: Budgeted contribution margin per unit: Zenith = $1,500,000/5,000 = $300 House-Helper = $3,000,000/20,000 = $150 Flexible-budget contribution margin: 4,000 × $300 = $1,200,000 28,000 × $150 = 4,200,000 $5,400,000 $900,000 F = $4,500,000 - $5,400,000 Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
55) What is the total sales-quantity variance in terms of the contribution margin? A) $200,000 U B) $900,000 F C) $360,000 U D) $1,260,000 F E) $400,000 F Answer: D Explanation: Budgeted sales-mix percentage: Zenith = 5,000/25,000 = 0.20 House-Helper = 20,000/25,000 = 0.80 Actual sales-mix percentage: Zenith = 4,000/32,000 = 0.125 House-Helper = 28,000/32,000 = 0.875 Sales-quantity variance
Zenith House-Helper Total
Actual units of all Budgeted Budgeted Sales-quantity products sold sales-mix % CM per unit variance Budgeted units of all products sold (32,000 - 25,000) × 0.20 × $300 = $ 420,000 F (32,000 - 25,000) × 0.80 × $150 = $ 840,000 F $1,260,000 F
Diff: 3 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
56) What is the total sales-mix variance in terms of the contribution margin? A) $200,000 U B) $360,000 U C) $900,000 F D) $1,260,000 F E) $400,000 U Answer: B Explanation: Sales-mix Actual units of Actual sales-mix % Budgeted Sales-mix variance all products - Budgeted sales- CM per unit variance sold mix% Zenith 32,000 × (0.125 - 0.200) × $300 = $720,000 F House-Helper 32,000 × (0.875 - 0.800) × $150 = $360,000 U Total $360,000 U Diff: 3 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
57) What is the budgeted contribution margin per composite unit of the budgeted mix? A) $140.625 B) $180.000 C) $208.000 D) $162.500 E) $160.000 Answer: B Explanation: Zenith = $300 × .2 = $ 60 House-Helper = $150 × .8 = 120 OR $4,500,000/25,000 = $180 Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
58) What is the market-size variance? A) $1,152,000 F B) $108,000 F C) $360,000 U D) $1,260,000 F E) $96,000 F Answer: B Explanation: Actual market share = 32,000/256,000 = 0.125 Budgeted market share = 25,000/250,000 = 0.100 Market-size variance
Actual market size in Budgeted units - Budgeted market market size in units share
Sasita Corp
(256,000 - 250,000) ×
0.100 ×
Budgeted CM Market-size per composite variance unit for budgeted mix $180 = $108,000 F
Diff: 3 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
59) What is the market-share variance? A) $360,000 U B) $1,260,000 F C) $1,152,000 F D) $108,000 F E) $1,024,000 F Answer: C Explanation: Market-share Actual Actual market variance market size share - Budgeted in units market share Sasita Corp
256,000 ×
Budgeted CM Market-share per composite variance unit for budgeted mix (0.125 - 0.100) × $180 = $1,152,000 F
Diff: 3 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
60) Big Products sells only one product. Last year it sold 22,000 items when the budget was 16,000 items. The increased sales were due in part to reduced selling prices averaging $52. The budgeted selling price was $60. Total variable costs were budgeted at $144,000. Required: Compute the contribution margin sales-volume variance. Why doesn't the contribution sales volume variance equal the difference between budgeted and actual revenue? Answer: Budgeted Variable costs per unit = $144,000/16,000 = $9, BCM = $60 - $9 = $51 Sales-volume variance (22,000 - 16,000) × $51 = $306,000 favourable The sales-volume variance is based on the budget contribution margin per unit, and does not consider any change in price. Diff: 2 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
61) Columbia Coffee Inc. sells two types of coffee, Regular and Decaf. The monthly budget for Canadian coffee sales is based on a combination of last year's performance, a forecast of industry sales, and the company's expected share of the Canadian market. The following information is provided for March:
Price per kilogram Variable cost per kilogram Contribution margin
Budgeted Regular Decaf $50 $60 24 26 $26 $34
Actual Regular Decaf $52 $60 24 28 $28 $32
Sales (in kg)
4,000
3,700
4,500
4,800
Budgeted fixed costs are $58,000. Actual fixed costs are $62,000. Required: Calculate the static-budget, flexible-budget and sales-volume variances for the contribution margin, for the company for March. Answer: Static-budget variance: Regular = ($28 × 3,700) - ($26 × 4,000) = 103,600 - 104,000 = $400 U Decaf = ($32 × 4,800) - ($34 × 4,500) = 153,600 - 153,000 = $600 F Total $200 F Flexible-budget variance: Regular = ($28 -$26) × 3,700 = Decaf = ($32 -$34) × 4,800 = Total
$7,400 F $9,600 U $2,200 U
Sales-volume variance: Regular = (3,700 - 4,000) × $26 = Decaf = (4,800 - 4,500) × $34 = Total
$7,800 U 10,200 F $2,400 F
Diff: 2 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
62) Green Coffee Inc. sells two types of coffee, Dark Roast and Light Roast. The monthly budget for Canadian coffee sales is based on a combination of last year's performance, a forecast of industry sales, and the company's expected share of the Canadian market. The following information is provided for March:
Price per kilogram Variable cost per kilogram Contribution margin Sales (in kg)
Budgeted Dark Light $25 $30 16 18 $9 $12 8,000
9,000
Actual Dark Light $28 $25 15 20 $13 $5 7,000
8,000
Budgeted fixed costs are $70,000. Actual fixed costs are $76,000. Required: Calculate the static-budget, flexible-budget and sales-volume variances for the contribution margin, for the company for March. Answer: Static-budget variance: Dark = ($13 × 7,000) - ($9 × 8,000) = 91,000 - 72,000 = $19,000 F Light = ($5 × 8,000) - ($12 × 9,000) = 40,000 - 108,000 = 68,000 U Total $49,000 U Flexible-budget variance: Dark = ($13 -$9) × 7,000 = Light = ($5 -$12) × 8,000 = Total
$28,000 F $56,000 U $28,000 U
Sales-volume variance: Dark = (7,000 -8,000) × $9 = Light = (8,000 - 9,000) × $12 = Total
$9,000 U 12,000 U $21,000 U
Diff: 2 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
63) A sporting goods division sells two types of juvenile skates; Atom and Mite. The following data are from the division's August results. Actual sales were 1,600 items, and the budget was 2,200 items.
Atom Mite
Actual Sales Price $115 99
Budget Sales Price $120 106
Actual Sales Mix 65% 35%
Budget Sales Mix 60% 40%
Variable costs per unit (pair) were budgeted at $56 for the Atom skates, and $119,350 in total. Required: Compute the sale-mix variance by type of skate, and in total. Answer: Budget sales units for Atom = 2,200 × 60% = 1,320 units Budget sales units for Mite = 2,200 × 40% = 880 units Budget Variable costs for Mites = $119,350 - ($56 × 1,320) = $45,430 Budget C.M. per unit Atom = $120 - $56 = $64.00 Budget C.M. per unit Mite = $106 - ($45,430/880) = $54.375 Sales-mix variance Atom = 1,600 × (.65 - .60) × $64.00 = Mite = 1,600 × (.35 - .40) × $54.375 = Total
$5,120.00 F $4,350.00U $770.00 F
Diff: 3 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 17-3
64) The Chair Company manufactures two modular types of chairs; one for the residential market, and the other for the office market. Budgeted and actual operating data for the past year are: Static Budget Home Office Number of chairs sold 260,000 140,000 Contribution margin $26,000,000 $11,200,000
Actual Results Home Office 248,400 165,600 $22,356,000 $13,248,000
The industry volume for residential and office chairs of the type sold by the Chair company had been estimated at 2,400,000. Actual industry volume for the year was 2,200,000 chairs. Required: a. Compute the sale-mix variance and the sales- quantity variance by type of chair, and in total. b. Compute the market-share variance and market-size variances. (Calculate actual and budgeted market share percentages to two decimal places.) Answer: Actual sales-mix percentage: Total volume of chairs sold = 248,400 + 165,600 = 414,000 Residential = 248,400/414,000 = 60% Office = 165,400/ 414,000 = 40% Budgeted sales-mix percentage: Residential = 260,000/400,000 = 65% Office = 140,000/400,000 = 35% BCM -Home BCM-Office BCM-Comp
= = =
$26,000,000/260,000 = $100 $11,200,000/140,000 = $80 $37,200,000/400,000 = $93
AQAll × AMix* Sales Mix BCM Variance 414,000 × 60% × 100 $24,840,000 $2,070,000 U 414,000 × 40% × 80 $13,248,000 $1,656,000 F $414,000 U
AQAll × BMix × Sales Quantity BQAll × BMIX × BCM Variance BCM 414,000 × 65% × 400,000 × 65% × 100 100 $26,910,000 $26,000,000 $910,000 F 414,000 × 35% × 400,000 × 35% × 80 80 $11,592,000 $11,200,000 $392,000 F $1,302,000F
Actual market share= 414,000/ 2,200,000 = 18.82% Budgeted market share= 400,000/2,400,000 = 16.67% Aqall × Ashare × BCM 2,200,000*18.81 %*93 414,000 × $93 $38,502,000
Aqall × BShare × BCM 2,200,000*16.67 %*93
BQAll × BShare × BCM 2,400,000 × 16.67% × 93 400,000 × $93 $37,200,000
$34,106,820 $4,395,180 F Mkt Share
$3,093,180 U Mkt Size
Diff: 2 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 17-3
65) Better Printing sells hardcover and softcover books. For January the following information is available:
Actual market size Budgeted market size Actual market share Budgeted market share Budgeted cont. margin Actual average selling price
Hardcover 200,000 250,000 38% 36% $2.40 $14.00
Softcover 400,000 300,000 36% 32% $1.00 $6.50
Required: a. Compute the market-share variance and market-size variance. (Round intermediate calculations to four decimal places) b. Compute the total sales-quantity variance . Answer: Actual market share
= = 0.3667
Budgeted market share = = 0.3382 CM per composite unit = = $312,000/186,000 = $1.6774 Market-share variance: 600,000 × (0.3667 - 0.3382) × $1.6774 = $28,684 F Market-size variance: (600,000 - 550,000) × 0.3382 × $1.6774= $28,364 F Sales-quantity variance = $28,684 + $28,364 = $57,048 F Diff: 3 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 17-3
66) Bob's Appliances manufactures industrial dryers and washers. During February the following data are available: Dryers Washers Actual units sold 10,000 40,000 Budgeted sales 8,820 33,180 Actual selling price $700 $900 Budgeted selling price $710 $930 Budgeted market share 25% 24% Actual market share 20% 25% Budget cont. margin /unit $275 $375 Required: Determine the following: a. Sales-mix and sales-quantity variances b. Market-share and market-size variances (for calculation purposes round combined actual and budgeted market share percentages to six decimal places.)
Answer: 1. Sales-mix and sales-quantity variances: Actual sales mix: Dryers = 10,000/(10,000 + 40,000) = 20%; Washers = 80%. Budgeted sales mix: Dryers = 8,820/(8,820 + 33,180) = 21%; Washers = 79%
2.
Sales-mix variance: Dryers = 50,000 × (0.20 - 0.21) × $275 = Washers = 50,000 × (0.80 - 0.79) × $375 = Total
$137,500 U 187,500 F $50,000 F
Sales-quantity variance: Dryers = (50,000 - 42,000) × 0.21 × $275 = Washers = (50,000 - 42,000) × 0.79 × $375 = Total
$462,000 F 2,370,000 F $2,832,000 F
Market-share and market-size variances: Actual market size: Dryers (10,000/0.20) + Washers (40,000/0.25) = 210,000 Budget market size: Dryers (8,820/0.25) + Washers (33,180/0.24) = 173,530 Actual combined market share: (10,000 + 40,000)/210,000 = 0.238095 Budgeted combined market share: (8,820 + 33,180)/173,530 = 0.242033 Budgeted CM per composite unit: ((8,820 × $275) + (33,180 × $375))/42,000 = $354 Market-share variance: 210,000 × (0.238095 - 0.242033) × $354 = $292,751 U Market-size variance: (210,000 - 173,530) × 0.242033 × $354 = 3,124,738 F $2,831,987 F
Rounding error = $2,832,000 - $2,831,987 = $13 Diff: 2 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
67) The Omega Corporation manufactures two types of vacuum cleaners: the ZENITH for commercial building use and the House-Helper for residences. Budgeted and actual operating data for the year are as follows: Static Budget Number sold Contribution margin
ZENITH 15,000 $3,750,000
House-Helper 60,000 $12,000,000
Total 75,000 $15,750,000
Actual Results Number sold Contribution margin
ZENITH 16,500 $6,200,000
House-Helper 38,500 $10,200,000
Total 55,000 $16,400,000
Required: a. Calculate the contribution margin for the flexible budget. b. Determine the total static-budget variance, the total flexible-budget variance, and the total salesvolume variance in terms of the contribution margin. Answer: Budgeted contribution margin per unit: ZENITH = $3,750,000/15,000 = $250 House-Helper = $12,000,000/60,000 = $200 a.
Flexible-budget contribution margin:
16,500 × $250 = $4,125,000 38,500 × $200 = 7,700,000 $11,825,000
b.
Static-budget variance is $650,000 favorable = $15,750,000 - $16,400,000 Flexible-budget variance is $4,575,000 favorable = $11,825,000 - $16,400,000 Sales-volume variance is $3,925,000 unfavorable = $15,750,000 - $11,825,000
Diff: 2 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 17-3
68) The Omega Corporation manufactures two types of vacuum cleaners: the ZENITH for commercial building use and the House-Helper for residences. Budgeted and actual operating data for the year are as follows: Static Budget Number sold Contribution margin
ZENITH 15,000 $3,750,000
House-Helper 60,000 $12,000,000
Total 75,000 $15,750,000
Actual Results Number sold Contribution margin
ZENITH 16,500 $6,200,000
House-Helper 38,500 $10,200,000
Total 55,000 $16,400,000
Required: Compute the sales-mix variance and the sales-quantity variance by type of vacuum cleaner, and in total. (in terms of the contribution margin) Answer: Budgeted sales-mix percentage: ZENITH = 15,000/75,000 = 20% House-Helper = 60,000/75,000 = 80% Actual sales-mix percentage: ZENITH = 16,500/55,000 = 30%
House-Helper = 38,500/55,000 = 70%
Budgeted contribution margin per unit: ZENITH = $3,750,000/15,000 = $250
House-Helper = $12,000,000/60,000 = $200
Sales-mix variance
Actual units of Actual salesBudgeted CM all products mix % per unit sold Budgeted salesmix % ZENITH 55,000 × (0.3 - 0.2) × $250 House-Helper 55,000 × (0.7 - 0.8) × $200 Total
Sales-mix variance
= $1,375,000 F = $1,100,000 U $275,000 F
Sales-quantity Actual units of all Budgeted Budgeted Sales-quantity variance products sold sales-mix % CM per unit variance Budgeted units of all products sold ZENITH (55,000 - 75,000) × 0.2 × $250 = $1,000,000 U House-Helper (55,000 - 75,000) × 0.8 × $200 = $3,200,000 U Total $4,200,000 U Diff: 3 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 17-3
69) The Omega Corporation manufactures two types of vacuum cleaners, the ZENITH for commercial
building use and the House-Helper for residences. Budgeted and actual operating data for the year are as follows: Static Budget Number sold Contribution margin
ZENITH 15,000 $3,750,000
House-Helper 60,000 $12,000,000
Total 75,000 $15,750,000
Actual Results Number sold Contribution margin
ZENITH 16,500 $6,200,000
House-Helper 38,500 $10,200,000
Total 55,000 $16,400,000
Prior to the beginning of the year, a consulting firm estimated the total volume for vacuum cleaners of the Zenith and House-Helper category to be 300,000 units, but actual industry volume was only 275,000 units. Required: Compute the market-share variance and market-size variance in terms of the contribution margin. Answer: Actual market share: = 55,000/275,000 = 0.20 Budgeted market share:
=
75,000/300,000
= 0.25
Budgeted contribution margin per composite unit of budgeted mix: ZENITH = $250 × 0.2 = $50 House-Helper = $200 × 0.8 = 160 OR $15,750,000/75,000 = $210 Market-share variance
Omega Corp Market-size variance
Actual market Actual market size in units share Budgeted market share 275,000 × (0.2 - 0.25) ×
Budgeted CM Market-share per composite variance unit for budgeted mix $210 = $2,887,500 U
Actual market size in Budgeted units - Budgeted market market size in units share
Budgeted CM Market-size per composite variance unit for budgeted mix $210 = $1,312,500 U
Omega Corp (275,000 - 300,000) ×
0.25 ×
Diff: 3 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 17-3
70) Richard's Electronics manufactures TVs and DVDRs. During April, the following activities occurred:
Budgeted units sold Budgeted contribution margin per unit Actual units sold Actual contribution margin per unit
TVs 17,640 $45 20,000 $50
DVDRs 66,360 $78 80,000 $79
Required: Compute the following variances in terms of the contribution margin. a. Determine the total sales-mix variance. b. Determine the total sales-quantity variance. c. Determine the total sales-volume variance. Answer: a. TVs [(100,000 × 0.20) × $45] = $900,000 [(100,000 × 0.21) × $45] = 945,000 $ 45,000 unfavorable DVDRs [(100,000 × 0.80) × $78] (100,000 × 0.79) × $78]
= =
$6,240,000 6,162,000 $ 78,000 favorable
Total sales-mix variance = $45,000 unfavorable + $78,000 favorable = $33,000 favorable. b.
TVs {[(100,000 - 84,000) × 0.21] × $45] DVDRs {[(100,000 - 84,000) × 0.79] × $78] Total sales-quantity variance
= =
$151,200 favorable 985,920 favorable $1,137,120 favorable
c.
Total sales-volume variance = $33,000 favorable + $1,137,120 favorable = $1,170,120 favorable
Diff: 3 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
71) Aromatic Coffee Inc. sells two types of coffee, Colombian and Blue Mountain. The monthly budget for U.S. coffee sales is based on a combination of last year's performance, a forecast of industry sales, and the company's expected share of the U.S. market. The following information is provided for March:
Sales in pounds
Actual Colombian Blue Mountain 14,000 lbs. 16,000 lbs.
Budget Colombian Blue Mountain 12,800 lbs. 17,200 lbs
Price per pound Variable cost per pound
$12.50 5.50
$15.00 7.00
$12.50 6.00
$15.00 6.50
Contribution margin
$7.00
$8.00
$6.50
$8.50
Budgeted and actual fixed corporate-sustaining costs are $60,000 and $72,000, respectively. Required: a. Calculate the actual total contribution margin for the month. b. Calculate the total contribution margin for the static budget. c. Calculate the total contribution margin for the flexible budget. d. Determine the total static-budget variance, the total flexible-budget variance, and the total salesvolume variance in terms of the contribution margin. Answer: a. Actual contribution margin: 14,000 × $7 = $ 98,000 16,000 × $8 = 128,000 $226,000 b.
Static-budget contribution margin:
12,800 × $6.50 = $ 83,200 17,200 × $8.50 = 146,200 $229,400
c.
Flexible-budget contribution margin: 14,000 × $6.50 = $ 91,000 16,000 × $8.50 = 136,000 $227,000
d. Static-budget variance is $3,400 unfavorable = $229,400 - $226,000 Flexible-budget variance is $1,000 unfavorable = $227,000 - $226,000 Sales-volume variance is $2,400 unfavorable = $229,400 - $227,000 Diff: 2 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-3
72) The measures used to compute market size and share are debated intensely in the television industry, but generally, a TV station's ability to charge premium prices for airtime increases as its audience size increases. Explain how the sales and market variances might be relevant in this situation. Answer: Sales-mix This would be applicable where the TV station marketed multiple products. In this case, there is only one product mentioned, however, airtime at different times of the day,. Or different days of the week may be considered to be a different product. Sales-quantity This variance is applicable even for a single product. It will reflect the variance due to a change in the number of units (ie minutes of airtime) sold. Market-size This variance deals with the change in the size of the market itself. If the market increases, and the sales quantity decreases, this would be a concern. Market Share This variance will tell the station the variance due to changes in market share, against what it expected to achieve. This variance would be relevant in the station evaluating itself against its competitors in terms of marketing. Diff: 3 Type: ES CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-3
73) Various Product Company is a manufacturer of numerous products which are similar and are processed on the same assembly line. The production manager has decided that she will require all product managers and assembly line managers to be responsible for their own operations. The accounting information system is a large complex system that can provide specialized reporting when needed. It also has room for new, permanent applications. Required: Discuss how the production manager can expand the reporting responsibilities of these managers. Answer: The reporting system can be expanded by providing a variety of variance reports. The product managers may receive sales-volume variances, total sales-quantity variances, sales-mix variances, marketsize and market-share variances. The assembly line managers may receive individual variances for the assembly lines they control. These can include direct materials price and efficiency variances, and direct materials yield and mix variances Diff: 2 Type: ES CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-3
74) Comment on why marketing managers generally find the market-share variance is more controllable than the market- size variance. Answer: Marketing managers generally find the market-share variance is more controllable than the market-size variance because pricing and sale promotion decisions are more likely to affect market share than total market size. If market size and the demand for an industry's products are largely influenced by factors such as economic conditions, the market size variance is less controllable by marketing managers. Diff: 2 Type: ES CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-3
17.4 Generate a customer profitability profile. 1) Customer-profitability analysis examines how individual customers, or groupings of customers, differ in their profitability. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-4
2) Customer-specific costs are costs that are traceable or allocated to individual customers. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-4
3) Customer retention likelihood is a qualitative customer value assessment. Answer: FALSE Explanation: Customer retention likelihood is a quantifiable assessment as it is a probability measure. Diff: 1 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-4
4) Managers find customer-profitability analysis useful because it frequently highlights how vital a small set of customers is to total profitability. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-4
5) Revenue shedding refers to the strategy of providing price discounts on a long-term basis to specific customers. Answer: FALSE Diff: 1 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-4
6) ________ examine(s) how customers differ in their profitability. A) Customer-profitability analysis B) Customer revenue analysis C) Customer-cost hierarchy D) Price discounting E) Customer-price hierarchy Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-4
7) Customer specific costs are costs that A) are traceable to or allocated to individual customers. B) are not traceable to individual customers. C) are the same as customer support costs. D) would not include cost of goods sold. E) would not include selling-related costs. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-4
8) Which of the following statements is TRUE? A) Managers often find the bar chart presentation to be the most accurate way to analyze customer profitability. B) Managers find customer-profitability analysis useful because it frequently highlights how vital a small set of customers is to total profitability. C) Managers find customer-profitability analysis useful because when a customer is ranked in the loss category, they can focus their resources on this type of customer. D) The 80/20 rule means that 80% of the customers provide 80% of the profit and 20% of the customers provide the remainder. E) Managers can ensure that low profitability customers receive high priority. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-4
9) Which of the following is NOT a factor that managers should consider in deciding how to allocate resources across customers? A) short-run and long-run customer profitability B) customer retention likelihood C) economic forecasts D) customer growth potential E) increases in overall demand from having well-known customers Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-4
10) A company manufactures three products, A, B, and C, from a single raw material input. Product C can be sold at the split-off point for total revenues of $60,000, or it can be processed further at a total cost of $16,000 and then sold for $78,000. Product C: A) should be sold at the split-off point and not processed further. B) would increase the company's overall net income by $18,000 if processed further and then sold. C) would increase the company's overall net income by $78,000 if processed further and then sold. D) would increase the company's overall net income by $2,000 if processed further and then sold. Answer: D Explanation: The increase in operating income would be $2,000 by further processing: $78,000 - $16,000 = $62,000 less the revenues at the split-off point of $60,000 = $2,000. Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-4
11) Which of the following statements is TRUE of sell-or-process-further decisions in joint costing? A) Joint costs incurred before the split-off point are relevant in deciding whether to process the product further. B) All separable costs in joint-cost allocations are incremental costs. C) Separable costs incurred before the split-off point are irrelevant in deciding whether to process the product further. D) Costs that differ between the alternatives of selling products or processing further are relevant. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-4
12) The data for a paint manufacturing company for February are as follows:
Customer 1 Customer 2 Customer 3 Customer 4 Customer 5
Litres Sold 50,000 55,000 20,000 15,000 40,000
List Price $9.00 $9.00 $9.00 $9.00 $9.00
Customer-specific Costs $20,000 $20,000 $9,000 $4,000 $19,000
Price discount policy: $0.25 discount per gallon in excess of 20,000 gallons (up to 40,000) $0.35 discount per gallon in excess of 40,000 gallons Required: Prepare a report showing the customer-specific contribution. Present one column for customer-specific contribution and a second column showing customer-specific contribution as a percentage of customer revenue net of discounts (round percentages to two decimal places). Answer: Customerspecific As % of Contrb'n Revenue Customer 1 $421,500 95.47% Customer 2 $464,750 95.87% Customer 3 $171,000 95.00% Customer 4 $131,000 97.04% Customer 5 $336,000 94.65% Customer 1 (20 × $9) + (20 × $8.75) + (10 × $8.65) - $20,000 Customer 2 (20 × $9) + (20 × $8.75) + (15 × $8.65) - $20,000 Customer 3 (20 × $9) - $9,000 Customer 4 (15 × $9) - $4,000 Customer 1 (20 × $9) + (20 × $8.75) - $19,000 Diff: 2 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-4
13) Harry's Electronics manufactures electronic parts. Data for two of the company's customers is as follows:
Revenues at list price Units sold Unit list price Cost of goods per unit Sales discounts Customer-specific costs Order-taking Product-handling Delivery
Customer 1 $220,000 40,000 $5.50 $2.90 20,000
Customer 2 $220,000 50,000 $4.40 $2.90 30,000
$1,800 $14,000 $4,200
$2,250 $17,500 $5,250
Required: Prepare a comparative income statement in gross margin format with one column for each customer. Present customer-specific costs as period expenses. Answer: Customer 1 Customer 2 Revenues at list price $220,000 $220,000 Discounts 20,000 30,000 Net revenues $200,000 $190,000 Cost of goods 116,000 145,000 Gross margin $84,000 $45,000 Customer-specific costs Order-taking $1,800 $2,250 Product-handling $14,000 $17,500 Delivery $4,200 $5,250 Customer-specific contribution $64,000 $20,000 Diff: 2 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-2; 17-4
14) Jung Manufacturing Ltd. manufactures small engine parts. Data for two of the company's customers is as follows: Customer 1 Customer 2 Revenues at list price $620,000 $94,000 Units sold 80,000 10,000 Unit list price $7.75 $9.40 Cost of goods per unit $4.90 $5.17 Sales discounts $93,000 $4,700 Customer-specific costs Order-taking $12,400 $470 Product-handling $14,000 $1,500 Delivery $9,200 $1,250 Required: a. Prepare a comparative income statement in gross margin format with one column for each customer; present customer-specific costs as period expenses. b. Which customer is relatively more profitable? Support your answer with comparative percentage analysis. Answer: a. Customer 1 Customer 2 Revenues at list price $620,000 $94,000 Discounts 93,000 4,700 Net revenues $527,000 $89,300 Cost of goods 392,000 51,700 Gross margin $135,000 $37,600 Customer-specific costs Order-taking $12,400 $470 Product-handling $14,000 $1,500 Delivery $9,200 $1,250 Customer-specific contribution $99,400 $34,380 b.
On every line item Customer 1 costs are higher as a percentage of sales than Customer 2.
Diff: 2 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-2; 17-4
15) Singh Manufacturing Ltd. manufactures electrical parts. Data for two of the company's customers is as follows: Customer 1 Customer 2 Revenues at list price $592,500 $102,000 Units sold 75,000 10,000 Unit list price $7.90 $10.20 Cost of goods per unit $5.10 $6.25 Sales discounts $11,850 $1,020 Customer-specific costs Order-taking $13,600 $1,500 Product-handling $14,100 $1,350 Delivery $9,400 $1,290 Required: a. Prepare a comparative income statement in gross margin format with one column for each customer; present customer-specific costs as period expenses. b. Which customer is relatively more profitable? Support your answer with comparative percentage analysis. Answer: a. Customer 1 Customer 2 Revenues at list price $592,500 $102,000 Discounts 11,850 1,020 Net revenues $580,650 $100,980 Cost of goods 382,500 62,500 Gross margin $198,150 $38,480 Customer-specific costs Order-taking 13,600 1,500 Product-handling 14,100 1,350 Delivery 9,400 1,290 Customer-specific contribution $161,050 $34,340 b. Gross margin as a percentage of net revenues is higher for Customer 2 (34% vs 38%). Customer specific costs as a percentage of net revenues are: Customer 1, 6%; Customer 2, 4%. Customer-specific contribution is: Customer 1, 28%; Customer 2, 34%. Diff: 2 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 17-2; 17-4
16) Handy-Man Services is a repair-service company specializing in small household jobs. Each client pays a fixed monthly service fee based on the number of rooms in the house. Records are kept on the time and material costs used for each repair. The following profitability data apply to five customers:
Marveline Burnett J Jackson Roger Jones Paul Saas Becky Stephan
Customer Revenues Customer Costs $300 $225 200 305 80 75 75 110 350 220
Required: a. Compute the operating income for each of the five customers. b. What options should Handy-Man Services consider in light of the customer-profitability results? c. What problems might Handy-Man Services encounter in accurately estimating the operating costs of each customer? Answer: a. Customer Revenues Customer Costs Operating income Marveline Burnett $300 $225 $ 75 J Jackson 200 305 (105) Roger Jones 80 75 5 Paul Saas 75 110 (35) Becky Stephan 350 220 130 b.
1. Pay increased attention to the profitable customers Stephan and Burnett. 2. Seek ways of reducing costs and increasing revenues for the loss accounts of J Jackson and Paul Saas. Work with the customers so their behavior reduces overall costs. Reduce costs with better scheduling. Maybe a different fee schedule needs to be implemented depending on the age of the house, the distance to the home, if the repair is preventive or an emergency, etc. Determine whether the operating income pattern will probably continue or not and why. 3. As a last resort, the company may want to discontinue the Jackson account if the customer does not agree to a fee increase and the operating loss pattern is expected to continue. c.
Problems in accurately estimating operating costs of each customer include: 1. The basic underlying records may not be accurate. 2. Some repair personnel may be efficient and more experienced, others may be less experienced and slower, and still others may "chit-chat" more with the clients than others. 3. Costs that are allocated to more than one customer may be distorting operating income. For example, how is the cost of a trip for parts for three different customers allocated? Diff: 2 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 17-4
17) Each division manager for a paint manufacturer is provided with a customer profitability analysis for the past year. The managers use the analysis to determine how best to allocate the company's resources within their division, and when a customer is a "loss customer," that customer is dropped. Required: Advise (briefly) the managers on their strategy of focusing only on profitability over the year, in terms of improving the bottom line of their respective divisions. Include at least three other factors that managers should consider in deciding how to assess customer value. Answer: - short-run and long-run customer profitability - customer retention likelihood - customer growth potential - increases in overall demand from having a well-known customers - ability to learn from a customer Diff: 2 Type: ES CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-4
18) What actions might be taken with an unprofitable customer? Answer: An unprofitable customer might be dropped as a customer, might be charged more for some of the resources of the company that it is using in excess of other customers, or he/she might be counseled on how to use less resources and be restored to profitability in the future. Diff: 2 Type: ES CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 17-4
19) Customer profitability analysis is used by companies to identify the most valuable customers. Required: a. What are some of the metrics that can be used to assess customer profitability? b. What are some of the challenges companies face in customer profitability analysis? c. What are some of the ethical issues raised by customer profitability analysis? Answer: This is intended to be an open-ended question. a. Many metrics may be cited. Here are some examples. ∙ Revenue per customer ∙ Revenue per customer segment ∙ Top 10 or Bottom 10 list of customers by profit ∙ Lifetime value ∙ Expenditures per customer ∙ Customer profitability ∙ # of after sales service calls b. Customer profitability analysis (CPA) requires allocation of common services costs to customers. Improper allocation can lead to erroneous conclusions about a customer's profitability. ABC can assist here through identification of more accurate cost drivers. The time frame for measurement is a difficult variable to measure. The concept of lifetime value is considered in CPA, but the valuation and measurement is highly problematic. The opportunity costs of improper customer profitability assessment is extremely difficult to identify, let alone measure. Customers that are not profitable today may become highly profitable in the future. c. Issues of data mining, customer privacy. Issues of discrimination or unfair practices may damage reputation. There may be incentives to manipulate data. For example sales people might encourage customers to order frequently if # of orders or volume measures are used. Yet such practices may be more costly for the company. Diff: 3 Type: ES CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: Cumulative
20) Why would a manager perform customer-profitability analysis? Answer: Customer profitability analysis highlights how individual customers contribute to profitability. It helps managers determine whether customers who are contributing significantly to profits are receiving a comparable level of attention from the organization. Diff: 1 Type: ES CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 17-4
17.5 Analyze relevant profitability data, and decide whether to drop or add customers or branches. 1) A policy of dropping any customer that is currently unprofitable will eliminate, in the short run, all of the costs assigned to it. Answer: FALSE Diff: 2 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-5
2) Analyzing whether to add or drop a customer is an application of relevant costing analysis. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-5
3) Allocated corporate costs are irrelevant when analyzing whether to drop a customer. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 17-5
4) Bannock Safety Equipment Ltd. operates two stores, one in Edmonton and another in Thunderbay. The following income statements were prepared for the most recent year:
Net sales Variable costs: Cost of goods sold Sales commission Utilities Contribution margin Fixed costs: Annual building lease Salaries Allocated corporate overhead Amortization of store equipment & leasehold improvements Operating income (loss)
Edmonton Thunderbay $3,780,000 $960,000 1,512,000 189,000 17,200 $2,061,800
528,000 48,000 15,300 $368,700
84,000 380,000 750,000 60,000 $787,800
39,000 180,000 250,000 30,000 $(130,300)
The store equipment and leasehold improvements have no market value. The building leases can be cancelled without penalty. Required: a. Calculate the dollar value of sales required for each store to break-even assuming that all of the fixed costs are to be covered? b. Should management close the Thunderbay store? Assume that corporate overhead would be reduced by $100,000 if the Thunderbay store is closed. Answer: a. Edmonton ($84,000 + $380,000 + $750,000 + $60,000)/($2,061,800/$3,780,000) = $2,335,687.26 Thunderbay ($39,000 + $180,000 + $250,000 + $30,000)/($368,700/$960,000) = $1,299,267.70 b.
The inescapable corporate overhead ($150,000) and amortization ($30,000) are both irrelevant. $368,700 - ($39,000 + $180,000 + $100,000) = $49,700; therefore do not close
Diff: 3 Type: SA CPA Competencies: Chapter 17 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 17-5; 3-3
Cost Accounting: A Managerial Emphasis - Cdn. Ed., 9e (Datar) Chapter 18 Process Costing 18.1 Distinguish process- from job-costing allocation methods within the decision framework, and apply the weighted-average method of inventory valuation when the beginning work-inprocess inventory is zero. 1) The primary difference between job costing and process costing is the extent of averaging used to compute unit costs of products or services. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-1
2) Standard costing can be used in process costing systems. Answer: TRUE Explanation: Diff: 1 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-1
3) Operating personnel must be able to estimate the percentage of work-in-process completed in process costing. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-1
4) Equivalent units measure output in terms of the physical quantities of each of the inputs (factors of production) that have been consumed by the units. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-1
5) Process costing is extremely useful when there are a variety of products produced, as compared to the
production of a single product. Answer: FALSE Explanation: In a process costing system all units produced are identical (or very similar) Diff: 1 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-1
6) Examples of industries that would use process costing include the pharmaceutical and semiconductor industry. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 18-1
7) Process-costing systems separate costs into cost categories according to the timing of when costs are introduced into the process. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-1
8) When identical or similar units of products or services are mass produced, job-costing is used to calculate an average production cost for all units produced. Answer: FALSE Explanation: When identical or similar units of products or services are mass produced, process costing is used to calculate an average production cost for all units produced. Diff: 2 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-1
9) When there are insignificant amounts of beginning and ending inventory then the weighted-average and FIFO process costing methods will generate results that are not materially different. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 18-1
10) In process costing only the weighted average and FIFO methods are IFRS/ASPE compliant. Answer: FALSE Explanation: Standard costing is also IFRS/ASPE compliant. Diff: 2 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-1
11) Costing systems that are used for costing like or similar units of products in mass production are called A) inventory-costing systems. B) job-costing systems. C) process-costing systems. D) weighted-average costing systems. E) bulk costing systems. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-1
12) Which of the following manufactured products should use process costing? A) 767 jet aircraft B) bags of cement C) custom build houses D) designer original evening gowns E) expensive jewelry Answer: B Explanation: Homogeneous product Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 18-1
13) Which of the following is FALSE concerning process costing? A) Process costing can only be used in manufacturing. B) Process costing is used when outputs are homogeneous. C) In process costing, labour and overhead costs are often combined and classified as conversion costs. D) In process costing, some units will be incomplete at the end of the period. E) Process costing averages unit costs of production. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-1
14) Compare and contrast process costing and job order costing. Answer: In job costing the job or product is a distinctly identifiable product or service. Each job requires (or can require) vastly different amounts of input. Job costing is usually associated with products that are unique or heterogeneous. Thus, each job requires different amounts of input, and they can require vastly different amount of costs to finish. Job-costed products tend to be high cost per unit. Thus the costs of each (unique) job are important for planning, pricing, and profitability. In process costing, the jobs or products are similar (or homogeneous). Each job usually requires the same inputs, and results in approximately the same costs per unit. The cost of a product or service is obtained by assigning total costs to many identical or similar units. We assume each unit receives the same amount of direct material costs, direct manufacturing labour costs, and indirect manufacturing costs. Unit costs are then computed by dividing total costs by the number of units. The principal difference between process costing and job costing is the extent of averaging used to compute unit costs. As noted above in job costing, individual jobs use different quantities of production resources; whereas in process costing, we assume that each job uses approximately the same amount of resources. Diff: 3 Type: ES CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 18-1
15) The president of the Gulf Coast Refining Corporation wants to know why his golfing partner, who is the chief financial officer of a large construction company, calculates his costs by the job, but his own corporation calculates costs by large units rather than by individual barrel of oil. Answer: Oil refineries use process costing to calculate their costs per barrel of oil. Each barrel of oil is essentially the same. Thus, costs are accumulated for all the oil processed during a given time period, and the total costs are divided by the barrels of oil produced. An average cost is calculated. Since the costs to actually produce the oil are essentially the same, accuracy is not lost by this process. The construction company calculates costs by each job, since each job can require substantially different amounts of the various inputs. Thus, the cost of each job could be radically different from the other jobs. Diff: 2 Type: ES CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 18-1
16) Discuss some typical products which would likely use process costing. Answer: In a process-costing system, the units produced as output are very similar to one another. As a result, the means by which the raw material is converted to a finished product is common among all of the products. This allows the conversion costs to be summed up and divided by the total number of units for an accurate conversion cost on a unit by unit basis. Some typical types of products which are likely to use process costing are oil refineries, ice cream, various food preparation industries, etc. This is because the raw material is processed in a similar manner for all of the units produced. Diff: 1 Type: ES CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 18-1
17) What is meant by the term "prime cost pool"? Answer: A prime cost is a direct cost. In most process costing operations, labour is not treated as a direct cost, but rather as an indirect cost and is grouped with overhead as part of conversion costs. Therefore, a prime cost pool in process costing is normally the direct materials cost pool. Diff: 2 Type: ES CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 18-1
18) Why do we need to accumulate and calculate unit costs in process costing (and also job costing)? Answer: We need to accumulate unit costs to: 1. Budget (planning) 2. Price 3. Account for the costs 1. Budgeting — To operate a successful business, we should prepare budgets, review the results, and make decisions as to how well our business is doing. Our business has formulated plans for the future. The resources we need for the future (materials, conversion costs, facilities, etc.) will depend on our estimate of the resources we need to accomplish these goals. An important part of these estimates is the unit costs of the products we plan to produce. These unit costs will tell us how many dollars we must acquire to accomplish our plans. 2. Price — In order to be a profitable business, we must sell our product at a price in excess of what it costs us to produce the product. Essential for the pricing decision is the cost per unit. We will also learn whether we can sell a product at a profit. 3. Accounting — During the course of the accounting period, we will be accumulating costs. At the end of the accounting period, we must allocate this pool of costs between the units that were transferred out and the goods in ending inventory. Unit costs are essential for this purpose. Diff: 2 Type: ES CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: Cumulative
18.2 Contrast the journal entries for a process-costing system when there is and when there is not ending work-in-process inventory using the weighted-average method of inventory valuation. 1) Production costs are divided into three classifications: administrative costs, direct materials, and conversion costs in process costing. Answer: FALSE Explanation: Only inventoriable costs so administrative costs are incorrect. Diff: 2 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-2
2) Process-costing journal entries and job-costing journal entries are similar with respect to direct materials and conversion costs. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-2
3) The accounting (for a bakery) entry to record the transfer of rolls from the mixing department to the baking department is: Work in Process-Mixing Department Work in Process-Baking Department Answer: FALSE Explanation: The correct accounting entry is the opposite of the entry shown here. Diff: 2 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 18-2
4) Process-costing journal entries and job-costing journal entries are similar except for the multiple workin-process accounts in the job-costing system. Answer: FALSE Explanation: The number of WIP accounts is related to the number of processes or departments. Diff: 2 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-2
5) A key feature in process costing is that A) total costs are divided by total equivalent units. B) total units are multiplied by total costs. C) (total costs times percentage allocated to each unit) are divided by total units. D) (total units multiplied by the percentage allocated to each unit) is multiplied by total costs. E) total units are multiplied by individual costs. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 18-2
6) Which of the following is FALSE concerning equivalent units? A) Equivalent units are calculated separately for each cost category. B) Equivalent units are equal to physical units. C) Equivalent units measure output in terms of the physical quantities of the inputs consumed. D) Equivalent units are necessary when process costing is used. E) The number of equivalent units may be identical for direct materials and for conversion costs. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-2
7) When a bakery transfers goods from the Baking Department to the Decorating Department, the accounting entry is A) Work in Process — Baking Department Work in Process — Decorating Department B) Work in Process — Decorating Department Accounts Payable C) Work in Process — Decorating Department Work in Process-Baking Department D) Work in Process — Baking Department Accounts Payable E) Finished Goods - Decorating Department Work in Process-Baking Department Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 18-2
8) Alexander Ltd. began operations on October 1 of the current year. Its production requires that direct materials be added at the beginning of the process, and conversion costs are incurred uniformly. Direct materials costs for October were $380,000, and conversion costs were $1,750,000. There were 80,000 units started during the month. The ending inventory was 25,000 units, which were 60% complete. The cost per equivalent unit for direct materials was ________. A) $4.75 B) $15.20 C) $5.85 D) $5.43 E) $7.92 Answer: A Explanation: $380,000/80,000 = $4.75, direct materials are added at the beginning. Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-2
9) Axel Ltd. began operations on October 1 of the current year. Its production requires that direct materials be added at the beginning of the process, and conversion costs are incurred uniformly. Direct materials costs for October were $380,000, and conversion costs were $1,750,000. There were 80,000 units started during the month. The ending inventory was 25,000 units, which were 60% complete. The cost per equivalent unit for conversion was ________. A) $25.00 B) $21.88 C) $70.00 D) $116.67 E) $16.67 Answer: A Explanation: $1,750,000/[55,000 + 15,000] = $25 (80,000 units started, 25,000 ending, so 55,000 units started and completed in the period; 25,000 units × 60% = 15,000 EU) Diff: 3 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-2
10) Angel Industries manufactured 2,400 units of its product Huge in the month of April. It incurred a total cost of $132,000 during the month. Out of this $132,000, $45,700 was direct materials used in the product, and the rest was incurred because of the conversion cost involved in the process. Angel had no opening or closing inventory. What will be the total cost per unit of the product, assuming conversion costs contained $10,000 of indirect labour? A) $55 B) $50 C) $39 D) $35 Answer: A Explanation: Total cost per unit = $132,000 / 2,400 = $55 Diff: 3 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-2
Use the information below to answer the following question(s). Time Clock Shop manufactures clocks on an automated assembly line. It utilizes two cost categories: direct materials and conversion costs. Each product must pass through the Assembly Department and the Testing Department. Direct materials are added at the beginning of production, while conversion costs are allocated evenly throughout production. The company uses weighted-average costing. Data for the Assembly Department are: Work in process, beginning inventory Direct materials (100% complete) Conversion costs (50% complete)
250 units
Units started during June Work in process, ending inventory Direct materials (100% complete) Conversion costs (75% complete)
800 units 150 units
Work in process, beginning inventory Direct materials Conversion costs Direct materials costs added during June Conversion costs added during June
$180,000 $270,000 $1,000,000 $1,000,000
11) Which of the following entries would be made to record the issue of direct materials in the Testing Department under process-costing? A) debit to Testing Department assets B) debit to Testing Department Materials Inventory C) debit to Work in Process - Testing Department D) credit to Direct Materials E) credit to Work in Process - Testing Department Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 18-2
12) Amir Corporation was recently formed to produce a semiconductor chip that is an essential part of the personal computer manufactured by a major corporation. The direct materials are added at the start of the production process, while conversion costs are added uniformly throughout the production process. June is Amir's first month of operations, and therefore, there was no beginning inventory. Direct materials cost for the month totaled $895,000, while conversion costs equaled $4,225,000. Accounting records indicate that 475,000 chips were started in June, and 425,000 chips were completed. Ending inventory was 50% complete as to conversion costs. Required: a. What is the total manufacturing cost per chip for June? b. Allocate the total costs between the completed chips and the chips in ending inventory. Answer: a. Direct Conversion Materials Costs Total Cost to account for $895,000 $4,225,000 $5,120,000 Divided by equivalent units 475,000 450,000 Cost per equivalent units $1.88 $9.39 $11.27 Equivalent unit for conversion costs = 425,000 completed + (50,000 × 0.5 completed) = 425,000 + 25,000 = 450,000 b. Completed units = $11.27 × 425,000 = $4,789,750 Ending work in process = Direct materials = 50,000 × $1.88 = $94,000 Conversion costs = 25,000 × $9.39 = 234,750 Total $328,750 Diff: 2 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-2
13) Ashton Corporation was recently formed to produce a semiconductor chip that is an essential part of the cell phone manufactured by a major corporation. The direct materials are added at the start of the production process, while conversion costs are added uniformly throughout the production process. June is Ashton's first month of operations, and therefore, there was no beginning inventory. Direct materials cost for the month totaled $743,750, while conversion costs equaled $3,403,000. Accounting records indicate that 425,000 chips were started in June, and 395,000 chips were completed. Ending inventory was 50% complete as to conversion costs. Required: a. What is the total manufacturing cost per chip for June? b. Allocate the total costs between the completed chips and the chips in ending inventory. Answer: a. Direct Conversion Materials Costs Total Cost to account for $743,750 $3,403,000 Divided by equivalent units 425,000 410,000 Cost per equivalent units $1.75 $8.30 $10.05 Equivalent unit for conversion costs = 395,000 completed + (30,000 × 0.5 completed) = 410,000 equivalent units b. Completed units = $10.05 × 395,000 = $3,969,750 Ending work in process = Direct materials = 30,000 × $1.75 = $52,500 Conversion costs = 15,000 × $8.30 = 124,500 Total $177,000 Diff: 2 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-2
14) Treated Lumber Company specializes in processing treated wood. All direct materials are included at the inception of the sawing process and conversion is applied at the end of the process. For December there was no beginning inventory in the sawmill. Direct materials totalled $399,750 for the month and conversion costs totalled $165,000. work-in-process records revealed that 75,000 boardmetres were started in December and that 55,000 boardmetres were completed. Ending work-in-process units are complete only in respect to direct materials costs. Required: a. What is the total manufacturing cost per equivalent unit (boardmetres) for December? b. What are the costs assigned to completed boardmetres in December? c. What are the costs transferred out during December? d. What are the amounts assigned to December's ending work-in-process inventory? Answer: a. Materials Conversion Totals Cost to account for: $399,750 $165,000 $564,750 Equivalent units: 75,000 55,000 Cost per equivalent unit $5.33 $3.00 $8.33 b. Assigned to completed units: (55,000 × $8.33) = $458,150 c. Transferred out: (55,000 × $8.33) = $458,150 d. Ending work-in-process inventory: Direct materials (20,000 × $5.33) $106,600 Conversion (0 × $3.00) 0 Total $106,600 Diff: 2 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-2
15) The Parson Valve Corporation was recently formed to produce a brass valve that forms an essential part of a compressor manufactured by a major corporation. The direct materials are added at the start of the production process while conversion costs are added uniformly throughout the production process. September is Parson's first month of operations, and therefore, there was no beginning inventory. Direct materials cost for the month totaled $1,400,000, while conversion costs equaled $1,800,000. Accounting records indicate that 800,000 valves were started in September and 700,000 valves were completed. Ending inventory was 20% complete as to conversion costs. Required: a. What is the total manufacturing cost per valve for September? b. Allocate the total costs between the completed valves and the valves in ending inventory. Answer: a. Direct Conversion Materials Costs Total Cost to account for $1,400,000 $1,800,000 $3,200,000 Divided by equiv. units 800,000 720,000 Cost per equivalent units $1.75 $2.50 $4.25 Equivalent unit for conversion costs = 700,000 completed + (100,000 × 0.2 completed) = 700,000 + 20,000 = 720,000 b. Completed units = $4.25 × 700,000 =
$2,975,000
Ending work in process = Direct materials = 100,000 × $1.75 = Conversion costs = 20,000 × $2.50 = Total
$175,000 50,000 $225,000
Diff: 2 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-2
16) Cedar Rapids Chemical placed 220,000 liters of direct materials into the mixing process. At the end of the month, 10,000 liters were still in process, 30% converted as to labour and factory overhead. All direct materials are placed in mixing at the beginning of the process and conversion costs occur evenly during the process. Cedar Rapids Chemical uses weighted-average costing. Required: Determine the equivalent units in process for direct materials and conversion costs, assuming there was no beginning inventory. Answer: a. Direct materials: Beginning inventory 0 liters Units started 220,000 liters Equivalent units 220,000 liters Conversion costs: Beginning inventory Units started To account for Units transferred out Ending inventory Units transferred out Ending inventory, 30% complete Equivalent units
0 liters 220,000 liters 220,000 liters 210,000 liters 10,000 liters 210,000 liters 3,000 liters 213,000 liters
Diff: 2 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-2
17) List and describe the five steps in process costing. Answer: Step 1 involves summarizing the physical flow of the units of output. Step 2 involves determining the number output expressed in terms of equivalent units. This means determining how many complete units would have been done with the materials, time, and effort expended had units been done one at a time. The third step involves computing the cost per equivalent unit—determining how much a whole unit cost for each item this period. In the fourth step, the costs that need to be assigned to the units are summarized. The fifth step involves assigning the costs to the completed units and the units still remaining in work in process. Diff: 2 Type: ES CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-2
18.3 Apply the weighted-average method of process costing to calculate the cost of goods manufactured and transferred out when there is both beginning and ending work-in-process inventory. 1) The final result of the process costing procedure is to compute the dollar amount of the credit to a work-in-process account and the corresponding debit to finished goods and/or other work-in-process accounts. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-2; 18-3
2) The weighted-average process costing method assigns the cost of the earliest equivalent units available to units completed and transferred out, and the cost of the most recent equivalent units worked on during the period to ending work-in-process inventory. Answer: FALSE Explanation: This is true for FIFO, not weighted-average. Diff: 2 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-2; 18-3
3) The weighted-average process costing method distinguishes between units started in the previous period but completed during the current period and units started and completed during the current period. Answer: FALSE Explanation: The weighted-average method groups beginning inventory units with those started during the period for calculation purposes. Diff: 2 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-2; 18-3
4) In the weighted-average method, costs of units completed and transferred out, and in ending work-inprocess, are calculated using average total costs obtained after merging costs of beginning work-inprocess and costs added in the current period. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-2; 18-3
5) Unit costs do not fluctuate between periods. Answer: FALSE Explanation: Unit costs will fluctuate when the ratio of inputs to outputs change, and when costs change. Diff: 2 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-1; 18-2; 18-3
6) In the weighted-average costing method, the costs of direct materials in beginning inventory are not included in the cost per unit calculation since direct materials are almost always added at the start of the production process. Answer: FALSE Explanation: The costs of the direct materials are included in the cost per unit calculation. Diff: 2 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-3
7) Equivalent units in beginning work in process plus equivalent units of work done in the current period equals equivalent units completed and transferred out in the current period minus equivalent units in ending work in process. Answer: FALSE Explanation: The second part of the equation should be: equivalent units completed and transferred out in the current period PLUS equivalent units in ending work in process. Diff: 2 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-3
8) In process costing the end of period journal entry to record $10,000 of ending inventory requires a debit
to the ending inventory account and a credit to work-in-process inventory. Answer: FALSE Explanation: No entry is required to record the value of the ending inventory unless it is being written down. Diff: 2 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
9) Which of the following is an assumption implicit in process-costing? A) All completed units receive more direct material inputs than units in process. B) All completed units receive less direct material inputs than units in process. C) Opening inventory is always nil, for the cost calculations. D) Ending inventory is always nil, for the cost calculations. E) All completed units receive the same amount of direct material inputs and the same amount of conversion costs. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 18-1; 18-2; 18-3
10) Which of the following is NOT one of the procedures in process costing? A) summarize the flow of physical units of output B) assign costs to equivalent units based on their percentage of completion C) compute equivalent unit costs D) summarize total costs to account for E) assign costs to completed units Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 18-2; 18-3
11) The assembly department of Sofia Technologies had 200 units as work in process at the beginning of the month. These units were 45% complete. It has 300 units which are 25% complete at the end of the month. During the month, it completed and transferred 650 units. Direct materials are added at the beginning of production. Conversion costs are allocated evenly throughout production. Sofia uses weighted-average process-costing method. What is the number of equivalent units of work done during the month with regards to direct materials? A) 750 units B) 1100 units C) 900 units D) 600 units Answer: A Explanation: Equivalent units for direct material = 650 units + 300 units – 200 units = 750 units Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-3
12) Which of the following is NOT true of the weighted-average process-costing method? A) The method calculates the cost per equivalent unit of all work done to date regardless of the accounting period in which the work was done. B) The costs in work in process (beginning work in process) when the period starts are not considered when calculating the weighted-average cost per equivalent unit. C) The weighted-average cost is the total of all costs entering the work in process account divided by the total equivalent units in the ending work-in-process inventory. D) The costs to account for are equal to the beginning work in process plus the costs added to work in process during the same period. Answer: B Diff: 3 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-3
13) Which of the following assertions is TRUE concerning conversion costs? A) Direct labour costs are always included in conversion costs. B) The conversion period (for conversion costs calculation) can only include one operation. C) When conversion costs are estimated to be over 80% complete, then the cost-benefit constraint requires us to use 100% as the estimate. D) Conversion costs are impossible to estimate with any reliability. E) The conversion period often includes several operations, and it may be impossible to estimate conversion costs with any reliability in some cases. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 18-2; 18-3
Use the information below to answer the following question(s). Plastic Molding, Inc.'s costing system utilizes two cost categories; direct materials and conversion costs. Each product must pass through the Assembly Department and the Testing Department. Direct materials are added at the beginning of production. Conversion costs are allocated evenly throughout production. Data for the Assembly Department for March are: Work in process, beginning inventory, 40% converted Units started during March Work in process, ending inventory
400 units 1,200 units 200 units
Work in process, beginning inventory: Direct materials Conversion costs Direct materials costs added during March Conversion costs added during March
$200,000 $200,000 $2,000,000 $2,500,000
14) How many units were completed and transferred out of the Assembly Department during March? A) 200 units B) 1,200 units C) 1,400 units D) 1,600 units E) 1,720 units Answer: C Explanation: 400 units + 1,200 units - 200 units = 1,400 units Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
15) What is the unit cost for February in the Assembly Department? A) $1,000 B) $1,750 C) $3,500 D) $3,750 E) $3,900 Answer: B Explanation: Direct materials per unit ($200,000/400 units) $500 Conversion costs per unit ($200,000/(400 × 0.40) units) 1,250 Total costs per unit $1,750 Diff: 3 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
16) Which of the following journal entries correctly reflects the transfer of goods completed from the Assembly Department to the Testing Department? A) Work in Process - Assembly Work-in-process - Testing
XXX
B) Work in Process - Testing Work-in-process - Assembly
XXX
C) Work in Process - Assembly Finished Goods - Testing
XXX
D) Finished Goods - Testing Work-in-process - Assembly
XXX
E) Finished Goods - Testing Work-in-process - Testing
XXX
XXX
XXX
XXX
XXX
XXX
Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-2; 18-3
17) Beginning inventory contained 5,000 units of goods that were 40 percent complete as to direct material, and 50 percent complete as to conversion. What is the equivalent units completed for materials and conversion at the beginning of the year, respectively? Assume that both types of costs are incurred evenly throughout the process. A) 5,000 and 5,000 B) 1,000 and 5,000 C) 3,000 and 2,500 D) 2,000 and 2,500 E) 0 and 5,000 Answer: D Explanation: Materials (0.40 × 5,000) 2,000 units Conversion (0.50 × 5,000) 2,500 units Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
18) The final step of the accounting for processes with respect to process costing is to A) compute the amount of debits to work-in-process. B) compute the amount of credits to work-in-process. C) compute the equivalent units for the period. D) account for all units placed in process during the period. E) account for all units in ending inventory at the end of the period. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 18-2; 18-3
Use the information below to answer the following question(s). Time Clock Shop manufactures clocks on an automated assembly line. It utilizes two cost categories: direct materials and conversion costs. Each product must pass through the Assembly Department and the Testing Department. Direct materials are added at the beginning of production, while conversion costs are allocated evenly throughout production. The company uses weighted-average costing. Data for the Assembly Department are: Work in process, beginning inventory Direct materials (100% complete) Conversion costs (50% complete)
250 units
Units started during June Work in process, ending inventory Direct materials (100% complete) Conversion costs (75% complete)
800 units 150 units
Work in process, beginning inventory Direct materials Conversion costs Direct materials costs added during June Conversion costs added during June
$180,000 $270,000 $1,000,000 $1,000,000
19) What are the equivalent units for direct materials and conversion costs at Time Clock Shop, respectively? A) 1,200.5 units; 1,160.64 units B) 1,050 units; 1,012.5 units C) 1,050 units; 887.5 units D) 962 units; 990 units E) 990 units; 962 units Answer: B Explanation: Direct materials Conversion costs Completed and transferred out: 900 900.0 Work in process, ending: 150 112.5 Total equivalent units: 1,050 1,012.5 Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
20) What is the total amount debited to the work-in-process account during the month of June at Time Clock Shop? A) $450,000 B) $2,000,000 C) $2,270,000 D) $2,450,000 E) $3,250,000 Answer: B Explanation: $1,000,000 + $1,000,000 = $2,000,000 Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
21) What is the direct materials cost per equivalent unit during June at Time Clock Shop? A) $982.92 B) $1,226.61 C) $952.38 D) $1,123.81 E) $1,000.00 Answer: D Explanation: $180,000 + $1,000,000 = $1,180,000 $1,180,000/1,050 units = $1,123.81 Diff: 3 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
22) What is the conversion cost per equivalent unit in June at Time Clock Shop? A) $1,254.32 B) $1,430.99 C) $987.65 D) $1,282.83 E) $1,320.17 Answer: A Explanation: $270,000 + $1,000,000 = $1,270,000 $1,270,000/1,012.5 = $1,254.32 Diff: 3 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
23) What amount of conversion costs are assigned to ending work-in-process for June at Time Clock
Shop? A) $160,986.38 B) $137,993.63 C) $141,111.00 D) $188,148.00 E) $111,110.63 Answer: C Explanation: (150 units × 75%) × $1,254.32 = $141,111 Diff: 3 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
24) Process-costing systems separate costs into cost categories according to which factor(s)? A) physical units B) indirect labour C) fixed and variable costs D) standard costs E) direct materials, conversion costs, and in some cases, transferred-in costs Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-2; 18-3
25) Which one of the following methods focuses on the total costs and total equivalent units completed to date? A) equivalent-units method B) first-in, first-out method C) standard-costs method D) weighted-average method E) last-in, last-out method Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-2; 18-3
26) When using the weighted-average method, work completed in beginning work-in-process and work done during the current period are included in the A) equivalent units. B) process units. C) qualitative units. D) standard units. E) normal units. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-2; 18-3
Use the information below to answer the following question(s). Solid Furniture had 60,000 foam cushions in process on May 1 (70% converted) and 40,000 cushions in process on May 31 (50% converted). All direct materials are added at the beginning of the production process. During the month, 140,000 cushions were transferred to finished goods. 27) What is Solid Furniture's equivalent units for materials costs for May using the weighted average method? A) 180,000 cushions B) 160,000 cushions C) 140,000 cushions D) 118,000 cushions E) 123,000 cushions Answer: A Explanation: 120,000 cushions + 60,000 cushions = 180,000 cushions; or 140,000 cushions + 40,000 cushions = 180,000 cushions Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
28) What is Solid Furniture's equivalent units for conversion costs for May using the weighted average method? A) 180,000 cushions B) 160,000 cushions C) 140,000 cushions D) 118,000 cushions E) 123,000 cushions Answer: B Explanation: (40,000 cushions × 50%) = 20,000 cushions 20,000 cushions + 140,000 cushions = 160,000 cushions Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
29) How many cushions were started during May at Solid Furniture? A) 60,000 cushions B) 120,000 cushions C) 140,000 cushions D) 180,000 cushions E) 223,000 cushions Answer: B Explanation: 60,000 cushions + X - 40,000 cushions = 140,000 cushions X = 140,000 cushions - 20,000 cushions; X = 120,000 cushions Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
Use the information below to answer the following question(s). Ali Disk Company operates a computer disk manufacturing plant. Direct materials are added at the end of the process. The following data were presented for August: Work in process, beginning inventory Transferred-in costs (100% complete) Direct materials (0% complete) Conversion costs (90% complete)
100,000 units
Transferred in during current period Completed and transferred out
300,000 units 350,000 units
Work in process, ending inventory Transferred-in costs (100% complete) Direct materials (0% complete) Conversion costs (65% complete) 30) Calculate the equivalent units for conversion costs at Ali Disk Company using the weighted-average method. A) 300,000 units B) 350,000 units C) 382,500 units D) 450,920 units E) 499,000 units Answer: C Explanation: Completed and transferred out 350,000 units Ending work-in-process (50,000 × .65) 32,500 units 382,500 units Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
31) Calculate equivalent units for direct materials at Ali Disk Company using the weighted-average method. A) 100,000 units B) 350,000 units C) 400,000 units D) 450,000 units E) 499,000 units Answer: B Explanation: 350,000 units + 0 units = 350,000 units Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
Answer the following questions using the information below: Amelia Tractor Company manufactures small garden tractors on a highly automated assembly line. Its costing system uses two cost categories, direct materials and conversion costs. Each tractor must pass through the Assembly Department and the Testing Department. Direct materials are added at the beginning of the production process. Conversion costs are allocated evenly throughout production. Amelia Tractor uses weighted-average costing. Data for the Assembly Department for April are: Work in process, beginning inventory Direct materials (100% complete) Conversion costs (40% complete) Units started during April Work in process, ending inventory: Direct materials (100% complete) Conversion costs (80% complete) Costs for April: Work in process, beginning inventory: Direct materials Conversion costs Direct materials costs added during June Conversion costs added during June
40 units
1,200 units 250 units
$230,000 $220,000 $700,000 $1,175,000
32) What are Amelia Company's equivalent units for direct materials and conversion costs, respectively, for April? A) 1,350 units; 1,350 units B) 1,850 units; 1,690 units C) 1,240 units; 1,190 units D) 250 units; 200 units E) 1,600 units; 1,350 units Answer: C Explanation: Direct materials Conversion costs Completed and transferred out 1,350 1,350 Work in process, ending 250 200 Total equivalent units 1,240 1,190 Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
33) What is the total amount credited to Amelia Company's work-in-process account during the month of April? A) $1,875,000.00 B) $2,370,000.00 C) $1,903,047.30 D) $2,295,937.50 E) $450,000.00 Answer: C Explanation: Equivalent unit cost = $750 for DM [$930,000/1,240] + $1,172.27 for CC [$1,395,000/1,190] $1,922.27 × 990 units completed and transferred out = $1,903,047.30 Diff: 3 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
34) What is Amelia Company's direct materials cost per equivalent unit during April? A) $1,250.00 B) $1,241.94 C) $575.00 D) $750.00 E) $900.00 Answer: D Explanation: Direct materials Conversion costs Completed and transferred out 990 990 Work in process, ending 250 200 Total equivalent units 1,240 1,190 $230,000 + $700,000 = $930,000 $930,000/1,240 units = $750.00 Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
35) What is Amelia Company's conversion cost per equivalent unit in April? A) $1,250.00 B) $1,172.27 C) $575.00 D) $581.25 E) $1,241.94 Answer: B Explanation: Direct materials Conversion costs Completed and transferred out 990 900 Work in process, ending 250 200 Total equivalent units 1,240 1,190 $220,000 + $1,175,000 = $1,395,000 $1,395,000/1,190 units = $1,172.27 Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
36) What amount of direct materials costs are assigned to Amelia Company's ending work-in-process account for April? A) $248,387.10 B) $250,000.00 C) $143,750.00 D) $187,500.00 E) $116,250.00 Answer: D Explanation: Direct materials Conversion costs Completed and transferred out 990 990 Work in process, ending 250 200 Total equivalent units 1,240 1,190 $230,000 + $700,000 = $930,000 $930,000/1,240 units = $750 250 units × $750 = $187,500 Diff: 3 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
37) What amount of conversion costs are assigned to Amelia Company's ending work-in-process account for April? A) $143,750.00 B) $145,312.50 C) $234,454.00 D) $250,000.00 E) $116,250.00 Answer: C Explanation: Direct materials Conversion costs Completed and transferred out 990 990 Work in process, ending 250 200 Total equivalent units 1,240 1,190 $220,000 + $1,175,000 = $1,395,000 $1,395,000/1,190 units = $1,172.27 200 units × $1,172.27 = $234,454 Diff: 3 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
38) Weighty Steel processes a single type of steel. For the current period the following information is given:
Beginning Inventory Started During the Current Period Ending Inventory
Units Material Costs Conversion Costs 3,000 $ 4,500 $ 5,400 20,000 $32,000 $78,200 2,500
All materials are added at the beginning of the production process. The beginning inventory was 40% complete as to conversion, while the ending inventory was 30% completed for conversion purposes. Weighty uses the weighted-average costing method. What is the total cost assigned to the units completed and transferred this period? A) $107,010 B) $109,440 C) $113,160 D) $120,100 Answer: C Explanation: EU (materials) = 20,500 + (2,500 × 100%) = 23,000. ($4,500 + $32,000)/23,000 = $1.59 per unit for material EU (conversion) = 20,500 + (2,500 × 30%) = 21,250. ($5,400 + $78,200)/21,250 = $3.93 per unit for conversion. Total cost per unit = $1.59 + $3.93 = $5.52 Cost of transferred units = 20,500 × $5.52 = $113,160 Diff: 3 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
Answer the following questions using the information below: Dustin Plastics, Inc., manufactures plastic moldings for car seats. Its costing system uses two cost categories, direct materials and conversion costs. Each product must pass through Department A and Department B. Direct materials are added at the beginning of production. Conversion costs are allocated evenly throughout production. Data for Department A for February 2018 are: Work in process, beginning inventory, 40% converted Units started during February Work in process, ending inventory: 30% complete as to conversion costs 100% complete as to materials Costs for the Department A for February 2018 are: Work in process, beginning inventory: Direct materials Conversion costs Direct materials costs added during February Conversion costs added during February
200 units 600 units 100 units
$200,000 $200,000 $2,000,000 $2,500,000
39) What were the equivalent units of direct materials and conversion costs, respectively, for February? Assume Dustin Plastics, Inc., uses the weighted-average process costing method. A) 800; 730 B) 800; 800 C) 800; 700 D) 600; 500 E) 700; 630 Answer: A Explanation: Ending inventory = 700 + 100 = 800 Conversion costs = 700 + (100 × 30%) = 730 Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
40) What is the material cost per equivalent unit in Department A? A) $2,000 B) $2,750 C) $3,667 D) $2,500 E) $3,143 Answer: B Explanation: ($200,000 + $2,000,000)/800 = $2,750 Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
41) What is the conversion cost per equivalent unit in Department A? A) $5,400 B) $3,425 C) $3,571 D) $3,699 E) 3,857 Answer: D Explanation: ($200,000 + $2,500,000)/730 = $3,698.63 Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
42) What is the total amount transferred to Department B in February? A) $4,112,500 B) $4,450,000 C) $5,200,000 D) $6,346,900 E) $4,514,300 Answer: E Explanation: 700 units × ($2,750 + $3,699) = $4,514,300 Diff: 3 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
43) What is the total amount of the work-in-process ending inventory for Department A at the end of February? A) $ 385,970 B) $619,900 C) $ 315,571 D) $ 276,157 E) $315,571 Answer: A Explanation: (100 units × $2,750) + [(100 × 0.30) × $3,699] = $385,970 Diff: 3 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
44) The following production-cost worksheet has been prepared for the month of December for Ag Chemical. Production-Cost Worksheet Weighted-Average Method of Process Costing Ag Chemical December, 2019 Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent unit costs
Totals $36,000 114,000 $150,000 $9.60
Assignment of costs: Costs transferred out (12,000 × $9.60) Work in process, ending: Direct materials (8,000 × $2.6) Conversion (2,000 × $7) Costs accounted for
Direct Materials Conversion $12,000 $24,000 40,000 74,000 $52,000 $98,000 20,000 14,000 $2.60 $7.00
$115,200 20,800 14,000 $150,000
Required: Prepare general journal entries for the following: a. Record costs of materials put into process for December. b. Record conversion costs put into process in December. c. Record goods transferred-out to finished goods for December. Answer: a. Work in Process 40,000 Materials Inventory 40,000 b. Work in Process Various accounts
74,000
c. Finished Goods Work in Process
115,200
74,000
115,200
Diff: 2 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
45) The following production-cost worksheet has been prepared for the month of December for BBM Manufacturing Ltd. Production-Cost Worksheet Weighted-Average Method of Process Costing BBM Manufacturing Ltd. December, 2019 Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent unit costs
Totals $26,000 115,000 $141,000 $6.70
Assignment of costs: Costs transferred out (16,000 × $6.70) Work in process, ending: Direct materials (14,000 × $1.70) Conversion (2,000 × $5) Costs accounted for
Direct Materials Conversion $16,000 $10,000 35,000 80,000 $51,000 $90,000 30,000 18,000 $1.70 $5.00
$107,200 23,800 10,000 $141,000
Required: Prepare general journal entries for the following: a. Record costs of materials put into process for December. b. Record conversion costs put into process in December. c. Record goods transferred-out to finished goods for December. Answer: a. Work in Process 35,000 Materials Inventory 35,000 b. Work in Process Various accounts
80,000
c. Finished Goods Work in Process
107,200
80,000
107,200
Diff: 2 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
46) Scarborough Chemical placed 440,000 litres of direct materials into the mixing process. At the end of the month, 20,000 litres were still in process, 30 percent converted as to labour and factory overhead. All direct materials are placed in mixing at the beginning of the process and conversion costs occur evenly during the process. Scarborough Chemical uses weighted-average costing. Required: a. Determine the equivalent units in process for direct materials and conversion costs assuming there was no beginning inventory. b. Determine the equivalent units in process for direct materials and conversion costs assuming that a beginning inventory of 24,000 litres of chemicals were 40 percent complete as to conversion costs prior to the addition of the 440,000 litres. Answer: a. Direct materials: Beginning inventory 0 litres Units started 440,000 litres Equivalent units 440,000 litres Conversion costs: Beginning inventory Units started To account for Units transferred out Ending inventory
0 litres 440,000 litres 440,000 litres 420,000 litres 20,000 litres
Units transferred out Ending inventory 30 percent complete Equivalent units
420,000 litres 6,000 litres 426,000 litres
b. Direct materials: Beginning inventory, 100% Units started Equivalent units
24,000 litres 440,000 litres 464,000 litres
Conversion costs: Completed and transferred out Ending inventory 30 percent complete Equivalent units
444,000 litres 6,000 litres 450,000 litres
Diff: 2 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-2; 18-3
47) Calendar Time Company prints calendars. All direct materials are included at the inception of the printing process. There were 20,000 units in beginning inventory with a direct material cost of $1,000 in March. Direct materials totalled $26,000 for the month. work-in-process records revealed that 160,000 calendars were started in March and that a total of 144,000 were completed. Ending work-in-process units are complete in respect to direct materials costs and contain no labour and overhead costs. The weightedaverage method is used by Calendar Time. Required: a. Determine the equivalent units of materials. b. What are the material costs assigned to completed calendars? c. What amount of materials is assigned to the ending work-in-process inventory? Answer: a. Physical Units: Equivalent units Beginning inventory 20,000 Units completed 144,000 Units started 160,000 Ending inventory 36,000 To account for 180,000 Equivalent units 180,000 Units completed -144,000 Ending inventory 36,000 b. Materials Cost to account for Beginning work-in-process Current period Total costs to account for Equivalent units Cost per equivalent unit
$1,000 26,000 $27,000 180,000 $0.15
Assigned to good units (144,000 × $0.15)
$21,600
c. Ending work-in-process (36,000 × $0.15)
$5,400
Diff: 2 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
48) Amana Woolens is a manufacturer of wool cloth. The information for March is as follows: Beginning work in process Units started Units completed Beginning work-in-process direct materials Beginning work-in-process conversion Direct materials added during month Direct manufacturing labour during month Factory overhead
20,000 units 40,000 units 50,000 units $ 12,000 $ 5,200 $60,000 $24,000 $ 10,000
Beginning work in process was half converted as to labour and overhead. Direct materials are added at the beginning of the process. All conversion costs are incurred evenly throughout the process. Ending work in process was 60% complete. Required: Prepare a production cost worksheet using the weighted-average method. Include any necessary supporting schedules.
Answer:
PRODUCTION COST WORKSHEET
Flow of production Physical Units Direct Materials Work in process, beginning 20,000 Started during period 40,000 To account for 60,000 Units completed Work in process, ending Accounted for Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent unit costs
50,000 10,000 60,000
50,000 10,000 60,000
Conversion
50,000 6,000 56,000
Totals Direct Materials Conversion $ 17,200 $ 12,000 $ 5,200 94,000 60,000 34,000 $111,200 $72,000 $39,200 60,000 56,000 $ 1.90 $ 1.20 $ 0.70
Assignment of costs Costs transferred out (50,000 × $1.90) Work in process, ending Direct materials (10,000 × $1.20) Conversion (10,000 × $0.70 × 0.60) Costs accounted for
$95,000 12,000 4,200 $111,200
Diff: 3 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
49) Jordana Woolens is a manufacturer of wool cloth. The information for March is as follows: Beginning work in process Units started Units completed Beginning work-in-process direct materials Beginning work-in-process conversion Direct materials added during month Direct manufacturing labour during month Factory overhead
10,000 units 20,000 units 25,000 units $ 6,000 $ 2,600 $30,000 $12,000 $ 5,000
Beginning work in process was half converted as to labour and overhead. Direct materials are added at the beginning of the process. All conversion costs are incurred evenly throughout the process. Ending work in process was 60% complete. Required: Prepare a production cost worksheet using the weighted-average method. Include any necessary supporting schedules.
Answer:
PRODUCTION COST WORKSHEET
Flow of production Physical Units Direct Materials Work in process, beginning 10,000 Started during period 20,000 To account for 30,000 Units completed Work in process, ending Accounted for Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent unit costs
25,000 5,000 30,000
25,000 5,000 30,000
Conversion
25,000 3,000 28,000
Totals Direct Materials Conversion $ 8,600 $ 6,000 $ 2,600 47,000 30,000 17,000 $55,600 $36,000 $19,600 30,000 28,000 $ 1.90 $ 1.20 $ 0.70
Assignment of costs Costs transferred out (25,000 × $1.90) Work in process, ending Direct materials (5,000 × $1.20) Conversion (5,000 × $0.70 × 0.60) Costs accounted for
$47,500 6,000 2,100 $55,600
Diff: 3 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
50) Four Seasons Company makes snow blowers. Materials are added at the beginning of the process and conversion costs are uniformly incurred. At the beginning of September the work-in-process is 40 percent complete and at the end of the month it is 60 percent complete. Other data for the month include: Beginning work-in-process inventory Units started Units placed in finished goods Conversion costs Cost of direct materials Beginning work-in-process costs: Materials Conversion
1,600 units 2,000 units 3,200 units $200,000 $260,000 $154,000 $82,080
Required: a. Using the weighted-average method determine the assignment of costs to units transferred-out and ending inventory. b. Prepare journal entries to record transferring of material and conversion costs to work-in-process; and, the cost of the units completed and transferred from processing to finished goods.
Answer: a. Production Cost Worksheet Flow of Production Work in process, beginning Started during period To account for
Physical units Direct materials Conversion 1,600 2,000 3,600
Units completed Work in process ending Accounted for
Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent unit costs Assignment of costs: Completed units (3,200 × $197) Work in process, ending Direct materials (400 × $115) Conversion (400 × $82 × 0.60) Costs accounted for b. Work-in-process Materials Inventory Various Accounts
3,200 400 3,600
3,200 400 3,600
Totals $236,080 460,000 $696,080
Direct materials $154,000 260,000 $414,000 3,600 $115
$197
$630,400 65,680
$46,000
3,200 240 3,440
Conversion $82,080 200,000 $282,080 3,440 $82
$19,680
$696,080 460,000
Finished Goods Inventory 630,400 Work-in-Process Inventory
260,000 200,000
630,400
Diff: 3 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3
51) Creative Colors Paint Company placed 315,000 litres of direct materials into the mixing process. All direct materials are placed in mixing at the beginning of the process and conversion costs occur evenly during the process. Creative Colors uses weighted-average costing. The initial forecast for the end of the month was to have 75,000 litres still in process, 15% converted as to labour and factory overhead. Required: a. Determine the total equivalent units (in process and transferred out) for direct materials and for conversion costs, assuming there was no beginning inventory. b. With the installation of a new paint processing filtration device, the forecast for the end of the month was to have 50,000 litres still in process, 70% converted as to labour and factory overhead. In this event, determine the equivalent units (in process and transferred out) for direct materials and for conversion costs, assuming there was no beginning inventory.
Answer: a. Direct materials: Beginning inventory Units started Equivalent units
0 litres 315,000 litres 315,000 litres
Conversion costs: Beginning inventory Units started To account for Units transferred out Ending inventory
0 litres 315,000 litres 315,000 litres 240,000 litres 75,000 litres
Units transferred out Ending inventory, 15% complete Equivalent units b.
240,000 litres 11,250 litres 251,250 litres
Direct materials: Beginning inventory Units started Equivalent units
0 litres 315,000 litres 315,000 litres
Conversion costs: Beginning inventory Units started To account for Units transferred out Ending inventory
0 litres 315,000 litres 315,000 litres 265,000 litres 50,000 litres
Units transferred out Ending inventory, 70% complete Equivalent units
265,000 litres 35,000 litres 300,000 litres
Diff: 2 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-2; 18-3
52) Marv and Vicki own and operate a vegetable canning plant. In recent years their business has grown tremendously and at any point in time they may have 30 to 35 different vegetables being processed. Also, during the peak summer months there are several thousand bushels of vegetables in some stage of being processed at any one time. With the company's growth during the past few years the owners decided to employ an accountant to provide cost estimations on each vegetable category and prepare monthly financial statements. Although the accountant is doing exactly as instructed, Marv and Vicki are confused about the monthly operating costs. Although they process an average of 50,000 canned units a month, the monthly production report fluctuates wildly. Required: Explain how income can fluctuate when sales are relatively stable. Answer: It appears that the accountant may not be using equivalent units of production but is only including completed units when preparing the monthly reports. Particularly with large summer inventories, the number and value of costs associated with ending work-in-process could cause wide fluctuations between months if the equivalent unit concept is ignored. The accountant should start using equivalent units to determine the costs to assign to finished goods and ending work-in-process each month. Diff: 2 Type: ES CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-1; 18-2; 18-3
18.4 Analyze weighted-average, FIFO, and standard-costing methods of inventory valuation of cost of goods manufactured and transferred out. 1) The first-in, first-out process-costing method computes unit costs by confining equivalent units to work only done during the current period. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-4
2) Process-costing systems using standard costs usually accumulate actual costs separately from the inventory accounts. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-4
3) The cost of units completed can differ materially between the weighted average and the FIFO methods of process costing. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-4
4) A distinctive feature of the FIFO process costing method is that the work done on beginning inventory before the current period is averaged with work done in the current period. Answer: FALSE Explanation: A distinctive feature of the FIFO process costing method is that the work done on beginning inventory before the current period is kept separate from work done in the current period. Diff: 2 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-4
5) The first-in, first-out process-costing method assumes that units in beginning inventory are completed during the current accounting period. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-4
6) Activity-based costing has more applicability in a process-costing system than in a job-costing environment. Answer: FALSE Explanation: Activity-based costing is less applicable to process costing because the process-costing units all go through similar processes. Diff: 2 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-4
7) Standard costing is not possible in a firm that uses process costing. Answer: FALSE Explanation: Standard costing is possible in a firm that uses process costing. Diff: 2 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-4
8) The first-in, first-out (FIFO) process costing method assigns the cost of the previous accounting period's equivalent units in beginning work-in-process inventory to the first units completed and transferred out of the process. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-4
9) The weighted average method of process costing assigns the cost of equivalent units worked on during the current period first to complete beginning inventory, next to start and complete new units, and finally to units in ending work-in-process inventory. Answer: FALSE Explanation: The FIFO method of process costing assigns the cost of equivalent units worked on during the current period first to complete beginning inventory, next to start and complete new units, and finally to units in ending work-in-process inventory. Diff: 2 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-3; 18-4
10) Select the TRUE statement regarding process costing. A) The degree of completion for conversion costs in ending work-in-process depends on the amount of direct materials used during the period. B) Because it tracks beginning inventory's actual costs of completion, the weighted-average method is the most accurate process costing system. C) Estimating the degree of completion is usually easier for conversion costs than for transferred-in costs. D) Estimating the degree of completion is usually easier for direct materials than for conversion costs. E) The accuracy of the completion percentages depends on the accounting system used. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 18-3; 18-4
11) The first-in, first-out method computes unit costs by A) dividing total units by units completed this period. B) confining equivalent units to the work completed during the current period only. C) the standard-costing method. D) separately identifying the conversion costs of beginning and ending inventories. E) adding opening inventory units to work-in-process units and dividing by total cost. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-4
Use the information below to answer the following question(s). Hollywood North Magic, a cosmetic manufacturer, began operations in January. During the first month of operations, $60,000 was incurred for direct materials and $80,000 was incurred for conversion costs. During January, 30,000 litres of cosmetics were started and 6,000 litres were unfinished at the end of the month. Ending work-in-process was 45% completed. All inputs are added evenly throughout the production process. 12) Calculate the equivalent units for conversion costs in January using the FIFO method. A) 24,000 litres B) 26,700 litres C) 30,000 litres D) 36,000 litres E) 39,000 litres Answer: B Explanation: (30,000 - 6,000) + (6,000 × 0.45) = 26,700 litres Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
13) What is the materials cost per unit in January using the FIFO method? A) $2.00 B) $1.67 C) $2.25 D) $2.50 E) $3.00 Answer: C Explanation: $60,000/26,700 = $2.25 Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
14) Which of the following items is NOT a component of "total costs to be accounted for in a given department's operations" when using process costing? A) direct manufacturing labour used in the given department B) the cost of materials requisitioned and used by the given department C) transferred-in costs from the prior processing department D) transferred-out costs to the next department E) conversion costs Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-3; 18-4
15) Bag Company had a beginning inventory of 4,000 bags with costs of $18,000 on January 1. The direct materials were complete and all overhead had been assigned; however, only 40 percent of direct manufacturing labour was added in the prior period. Another 20,000 units were started and completed during the current period. Bag Company uses FIFO process-costing and calculated equivalent unit costs as follows: materials, $8.00; labour, $9.00; and overhead, $5.00. What is the total cost of goods transferred out using the FIFO method? A) $440,000 B) $468,000 C) $470,000 D) $491,600 E) $519,500 Answer: C Explanation: Materials (20,000 units × $8.00) $160,000 Labour (20,000 units × $5.00) 100,000 Overhead (20,000 units × $9.00) 180,000 Complete beg. (2,400 × $5.00) 12,000 Beginning 18,000 $470,000 Diff: 3 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
Use the information below to answer the following question(s). Canadian Oil Company manufactures cooking oils. All direct materials are added at the beginning of the production process. The company currently uses the FIFO method. Data for the month of July is listed below. Production data: Beginning work-in-process Units started during the period Completed and transferred out Manufacturing cost: Beginning work-in-process Direct materials used
100,000 units 200,000 units 270,000 units
$176,000 $244,000
16) How many units were started and completed with respect to direct materials during the month? A) 170,000 units B) 200,000 units C) 270,000 units D) 300,000 units E) 330,000 units Answer: A Explanation: 100,000 + 200,000 - 270,000 = 30,000 ending inventory 200,000 - 30,000 = 170,000 started and completed units Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
17) What is the amount of direct materials assigned to ending work-in-process? A) $63,000 B) $42,000 C) $36,600 D) $21,050 E) $17,000 Answer: C Explanation: $244,000/200,000 units = $1.22 per unit $1.22 × 30,000 = $36,600 Diff: 3 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
18) What is the amount of goods transferred-out during the month assuming no labour or conversion
costs? A) $398,950 B) $383,400 C) $378,000 D) $357,000 E) $391,000 Answer: B Explanation: $244,000 + $176,000 - $36,600 = $383,400 Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
19) Unit costs of the weighted-average and FIFO methods will differ significantly when A) direct materials or conversion costs per unit vary little from period to period. B) physical inventory levels of work-in-process are small in relation to the number of units transferred out. C) direct materials or conversion cost per unit vary greatly and physical inventory levels of work-inprocess are large relative to the number of units transferred out. D) conversion costs per unit vary greatly and physical inventory levels of work-in-process are small relative to the number of units transferred out. E) direct materials or conversion costs per unit are similar and physical inventory of work-in-process are small relative to the number of units transferred in. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 18-4
Use the information below to answer the following question(s). Ali Disk Company operates a computer disk manufacturing plant. Direct materials are added at the end of the process. The following data were presented for August: Work in process, beginning inventory Transferred-in costs (100% complete) Direct materials (0% complete) Conversion costs (90% complete)
100,000 units
Transferred in during current period Completed and transferred out
300,000 units 350,000 units
Work in process, ending inventory Transferred-in costs (100% complete) Direct materials (0% complete) Conversion costs (65% complete) 20) How many units must be accounted for during the period, assuming a FIFO cost flow? A) 450,000 units B) 400,000 units C) 359,000 units D) 300,000 units E) 275,000 units Answer: B Explanation: 100,000 units + 300,000 = 400,000 units Diff: 1 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
21) How many actual units remain in the ending work-in-process, assuming a FIFO cost flow? A) 200,000 units B) 150,000 units C) 100,000 units D) 50,000 units E) 25,000 units Answer: D Explanation: 400,000 units - 350,000 = 50,000 units Diff: 1 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
22) Calculate equivalent units for conversion costs using the FIFO method. A) 401,500 units B) 350,000 units C) 300,000 units D) 292,500 units E) 170,000 units Answer: D Explanation: Beginning work-in-process (100,000 × .10) 10,000 units Started and completed 250,000 units Ending work-in-process (50,000 × .65) 32,500 units 292,500 units Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
23) Calculate equivalent units for direct materials using the FIFO method. A) 100,000 units B) 350,000 units C) 400,000 units D) 450,000 units E) 515,000 units Answer: B Explanation: 100,000 units + 250,000 units + 0 = 350,000 units Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
24) Using standard costs simplifies the calculations for which of the following in process-costing? A) direct materials B) conversion costs C) equivalent units D) direct materials and conversion costs but standard costs not relevant for equivalent units E) direct materials and conversion costs and equivalent units Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 18-4
25) Which costing system is well-suited for companies which have infrequent changes in their basic
products? A) equivalent-average unit costing method B) first-in, first-out method C) standard costing D) weighted-average costing E) last in first out costing Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 18-4
26) A distinct feature of the FIFO process-costing method is that the ________. A) work done on beginning inventory before the current period is blended with the work done during the current period in the calculation of equivalent units B) work done on beginning inventory before the current period is kept separate from the work done during the current period in the calculation of equivalent units C) work done on ending inventory is kept separate from the work done during the current period in the calculation of equivalent units and is usually not included in the calculation D) FIFO process-costing method is only minimally different from the weighted-average process-costing method Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-4
Use the information below to answer the following question(s). Reynolds Dock Company manufactures boat docks on an assembly line. Its standard costing system utilizes two cost categories; direct materials and conversion costs. Each product must pass through the Assembly Department and the Finishing Department. Direct materials are added at the beginning of the production process. Conversion costs are allocated evenly throughout production. Data for the Assembly Department for October 2019 are: Work in process, beginning inventory: Direct materials (100% complete) Conversion costs (25% complete) Units started during October Work in process, ending inventory: Direct materials (100% complete) Conversion costs (50% complete) Standard Costs for Assembly: Direct materials Conversion costs Work in process, beginning inventory: Direct materials Conversion costs
70 units
40 units 10 units
$4,000 per unit $16,000 per unit
$280,000 $280,000
27) What is the balance in ending work-in-process inventory? A) $82,000 B) $120,000 C) $200,000 D) $170,000 E) $174,000 Answer: B Explanation: 10 units × $4,000 = $40,000 10 units × 50% × $16,000 = 80,000 $120,000 Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
28) Which of the following journal entries records the actual Assembly Department's conversion costs for the month assuming conversion costs are 20 percent higher than expected? A) Assembly Department Conversion Cost Control 1,680,000 Various accounts 1,680,000 B) Materials Inventory 1,680,000 Assembly Department Conversion Cost Control 1,680,000 C) Assembly Department Conversion Cost Control 1,400,000 Materials Inventory 1,400,000 D) Materials Inventory Various accounts
1,680,000
E) Work-in-process Assembly Various accounts
1,680,000
Answer: A Explanation: 70 units × 75% × $16,000 = (40 - 10 units) × $16,000 = 10 units × 50% × $16,000 = Budgeted
1,680,000
1,680,000
$840,000 480,000 80,000 $1,400,000
$1,400,000 × 1.20% = $1,680,000 Diff: 3 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
29) Which of the following journal entries properly records the assignment of conversion costs to workin-process inventory, and the conversion-cost variances of the Assembly Department assuming that conversion costs are 20% higher than expected? A) Work in Process - Assembly 1,680,000 Conversion-Cost Variances 280,000 Assembly Department Conversion Cost Control 1,400,000 B) Work in Process - Assembly Direct Materials Variances Testing Department Conversion Cost Control
1,680,000 280,000 1,400,000
C) Work in Process - Assembly 1,400,000 Conversion-Cost Variances 280,000 Assembly Department Conversion Cost Control 1,680,000 D) Work in Process - Assembly 1,400,000 Assembly Department Conversion Cost Control $1,400,000 E) Work-in-process - Assembly Conversion-Cost Variances Work-in-process - Finishing
1,400,000 280,000 1,680,000
Answer: C Explanation: $1,680,000 - $1,400,000 = $280,000 conversion cost variances Diff: 3 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
30) Which of the following journal entries properly records direct materials requisitions for the work-inprocess inventory and direct materials variances assuming that the Assembly department used 10 percent less materials than expected? A) Work in Process - Assembly 160,000 Assembly Department Materials Cost Control 160,000 B) Work in Process - Assembly Direct Materials Variances Assembly Department Materials Cost Control
160,000 16,000 144,000
C) Work in Process - Finishing Direct Materials Variances Work in Process - Assembly
144,000 16,000
D) Work in Process - Assembly Direct Materials Variances Assembly Department Materials Cost Control
144,000 16,000
E) Work-in-process - Assembly Direct Materials Variances Materials Inventory
144,000 16,000
160,000
160,000
160,000
Answer: B Explanation: 40 × $4,000 = $160,000 $160,000 × .9 = $144,000 Diff: 3 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
Use the information below to answer the following question(s). Baylen Company manufactures hydraulic lifts on an assembly line. Its standard costing system utilizes two cost categories; direct materials and conversion costs. Each product must pass through the Assembly Department and the Finishing Department. Direct materials are added at the beginning of the production process. Conversion costs are allocated evenly throughout production. Data for the Assembly Department for October 2019 are: Work in process, beginning inventory: Direct materials (100% complete) Conversion costs (25% complete) Units started during October Work in process, ending inventory: Direct materials (100% complete) Conversion costs (50% complete) Standard Costs for Assembly: Direct materials Conversion costs Work in process, beginning inventory: Direct materials Conversion costs
20 units
80 units 10 units
$12,000 per unit $4,000 per unit
$240,000 $20,000
31) What is the balance in ending work-in-process inventory? A) $100,000 B) $120,000 C) $160,000 D) $140,000 E) $260,000 Answer: D Explanation: 10 units × $12,000 = $120,000 10 units × 50% × $4,000 = 20,000 $140,000 Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
32) Which of the following journal entries records the actual Assembly Department's conversion costs for the month assuming conversion costs are 20 percent higher than expected? A) Assembly Department Conversion Cost Control 360,000 Various accounts 360,000 B) Materials Inventory 360,000 Assembly Department Conversion Cost Control
360,000
C) Assembly Department Conversion Cost Control 432,000 Various accounts
432,000
D) Materials Inventory Various accounts
432,000 432,000
E) Work-in-process Assembly Various accounts
432,000
Answer: C Explanation: 20 units × 75% × $4,000 = (80 - 10 units) × $4,000 = 10 units × 50% × $4,000 = Budgeted
432,000
$60,000 280,000 20,000 $360,000
$360,000 × 1.20% = $432,000 Diff: 3 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
33) Which of the following journal entries properly records the assignment of conversion costs to workin-process inventory, and the conversion-cost variances of the Assembly Department assuming that conversion costs are 20% higher than expected? A) Work in Process - Assembly 360,000 Conversion-Cost Variances 73,000 Assembly Department Conversion Cost Control 432,000 B) Work in Process - Assembly 432,000 Direct Materials Variances Assembly Department Conversion Cost Control
73,000 360,000
C) Work in Process - Assembly 432,000 Conversion-Cost Variances Assembly Department Conversion Cost Control
73,000 360,000
D) Work in Process - Testing 360,000 Assembly Department Conversion Cost Control
360,000
E) Work-in-process - Assembly Conversion-Cost Variances Work in Process - Finishing
432,000
360,000 73,000
Answer: C Explanation: $360,000 - $432,000 = $73,000 U conversion cost variances Diff: 3 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
34) Which of the following journal entries properly records direct materials requisitions for the work-inprocess inventory and direct materials variances assuming that the Assembly department used 10 percent less materials than expected? A) Work in Process - Assembly 960,000 Assembly Department Materials Cost Control 960,000 B) Direct Materials Inventory Direct Materials Variances Work in Process - Assembly C) Work in Process - Assembly Direct Materials Variances Work in Process - Finishing D) Work in Process - Assembly Direct Materials Variances Assembly Department Materials Cost Control E) Work-in-process - Assembly Direct Materials Variances Assembly Department Materials Cost Control
864,000 96,000 960,000
960,000 96,000 864,000
864,000 96,000 960,000
960,000 96,000 864,000
Answer: E Explanation: 80 × $12,000 = $960,000 $960,000 × .9 = $864,000 Diff: 3 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
Answer the following questions using the information below: Have-a-Chair company manufactures a standard recliner. During February, the firm's Assembly Department started production of 75,000 chairs. During the month, the firm completed 80,000 chairs, and transferred them to the Finishing Department. The firm ended the month with 10,000 chairs in ending inventory. There were 15,000 chairs in beginning inventory. All direct materials costs are added at the beginning of the production cycle, and conversion costs are added uniformly throughout the production process. The FIFO method of process costing is used by Have-a-Chair. Beginning work in process was 30% complete as to conversion costs, while ending work in process was 80% complete as to conversion costs. Beginning inventory: Direct materials Conversion costs
$24,000 $35,000
Manufacturing costs added during the accounting period: Direct materials $168,000 Conversion costs $278,000 35) How many of the Have-a-Chair company units that were started during February were completed during February? A) 85,000 B) 80,000 C) 75,000 D) 65,000 E) 70,000 Answer: D Explanation: 80,000 - 15,000 = 65,000 Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
36) What were Have-a-Chair company's equivalent units for conversion costs during February? A) 83,500 B) 85,000 C) 75,000 D) 79,500 E) 73,000 Answer: A Explanation: (15,000 × 0.7) + 65,000 + (10,000 × 0.8) = 83,500 Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
37) What is Have-a-Chair company's amount of direct materials cost assigned to ending work-in-process inventory at the end of February? A) $19,200 B) $22,400 C) $25,600 D) $22,500 E) $21,000 Answer: B Explanation: $168,000/75,000 = $2.24 × 10,000 = $22,400 Diff: 3 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
38) What is the Have-a-Chair company cost of the goods transferred out during February? A) $417,750 B) $421,050 C) $476,750 D) $505,000 E) $456,015 Answer: E Explanation: 75,000 - 10,000 = 65,000 (15,000 × 0.7) + 65,000 + (10,000 × 0.8) = 83,500 $168,000/75,000 = $2.24 × 10,000 = $22,400 The costs in beginning inventory $24,000 + $35,000 = Direct materials = $2.24 × 65,000 = Conversion costs = [$278,000/(10,500 + 8,000 + 65,000)] × 65,000 = also FG beginning inventory (15,000 × 0.7 × $3.33) = Total
$ 59,000 145,600 216,450 34,965 $456,015
Diff: 3 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
39) Surf Products Company uses an automated process to clean and polish its souvenir items. Direct materials are placed into production at the beginning of the process and conversion costs are incurred evenly throughout the process. The following data pertain to March. Beginning work-in-process inventory Units placed in production Units completed Ending work-in-process inventory Cost of beginning work-in-process Direct material costs, current month Conversion costs, current month
6,000 items, 1/3 complete as to conversion costs 24,000 units 18,000 units 12,000 items, 1/2 complete as to conversion costs $5,000 $18,000 $15,400
Required: Using the first-in, first-out method determine the assignment of costs to units transferred-out and ending inventory.
Answer:
Production Cost Worksheet
Flow of Production Work in process, beginning Started during period To account for
Physical units 6,000 24,000 30,000
Units completed: Beginning work-in-process Started and completed Work in process ending Accounted for
6,000 12,000 12,000 30,000
Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent unit costs
Totals $5,000 33,400 $38,400 $1.45
Assignment of costs: Work in process, beginning Completion of beginning (4,000 × $0.70) Total beginning inventory Started and Completed (12,000 × $1.45) Total costs transferred out Work in process, ending Direct materials (12,000 × $0.75) Conversion (12,000 × $0.70 × 0.50) Costs accounted for
Direct materials
12,000 12,000 24,000
Conversion
4,000 12,000 6,000 22,000
Direct materials Conversion $18,000 $18,000 24,000 $0.75
$15,400 $15,400 22,000 $0.70
$5,000 2,800 $7,800 17,400 $25,200 $9,000 4,200
13,200 $38,400
Diff: 3 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
40) Pet Products Company uses an automated process to manufacture its pet replica products. For June, the company had the following activities: Beginning work in process inventory Units placed in production Units completed Ending work in process inventory
4,500 items, 1/4 complete 15,000 units 17,500 units 2,000 items, 3/4 complete
Cost of beginning work in process Direct material costs, current Conversion costs, current
$5,250 $16,500 $23,945
Direct materials are placed into production at the beginning of the process and conversion costs are incurred evenly throughout the process. Required: Prepare a production cost worksheet using the FIFO method. Round equivalent unit costs to the nearest cent.
Answer: PRODUCTION COST WORKSHEET
Flow of production Work in process, beginning Started during period To account for Units completed Work in process, beginning Started and completed Work in process, ending
Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent unit costs
Assignment of costs Work in process, beginning Completion of beginning (3,375 × $1.34) Total beginning inventory Started and Completed (13,000 × $2.44) Total costs transferred out Work in process, ending Direct materials (2,000 × $1.10) Conversion (2,000 × $1.34 × 0.75) Costs accounted for
Physical Units Direct Materials Conversion 4,500 15,000 19,500
4,500 13,000 2,000 19,500
13,000 2,000 15,000
3,375 13,000 1,500 17,875
Totals Direct Materials Conversion $5,250 40,445 $16,500 $23,945 $45,695 $16,500 $23,945 15,000 17,875 $2.44 $1.10 $1.34
5,250.00 4,522.50 9,772.50 31,720.00 $41,492.50 $2,200.00 2,010.00
4,210.00 $45,702.50
Diff: 3 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
41) Brampton Ltd. uses an automated process to manufacture key chains. For September, the company had the following activities: Beginning work in process inventory Units placed in production Units completed Ending work in process inventory
40,000 unit 30% complete 140,000 units ? 30,000 items, 60% complete
Cost of beginning work in process Direct material costs, current Conversion costs, current
$36,080 $100,800 $101,400
Direct materials are placed into production at the beginning of the process and conversion costs are incurred evenly throughout the process. There is no spoilage. Required: Prepare a production cost worksheet using the FIFO method.
Answer: PRODUCTION COST WORKSHEET
Flow of production Work in process, beginning Started during period To account for Units completed Work in process, beginning Started and completed Work in process, ending
Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent unit costs
Assignment of costs Work in process, beginning Completion of beginning (28,000 × $0.65) Total beginning inventory Started and Completed (110,000 × $1.37) Total costs transferred out Work in process, ending Direct materials (30,000 × $0.72) Conversion (18,000 × $0.65) Costs accounted for
Physical Units Direct Materials Conversion 40,000 140,000 180,000
40,000 110,000 30,000 180,000
110,000 30,000 140,000
28,000 110,000 18,000 156,000
Totals Direct Materials Conversion $36,080 202,200 $100,800 $101,400 $238,280 $100,800 $101,400 140,000 156,000 $1.37 $0.72 $0.65
36,080 18,200 54,280 150,700 $204,980 $21,600 11,700
33,300 $238,280
Diff: 3 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
42) Smithers Ltd. uses the FIFO method for its production costing. On June 1, it had 35,000 units in beginning work in process that were 60% complete with respect to conversion costs. During the month it completed 80,000 units and on June 30, there were 16,000 units in ending work in process. These units were 35% complete with respect to conversion. Direct materials are added at the beginning of the process and no units are lost during production. The costs associated with the beginning inventory were $83,300 for direct materials and $66,780 for conversion. During the month, Smithers issued $146,400 of direct materials and incurred $206,720 of conversion costs. Required: Prepare a production cost worksheet using the FIFO method.
Answer: PRODUCTION COST WORKSHEET
Flow of production Work in process, beginning Started during period To account for Units completed Work in process, beginning Started and completed Work in process, ending
Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent unit costs
Assignment of costs Work in process, beginning Completion of beginning (14,000 × $3.20) Total beginning inventory Started and Completed (45,000 × $5.60) Total costs transferred out Work in process, ending Direct materials (16,000 × $2.40) Conversion (5,600 × $3.20) Costs accounted for
Physical Units Direct Materials Conversion 35,000 61,000 96,000
35,000 45,000 16,000 96,000
45,000 16,000 61,000
14,000 45,000 5,600 64,600
Totals Direct Materials Conversion $150,080 353,120 $146,400 $206,720 $503,200 $146,400 $206,720 61,000 64,600 $5.60 $2.40 $3.20
$150,080 44,800 194,880 252,000 $446,880 $38,400 17,920
56,320 $503,200
Diff: 3 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
43) Marvin Ltd. uses an automated process in its manufacturing operations. On November 1, the company had 25,000 units in beginning work in process which were 80% complete with respect to conversion. During the month of November, it started 120,000 into production. On November 30, there were 20,000 units in process, which were 40% complete with respect to conversion. Direct materials are added at the beginning of the process, and no units are spoiled in production. The beginning inventory had direct materials costs of $105,750 and conversion costs of $45,500. During the month, the company issues $510,000 of direct materials and incurred $203,400 of conversion costs. Required: Prepare a production cost worksheet using the FIFO method.
Answer:
PRODUCTION COST WORKSHEET
Flow of production Work in process, beginning Started during period To account for Units completed Work in process, beginning Started and completed Work in process, ending
Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent unit costs
Assignment of costs Work in process, beginning Completion of beginning (5,000 × $1.80) Total beginning inventory Started and Completed (100,000 × $6.05) Total costs transferred out Work in process, ending Direct materials (20,000 × $4.25) Conversion (8,000 × $1.80) Costs accounted for
Physical Units Direct Materials Conversion 25,000 120,000 145,000
25,000 100,000 20,000 145,000
100,000 20,000 120,000
5,000 100,000 8,000 113,000
Totals Direct Materials Conversion $151,250 713,400 $510,000 $203,400 $864,650 $510,000 $203,400 120,000 113,000 $6.05 $4.25 $1.80
$151,250 9,000 160,250 605,000 $765,250 $85,000 14,400
99,400 $864,650
Diff: 3 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
44) Marvin Ltd. uses an automated process in its manufacturing operations. On November 1, the company had 25,000 units in beginning work in process which were 80% complete with respect to conversion. During the month of November, it started 120,000 into production. On November 30, there were 20,000 units in process, which were 40% complete with respect to conversion. Direct materials are added at the beginning of the process, and no units are spoiled in production. The company has standard costs per unit as follows: direct materials $4.00; conversion costs $2.00. Actual costs for November: The beginning inventory had direct materials costs of $105,750 and conversion costs of $45,500. During the month, the company issued $510,000 of direct materials and incurred $203,400 of conversion costs. Required: 1. Prepare a journal entry to record the direct material placed into work-in-process. The direct materials variance, if there is one, is recorded when materials are placed into production. 2. What is the end of month balance in the Work-in-Process Inventory account assuming that variances are closed to the Cost of Goods Sold account? Answer: Work-in-Process Inventory 480,000 Direct Materials Variances 30,000 Direct Materials Control 510,000 WIP 120,000 units × $4.00 = $480,000 Ending WIP Inventory: Materials (20,000 × $4.00) Conversion costs (20,000 × 40% × $2.00)
$ 80,000 16,000 $ 96,000
Diff: 3 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
45) Jackson Ltd. uses an automated process in its manufacturing operations. On September 1, the company had 15,000 units in beginning work in process which were 60% complete with respect to conversion. During the month of September, it started 100,000 into production. On September 30, there were 20,000 units in process, which were 30% complete with respect to conversion. Direct materials are added at the beginning of the process, and no units are spoiled in production. The beginning inventory had direct materials costs of $135,900 and conversion costs of $38,500. During the month, the company issues $620,000 of direct materials and incurred $199,400 of conversion costs. Required: Prepare a production cost worksheet using the FIFO method. Round equivalent unit costs to the nearest cent.
Answer:
PRODUCTION COST WORKSHEET
Flow of production Work in process, beginning Started during period To account for Units completed Work in process, beginning Started and completed Work in process, ending
Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent unit costs
Assignment of costs Work in process, beginning Completion of beginning (6,000 × $2.17) Total beginning inventory Started and Completed (80,000 × $8.37) Total costs transferred out Work in process, ending Direct materials (20,000 × $6.20) Conversion (6,000 × $2.17) Costs accounted for
Physical Units Direct Materials Conversion 15,000 100,000 115,000
15,000 80,000 20,000 115,000
80,000 20,000 100,000
6,000 80,000 6,000 92,000
Totals Direct Materials Conversion $174,400 819,400 $620,000 $199,400 $993,800 $620,000 $199,400 100,000 92,000 $8.37 $6.20 $2.17
$174,400 13,020 187,420 669,600 $857,020 $124,000 13,020
137,020 $994,040
Diff: 3 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
46) Lehman Pottery Company manufactures clay molded pottery on an assembly line. Its standard costing system uses two cost categories, direct materials and conversion costs. Each product must pass through the Assembly Department and the Finishing Department. Direct materials are added at the beginning of the production process. Conversion costs are allocated evenly throughout production. Data for the Assembly Department for August 2018 are: Work in process, beginning inventory: Direct materials (100% complete) Conversion costs (40% complete)
800 units
Units started during August
450 units
Work in process, ending inventory: Direct materials (100% complete) Conversion costs (60% complete)
300 units
Costs for August: Standard costs for Assembly: Direct materials Conversion costs Work in process, beginning inventory: Direct materials Conversion costs Required:
$30 per unit $55 per unit
$22,000 $16,500
Prepare general journal entries to record: 1. The actual Assembly Department's conversion costs for the month assuming conversion costs are 10 percent higher than expected. 2. The assignment of conversion costs to work-in-process inventory, and the conversion-cost variances of the Assembly Department assuming that conversion costs are 10 percent higher than expected. 3. The direct materials requisitions for the work-in-process inventory and direct materials variances assuming that the Assembly department used 10 percent less materials than expected.
Answer: 1. Assembly Department Conversion Cost Control 49,005 Various accounts 800 units × 60% × $55 (450 - 300 units) × $55 300 units × 60% × $55 Budgeted
= = =
49,005
$ 26,400 8,250 9,900 $44,550
$44,550 × 1.10% = $49,005 2. Work in Process - Assembly Conversion-Cost Variances Assembly Department Conversion Cost Control 3. Work in Process - Assembly Direct Materials Variances Assembly Department Materials Cost Control
44,550 4,455 49,005
13,500 1,350 12,150
450 × $30 = $13,500 $13,500 × .9 = $12,150 Diff: 3 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4
47) Vita-Heath Company manufactures three different types of vitamins: vitamin C, vitamin B, and vitamin D. The company uses four operations to manufacture the vitamins: mixing, tabletting, encapsulating, and bottling. Vitamins C and B are produced in tablet form (in the tabletting department) and vitamin D is produced in capsule form (in the encapsulating department). Each bottle contains 80 vitamins, regardless of the product. Conversion costs are applied based on the number of bottles in the tabletting and encapsulating departments. Conversion costs are applied based on direct labour hours in the mixing department. It takes two minutes to mix ingredients for a 80-unit bottle for each product. Conversion costs are applied based on machine hours in the bottling department. It takes one-tenth of a minute of machine time to fill a 80-unit bottle, regardless of product. Vita-Health Company uses operation costing. The company is planning to complete one batch of each type of vitamin in March. The budgeted number of bottles and expected direct material cost for each type of vitamin is as follows:
Number of 80 unit bottles Direct material cost
Vitamin C 11,000 $ 25,600
Vitamin B 9,000 $19,320
Vitamin D 19,000 $44,790
The budgeted conversion costs for March are as follows:
Department Mixing Tabletting Encapsulating Bottling
Budgeted Conversion Cost $ 9,180 25,300 27,580 4,670
Required: 1. Calculate the conversion cost rates for each department. 2. Calculate the budgeted cost of goods manufactured for vitamin C, vitamin B, and vitamin D for the month of March. 3. Calculate the cost per 80-unit bottle for each type of vitamin for the month of July.
Answer: 1. Calculate the conversion rates for each department:
Budgeted 80-unit bottles Budgeted labour hours Budgeted machine hours
Vitamin C
Vitamin B
Vitamin D
Total
11,000 366.7
9,000 300.0
19,000 633.3
39,000 1,300
18.3
15.0
31.7
65
Budgeted labour hours = (2 minutes × # of bottles)/60 Budgeted machine hours = (0.10 minutes × # of bottles)/60
Mixing Tabletting Encapsulating Bottling 2.
Budgeted qty. Conversion cost of cost driver rate 1,300 $ 7.06 39,000 0.65 39,000 0.71 65 71.85
Budgeted cost of goods manufactured:
Direct materials Mixing Tabletting Encapsulating Bottling Total 3.
Budgeted conversion cost Cost driver $ 9,180 labour hrs 25,300 # of bottles 27,580 # of bottles 4,670 machine hrs
Vitamin C $ 25,600.00 2,588.90 7,150.00 7,810.00 1,314.86 $ 44,463.76
Vitamin B $ 19,320.00 2,118.00 5,850.00 6,390.00 1,077.75 $ 34,755.75
Vitamin D $ 44,790.00 4,471.10 12,350.00 13,490.00 2,277.65 $ 77,378.75
Vitamin B $ 34,755.75 9,000 $ 3.86
Vitamin D $ 77,378.75 19,000 $4.07
Budgeted cost per bottle:
Total budgeted costs # of bottles Budgeted cost per bottle
Vitamin C $ 44,463.76 11,000 $ 4.04
Diff: 2 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-4; 4-1
48) What is the difference between a weighted-average method of process costing and a first-in, first-out method of process costing? Answer: The weighted average method computes unit costs by dividing total costs entering the workin-process account (whether from beginning work-in-process or from work started during the period) by total equivalent units completed to date, and assigns this average cost to units completed and to units in ending work-in process inventory. The first-in, first-out (FIFO) method computes unit costs based on costs incurred during the current period and equivalent units of work done in the current period. It assigns the costs of beginning work-inprocess inventory to the first units completed, and it assigns costs of the equivalent units worked on during the current period first to complete beginning inventory, next to start and complete new units, and finally to units in ending work-in-process inventory. Diff: 2 Type: ES CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 18-3; 18-4
49) Universal Industries operates a division in Brazil, a country with very high inflation rates. Traditionally, the company has used the same costing techniques in all countries so as to facilitate reporting to corporate headquarters. However, the financial accounting reports from Brazil never seem to match the actual unit results of the division. Management has studied the problem and it appears that beginning inventories may be the cause of the unmatched information. The reason is that the inventories have a different financial base because of the severe inflation. Required: How can process costing assist in addressing the problem facing Universal Industries? Answer: Probably the best way to address the problem of inflation is to use FIFO costing. This method keeps the cost of beginning inventories separate from production units started and completed in a given period. Therefore, the company may be able to track the cost of items that were actually produced in a given period, versus mixing the units and costs of multiple periods. Diff: 2 Type: ES CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 18-4
50) BIG Manufacturing Products has been using FIFO process costing for tracking the costs of its manufacturing activities. However, in recent months the system has become somewhat bogged down with details. It seems that when the company purchased Brown Electronics last year its product lines increased six fold. This has caused both the accountants and the suppliers of the information, the line managers, great difficulty in keeping the costs of each product line separate. Likewise, the estimation of the completion of ending work-in-process inventories and the associated costs has become very cumbersome. The chief financial officer of the company is looking for ways to improve the reporting system of product costs. Required: What can you recommend to improve the situation? Answer: A beginning point would be to change to a standard costing system. Standard costing eliminates many of the problems of FIFO costing in tracking actual costs to products. With standard costing only the equivalent units have to be determined immediately, not the actual cost of the period. A standard cost for materials and conversion are then applied to the equivalent units for the reporting period. Actual costs and variances from standard can be determined later. This approach is very appropriate for a company that has many products. Diff: 2 Type: ES CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 18-4
51) Ford Motor Company is said to use a hybrid costing system. What is a hybrid costing system, and what would be the advantage to Ford of such a system? Answer: A hybrid costing system is one that combines the elements of job costing and process costing systems. Important elements of profitability include knowing what the costs are, and controlling costs. Ford has a basic platform that they use to produce cars. Vehicles undergo essentially the same processing and are in effect manufactured in a continuous flow using standard parts and standardized manufacturing processes. Another important part of profitability is making a product different than other vehicles so buyers will be attracted to purchase the vehicle. Vehicles that are different can command a higher price and increase profitability. Costs are accumulated using process costing up to the point where the product is differentiated. Job costing is used from that point forward. Diff: 2 Type: ES CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 18-4
18.5 Apply process-costing methods to report transferred-in costs and operations costing. 1) Transferred-in costs are an allocated indirect cost in process costing. Answer: FALSE Explanation: They can contain direct and indirect costs from the previous department. Diff: 2 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-5
2) Transferred in costs are costs which have been incurred in a preceding department. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-5
3) An operation-costing system is a hybrid costing system, applied to batches of similar products. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-5
4) Operation-costing captures the non-financial impact of the control of physical processes. Answer: FALSE Diff: 1 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-5
5) Operation-costing differs from pure process-costing in that operation-costing charges each work order separately for direct material cost. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-5
6) It is possible to design a hybrid costing system, to combine elements of both job costing and of process costing. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-5
7) Which of the following best describes transferred-in costs? A) They are the cost of transferring products from a vendor. B) They are value-added costs that are only considered in the first-in, first-out process costing system. C) They are costs incurred in a previous department or process that are carried forward as the product's cost as that product moves to another department or process in the production cycle. D) They are the shipping costs related to finished goods that are transported to a customer's location. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-5
8) Transferred-in costs incurred in a previous department and charged to a subsequent department A) are combined with direct materials costs of the subsequent department for a total direct materials costs figure. B) are always from the previous period. C) become part of Cost of Goods Sold in the current period. D) are always assigned using the FIFO method. E) follow the physical movement of the units. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 18-5
9) Regardless of whether previous departments used the weighted-average or the FIFO method, all transferred-in costs during a given period are carried at A) the cost at which it was transferred in. B) the previous period's costs. C) multiple unit-cost figures. D) the final cost. E) one average unit-cost. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 18-5
10) Which of the following is an error when accounting for transferred-in costs? A) including transferred-in costs from previous departments B) costing units at average costs C) converting units to a common measurement when transferred in D) consider costs assigned at the beginning of the period when calculating costs to be transferred on a weighted average basis E) consider costs assigned at the beginning of the period when calculating costs to be transferred on a FIFO basis Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 18-5
11) Which of the following is FALSE concerning an operations-costing system? A) It has characteristics of a job-costing system and of a process-costing system. B) Within each operation, all product-units are treated exactly alike with respect to conversion costs. C) Direct materials that are unique to different work orders, are specifically identified with the appropriate work order, as in job-costing. D) Work orders are used to specify direct materials and step-by-step operations. E) A separate conversion cost is calculated for each work order, as in job costing. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 18-5
12) Conceptually transferred-in costs from another department are similar to A) direct labour. B) finished goods inventory. C) direct labour and materials. D) manufacturing overhead. E) materials provided by external suppliers. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-5
13) An operation costing system would be applicable to A) batches of similar products where each batch is a variation of a single design. B) the construction of a bridge. C) a cement plant. D) a company that makes special order products that are unique. E) cost systems that are not hybrid. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-5
14) Managers find operation costing useful in cost management because it A) often results in profit maximization. B) results in cost minimization. C) captures the financial impact of hybrid processes. D) overstates production costs. E) understates operating income. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 18-5
15) The Leather Factory has two departments that process all of its production, the Tanning Department and the Finishing Department. Production begins in the Tanning Department, then the units are transferred to the Finishing Department. Conversion costs are added evenly throughout the process, no additional materials are added in the Finishing Department. Beginning work-in-process in the finishing department was 60 percent complete as to conversion; ending inventory was 30 percent complete. Additional information about the Finishing Department follows: Beginning work-in-process inventory Units transferred-in Ending work-in-process inventory Conversion costs Transferred-in costs Beginning work-in-process costs: Conversion Transferred-in
8,000 units 32,000 units 4,000 units $38,000 $100,000 $20,000 $14,000
Required: Using the weighted-average method determine the assignment of costs to units transferred-out and ending inventory for the Finishing Department. Round costs per equivalent unit to the nearest cent.
Answer:
Production Cost Worksheet Finishing Department
Flow of Production Work in process, beginning Transferred in during period To account for Units transferred out Work in process ending Accounted for Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent unit costs
Phys. units 8,000 32,000 40,000
Conversion
Trans.-in
36,000 4,000 40,000
36,000 1,200 37,200
36,000 4,000 40,000
Totals $34,000 138,000 $172,000
Conversion $20,000 38,000 $58,000 37,200 $1.56
Trans.-in $14,000 100,000 $114,000 40,000 $2.85
$4.41
Assignment of costs: Transferred out (36,000 × $4.41) Work in process, ending: Transferred-in costs (4,000 × $2.85) Conversion (1,200 × $1.56) Costs accounted for
$158,760 $11,400 1,872
13,272 $172,032
Diff: 3 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-5
16) The Modern Toys Factory has two departments that process all of its production, the Parts Production Department and the Finishing Department. Production begins in the Parts Production Department, then the units are transferred to the Finishing Department. Conversion costs are added evenly throughout the process, and no additional materials are added in the Finishing Department. Beginning work-in-process in the finishing department was 60 percent complete as to conversion; ending inventory was 50 percent complete. Additional information about the Finishing Department follows: Beginning work-in-process inventory Units transferred in Ending work-in-process inventory Conversion costs added Transferred-in costs added Beginning work-in-process costs: Conversion Transferred-in
10,000 units 38,000 units 2,000 units $55,000 $99,840 $27,250 $24,960
Required: Using the weighted-average method, determine the assignment of costs to units transferred-out and to ending inventory for the Finishing Department. Round costs per equivalent unit to the nearest cent.
Answer:
Production Cost Worksheet Finishing Department
Flow of Production Work in process, beginning Transferred in during period To account for Units transferred out Work in process ending Accounted for Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent unit costs
Phys. units 10,000 38,000 48,000
Conversion
Trans.-in
46,000 2,000 48,000
46,000 1,000 47,000
46,000 2,000 48,000
Totals $52,210 154,840 $207,050
Conversion $27,250 55,000 $82,250 47,000 $1.75
Trans.-in $24,960 99,840 $124,800 48,000 $2.60
$4.35
Assignment of costs: Transferred out (46,000 × $4.35) Work in process, ending: Transferred-in costs (2,000 × $2.60) $5,200 Conversion (1,000 × $1.75) 1,750 Costs accounted for
$200,100
6,950 $207,050
Diff: 3 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-5
17) Florida Company produces baseball bats and cricket paddles. It has two departments that process all products. During July, the beginning work in process in the cutting department was half completed as to conversion and complete as to direct materials. The beginning inventory included $40,000 for materials and $60,000 for conversion costs. Ending work-in-process inventory in the cutting department was 40% complete. Direct materials are added at the beginning of the process. Beginning work in process in the finishing department was 80% complete as to conversion. Direct materials for finishing the units are added near the end of the process. Beginning inventories included $24,000 for transferred-in costs and $28,000 for conversion costs. Ending inventory was 30% complete. Additional information about the two departments follows:
Beginning work-in-process units Units started this period Units transferred this period Ending work-in-process units Material costs added Conversion costs Transferred-out cost
Cutting 20,000 60,000 64,000
Finishing 24,000
$48,000 28,000 128,000
$34,000 68,500
68,000 20,000
Required: Prepare a production cost worksheet, using FIFO for the finishing department.
Answer:
Production Cost Worksheet Finishing Department FIFO Method
Flow of production Work in process, beginning Started during period To account for Good units completed Beginning work in process Started and completed Ending work in process Accounted for
Costs WIP, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent-unit costs
Physical Direct Units Materials 24,000 64,000 88,000
24,000 44,000 20,000 88,000
24,000 44,000 0 68,000
Conversion
4,800 44,000 6,000 54,800
Trans-In
44,000 20,000 64,000
Direct Totals Materials Conversion Trans-in $52,000 230,500 $34,000 $68,500 $128,000 $282,500 $34,000 $68,500 $128,000 68,000 54,800 64,000 $ 3.75 $ 0.50 $1.25 $ 2.00
Assignment of costs Work in process, beginning Completion of beginning Direct Materials (24,000 × $0.50) Conversion (4,800 × $1.25) Total Beginning Inventory Started and Completed (44,000 × $3.75) Total costs transferred out Work in process, ending Transferred-in (20,000 × $2.00) Conversion (20,000 × $1.25 × 0.30) Costs accounted for
$52,000 $12,000 6,000
$40,000 7,500
18,000 $70,000 165,000 $235,000
47,500 $282,500
Diff: 3 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-5
18) Professional Fabricators assembles its product in several departments. It has two departments that process all units. During October, the beginning work in process in the cutting department was half completed as to conversion and complete as to direct materials. The beginning inventory included $12,000 for materials and $3,000 for conversion costs. Ending work-in-process inventory in the cutting department was 40% complete. Direct materials are added at the beginning of the process. Beginning work in process in the finishing department was 75% complete as to conversion. Direct materials are added at the end of the process. Beginning inventories included $16,000 for transferred-in costs and $20,000 for conversion costs. Ending inventory was 25% complete. Additional information about the two departments follows:
Beginning work-in-process units Units started this period Units transferred this period Ending work-in-process units Material costs added Direct manufacturing labour Other conversion costs
Cutting 20,000 40,000 50,000 10,000 $48,000 $16,000 $8,000
Finishing 20,000 50,000 20,000 $28,000 $40,000 $24,000
Required: Prepare a production cost worksheet using weighted-average for the cutting department and FIFO for the finishing department.
Answer:
Production Cost Worksheet Cutting Department Weighted-Average Method
Flow of production
Physical Units
Work in process, beginning Started during period To account for
20,000 40,000 60,000
Units transferred out Work in process, ending Accounted for
50,000 10,000 60,000
Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent-unit costs Assignment of costs Transferred out (50,000 × $1.50) Work in process, ending Direct materials (10,000 × $1.00) Conversion (10,000 × 0.40 × $0.50) Costs accounted for
Totals $15,000 72,000 $87,000 $ 1.50
Direct Materials
50,000 10,000 60,000
Conversion
50,000 4,000 54,000
Direct Materials Conversion $12,000 $ 3,000 48,000 24,000 $60,000 27,000 60,000 54,000 $ 1.00 $ 0.50
$75,000 $10,000 2,000
12,000 $87,000
Production Cost Worksheet Finishing Department FIFO Method Flow of production Work in process, beginning Started during period To account for Good units completed Beginning work in process Started and completed Ending work in process Accounted for
Costs WIP, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent-unit costs
Physical Direct Units Materials 20,000 50,000 70,000
20,000 30,000 20,000 70,000
20,000 30,000 0 50,000
Conversion
5,000 30,000 5,000 40,000
Trans-In
30,000 20,000 50,000
Direct Totals Materials Conversion Trans-in $36,000 167,000 $28,000 $64,000 $75,000 $203,000 $28,000 $64,000 $75,000 50,000 40,000 50,000 $ 3.66 $ 0.56 $1.60 $ 1.50
Assignment of costs Work in process, beginning Completion of beginning Direct Materials (20,000 × $0.56) Conversion (20,000 × 0.25 × $1.60) Total Beginning Inventory Started and Completed (30,000 × $3.66) Total costs transferred out Work in process, ending Transferred-in (20,000 × $1.50) Conversion (20,000 × $1.60 × 0.25) Costs accounted for
$36,000 $11,200 8,000
$30,000 8,000
$19,200 55,200 109,800 165,000
38,000 $203,000
Diff: 3 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-5
19) Ingersoll Ltd. has two production departments in the manufacturing of its products. In the first department, Fabricating, component parts are manufactured. In the second department, Assembly, the components are assembled and finished. Direct materials are added at the start of production in Fabricating and at the 90% point of the process in Assembly. During July, the beginning work-in-process of 50,000 units in the Fabricating Department was 40% complete with respect to conversion. The Assembly Department had 38,000 units in beginning work in process; these units were 85% complete with respect to conversion. On July 31, the ending work-in-process inventory was 20% complete in the Fabricating Department and 40% complete in the Assembly Department. Conversion costs are added evenly throughout both departments. Beginning work in process in the Fabricating Department had costs assigned of $290,000 for direct materials and $52,000 for conversion. In the Assembly Department, the beginning work in process included $318,440 for transferred-in costs and $8,550 for conversion costs. Additional information about the two departments follows: Fabricating Assembly Units started or transferred-in in July Units transferred out in July Ending work in process Material costs added Other conversion costs
60,000 70,000 ?
? 76,000 ?
$348,000 $150,800
$60,800 $79,100
Required: Determine the assignment of costs to units transferred-out and ending inventory, using weighted-average for the Assembly Department and FIFO for the Finishing Department.
Answer:
Production Cost Worksheet Fabricating Department Weighted-Average Method
Flow of Production Work in process, beginning Started during period To account for
Physical units 50,000 60,000 110,000
Direct materials
Conversion
Units transferred out Work in process ending Accounted for
70,000 40,000 110,000
70,000 40,000 110,000
70,000 8,000 78,000
Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent unit costs
Totals $342,000 498,800 $840,800
Direct materials $290,000 348,000 $638,000 110,000 $5.80
Conversion $52,000 150,800 $202,800 78,000 $2.60
Assignment of costs: Transferred out (70,000 × $8.40) Work in process, ending: Direct materials (40,000 × $5.80) Conversion (40,000 × 0.20 × $2.60) Costs accounted for
$8.40
$588,000 $232,000 20,800
252,800 $840,800
Production Cost Worksheet Assembly Department FIFO Method Flow of Production Work in process, beginning Started during period To account for
Phy.Units 38,000 70,000 108,000
D.mat.
Conversion
Trans.-in
Good units completed: Beginning work-in-process Started and completed Work in process ending
38,000 38,000 32,000
38,000 38,000 0
5,700 38,000 12,800
0 38,000 32,000
Accounted for
108,000
76,000
56,500
70,000
Totals $326,990 727,900 $1,054,890 _______ $10.60
D. mat.
Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent unit costs
Assignment of costs: Work in process, beginning Completion of beginning: D. mat. (38,000 × $0.80) Conv. (38,000 × 0.15 × $1.40) Total beginning inventory Started and Completed (38,000 × $10.60) Total costs transferred out Work in process, ending: Trans.-in (32,000 × $8.40) Conversion (32,000 × 0.40 × $1.40) Costs accounted for
$60,800 $60,800 76,000 $0.80
Conversion Trans.-in $79,100 $79,100 56,500 $1.40
$588,000 $588,000 70,000 $8.40
$326,990 $30,400 7,980
$268,800 17,920
38,380 $365,370 402,800 $768,170
286,720 $1,054,890
Diff: 3 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-3; 18-5
20) The president of Thames River Ltd. has approached the controller of the company with concerns over the projected year end results. The company needs to present its financial statements to the bank to renew its loan and the president is concerned that the loan may either be denied, or the renewal terms will impose a much higher interest rate. The following summarizes the conversation between the president and the controller: President: I am very concerned about the upcoming loan renewal. Our cash position is low and our operating results for the year were not as strong as expected. Our unit cost of production has come in at $1,800 based on equivalent units of production of 2,590. I know that currently, we have 600 units in ending work in process that are only 15% complete. If we were to reclassify these as 80% complete, we would increase our equivalent units of production by 390. Since all of our 2,500 completed units were sold, this reclassification would lower our unit costs, reduce cost of goods sold and increase our ending work in process inventory, which could be used as collateral. This would improve our financial position and allow us to renew our loan and keep our current rate of interest. Controller: I think this is risky. It would be easy to determine that the units are not 80% complete. President: I don't see how. By the time we are audited, the units will have long since been completed and shipped to customers. Required: Assume you are the controller for Thames River Ltd. and that you hold a professional accounting designation. a. Determine the impact of the president's proposal on the financial results for Sampson Ltd. b. Referring back to the standards of ethical conduct, what should you do as controller?
Answer: a. Current Results (Ending Work in Process reported as 15% complete) Cost of Goods Sold (2,500 × $1,800) Ending Work in Process (600 × 15% × $1,800) Total Costs of Production
$4,500,000 $162,000 $4,662,000
Revised Results (Ending Work in Process reported as 80% complete) Cost of Goods Sold (2,500 × $1,564.43*) $3,911,075 Ending Work in Process (600 × 80% × $1,564.43) 750,925 Total Costs of Production $4,662,000 *Costs Total Costs $4,662,000 Divided by equivalent units [600 × 80%] + 2,500 2,980 Cost per equivalent unit $1,564.43 Percentage decrease in CGS [$588,925/$4,500,000] Percentage increase in EWIP [$588,925/$162,000]
13.09% 363.53%
b. The controller should not agree to this reclassification. In order to comply with an accountant's code of ethical conduct, the controller must remain objective and free from bias. The controller has a fiduciary duty to act with fidelity for public needs, maintain independence of thought and action, and disclose all material facts to ensure that financial reports and statements are not misleading. Diff: 3 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: Cumulative
21) Windsor Factory produces expensive boots. It has two departments that process all the items. During January, the beginning work in process in the tanning department was 40% complete as to conversion and 100% complete as to direct materials. The beginning inventory included $6,000 for materials and $18,000 for conversion costs. Ending work-in-process inventory in the tanning department was 40% complete. Direct materials are added at the beginning of the process. Beginning work in process in the finishing department was 60% complete as to conversion. Beginning inventories included $7,000 for transferred-in costs and $10,000 for conversion costs. Ending inventory was 30% complete. Additional information about the two departments follows:
Beginning work-in-process units Units started this period Units transferred this period Ending work-in-process units Material costs added Conversion costs Transferred-out cost
Tanning 5,000 14,000 16,000 ?
Finishing 4,000 ? 18,000 2,000
$18,000 32,000 50,000
? $19,000 ?
Required: Prepare a production cost worksheet using weighted-average costing for the finishing department.
Answer:
Production Cost Worksheet Finishing Department Weighted-Average Method
Flow of production Work in process, beginning Transferred in during period To account for
Physical Units Conversion 4,000 16,000 20,000
Units transferred out Work in process, ending Accounted for Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent-unit costs
18,000 2,000 20,000
Trans-In
18,000 600 18,600
18,000 2,000 20,000
Totals Conversion $17,000 $10,000 69,000 19,000 $86,000 $29,000 18,600 $ 4.41 $ 1.56
Trans-in $ 7,000 50,000 $57,000 20,000 $ 2.85
Assignment of costs Transferred out (18,000 × $4.41) Work in process, ending Transferred-in costs (2,000 × $2.85) Conversion (600 × $1.56) Costs accounted for
$79,380 $5,700 936
6,636 $86,016
Diff: 3 Type: SA CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 18-5
22) When there are multiple support departments within an organization, it is common to use journal entries to transfer-in costs from one department to another. What are some of the points to remember about these costs? Answer: 1. Be sure to include transferred-in costs from previous departments in your calculations. 2. If you are using a FIFO basis, do not overlook costs assigned in the previous period to units that were in process at the beginning of the current period but are now included in the units transferred. 3. Unit costs may fluctuate between periods, consequently, transferred units may contain batches accumulated at different unit costs. 4. Different departments may have different measurement denominations. If this is the case, as units are received in one department coming from another department, their measurements must be converted to the denomination of the receiving department. Diff: 2 Type: ES CPA Competencies: Chapter 18 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 18-5
Cost Accounting: A Managerial Emphasis - Cdn. Ed., 9e (Datar) Chapter 19 Spoilage, Rework, and Scrap 19.1 Distinguish among spoilage, rework, and scrap, and apply the appropriate methods to account for normal and abnormal spoilage. 1) Scrap products may be reprocessed and subsequently sold as a finished good. Answer: FALSE Explanation: Scrap has no subsequent use in the current production process. Diff: 2 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-1
2) The costs of abnormal spoilage are written off as a loss; however, the costs of normal spoilage are treated as part of cost of goods manufactured. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-1
3) Normal spoilage is avoidable and controllable. Answer: FALSE Explanation: Normal spoilage is part of the production process. Diff: 2 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-1
4) Spoilage issues arise in accounting for process costing but not in accounting for job costing. Answer: FALSE Explanation: Spoilage can occur in both types of processing. Diff: 1 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-1
5) An item classified as spoilage has no value. Answer: FALSE Explanation: Although the item does not meet the specifications, it may be sold as a "second" or for its scrap value. It is not necessarily thrown out. Diff: 2 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-1
6) Reworked goods are unacceptable units of production usually not capable of being repaired or converted into a salable product. Answer: FALSE Explanation: Reworked goods are unacceptable units of production that can be repaired into a salable product. Diff: 2 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-1
7) When calculating normal spoilage rates, the base should be the actual units started in production. Answer: FALSE Explanation: The base should be good units completed. Diff: 2 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-1
8) Abnormal spoilage is spoilage that should arise under efficient operating conditions. Answer: FALSE Explanation: Abnormal spoilage should not arise under efficient operating conditions. Diff: 2 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-1
9) A company whose goal is zero defects would usually treat all spoilage as abnormal. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 19-1
10) Under efficient operating conditions, all spoilage is considered to be abnormal spoilage.
Answer: FALSE Explanation: Normal spoilage is spoilage that is considered to be inherent in a production process. It arises even when the process is operated in an efficient manner. Diff: 1 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-1
11) IFRS/ASPE permits normal spoilage costs to be part of cost of goods sold. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-1
12) Deducting the disposal value from the costs of the spoiled goods accumulated to the point of inspection equals A) the net cost of discarded goods. B) the net cost of reworked goods. C) the net cost of spoilage. D) the net cost of scrap. E) the net cost of disposals. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-1
13) Which of the following defines spoilage? A) units of production that do not meet the specifications required by customers but that are subsequently repaired and sold as good finished units B) units of production, whether fully or partially completed, that do not meet the specifications required by customers for good units and are discarded or sold at reduced prices C) residual material that results from manufacturing a product D) products of a joint production process that have low total sales values relative to the total sales value of the main product Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-1
14) If the inspection point occurs at 33% into the production cycle, which of the following units would be allocated costs of spoilage detected at inspection?
A) all units in the system B) units that are under 33% complete C) units detected to be spoiled units D) units that are more than 33% complete E) units that are under 33% complete, and units detected to be spoiled units Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 19-1
15) Units of production that can be reprocessed and then be sold as finished goods are best known as A) reworked units. B) scrap. C) normal spoilage. D) work-in-process. E) abnormal spoilage. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-1
16) Items with minimal sales value are known as A) reworked units. B) scrap. C) spoilage. D) ending work-in-process units. E) abnormal spoilage. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-1
17) The costs from abnormal spoilage should appear A) on the balance sheet as part of finished goods inventory. B) as a separate inventory item. C) as a detailed item on the income statement. D) as part of cost of goods manufactured. E) either on the balance sheet as part of finished goods inventory, or as a separate inventory item. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-1
18) Companies that attempt to achieve zero defects in the manufacturing process treat all spoilage as which of the following? A) scrap B) reworked units C) normal spoilage D) abnormal spoilage E) production costs added to inventory Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-1
19) Normal spoilage rates for a manufacturing process should be computed on the basis of A) total good units. B) total actual units. C) total reworked units. D) total production units. E) total actual units minus total reworked units. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-1
20) Spoilage that should not arise under efficient operating conditions is referred to as A) ordinary spoilage. B) normal spoilage. C) abnormal spoilage. D) uncontrollable. E) standard spoilage. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-1
21) Costs of normal spoilage are usually accounted for as A) part of the cost of goods sold. B) part of the cost of goods manufactured. C) a separate line item in the income statement. D) an asset in the balance sheet. E) a liability in the balance sheet. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-1
22) Spoilage that is an inherent result of the particular production process and arises even under efficient operating conditions is referred to as ________. A) incremental spoilage B) normal spoilage C) irregular spoilage D) direct spoilage Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-1
23) Spoilage that is not inherent in a particular production process and would not arise under efficient operating conditions is referred to as ________. A) incremental spoilage B) usual spoilage C) abnormal spoilage D) indirect spoilage Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-1
24) Material left over when making a product is referred to as A) reworked units. B) spoilage. C) scrap. D) defective units. E) indirect material. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-1
Use the information below to answer the following question(s). Saskatchewan Computer Systems, Inc. manufactures computer memory cards and uses process-costing. All direct materials are added at the inception of the production process. The accounting department noted that there was no beginning inventory for January. Direct materials purchases totalled $150,000 during the month. Work-in-process records revealed that 7,500 cards were started in January, 4,500 cards were completed, and 1,500 units were spoiled as expected. Ending work-in-process units are complete in respect to direct materials costs. Inspection occurs at the end of the process. 25) What are the Saskatchewan Computer Systems Inc. respective direct material costs per equivalent unit assuming spoiled units are counted when computing output in equivalent units and when not counting spoiled units in the equivalent unit total? A) $15.00; $20.00 B) $20.00; $25.00 C) $25.00; $30.00 D) $30.00; $35.00 E) $35.00; $40.00 Answer: B Explanation: Recognized Ignored Cost to account for: $150,000 $150,000 Equivalent units: 7,500 6,000 Cost per equivalent unit $20.00 $25.00 Assigned to: Good units completed: (4,500 × $20; $25) + normal spoilage (1,500 × $20) Costs trans. out WIP EI (1,500 × $20; $25) Cost Accounted for:
$90,000
$112,500
30,000 $120,000 30,000 $150,000
0 $112,500 37,500 $150,000
Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-1
26) What is the Saskatchewan Computer Systems Inc. direct material cost assigned to good units completed when spoilage units are recognized in the total equivalent units? A) $150,000 B) $120,000 C) $112,500 D) $90,000 E) $77,000 Answer: B Explanation: Recognized Ignored Cost to account for: $150,000 $150,000 Equivalent units: 7,500 6,000 Cost per equivalent unit $20.00 $25.00 Assigned to: Good units completed: (4,500 × $20; $25) + normal spoilage (1,500 × $20) Costs trans. out WIP EI (1,500 × $20; $25) Cost Accounted for:
$90,000
$112,500
30,000 $120,000 30,000 $150,000
0 $112,500 37,500 $150,000
Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-1
27) What is the Saskatchewan Computer Systems Inc. cost transferred out, assuming spoilage units are not included in the equivalent unit calculation? A) $120,000 B) $112,500 C) $90,000 D) $82,500 E) $37,500 Answer: B Explanation: Recognized Ignored Cost to account for: $150,000 $150,000 Equivalent units: 7,500 6,000 Cost per equivalent unit $20.00 $25.00 Assigned to: Good units completed: (4,500 × $20; $25) + normal spoilage (1,500 × $20) Costs trans. out WIP EI (1,500 × $20; $25) Cost Accounted for:
$90,000
$112,500
30,000 $120,000 30,000 $150,000
0 $112,500 37,500 $150,000
Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-1
28) At Saskatchewan Computer Systems Inc., what amounts are allocated to ending work-in-process inventory assuming spoilage units are recognized in the equivalent unit calculation, and that they are ignored, respectively? A) $27,500; $30,000 B) $30,000; $34,250 C) $30,000; $37,500 D) $37,500; $40,000 E) $30,000; $40,000 Answer: C Explanation: Recognized Ignored Cost to account for: $150,000 $150,000 Equivalent units: 7,500 6,000 Cost per equivalent unit $20.00 $25.00 Assigned to: Good units completed: (4,500 × $20; $25) + normal spoilage (1,500 × $20) Costs trans. out WIP EI (1,500 × $20; $25) Cost Accounted for:
$90,000
$112,500
30,000 $120,000 30,000 $150,000
0 $112,500 37,500 $150,000
Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-1
29) At Saskatchewan Computer Systems Inc., spoilage costs allocated to completed units are larger by which method and by how much? A) when spoiled units are recognized by $2,500 B) when spoiled units are recognized by $4,250 C) when spoiled units are ignored by $4,250 D) when spoiled units are ignored by $7,500 E) when spoiled units are recognized by $7,500 Answer: E Explanation: $120,000 - $112,500 = $7,500 or $5.00 × 1,500 units = $7,500 Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-1
Use the information below to answer the following question(s). Asmee Concept manufactures small tables in its Processing Department. Direct materials are added at the initiation of the production cycle and must be bundled in single kits for each unit. Conversion costs are incurred evenly throughout the production cycle. Before inspection, some units are spoiled due to nondetectable materials defects. Inspection occurs at the end of the process. Spoiled units generally constitute 5 percent of the good units. Data for December are as follows: WIP, Beginning inventory Dec 1 Direct materials: 100% complete Conversion costs: 75% complete
10,000 units
Started during December
40,000 units
Completed and transferred out during month
38,400 units
WIP, ending inventory December 31 Direct materials: 100% complete Conversion costs: 65% complete
8,000 units
Costs: WIP, beginning inventory: Direct materials Conversion costs Direct materials added during December Conversion costs added during December
$50,000 30,000 100,000 140,000
30) What is the number of total spoiled units? A) 1,600 units B) 2,000 units C) 2,700 units D) 3,600 units E) 4,500 units Answer: D Explanation: Spoiled units = (10,000 units + 40,000) - (38,400 units + 8,000) = 3,600 units Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-1
31) Normal spoilage totalled A) 1,600 units. B) 2,000 units. C) 2,700 units. D) 1,920 units. E) 1,700 units. Answer: D Explanation: Normal spoilage = 5% × 38,400 units = 1,920 spoiled units Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-1
32) Abnormal spoilage totalled A) 1,600 units. B) 2,000 units. C) 1,680 units. D) 1,920 units. E) 1,700 units. Answer: C Explanation: Abnormal spoilage = 3,600 units - 1,920 units = 1,680 units Diff: 3 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-1
33) The costs of abnormal spoilage are A) locked-in in the product design stage. B) part of the inventoriable costs when units are reworked. C) included in the cost of goods manufactured. D) highlighted on the cash flow statement to draw the readers attention. E) written off as losses. Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-1
34) Marble Shop manufactures marble products. All direct materials are included at the inception of the production process. For April there was no beginning inventory in the processing plant. Direct materials totalled $420,000 for the month. Work-in-process records revealed that 7,500 tonnes were started in April and that 5,500 tonnes were finished; 500 tonnes were spoiled as expected. Ending work-in-process units are complete in respect to direct materials costs. Spoilage is not detected until the process is complete. Required: a. What are the costs assigned to completed units when spoilage units are recognized and when they are not recognized in the cost per equivalent unit? b. What are the costs transferred out if spoilage units are recognized and if they are ignored? c. What are the amounts allocated to the work-in-process ending inventory when spoilage units are recognized and when spoilage units are ignored? Answer: Recognized Ignored a. Cost to account for: $420,000 $420,000 Equivalent units: 7,500 7,000 Cost per equivalent unit $56 $60 Assigned to good units completed: (5,500 × $56) (5,500 × $60) b. Transferred out: Finished Normal spoilage: (500 × $56) Total c. Ending work-in-process inventory: (1,500 × $56) (1,500 × $60)
$308,000 $330,000
$308,000
$330,000
28,000 $336,000
0 $330,000
$84,000 $90,000
Diff: 2 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-1
35) Regina Shop manufactures pottery products. All direct materials are included at the inception of the production process. For April, there was no beginning inventory in the processing plant. Direct materials totaled $310,000 for the month. Work-in-process records revealed that 5,000 kilograms were started in April and 3,000 kilograms were finished; 1,000 kilograms were spoiled as expected. Ending work-inprocess units are complete in respect to direct materials costs. Spoilage is not detected until the process is complete. Required: a. What are the costs assigned to completed units when spoilage units are recognized and when they are not recognized in the cost per equivalent unit? b. What are the costs transferred out if spoilage units are recognized and if they are ignored? c. What are the amounts allocated to the work-in-process ending inventory when spoilage units are recognized and when spoilage units are ignored? Answer: a. Cost to account for $310,000 $310,000 Divided by equivalent units 5,000 4,000 Cost per equivalent unit $62 $77.50 Assigned to good units completed: (3,000 × $62) (3,000 × $77.50)
$186,000
b.
Transferred out – Finished Normal spoilage (1,000 × $62) Total
$186,000 62,000 $248,000
c.
Ending work-in-process inventory: (1,000 × $62) (1,000 × $77.50)
$62,000
$232,500 $232,500 0 $232,500
$77,500
Diff: 2 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-1
36) Ottawa's Pottery manufactures pottery products. All direct materials are included at the inception of the production process. For April, there was no beginning inventory in the processing plant. Direct materials totaled $155,000 for the month. Work-in-process records revealed that 2,500 tons were started in April and that 1,500 tons were finished; 500 tons were spoiled as expected. Ending work-in-process units are complete in respect to direct materials costs. Spoilage is not detected until the process is complete. Required: a. What are the costs assigned to completed units when spoilage units are recognized and when they are not recognized in the cost per equivalent unit? b. What are the costs transferred out if spoilage units are recognized and if they are ignored? c. What are the amounts allocated to the work-in-process ending inventory when spoilage units are recognized and when spoilage units are ignored? Answer: a. Recognized Ignored Cost to account for $155,000 $155,000 Divided by equivalent units 2,500 2,000 Cost per equivalent unit $ 62 $ 77.50 Assigned to good units completed: (1,500 × $62) (1,500 × $77.50)
$93,000
b.
Transferred out — Finished Normal spoilage (500 × $62) Total
$93,000 31,000 $124,000
c.
Ending work-in-process inventory: (500 × $62) (500 × $77.50)
$ 31,000
$116,250 $116,250 0 $116,250
$38,750
Diff: 2 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-1
37) CHEN Shoes manufactures shoes. All direct materials are included at the inception of the production process. For March, there were 2,000 units in beginning inventory with a direct material cost of $1,000. Direct materials totalled $20,000 for the month. Work-in-process records revealed that 40,000 shoes were started in March and 36,000 were finished. Normal spoilage of 5 percent of units finished was incurred. Ending work-in-process units are complete in respect to direct materials costs. Spoilage is not detected until the process is complete. CHEN Shoes uses the weighted-average method. Required: a. What are the costs assigned to completed units when spoilage units are recognized and when they are not recognized in the cost per equivalent unit? b. What are the costs transferred out if spoilage units are recognized and if they are ignored? c. What are the amounts allocated to the work-in-process ending inventory when spoilage units are recognized and when spoilage units are ignored? Answer: a. Equivalent units (spoilage recognized) = 2,000 + 40,000 = 42,000 Equivalent units (spoilage ignored) = 2,000 + 40,000 - (36,000 × 0.05) = 40,200 Recognized
Ignored
$1,000 20,000 $21,000 42,000 $0.50
$1,000 20,000 $21,000 40,200 $0.52
Assigned to good units completed: (34,200 × $0.50) $17,100 (34,200 × $0.52)
$17,784
Cost to account for: Beginning work-in-process Current period Total costs to account for: Equivalent units: Cost per equivalent unit
b.
Transferred out — Finished $17,100 Normal spoilage (1,800 × $0.50) 900 Total $18,000
c. Ending work-in-process: (6,000 × $0.50) (6,000 × $0.52)
$17,784 0 $17,784
$3,000 $3,120
Diff: 3 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-1
38) CHANGYING Shoes manufactures shoes. All direct materials are included at the inception of the production process. For March, there were 1,400 units in beginning inventory with a direct material cost of $700. Direct materials totaled $15,000 for the month. Work-in-process records revealed that 35,000 units were started in March and that 30,000 were finished. Normal spoilage of 2% of units finished was incurred. Ending work-in-process units are complete in respect to direct materials costs. Spoilage is not detected until the process is complete. CHANGYING Shoes uses the weighted-average method. Required: a. What are the costs assigned to completed units when spoilage units are recognized and when they are not recognized in the cost per equivalent unit? b. What are the costs transferred out if spoilage units are recognized and if they are ignored? c. What are the amounts allocated to the work-in-process ending inventory when spoilage units are recognized and when spoilage units are ignored? Answer: a. Equivalent units (spoilage recognized) = 1,400 + 35,000 = 36,400 Equivalent units (spoilage ignored) = 1,400 + 35,000 - (30,000 × 0.02) = 35,800
Cost to account for: Beginning work in process Current period Total costs to account for Divided by equivalent units Cost per equivalent unit
Recognized
Ignored
$ 700 15,000 $15,700 36,400 $ 0.431
$ 700 15,000 $15,700 35,800 $ 0.439
Assigned to good units completed: (29,400 × $0.431) (29,400 × $0.439)
$12,671
b.
Transferred out — Finished Normal spoilage (600 × $0.431) Total
$12,671 259 $12,930
c.
Ending work in process: (6,400 × $0.431) (6,400 × $0.439)
$ 2,758
$12,907 $12,907 0 $12,907
$ 2,810
Diff: 3 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-1
39) AI Ltd. manufactures sun roof kits. All direct materials are included at the inception of the production process. For June, there were 1,500 units in beginning inventory with a direct material cost of $225,000. Direct materials totalled $3,100,000 for the month. Work-in-process records revealed that 20,000 sun roof kits were started in June and that 18,000 were finished. Normal spoilage of 2 percent of units finished was incurred. Ending work-in-process units are complete in respect to direct materials costs. Spoilage is not detected until the process is complete. AI Ltd. uses the weighted-average method. Required: a. What are the costs assigned to completed units when spoilage units are recognized and when they are not recognized in the cost per equivalent unit? b. What are the costs transferred out if spoilage units are recognized and if they are ignored? c. What are the amounts allocated to the work-in-process ending inventory when spoilage units are recognized and when spoilage units are ignored? Answer: a. Equivalent units (spoilage recognized) = 1,500 + 20,000 = 21,500 Equivalent units (spoilage ignored) = 1,500 + 20,000 - (18,000 × 0.02) = 21,140
Cost to account for: Beginning work-in-process Current period Total costs to account for: Equivalent units: Cost per equivalent unit Assigned to good units completed: (17,640 × $154.65) (17,640 × $157.28) b.
Transferred out — Finished Normal spoilage (360 × $154.65) Total
c. Ending work-in-process: (3,500 × $154.65) (3,500 × $157.28)
Recognized
Ignored
$225,000 3,100,000 $3,325,000 21,500 $154.65
$225,000 3,100,000 $3,325,000 21,140 $157.28
$2,728,047 $2,774,503 $2,728,047 55,674 $2,783,721
$2,774,503 0 $2,774,503
$541,279 $550,497
Diff: 3 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-1
40) Busy Hands Craft Company is a small manufacturing company that specialized in arts and crafts items. It recently bought an old textile mill that it has refurbished to manufacture and dye special cloth to be sold in its craft shops. However, it discovered something new for its accounting system. The company had never before had finished goods that did not meet standard, leftover materials from processing runs, or unacceptable outputs. Required: As the business consultant for the company, explain how it can handle the items mentioned. Include any potential problems with the accounting procedures. Answer: First, an explanation of each item is needed. 1. Rework units are those units that are defective but can be reworked and sold as acceptable finished goods. 2. Scrap is the leftover materials that may have a minimal sales value. Scrap may be either sold, disposed of, or reused in another job or processing run. 3. Spoilage is the production outputs that cannot be reworked. These units are discarded or sold for minimal value. The potential problem with these areas is that they may be treated differently by the accounting system. The company should establish an acceptable and consistent method of handling each area. A consistent policy also aids the managers who are being evaluated by their department's efforts. Diff: 2 Type: ES CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 19-1
41) Explain the meaning of the terms spoilage, scrap, and rework. Provide an example of each. Is it possible for a single firm to have all three from a single productive process? Answer: Spoilage is units of production that do not meet the specifications required by customers for good units, and are discarded or sold for reduced prices. An example of spoilage would be a damaged pair of Levi's Jeans sold as a "second." Rework is unacceptable units that are subsequently repaired and sold as acceptable finished goods. An example of rework would be a pair of Jeans that might require some additional trimming before they become acceptable. Scrap is residual material that results from manufacturing a product; it has low retail sales value compared with the total sales value of the product. An example of scrap would be any leftover material from a cutting process that is too small to use in any other clothing. As the above examples indicate, a single productive process might generate, spoilage, scrap, and rework simultaneously. Diff: 2 Type: ES CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 19-1
42) You are the chief financial officer of a lumber mill, and you are becoming quite concerned about the spoilage, scrap, and reworked items associated with your production processes. Your firm produces mainly products for the building industry. Required: Discuss the problems associated with these items and the methods your company can use to reduce spoilage, scrap, and reworked items. Answer: The problems associated with these items include: 1. Your company pays for the total raw material, not just the portion converted into a salable product; 2. The cost of disposing these unsalable or unused items, both the disposal costs and the costs and problems associated with finding a landfill site or other disposal site; 3. These disposed or unused items can create an eyesore, and attract the wrath of the environmentalists; and 4. Developing high-value added products that can be produced from these various items. Diff: 2 Type: ES CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 19-1
43) Anika has been reviewing the accounting system for her company and is very concerned about the accounting for spoilage. It appears that spoilage is accounted for only at the end of the processing cycle. While this concept is acceptable in general, Anika believes that a better method can be found to properly account for the spoilage when it occurs. She believes that there must be something better than the weighted-average method of accounting for spoilage. She would like the company to use a method that provides closer tracking of the spoilage with the accounting for the spoilage. Required: Discuss the problems Anika is having with the accounting system. Answer: The main problem Anika has is that she does not understand the accounting system. The use of weighted-average or FIFO is not for addressing the problems of spoilage tracking. While the methods do differ slightly in the tracking of costs, FIFO keeps beginning inventories separate; the point of accounting for spoilage is not affected by the accounting method. If the company can account for spoilage at different stages of completion, these stages can be converted into percentage of completion points, and the spoilage can be accounted for as the process completes each stage. Diff: 3 Type: ES CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 19-1
44) Distinguish among spoilage, reworked units, and scrap. Give an example of each. Answer: Spoilage refers to unacceptable units of production that are discarded or are sold for reduced prices. Both partially completed or fully completed units of output can be spoiled. Examples are defective clothes sold as seconds. Reworked units are unacceptable units of production that are subsequently repaired and sold as acceptable finished goods. Defective units of product (such as pagers, computer disk drives, computers, and telephones) detected during production or immediately after production but before units are shipped to customers, can sometimes be reworked and sold as good products. Scrap is material left over when making a product. It has low sales value compared with the sales value of the product. Examples are shavings and short lengths from woodworking operations and edges left over from plastic molding operations. Diff: 1 Type: ES CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 19-1
45) What are the objectives in accounting for spoilage? Answer: The key objectives in accounting for spoilage are determining the magnitude of the costs of the spoilage and distinguishing between the costs of normal and abnormal spoilage. To effectively manage a company (or a division of a business), a manager needs information concerning how his business is performing. Spoilage is a cost which should be controlled and minimized. The dimensions of the cost must be known (the dollar amount of the spoilage). The accounting system must be capable of determining the dollar amount of the spoilage costs while distinguishing between normal and abnormal spoilage. This information must be reported and available to management on a timely basis. Diff: 2 Type: ES CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-1
46) Spoilage can be a significant cost for many organizations. Discuss when spoilage might happen and how the costs of normal spoilage get allocated. Answer: Spoilage may occur at various stages of the production process. In general, the cost of spoiled units is equal to the all costs incurred in producing the spoiled units up to the point of inspection. The costs of normal spoilage are allocated to units in ending work-in-process inventory. The most common approach is to presume that normal spoilage occurs at the inspection point in the production cycle and to allocate its cost over all units that have passed that point during the accounting period. One cost-benefit decision to be made is when to do inspections. Naturally, the earlier the spoilage is caught, the less costly it will be as the conversion costs will be lower in the early stages of production. The costs of performing inspections can be compared to the expected savings from reducing the spoilage costs as part of the determination of when in the process the inspections should happen. Diff: 3 Type: ES CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-1
47) For each of the following items identify whether it is spoilage, reworked units, or scrap. ________ a. Defective jeans sold as seconds ________ b. Shavings ________ c. Edges from plastic moldings ________ d. Carpets sold as seconds ________ e. Precision tools that are not built successfully to the necessary tolerance, but which can be successfully converted to a saleable product ________ f. Rock extracted as a result of mining processing ________ g. Complex defective products such as semiconductors Answer: a. spoilage b. scrap c. scrap d. spoilage e. spoilage and rework f. scrap g. spoilage (usually too complex to rework) Diff: 2 Type: ES CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 19-1
For each of the following items identify whether it is spoilage, reworked units, or scrap. A) scrap B) spoilage C) spoilage and rework 48) Defective jeans sold as seconds Diff: 1 Type: MA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 19-1
49) Shavings Diff: 1 Type: MA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 19-1
50) Edges from plastic moldings Diff: 1 Type: MA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 19-1
51) Carpets sold as seconds Diff: 1 Type: MA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 19-1
52) Precision tools that are not built successfully to the necessary tolerance, but which can be successfully converted to a saleable product Diff: 1 Type: MA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 19-1
53) Rock extracted as a result of mining processing Diff: 1 Type: MA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 19-1
54) Complex defective products such as semiconductors Diff: 1 Type: MA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 19-1
Answers: 48) B 49) A 50) A 51) B 52) C 53) A 54) B
19.2 Apply process-costing methods to account for spoilage using weighted-average and firstin, first-out (FIFO) methods. 1) Costs in beginning inventory are pooled with costs in the current period when determining the costs of good units under the weighted-average method of process costing. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
2) All spoilage costs are related to the units completed during the period using the unit costs of the current period under FIFO. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
3) Under the weighted-average method, the costs of normal spoilage are added to the costs of their related good units. Hence, the cost per good unit completed and transferred out equals the total costs transferred out divided by the number of good units produced. Answer: TRUE Diff: 3 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
4) The unit costs of abnormal and normal spoilage are equal, when the two are detected simultaneously.
Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
5) The last step in the five-step procedure for process costing with spoilage is to summarize total costs to account for. Answer: FALSE Explanation: The last step in the five-step procedure for process costing with spoilage is to assign total costs to units completed, to spoiled units, and to units in ending work-in-process. Diff: 2 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-2
6) Counting spoiled units as part of output units in a process-costing system usually results in a higher cost per unit. Answer: FALSE Explanation: Counting spoiled units usually results in a lower cost per unit. Diff: 1 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 19-2
7) If normal spoilage is presumed to occur prior to a specific inspection point, and abnormal spoilage is detected at other inspection points A) unit costs of abnormal spoilage will differ from the unit cost of normal spoilage. B) all spoilage will be recognized proportionately across the various inspection points. C) abnormal spoilage will generally be less than normal spoilage. D) normal spoilage costs may be allocated prior to inspection of the products and abnormal spoilage will be allocated after the inspection of the products. E) unit cost of abnormal spoilage will be the same as unit costs of normal spoilage. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-2
8) Asmee Computer Systems, Inc., manufactures printer circuit cards. All direct materials are added at the inception of the production process. During January, the accounting department noted that there was no beginning inventory. Direct materials of $310,000 were used during the month. Work-in-process records revealed that 12,000 card units were started in January, 6,000 card units were complete, and 4,600 card units were spoiled as expected. Ending work-in-process card units are complete in respect to direct materials costs. Spoilage is not detected until the process is complete. What is the direct material cost per equivalent unit? (Please round the final answer to the nearest cent.) A) $17.22 B) $25.83 C) $21.68 D) $29.99 Answer: B Explanation: Cost to account for: $310,000 Divided by equivalent units 12,000 Cost per equivalent unit $25.83 Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-2
9) Normal spoilage is usually computed on the basis of A) the number of good units that pass inspection during the current period. B) the number of units that pass the inspection point during the current period. C) the number of units that are 100% complete as to materials. D) the number of spoiled units that pass inspection during the current period. E) the percentage of good units that passed inspection in the previous period. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-2
10) Which of the following statements is FALSE? A) The cost of spoiled units is the costs incurred prior to detection. B) The unit costs of abnormal and normal spoilage are the same if detected simultaneously. C) The timing of inspection affects the amount of abnormal spoilage. D) Spoilage may occur at points other than the inspection point. E) Spoilage units cannot be sold. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-2
Use the information below to answer the following question(s). Asmee Concept manufactures small tables in its Processing Department. Direct materials are added at the initiation of the production cycle and must be bundled in single kits for each unit. Conversion costs are incurred evenly throughout the production cycle. Before inspection, some units are spoiled due to nondetectable materials defects. Inspection occurs at the end of the process. Spoiled units generally constitute 5 percent of the good units. Data for December are as follows: WIP, Beginning inventory Dec 1 Direct materials: 100% complete Conversion costs: 75% complete
10,000 units
Started during December
40,000 units
Completed and transferred out during month
38,400 units
WIP, ending inventory December 31 Direct materials: 100% complete Conversion costs: 65% complete
8,000 units
Costs: WIP, beginning inventory: Direct materials Conversion costs Direct materials added during December Conversion costs added during December
$50,000 30,000 100,000 140,000
11) What is the total cost per equivalent unit using the weighted-average method of process costing? A) $3.00 B) $3.60 C) $4.60 D) $6.60 E) $6.90
Answer: D Explanation: WIP, Beginning inventory Costs added during period Total cost to account for Divide by equivalent units Equivalent unit costs
Direct Materials $50,000 100,000 $150,000 50,000 $3.00
Conversion Costs $30,000 140,000 $170,000 47,200 $3.60
Total cost per equivalent unit = $3.00 + $3.60 = $6.60 Spoiled units = 3,600 = 1,920 Normal + 1,680 Abnormal EU calculation = 38,400 + 3,600 + 5,200 = 47,200 Completed & Transferred Out Normal Spoilage 38,400 × 5 % = 1,920 Abnormal Spoilage Ending WIP 8,000 × .65 = 5,200 Diff: 3 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
12) What cost is allocated to abnormal spoilage using the weighted-average process costing method? A) $0 B) $7,360 C) $11,088 D) $16,400 E) $18,100 Answer: C Explanation: 1,680 units × $6.60 = $11,088 Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
13) What are the amounts of direct materials and conversion costs assigned to ending work-in-process using the weighted-average process costing method? A) $18,720; $24,000 B) $22,900; $19,820 C) $24,000; $18,720 D) $28,560; $14,160 E) $33,650; $14,140 Answer: C Explanation: Direct materials = 8,000 units × $3.00 = $24,000 Conversion costs = 5,200 units × $3.60 = $18,720 Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
14) Total cost per equivalent unit using the weighted-average method equals A) the cost per equivalent unit of direct materials plus cost per spoiled unit. B) the cost per equivalent unit of conversion costs plus cost per unit of spoiled materials. C) the total costs divided by total equivalent units. D) the cost per equivalent unit of direct materials plus the cost per equivalent unit of conversion costs. E) the cost per equivalent unit of indirect materials plus cost per spoiled unit. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-2
15) The goal of separately identifying abnormal spoilage is to A) properly cost units in the system. B) assist in performance measurement. C) ensure that such units do not reach finished goods inventory. D) reduce abnormal spoilage to an acceptable level. E) reduce abnormal spoilage to nil. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 19-2
16) Under the FIFO method, all spoilage costs are assumed to be A) related to the units in beginning inventory, plus the units completed during the period. B) related to the units completed during the period. C) related to the units in ending inventory. D) related to the units in both beginning and ending inventory plus the units completed during the period. E) related to the units completed in both beginning and ending inventory. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-2
Use the information below to answer the following question(s). Nesrien Custom Carpentry manufactures chairs in its Processing Department and uses the FIFO cost flow assumption. Direct materials are included at the inception of the production cycle and must be bundled in single kits for each unit. Conversion costs are incurred evenly throughout the production cycle. Inspection takes place at the end of the process, and spoiled units generally constitute 3 percent of the good output. Information provided for March is as follows: WIP, Beginning inventory March 1 Direct materials: 100% complete Conversion costs: 89.5% complete
30,000 units
Started during March
80,000 units
Completed & Transferred Out
86,000 units
WIP, Ending inventory March 31 Direct materials: 100% complete Conversion costs: 75% complete
20,000 units
Costs: WIP, Beginning inventory: Direct materials Conversion costs Direct materials added Conversion costs added
$70,000 40,000 160,000 120,000
17) What are the normal and abnormal spoilage units, respectively, for March? A) 2,580 units; 1,420 units B) 1,950 units; 1,390 units C) 1,690 units; 1,050 units D) 1,420 units; 2,580 units E) 1,140 units; 1,140 units Answer: A Explanation: Spoiled units = 30,000 + 80,000 - 20,000 - 86,000 = 4,000 Normal spoilage = 3% × 86,000 units = 2,580 spoiled units Abnormal spoilage = 4,000 units - 2,580 = 1,420 units Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
18) What are the costs per equivalent unit for direct materials and conversion respectively? A) $2.00; $1.54 B) $1.45; $1.54 C) $2.11; $1.62 D) $2.11; $1.18 E) $2.00; $1.18 Answer: A Explanation: Total Direct Materials Conversion From Beg 30,000 0 3,150 Started & Completed 56,000 56,000 56,000 Normal Spoilage 2,580 2,580 2,580 Abnormal Spoilage 1,420 1,420 1,420 Ending WIP 20,000 20,000 15,000 Total 80,000 78,150 Current Period $ $160,000 $120,000 Cost per EU $2.00 $1.5355 Diff: 3 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
19) What costs are allocated to the ending work-in-process inventory for direct materials and conversion costs, respectively? A) $28,250; $24,850 B) $30,000; $23,100 C) $30,000; $21,590 D) $39,500; $13,600 E) $40,000; $23,100 Answer: E Explanation: Direct materials: 20,000 units × $2.00 = $40,000 Conversion costs: 15,000 units × $1.54 = $23,100 Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
20) What costs would be associated with normal and abnormal spoilage, respectively, using the FIFO method of process costing? A) $5,890.64; $9,133.20 B) $5,890.64; $5,826.00 C) $6,469.64; $7,690.36 D) $7,690.36; $5,026.80 E) $9,133.20; $5,026.80 Answer: E Explanation: Direct Materials Conversion Costs WIP, Beginning inventory Total cost to account for $160,000 $120,000 Divide by equivalent units 80,000 78,150 Equivalent unit costs $2.00 $1.54 (56,000 + 2,580 + 1,420 + 20,000) = 80,000 units (3,150 + 56,000 + 2,580 + 1,420 + 15,000) = 78,150 units Normal Spoilage = 2,580 units × $3.54 = $9,133.20 Abnormal Spoilage = 1,420 units × $3.54 = $5,026.80 Diff: 3 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
21) Which of the following journal entries correctly represents the transfer of completed goods for the current period using the FIFO method of process costing? A) Finished Goods $10,560.28 Loss from Spoilage $10,560.28 B) Loss from Spoilage Finished Goods
$5,026.80 $5,026.80
C) Finished Goods Work-in-Process
$311,500.00 $311,500.00
D) Finished Goods Work-in-Process
$401,700.00 $401,700.00
E) Finished Goods Work-in-Process
$322,224.20 $322,224.20
Answer: E Explanation: Abnormal spoilage $5,026.80 BWIP 110,000.00 Costs added 3,150 × $1.54 4,851.00 Started & completed 56,000 × $3.54 198,240.00 Normal spoilage 2,580 × $3.54 9,133.20 Total cost transferred out $322,224.20 Abnormal spoilage is not attached to the inventory Diff: 3 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
22) Viti Cycle generally has spoiled goods during each job. Costs are assigned to normal spoilage at $10.00 per unit and abnormal spoilage at $20.00 per unit. Disposal fees typically run $5.00 per item. Viti Cycle has a policy never to rework spoiled units. Management believes that once a unit is damaged, it cannot be reworked into a quality product. The losses are charged back to the specific job. What is the appropriate journal entry if 300 units are considered abnormal spoilage and are not disposed of in a process costing system? A) Loss from Abnormal Spoilage $6,000 Work-in-Process Control $6,000 B) Work-in-Process Control Loss from Abnormal Spoilage
$1,500
C) Loss from Abnormal Spoilage Inventory
$6,000
D) Loss from Abnormal Spoilage Work-in-Process
$1,500
E) Loss from Abnormal Spoilage Work-in-Process Control
$1,500
$1,500
$6,000
$1,500
$1,500
Answer: A Explanation: 300 units × $20.00 = $6,000 Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
Answer the following question(s) using the information below. Viti's Office Supplies manufactures desk organizers in its Processing Department. Direct materials are added at the beginning of the process, and conversion costs are incurred evenly throughout the production cycle. Inspection takes place at the end of the process and spoiled units generally constitute 4% of the good units. Data provided for February are as follows: WIP, beginning inventory February 1 Direct materials (100% complete) Conversion costs (50% complete)
25,000 units
Started during February Completed and transferred out
82,000 units 81,000 units
WIP, ending inventory February 28 Direct materials (100% complete) Conversion costs (25% complete)
15,000 units
Costs: WIP, beginning inventory: Direct materials Conversion costs Direct materials added Conversion costs added
$150,000 44,000 209,916 109,893
23) What are the normal and abnormal spoilage units, respectively, for February when using FIFO? A) 1,400 units; 1,480 units B) 3,280 units; 1,640 units C) 3,240 units; 7,760 units D) 3,240 units; 11,000 units E) 7,760 units; 1,640 units Answer: C Explanation: Spoiled units = 25,000 + 82,000 - 81,000 - 15,000 = 11,000 Normal spoilage = 4% × 81,000 units = 3,240 spoiled units Abnormal spoilage = 11,000 - 3,240 = 7,760 units Diff: 3 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
24) What costs would be associated with normal and abnormal spoilage, respectively, using the FIFO method of process costing? A) $12,571; $30,108 B) $30,108; $12,571 C) $1,257; $3,010 D) $8,000; $4,000 E) $10,627; $25,453 Answer: A Explanation: Direct Materials Conversion Costs WIP, beginning inventory Costs added during period $209,916 $109,893 Total cost to account for Divided by equivalent units Equivalent-unit costs
209,916 82,000 *
109,893 83,250 **
$2.56
$1.32
Total Cost per equivalent unit = $2.56 + $1.32 = $3.88 Normal spoilage = 4% × 81,000 units = 3,240 spoiled units Abnormal spoilage = (25,000 units + 82,000) - (81,000 units + 15,000) - 3,240 = 7,760 units * (56,000 + 3,240 + 7,760 + 15,000) = 82,000 units ** (.5 × 25,000 + 56,000 + 3,240 + 7,760 +.25 × 15,000) = 83,250 units Normal Spoilage = 3,240 units × $3.88 = $12,571 Abnormal Spoilage = 7,760 units × $3.88 = $30,108 Diff: 3 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
25) What costs are allocated to the ending work-in-process inventory for direct materials and conversion costs, respectively, using the FIFO method of process costing? A) $38,250; $4,850 B) $40,000; $23,100 C) $38,400; $4,950 D) $49,500; $38,400 E) $38,400; $19,800 Answer: C Explanation: Direct Materials Conversion Costs WIP, beginning inventory Costs added during period $209,916 $109,893 Total cost to account for Divided by equivalent units Equivalent-unit costs
209,916 82,000 *
109,893 83,250 **
$2.56
$1.32
Total Cost per equivalent unit = $2.56 + $1.32 = $3.88 Direct materials: 15,000 units × $2.56 = $38,400 Conversion costs: 15,000 units × .25 × $1.32 = $4,950 Diff: 3 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
26) Using the FIFO method of process costing, what are the total costs of all the units that were in the beginning work-in-process inventory and were subsequently shipped? A) $194,000 B) $16,500 C) $210,500 D) $97,000 E) $274,500 Answer: C Explanation: Direct Materials Conversion Costs WIP, beginning inventory Costs added during period $209,916 $109,893 Total cost to account for Divided by equivalent units Equivalent-unit costs
209,916 82,000 *
109,893 83,250 **
$2.56
$1.32
Total Cost per equivalent unit = $2.56 + $1.32 = $3.88 * (56,000 + 3,240 + 7,760 + 15,000) = 82,000 units ** (.5 × 25,000 + 56,000 + 3,240 + 7,760 +.25 × 15,000) = 83,250 units Costs related to Beginning WIP: Costs Carried Forward from Previous period = $150,000 + $44,000 = $194,000 Additional Conversion Cost = 25,000 units × 50% $1.32 = $16,500 Total = $210,500 Diff: 3 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
27) What are the direct materials and conversion costs of all the units that were started and completed during February? A) $314,280 B) $217,280 C) $318,160 D) $153,500 E) $143,360 Answer: B Explanation: Direct Materials Conversion Costs WIP, beginning inventory Costs added during period $209,916 $109,893 Total cost to account for Divided by equivalent units Equivalent-unit costs
209,916 82,000 *
109,893 83,250 **
$2.56
$1.32
Total Cost per equivalent unit = $2.56 + $1.32 = $3.88 * (56,000 + 3,240 + 7,760 + 15,000) = 82,000 units ** (.5 × 25,000 + 56,000 + 3,240 + 7,760 +.25 × 15,000) = 83,250 units Costs related to units that were started and completed in the period: Started and Completed = Shipped Units less beginning Inventory = 81,000 - 25,000 = 56,000 units Cost = 56,000 units × $3.88 = $217,280 Diff: 3 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
Answer the following question(s) using the information below: Eagles Ltd. uses process costing in its Fabricating Department. At the beginning of October, it had 12,000 units in beginning work-in-process that were 40% complete with respect to conversion. During October, it put 87,000 units into production and completed 89,000 good units. On October 31, there were 3,000 units in ending work-in-process that were 70% complete with respect to conversion. Direct materials are added at the beginning of the process. Inspection occurs at the end of the process, and normal spoilage is 6% of good output. Costs related to the beginning inventory were $36,800 for direct materials and $28,600 for conversion costs. During the month, the company issued $280,000 of direct materials and incurred $599,400 of conversion costs. 28) What are the normal and abnormal spoilage units, respectively, for October assuming Eagles uses the weighted average method of process costing? A) 5,340 units; 1,660 units B) 7,000 units; 1,660 units C) 5,220 units; 1,780 units D) 5,340 units; 1,780 units E) 5,940 units; 1,060 units Answer: A Explanation: Spoilage = [12,000 + 87,000] - [89,000 + 3,000] = 7,000 units 89,000 × 6% = 5,340 normal spoilage; abnormal = 7,000 - 5,340 = 1,660 Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
29) Assuming Eagles uses the weighted-average method for process costing, the equivalent units for direct materials and conversion for October are ________. A) 89,000 units; 88,100 units B) 87,000 units; 93,300 units C) 82.000 units; 91,100 units D) 99,000 units; 98,100 units E) 92,000 units; 90,200 units Answer: D Explanation: Direct Materials Conversion Units Completed 89,000 89,000 Normal Spoilage 5,340 5,340 Abnormal Spoilage 1,660 1,660 Ending WIP (70% converted) 3,000 2,100 Total Equivalent units 99,000 98,100 Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
30) Assuming Eagles uses the FIFO method of process costing, the equivalent units for direct materials and conversion costs respectively for October are ________. A) 87,000 units; 93,300 units B) 87,000 units; 94,200 units C) 80,000 units; 86,300 units D) 87,000 units; 90,900 units E) 99,000 units; 94,200 units Answer: A Explanation: Direct Materials Conversion From Beginning inventory 0 7,200 Started & Completed in October 77,000 77,000 Normal Spoilage 5,340 5,340 Abnormal Spoilage 1,660 1,660 Ending WIP (70% converted) 3,000 2,100 Total Equivalent units 87,000 93,300 Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
31) Assuming Eagles uses the weighted average method of process costing, the cost per equivalent unit for direct materials and conversion costs, respectively, are ________. A) $3.20; $6.40 B) $3.44; $6.89 C) $2.81; $6.09 D) $3.64; $6.40 E) $3.22; $6.42 Answer: A Explanation: EU for DM = 89,000 + 5,340 + 1,660 + 3,000 = 99,000 EU for Conversion = 89,000 + 5,340 + 1,660 + 2,100 = 98,100 Cost per EU for DM = [$280,000 + $36,800]/99,000 = $3.20 Cost per EU for Conversion = [$599,400 + $28,600]/98,100 = $6.40 Diff: 3 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
32) Assuming Eagles uses the FIFO method of process costing, the cost per equivalent unit for direct materials and conversion costs, respectively, are ________. A) $3.20; $6.40 B) $3.64; $6.40 C) $2.81; $6.09 D) $3.22; $6.42 E) $3.44; $6.89 Answer: D Explanation: EU for DM = 77,000 + 5,340 + 1,660 + 3,000 = 87,000 EU for Conversion = 7,200 + 77,000 + 5,340 + 1,660 + 2,100 = 93,300 Cost per EU for DM = [$280,000]/87,000 = $3.22 Cost per EU for Conversion = [$599,400]/93,300 = $6.42 Diff: 3 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
33) Assuming Eagles uses the weighted-average method for process costing, the total cost of goods completed and transferred to finished goods is ________. A) $854,400 B) $921,600 C) $877,440 D) $928,704 E) $905,664 Answer: E Explanation: 89,000 units completed and transferred out at [$3.20 + $6.40] = $854,400 Add normal spoilage = 5,340 × $9.60 = $51,264 Total = $854,400 + $51,264 = $905,664 Diff: 3 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
34) Assuming Eagles uses the FIFO method of process costing, the cost of the ending work-in-process inventory is ________. A) $23,040 B) $23,142 C) $28,800 D) $28,920 E) $19,200 Answer: B Explanation: Cost per EU for DM = [$280,000]/87,000 = $3.22 Cost per EU for Conversion = [$599,400]/93,300 = $6.42 Ending WIP: $9,660 + $13,482 = $23,142 Direct materials 3,000 units @ $3.22 = $9,660 Conversion costs 2,100 units @ $6.42 = $13,482 Diff: 3 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
Answer the following questions using the information below: Fish Fillet Incorporated obtains fish and then processes them into frozen fillets and then prepares the frozen fish fillets for distribution to its retail sales department. Direct materials are added at the initiation of the cycle. Conversion costs are incurred evenly throughout the production cycle. Before inspection, some fillets are spoiled due to non detectable defects. Inspection occurs when units are 50% converted. Spoiled fillets generally constitute 3.5% of the good fillets. Data for April 2018 are as follows: WIP, beginning inventory April 1, 2018 Direct materials (100% complete) Conversion costs (50% complete) Started during April Completed and transferred in April WIP, ending inventory April 30, 2018 Direct materials (100% complete) Conversion costs (20% complete) Costs for April: WIP, beginning Inventory: Direct materials Conversion costs Direct materials added Conversion costs added
80,000 fillets
150,000 fillets 200,000 fillets 16,000 fillets
$ 110,000 80,000 290,200 376,130
35) What is the number of total spoiled units? A) 16,000 units B) 10,000 units C) 50,000 units D) 14,000 units E) 7,000 units Answer: D Explanation: Spoiled units = 80,000 + 150,000 - 200,000 - 16,000 = 14,000 units Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
36) What is the total cost per equivalent unit using the weighted-average method of process costing? A) $4.00 B) $1.74 C) $2.10 D) $3.84 E) $3.74 Answer: D Explanation: Direct Materials Conversion Costs WIP, beginning inventory $ 110,000 $ 80,000 Costs added during period 290,200 376,130 Total cost to account for 400,200 456,130 Divide by equivalent units 230,000 217,200 Equivalent-unit costs $ 1.74 $ 2.10 Total cost per equivalent unit = $1.74 + $2.10 = $3.84 Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
37) What cost is allocated to abnormal spoilage using the weighted-average process-costing method? A) $ 0 B) $26,880 C) $53,760 D) $29,000 E) $14,700 Answer: B Explanation: Spoiled units = (80,000 units + 150,000) - (200,000 units + 16,000 units) 14,000 units Normal spoilage = 3.5% × 200,000 units = 7,000 spoiled units Abnormal spoilage = 14,000 units - 7,000 units = 7,000 units
WIP, beginning inventory Costs added during period Total cost to account for Divide by equivalent units Equivalent-unit costs
Direct Materials $ 110,000 290,200 400,200 230,000 $ 1.74
Conversion Costs $ 80,000 376,130 456,130 217,200 $ 2.10
Total cost per equivalent unit = $1.74 + $2.10 = $3.84 7,000 units × $3.84 = $26,880 Diff: 3 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
38) What are the amounts of direct materials and conversion costs assigned to ending work-in-process
using the weighted-average process-costing method? A) $6,720; $27,840 B) $27,840; $6,720 C) $27,840; $33,600 D) $33,600; $27,840 E) $633,600; $6,720 Answer: B Explanation: Direct Materials WIP, beginning inventory $ 110,000 Costs added during period 290,200 Total cost to account for 400,200 Divide by equivalent units 230,000 Equivalent-unit costs $ 1.74
Conversion Costs $ 80,000 376,130 456,130 217,200 $ 2.10
Total cost per equivalent unit = $1.74 + $2.10 = $3.84 Direct materials = 16,000 units × $1.74 = $27,840 Conversion costs = 16,000 units × 20% × $2.10 = $6,720 Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
39) Viking Sports is a manufacturer of sport swear. It produces all of its products in one department. The information for the current month is as follows: Beginning work-in-process Units started Units completed Ending work-in-process Spoilage Beginning work-in-process direct materials Beginning work-in-process conversion Direct materials added during month Direct manufacturing labour during month
20,000 units 40,000 units 50,000 units 8,000 units 2,000 units $12,000 $4,000 $60,000 $20,000
Beginning work-in-process was half complete as to conversion. Direct materials are added at the beginning of the process. Factory overhead is applied at a rate equal to 50 percent of direct manufacturing labour. Ending work-in-process was 60 percent complete. All spoilage is normal and is detected at end of the process. Required: Prepare a production cost worksheet assuming that spoilage is recognized and the weighted-average method is used.
Answer: Flow of Production Work-in-process, beginning Started during period To account for Good units completed Normal spoilage Work-in-process ending Accounted for
Costs Work-in-process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent unit costs
Physical units 20,000 40,000 60,000 50,000 2,000 8,000 60,000
Totals $16,000 90,000 $106,000 $1.80
Direct materials Conversion
50,000 2,000 8,000 60,000
50,000 2,000 4,800 56,800
Direct materials $12,000 60,000 $72,000 60,000 $1.20
Conversion $4,000 30,000 $34,000 56,800 $0.60
Assignment of costs: Good units completed (50,000 × $1.80) $90,000 Normal spoilage (2,000 × $1.80) 3,600 Total cost of good units completed $93,600 Work-in-process, ending Direct materials (8,000 × $1.20) $9,600 Conversion (8,000 × $0.60 × 0.60) 2,880 $12,480 Costs accounted for (rounding error) $106,080 Diff: 2 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
40) The Skate Board Company uses a process cost system for making skateboard wheels. Materials are added at the beginning of the process and conversion costs are uniformly incurred. At the beginning of September the work-in-process is 40 percent complete and at the end of the month it is 60 percent complete. Spoilage is detected at the end of the process. Other data for the month include: Beginning work-in-process inventory 1,600 units Units started 20,000 units Units placed in finished goods 12,000 units Ending work-in-process inventory 1,200 units Normal spoilage % on all units finished 20 percent Conversion costs Cost of direct materials Beginning work-in-process costs: Materials Conversion
$40,320 $40,000 $4,000 $4,032
Required: a. Prepare a production cost worksheet assuming that spoilage is recognized and the weighted-average method is used. b. Prepare journal entries to record transferring out of cost from the work-in-process accounts.
Answer: a. Normal spoilage = (1,600 + 20,000 - 1,200) × 0.20 = 4,080 Abnormal spoilage = 1,600 + 20,000 - 12,000 - 1,200 - 4,080 = 4,320
Flow of Production Work-in-process, beginning Started during period To account for
Physical units 1,600 20,000 21,600
Direct materials
Conversion
Good units completed Normal spoilage Abnormal spoilage Work-in-process ending (60%) Accounted for
12,000 4,080 4,320 1,200 21,600
12,000 4,080 4,320 1,200 21,600
12,000 4,080 4,320 720 21,120
Direct Materials $4,000 40,000 $44,000 21,600 $2.037
Conversion $4,032 40,320 $44,352 21,120 $2.10
Costs Work-in-process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent unit costs
Totals $8,032 80,320 $88,352 $4.137
Assignment of costs: Completed units (12,000 × $4.14) $49,680 Normal spoilage (4,080 × $4.14) 16,891 Total costs transferred out $66,571 Abnormal spoilage (4,320 × $4.14) 17,885 Work-in-process, ending Direct materials (1,200 × $2.04) $2,448 Conversion (1,200 × $2.10 × 0.60) 1,512 $3,960 Costs accounted for(rounding) $88,416 b. Finished Goods $66,571 Work-in-process $66,571 Loss from Abnormal Spoilage $17,885 Work-in-Process $17,885 Explanation: Note slight differences in numbers may occur due to rounding of unit costs. Diff: 3 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
41) The Skate Board Company uses a process cost system for making skateboard wheels. Materials are
added at the beginning of the process and conversion costs are uniformly incurred. At the beginning of September the work-in-process is 40 percent complete and at the end of the month it is 60 percent complete. Spoilage is detected at the end of the process. Other data for the month include: Beginning work-in-process inventory Units started Units placed in finished goods Ending work-in-process inventory Normal spoilage % on all units finished Conversion costs Cost of direct materials Beginning work-in-process costs: Materials Conversion
1,600 units 20,000 units 12,000 units 1,200 units 20 percent $40,320 $40,000 $4,000 $4,032
Required: a. Prepare a production cost worksheet assuming that spoilage is recognized and the FIFO method is used. b. Prepare journal entries to record transferring out of cost from the work-in-process accounts. Answer: a. Normal spoilage = (1,600 + 20,000 - 1,200) × 0.20 = 4,080 Abnormal spoilage = 1,600 + 20,000 - 12,000 - 1,200 - 4,080 = 4,320
Flow of Production Work-in-process, beginning Started during period To account for
Physical units 1,600 20,000 21,600
Direct materials
Conversion
From beginning inventory Started & completed current period Normal spoilage Abnormal spoilage Work-in-process ending (60%) Accounted for
1,600 10,400 4,080 4,320 1,200 21,600
0 10,400 4,080 4,320 1,200 20,000
960 10,400 4,080 4,320 720 20,480
Direct Materials $4,000 40,000 $40,000 20,000 $2.00
Conversion $4,032 40,320 $40,320 20,480 $1.97
Costs Work-in-process, beginning Costs added during period Current period costs only Divided by equivalent units Equivalent unit costs Assignment of costs: Beginning inventory Costs to complete Total from beginning inventory Started & complete (10,400 × $3.97) Normal spoilage (4,080 × $3.97) Total costs transferred out Abnormal spoilage (4,320 × $3.97) Work-in-process, ending Direct materials (1,200 × $2.00) Conversion (1,200 × $1.97 × 0.60) Total WIP, ending Costs accounted for(rounding) b. Finished Goods Work-in-Process Loss from Abnormal Spoilage Work-in-Process
Totals $8,032 80,320 $88,352 $3.97
$8,032 $1,891 $9,923 41,288 16,198 $67,409 17,150 $2,400 1,418 $3,818 $88,377
$67,409 $67,409 $17,150 $17,150
Diff: 3 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
42) New Image Sports uses a process costing system. Direct materials are placed into production at the beginning of the process. All spoilage is normal and is detected at the end of the process. For March the company had the following activities: Beginning work-in-process inventory Units placed in production Good units completed Ending work-in-process inventory Cost of beginning work-in-process Direct material costs, current Conversion costs, current
6,000 units, one-third complete 24,000 units 18,000 units 10,000 units, one-half complete $5,000 $18,000 $13,800
Required: Prepare a production cost worksheet assuming that spoilage is recognized and the FIFO method is used.
Answer: Normal spoilage = 6,000 + 24,000 - 18,000 - 10,000 = 2,000 Started and completed = 18,000 - 6,000 = 12,000
Flow of Production Work-in-process, beginning Started during period To account for
Physical units 6,000 24,000 30,000
Good units completed: Beginning work-in-process Started and completed Normal spoilage Work-in-process ending Accounted for
6,000 12,000 2,000 10,000 30,000
Costs Work-in-process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent unit costs
Totals $5,000 31,800 $36,800 $1.35
Assignment of costs: Work-in-process, beginning $5,000 Completion of beginning (4,000 × $0.60) 2,400 Total beginning inventory $7,400 Started and Completed (12,000 × $1.35) 16,200 Normal spoilage (2,000 × $1.35) 2,700 Total costs transferred out $26,300 Work-in-process, ending Direct materials (10,000 × $0.75) $7,500 Conversion (10,000 × $0.60 × 0.5) 3,000 Total WIP, ending $10,500 Costs accounted for $36,800
Direct materials
Conversion
12,000 2,000 10,000 24,000
4,000 12,000 2,000 5,000 23,000
Direct materials
Conversion
$18,000 $18,000 24,000 $0.75
$13,800 $13,800 23,000 $0.60
$5,000 2,400
$7,500 $3,000
Diff: 2 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
43) Wilson Sports uses a process costing system. Direct material A is placed into production at the beginning of the process, while direct material B is placed into production at the end of the process. Inspection occurs at the end of the process, before the addition of direct material B. Normal spoilage is 5% of good units. For March the company had the following activities: Beginning work-in-process inventory Units placed in production Good units completed Ending work-in-process inventory Cost of beginning work-in-process Direct material A costs, current Direct material B costs, current Conversion costs, current
4,000 units, 30% complete 28,000 unit 24,000 units 6,000 units, 60% complete $10,000 ($5,500 direct material A, $4,500 conversion) $38,000 $26,400 $42,500
Required: Prepare a production cost worksheet assuming that spoilage is recognized and the weighted-average method is used.
Answer: Total spoilage = 4,000 + 28,000 - 24,000 - 6,000 = 2,000 Normal spoilage = 5% of 24,000 = 1,200 units, so abnormal spoilage = 2,000 - 1,200 = 800 units Flow of Production WIP, beg Started during period To account for
Physical units 4,000 28,000 32,000
DM A
DM B
Conversion
Good units completed Normal spoilage Abnormal spoilage Work-in-process ending Accounted for
24,000 1,200 800 6,000 32,000
24,000 1,200 800 6,000 32,000
24,000 0 0 0 24,000
24,000 1,200 800 3,600 29,600
Costs WIP begin $10,000 Costs added $106,900 Total costs $116,900 Divided by equivalent units Equivalent unit costs $4.05
$5,500 $38,000 $43,500 32,000 $1.36
$0 $26,400 $26,400 24,000 $1.10
$4,500 $42,500 $47,000 29,600 $1.59
$97,200 $3,540 $100,740 $2,360
[24,000 × $4.05] [1,200 × $2.95]
Assignment of costs: Good units completed Normal spoilage Total costs transferred out Abnormal spoilage Work-in-process, ending Direct materials A(6,000 × $1.36) Conversion (6,000 × 60% × $1.59) Total ending WIP Costs accounted for (rounding)
[800 × $2.95]
$8,160 $5,724 $13,884 $116,984
Diff: 3 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
44) Weather Instruments assembles products from component parts. It has two departments that process all products. During January the beginning work-in-process in the assembly department was half completed as to conversion and complete as to direct materials. The beginning inventory included $12,000 for materials and $4,000 for conversion costs. Overhead is applied at the rate of 50 percent of direct manufacturing labour costs. Ending work-in-process inventory in the assembly department was 40 percent complete. All spoilage is considered normal and is detected at the end of the process. Beginning work-in-process in the finishing department was 75 percent complete as to conversion and ending workin-process was 25 percent converted. Direct materials are added at the end of the process. Beginning inventories included $16,000 for transferred-in costs and $20,000 for conversion costs. Overhead in this department is equal to direct manufacturing labour costs. Additional information about the two departments follows: Assembly Finishing Beginning work-in-process units 20,000 24,000 Units started this period 40,000 ? Units transferred this period 50,000 54,000 Ending work-in-process units 8,000 20,000 Material costs added $44,000 $28,000 Direct manufacturing labour $16,000 $24,000 Required: Prepare a production cost worksheet using weighted-average for the assembly department and FIFO for the finishing department assuming that spoilage is recognized.
Answer: Normal spoilage assembly = 20,000 + 40,000 - 50,000 - 8,000 = 2,000 Production Cost Worksheet for Assembly Department Weighted-average Method Direct Flow of Production Physical units materials Work-in-process, beginning 20,000 Started during period 40,000 To account for 60,000 Good units completed and Transferred out Normal spoilage Work-in-process ending Accounted for
Costs Work-in-process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent unit costs Assignment of costs: Transferred out (50,000 × $1.44) Normal spoilage (2,000 × $1.44)
50,000 2,000 8,000 60,000
Totals $16,000 68,000 $84,000 $1.44
$72,000 2,880
Total costs transferred out $74,880 Work-in-process, ending Direct materials (8,000 × $0.93) $7,440 Conversion (8,000 × 0.40 × $0.51) 1,632 Costs accounted for (rounding error) $83,952
Conversion
50,000 2,000 8,000 60,000
50,000 2,000 3,200 55,200
Direct materials $12,000 44,000 $56,000 60,000 $0.93
Conversion $4,000 24,000 $28,000 55,200 $0.51
Production Cost Worksheet for Finishing Department FIFO Method Flow of Production WIP, beginning Started during period To account for Good units completed: Beginning work-in-process Started and completed Work-in-process ending Accounted for Costs Work-in-process, beginning Costs added in the period Total costs to account Divided by equivalent units Equivalent unit costs
Phy.units D. mat. 24,000 50,000 74,000
24,000 30,000 20,000 74,000
24,000 30,000 0 54,000
Totals $36,000 150,880 $186,880
D. mat.
$3.19
$28,000 $28,000 54,000 $0.52
Conversion Trans.-in
6,000 30,000 5,000 41,000
30,000 20,000 50,000
Conversion Trans.-in $48,000 $48,000 41,000 $1.17
$74,880 $74,880 50,000 $1.50
Assignment of costs: Work-in-process, beginning $36,000 Completion of beginning: Direct materials (24,000 × $0.52) 12,480 $12,480 Conv. (24,000 × 0.25 × $1.17) 7,020 $7,020 Total beginning inventory $55,500 Started & Completed 95,700 (30,000 × $3.19) Total costs transferred out $151,200 Work-in-process, ending: Transferred in (20,000 × $1.50) $30,000 Conversion 5,850 (20,000 × $1.17 × 0.25) $35,850 Costs accounted for (rounding) $187,050 Diff: 3 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
45) Dutton Industries is a manufacturer of cleaning products. Its main product goes through two departments: Mixing and Bottling. During June, the beginning WIP in the Mixing department was 32% complete as to conversion cost. The beginning inventory included $15,200 for materials and $19,800 for conversion costs. Ending WIP in the Mixing department was 80% complete. All direct materials are added at the beginning of the process in each department. Inspection occurs at the end of the process in both departments. Normal spoilage is 2.5% of good output in Mixing and 1.4% of good output in Bottling. Beginning WIP in Bottling was 60% complete with respect to conversion costs and ending WIP was 30% converted. Beginning WIP included $8,850 for direct materials, $72,200 for transferred in costs and $23,800 for conversion costs. Additional information follows:
Beginning work-in-process units Units started this period Units transferred this period Ending work-in-process units Material costs added Conversion costs added
Mixing 45,000 130,000 159,000 9,800 $45,500 $209,650
Bottling 42,000 ? 187,000 10,600 $35,000 $154,910
Required: Prepare a production cost worksheet using weighted-average for the Mixing department and FIFO for the Bottling department assuming that spoilage is recognized.
Answer: Total spoilage Mixing = 45,000 + 130,000 - 159,000 - 9,800 = 6,200 Normal spoilage = 159,000 × 2.5% = 3,975 Abnormal spoilage = 6,200 - 3,975 = 2,225 Production Cost Worksheet for Mixing Department Weighted-average Method Flow of Production Work-in-process, beginning Started during period To account for
Physical units 45,000 130,000 175,000
Direct materials Conversion
Good units completed and Transferred out Normal spoilage Abnormal spoilage Work-in-process ending Accounted for
159,000 3,975 2,225 9,800 175,000
Costs Work-in-process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent unit costs
Totals Direct materials Conversion $35,000 $15,200 $19,800 $255,150 45,500 209,650 $290,150 $60,700 $229,450 175,000 173,040 $1.673 $0.347 $1.326
159,000 3,975 2,225 9,800 175,000
159,000 3,975 2,225 7,840 173,040
Assignment of costs: Transferred out (159,000 × $1.673) $265,983 Normal spoilage (3,975 × $1.673) 6,650 Total costs transferred out $272,633 Abnormal spoilage (2,225 * $1.673) $3,722 Work-in-process, ending Direct materials (9,800 × $0.347) $3,399 Conversion (9,800 × 0.80 × $1.326) $10,396 Total ending work-in-process $13,795 Costs accounted for (rounding error) $290,150 Total spoilage Bottling = 42,000 + 159,000 - 187,000 - 10,600 = 3,400 Normal spoilage = 187,000 × 1.4% = 2,618 Abnormal spoilage = 3,400 - 2,618 =782
Production Cost Worksheet for Bottling Department FIFO Method Flow of Production WIP, beginning Started during period To account for Good units completed: Beginning work-in-process Started and completed Normal Spoilage Abnormal Spoilage Work-in-process ending (30%) Accounted for Costs Work-in-process, beginning Costs added in the period Current period costs Divided by equivalent units Equivalent unit costs
Phy.units 42,000 159,000 201,000
D. mat. Conversion
Trans.-in
42,000 145,000 2,618 782 10,600 201,000
0 145,000 2,618 782 10,600 159,000
0 145,000 2,618 782 10,600 159,000
Totals $104,850 $462,543 $567,393
D. mat. Conversion $8,850 $23,800 $35,000 $154,910 $35,000 $154,910 52,000 168,380 $0.220 $0.920
$2.855
Assignment of costs: Work-in-process, beginning Completion of beginning: Conv. (42,000 × 0.4 × $0.92) Total from beginning WIP Started & Completed (145,000 × $2.855) Normal Spoilage (2,618 × $2.855) Total costs transferred out Abnormal spoilage (782 × $2.855) Work-in-process, ending Transferred in (10,600 × $1.715) Direct materials (10,600 × $0.22) Conversion (10,600 × 0.30 × $0.92) Total ending WIP Costs accounted for (rounding)
16,800 145,000 2,618 782 3,180 168,380
Trans.-in $72,200 $272,633 $272,633 159,000 $1.715
$104,850 $15,456 $120,306 413,946 7,474 $541,726 2,232 $18,176 2,333 2,926 $23,434 $567,393
Diff: 3 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
46) Playtime Ltd. manufactures toys in two departments: Forming and Finishing. During August, the beginning WIP in the Forming Department was 38% complete with respect to conversion, direct materials are added at the beginning of the process. The beginning inventory in Forming included $36,400 for materials and $9,400 for conversion costs. Ending WIP in the Forming department was 70% complete. In the second department, Finishing, direct materials are added at the end of the process. Beginning WIP in Finishing was 22% complete with respect to conversion costs and ending WIP was 85% converted. Beginning WIP included $35,200 for transferred in costs and $12,350 for conversion costs. Additional information follows:
Beginning work-in-process units Units started this period Units transferred this period Ending work-in-process units Material costs added Conversion costs added Normal spoilage Inspection (degree of completion)
Forming 29,000 228,000 232,500 12,000 $286,200 $197,750 3.6% 100%
Finishing 17,000 ? 232,850 11,200 $114,380 $805,490 1.8% 100%
Required: Prepare a production cost worksheet using weighted-average for the Forming department and FIFO for the Finishing department assuming the spoilage is recognized.
Answer: Total spoilage Forming = 29,000 + 228,000 - 232,500 -12,000 = 12,500 Normal spoilage = 232,500 × 3.6% = 8,370 Abnormal spoilage = 12,500 - 8,370 = 4,130 Production Cost Worksheet for Forming Department Weighted-average Method Direct Flow of Production Physical units materials Conversion Work-in-process, beginning 29,000 Started during period 228,000 To account for 257,000 Good units completed and Transferred out Normal spoilage Abnormal spoilage Work-in-process ending Accounted for
Costs Work-in-process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent unit costs
232,500 8,370 4,130 12,000 257,000
Totals $45,800 $483,950 $529,750 $2.072
232,500 8,370 4,130 12,000 257,000
232,500 8,370 4,130 8,400 253,400
Direct materials $36,400 286,200 $322,600 257,000 $1.255
Conversion $9,400 197,750 $207,150 253,400 $0.817
Assignment of costs: Transferred out (232,500 × $2.072) $481,740 Normal spoilage (8,370 × $2.072) 17,343 Total costs transferred out $499,083 Abnormal spoilage (4,130 × $2.072) $8,558 Work-in-process, ending Direct materials (12,000 × 1.255) $15,060 Conversion (12,000 × 0.70 × $0.817) $6,863 Total ending work-in-process $21,923 Costs accounted for (rounding error) $529,564 Total spoilage Finishing = 17,000 + 232,500 - 232,850 -11,200 = 5,450 Normal spoilage = 232,850 × 1.8% = 4,191 Abnormal spoilage = 5,450 - 4,191 = 1,259
Production Cost Worksheet for Finishing Department FIFO Method Flow of Production WIP, beginning Started during period To account for
Phy.units 17,000 232,500 249,500
D. mat. Conversion Trans.-in
Good units completed: Beginning work-in-process Started and completed Normal spoilage Abnormal spoilage Work-in-process ending Accounted for
17,000 215,850 4,191 1,259 11,200 249,500
17,000 215,850 4,191 1,259 0 238,300
Costs Work-in-process, beginning Costs added in the period Current period costs Divided by equivalent units Equivalent unit costs
Totals D. mat. Conversion Trans.-in $47,550 $0 $12,350 $35,200 $1,418,953 $114,380 $805,490 $499,083 $1,466,503 $114,380 $805,490 $499,083 238,300 244,080 232,500 $5.927 $0.48 $3.300 $2.147
Assignment of costs: Work-in-process, beginning Completion of beginning: Direct materials (17,000 × $048) Conv. (17,000 × 0.78 × $3.30) Total from beginning WIP Started & Completed (215,850 × $3.30) Normal spoilage (4,191 × $5.927) Total costs transferred out Abnormal spoilage (1,259 × $5.927) Work-in-process, ending Transferred in (11,200 × $2.147) Conversion (11,200 × 85% × 3.30) Total ending WIP Costs accounted for (rounding)
13,260 215,850 4,191 1,259 9,520 244,080
0 215,850 4,191 1,259 11,200 232,500
$47,550 $8,160 $43,758 $99,468 1,279,343 24,840 $1,403,651 7,462 $24,046 31,416 $55,462 $1,466,575
Diff: 3 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
47) Silver Spoon Incorporated is a manufacturer of kitchen utensils. It produces all of its products in one department. The information for the current month is as follows: Beginning work-in-process Units started Units completed Ending work-in-process Spoilage Beginning work-in-process direct materials Beginning work-in-process conversion Direct materials added during month Direct manufacturing labour during month
37,500 units 55,000 units 75,000 units 14,500 units 3,000 units $25,000 $ 10,000 $113,750 $40,020
Beginning work-in-process was 25% complete as to conversion. Direct materials are added at the beginning of the process. Factory overhead is applied at a rate equal to 37.5% of direct manufacturing labour. Ending work-in-process was 60% complete. All spoilage is normal and is detected at the end of the process. Required: Prepare a production cost worksheet if spoilage is recognized and the weighted-average method is used.
Answer:
PRODUCTION COST WORKSHEET
Flow of Production Work-in- process, beginning Started during period To account for
Physical units 37,500 55,000 92,500
Direct materials
Conversion
Good units completed Normal spoilage Work-in-process, ending Accounted for
75,000 3,000 14,500 92,500
75,000 3,000 14,500 92,500
75,000 3,000 8,700 86,700
Costs Work-in-process, beginning Costs added during period
Totals $ 35,000 168,778
Direct Materials $25,000 113,750
Conversion $ 10,000 55,028
Total costs to account for Divided by equivalent units Equivalent unit costs
$203,778
$138,750 92,500 $ 1.50
$65,028 86,700 $ 0.75
Assignment of costs Costs transferred out (75,000 × $2.25) Normal spoilage (3,000 × $2.25) Work-in- process, ending Direct materials (14,500 × $1.50) Conversion (14,500 × $0.75 × 0.60) Costs accounted for
$ 2.25
$ 168,750 6,750 21,750 6,525 $203,775
Diff: 2 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-2
19.3 Apply the standard-costing method to account for spoilage. 1) Under standard costing, there is no need to calculate a cost per equivalent unit. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-3
2) Process costing is simplified when using standard costs. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-3
3) The calculation of equivalent units under standard costing is the same as under FIFO. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-3
4) Which of the following can be used in accounting for spoilage? A) standard costs B) FIFO C) weighted average D) FIFO and weighted average but not standard costs E) FIFO and weighted average and standard costs Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-3
5) The standard-costing method A) adds a layer of complexity to the calculation of equivalent-unit costs in a process-costing environment. B) makes calculating equivalent-unit costs unnecessary. C) requires an analysis of the spoilage costs in beginning inventory. D) requires an analysis of the spoilage costs in ending inventory. E) requires a calculation of the cost allocation rate. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 19-3
6) Springfield Sign Shop manufactures only specific orders. It uses a standard cost system. During one large order for the transit authority, an unusual number of signs were spoiled. The normal spoilage rate is 10% of units started. The point of first inspection is half way through the process, the second is threefourths through the process, and the final inspection is at the end of the process. Other information about the job is as follows: Signs started Signs spoiled
3,000 450
Direct materials put into process at beginning Conversion costs for job Standard direct material costs per sign Standard conversion cost per sign Average point of spoilage is the 3/4 completion point Average current disposal cost per spoiled sign
$60,000 $120,000 $27 $54 $15
Required: Make necessary journal entries to record all transactions related to the transit authority job.
Answer: Average cost per sign when spoiled: Direct material cost Conversion ($54 × 3/4) Total cost per spoiled sign
$27.00 40.50 $67.50
Abnormal spoilage = Total spoilage - normal spoilage = 450 - 300 = 150 Materials Control (450 × $15) 6,750 Loss from Abnormal Spoilage (150 × $67.50) 10,125 Manufacturing Overhead Control (300 × $67.50) 20,250 Work-in-Process Control,transport job (450 × $67.50) Cash/Accounts Payable (450 × $15)
30,375 6,750
Diff: 3 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-3
7) Hogan Ltd. uses a standard cost system in its manufacturing process. During a recent job, it noticed that its spoilage rate was high. Normal spoilage rate averages 8% of units started. Direct materials are added at the beginning of the process. Inspection occurs at the 75% point. Other information about the job follows: Units started Units spoiled
2,500 315
Direct materials Conversion costs on job Standard direct material cost per unit Standard conversion cost per unit
$87,500 $262,500 $33 $97
Spoiled units have no salvage value. Required: Make necessary journal entries to record all spoilage. Answer: Average cost per sign when spoiled: Direct material cost Conversion ($97 × 3/4) Total cost per spoiled sign
$33.00 72.75 $105.75
Abnormal spoilage = Total spoilage - normal spoilage Normal spoilage = 2,500 × 8% = 200 = 315 - 200 = 115 Loss from Abnormal Spoilage (115 × $105.75) Manufacturing Overhead Control (200 × $105.75) Work-in-Process Control (315 × $105.75)
$12,161.25 $21,150.00 $33.311.25
Diff: 3 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-3
8) Victory Ltd. uses a standard cost system in its manufacturing process. During a recent job, it noticed that its spoilage rate was high. Normal spoilage rate averages 6% of units started. Direct materials are added at the beginning of the process. Inspection occurs at the 80% point. Other information about the job follows: Units started Units spoiled
4,000 320
Direct materials Conversion costs on job Standard direct material cost per unit Standard conversion cost per unit
$204,800 $246,000 $49 $64
Spoiled units have no salvage value. Required: Make the necessary journal entries to record all spoilage. Answer: Average cost per sign when spoiled: Direct material cost Conversion ($64 × 0.80) Total cost per spoiled sign
$49.00 51.20 $100.20
Abnormal spoilage = Total spoilage - normal spoilage Normal spoilage = 4,000 × 6% = 240 = 320 - 240 = 80 Loss from Abnormal Spoilage (80 × $100.20) Manufacturing Overhead Control (240 × $100.20) Work-in-Process Control (320 × $100.20)
$8,016 $24,048 $32,064
Diff: 3 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-3
9) Intelligent Composite Materials Inc. is a manufacturer of advanced composites that can be formed electronically. Direct materials are added at the start of the production process. Conversion costs are added evenly during the process. Some units of the product XJ1 are spoiled as a result of defects not detectable before inspection of finished goods. Spoiled units are disposed of at zero net disposal value. The company uses standard costs with $300 per equivalent unit for direct materials, and $90 per equivalent unit for conversion costs for both beginning work-in-process inventory and work done during the period. Summary data for the month of July follow:
Work-in-process, beginning Degree of completion of beginning WIP Started during July Good units completed & transferred during July Work-in-process, ending Degree of completion of ending WIP Total costs added during July Normal spoilage as a percentage of good units Degree of completion of normal spoilage Degree of completion of abnormal spoilage
Physical Units Direct Materials 500 $168,000 100% 36,000 33,000 400 100% $805,000 5% 100% 100%
Required: a. Prepare a production cost report assuming the spoilage is recognized. b. Prepare the necessary journal entry to record abnormal spoilage.
Conversion Costs $42,000 40%
60% $620,000 100% 100%
Answer: Total spoiled units = 500 + 36,000 - 33,000 - 400 = 3,100 Normal spoilage = 33,000 × 5% = 1,650 Abnormal spoilage = 3,100 - 1,650 = 1,450
Flow of Production Work-in-process, beginning Started during period To account for
Physical units 500 36,000 36,500
Direct materials
Conversion
From beginning inventory Started & completed current period Normal spoilage Abnormal spoilage Work-in-process ending (60%) Accounted for
500 32,500 1,650 1,450 400 36,500
0 32,500 1,650 1,450 400 36,000
300 32,500 1,650 1,450 240 36,140
Costs Work-in-process, beginning Costs added during period Costs to account for
Direct Totals Materials $168,000 500 × $300 14,052,600 36,000 × $300 $14,220,600 $10,950,000
Assignment of costs at standard costs: Good units completed and transferred: Beginning inventory Complete beginning inventory (300 × $90) Started & completed (32,500 × $390) Normal spoilage (1,650 × $390) Abnormal spoilage (1,450 × $390) Work-in-process, ending: Direct materials (400 × $300) Conversion (240 × $90) Costs accounted for b. Loss from Abnormal Spoilage Work-in-Process
Conversion 200 × $90 36,140 × $90 $3,270,600
$168,000 27,000 12,675,000 $12,870,000 643,500 565,500 120,000 21,600 $14,220,600
$565,500 $565,500
Diff: 3 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-3
19.4 Allocate costs of normal spoilage. 1) The timing of inspection at various stages of completion affects the amount of normal and abnormal spoilage. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-4
2) When spoiled goods have a disposal value, the net cost of the spoilage is computed by ________. A) deducting the disposal value from the costs of the spoiled goods accumulated to the inspection point B) adding the costs to complete a saleable product to the costs accumulated to the inspection point C) deducting the costs to complete a saleable product from the costs accumulated to the inspection point D) adding the disposal value to the costs of the good units transferred Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-4
Answer the following questions using the information below: The following table presents the flow of production in units. Assume that there are 5,000 total spoiled units at each stage of completion and that the normal spoilage rate is 3% of good units passing the inspection point.
Work-in-process beginning (20% complete) Started during the month To account for
Physical Units Inspection at Stage of Completion at 15% at 40% at 100% 10,000 10,000 10,000 55.000 55,000 55,000 65,000 65,000 65,000
Good units completed and transferred
58,000
58,000
58,000
?
?
?
? 3,000 65,000
? 3,000 65,000
? 3,000 65,000
Normal spoilage Abnormal spoilage Work-in-process ending inventory (30% complete) To account for
3) What is the number of normal spoiled units recognized at the 40% stage of completion? A) 1,950 B) 1,800 C) 1,650 D) 1,500 E) 1,740 Answer: B Explanation: normal spoiled units = 3% × (65,000 - 5,000) = 1,800 abnormal spoiled units = 5,000 - 1,800 = 3,200 Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-4
4) What is the number of abnormal spoiled units recognized at the 40% stage of completion? A) 3,500 B) 3,350 C) 3,050 D) 3,260 E) 3,200 Answer: E Explanation: normal spoiled units = 3% × (65,000 - 5,000) = 1,800 abnormal spoiled units = 5,000 - 1,800 = 3,200 Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-4
5) What is the number of normal spoiled units recognized at the 100% stage of completion? A) 1,740 B) 1,650 C) 1,500 D) 1,950 E) 1,800 Answer: A Explanation: normal spoiled units = 3% × 58,000 = 1,740 abnormal spoiled units = 5,000 - 1,740 = 3,260 Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-4
6) What is the number of abnormal spoiled units recognized at the 100% stage of completion? A) 3,500 B) 3,350 C) 3,050 D) 3,260 E) 3,200 Answer: D Explanation: normal spoiled units = 3% × 58,000 = 1,740 abnormal spoiled units = 5,000 - 1,740 = 3,260 Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-4
7) Complete the following table by recording the units of normal and abnormal spoilage in the spaces provided. Assume that there are 4,000 total spoiled units at each stage of completion and that the normal spoilage rate is 5% of good units passing the inspection point.
Work-in-process beginning (20% complete) Started during the month To account for
Physical Units Inspection at Stage of Completion at 15% at 40% at 100% 10,000 10,000 10,000 55.000 55,000 55,000 65,000 65,000 65,000
Good units completed and transferred
58,000
58,000
58,000
Normal spoilage
______
______
______
Abnormal spoilage Work-in-process ending inventory (30% complete) To account for Answer:
______ 3,000 65,000
______ 3,000 65,000
______ 3,000 65,000
Work-in-process beginning (20% complete) Started during the month To account for
Physical Units Inspection at Stage of Completion at 15% at 40% at 100% 10,000 10,000 10,000 55.000 55,000 55,000 65,000 65,000 65,000
Good units completed and transferred
58,000
58,000
58,000
Normal spoilage
2,550
3,000
2,900
Abnormal spoilage Work-in-process ending inventory (30% complete) To account for
1,450 3,000 65,000
1,000 3,000 65,000
1,100 3,000 65,000
Normal spoilage calculations: at 15% = 5% × (55,000 - 4,000) = 2,550 at 40% = 5% × (65,000 - 4,000) = 3,050 at 100% = 5% × 58,000 = 2,900 Diff: 2 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-4
19.5 Apply job cost allocation procedures to account for spoilage in job costing. 1) Spoilage can be attributed to a particular job in a process costing system. Answer: TRUE Explanation: True if normal spoilage is attributable to a specific job. Diff: 2 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-5
2) The costs of normal spoilage are usually assigned to individual jobs in job costing. Answer: FALSE Explanation: Costs of normal spoilage are usually part of manufacturing overhead Diff: 2 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-5
3) When normal spoilage is detected, the work-in-process control account is debited in a job costing system. Answer: FALSE Explanation: Manufacturing department overhead control is debited. Diff: 2 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-5
4) In job costing, costs of abnormal spoilage are not considered as inventoriable costs and are therefore written off as costs of the period in which detection occurs. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-5
5) When assigning costs, job-costing systems generally distinguish normal spoilage attributable to a specific job from normal spoilage common to all jobs. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-5
6) Costs incurred due to spoilage in a job order costing system, may be treated in all of the following ways, EXCEPT A) added to abnormal spoilage and written off. B) added to the total cost of that particular job. C) allocated equally to all units at an inspection point. D) added to all jobs through manufacturing overhead. E) allocated between normal and abnormal spoilage. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-5
7) What is the effect of the following journal entry? Materials Control 280 Manufacturing Overhead Control 320 Work-in-Process Control (job #219)
600
A) $320 of spoilage is attributed to job #219. B) $280 of spoilage is attributed to job #219. C) $600 of spoilage is attributed to job #219. D) $320 of spoilage is attributed to all jobs evenly. E) $280 of spoilage is attributed to all jobs evenly. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-5
8) Boss Manufacturing generally has spoiled goods during each job. Costs are assigned to normal spoilage at $10.00 per unit and abnormal spoilage at $20.00 per unit. Boss has a policy never to rework spoiled units. Management believes that once a unit is damaged it cannot be reworked into a quality product. What is the appropriate journal entry if 500 units are considered abnormal spoilage in a job costing system? A) Materials Control $10,000 Work-in-Process Control $10,000 B) Work-in-Process Control Loss from Abnormal Spoilage
$5,000
C) Loss from Abnormal Spoilage Cost of Goods Sold
$10,000
D) Loss from Abnormal Spoilage Work-in-Process Control
$5,000
E) Loss from Abnormal Spoilage Work-in-Process Control
$10,000
$5,000
$10,000
$5,000
$10,000
Answer: E Explanation: 500 units × $20.00 = $10,000 Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-5
9) The Hawg Manufacturing Shop produces motorcycle parts. Typically, 20 pieces out of a job lot of 2,000 parts are normally spoiled. Costs are assigned at the inspection point, $100.00 per unit. Spoiled pieces may be disposed of for proceeds of $20.00 per unit. The spoiled goods must be inventoried appropriately when the normal spoilage is detected. The current job requires the production of 5,000 good parts. Which of the following journal entries properly reflects the recording of spoiled goods? A) Materials Control 400 Mfg. Dept. Overhead Control 1,600 Work-in-Process Control 2,000 B) Materials Control Manufacturing Overhead Control Work-in-Process Control
1,000 4,000 5,000
C) Work-in-Process Control 5,000 Materials Control Manufacturing Overhead Control
1,000 4,000
D) Manufacturing Overhead Control Materials Control Work-in-Process Control
400 1,600
E) Manufacturing Overhead Control Materials Control Work-in-Process Control
2,000
1,000 400 600
Answer: B Explanation: Materials Control: 50 pieces × $20.00 = $1,000 Manufacturing Overhead Control: 50 pieces × ($100.00 - $20.00) = $4,000 WIP - Control: 50 pieces × $100.00 = $5,000 Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-5
10) A company manufactures draperies. Because of strict production specifications, the manufacturing department often has spoiled items. If the spoiled items are under 10 percent of a job's total items they are treated as normal spoilage. During February job #101 for 200 draperies had 16 spoiled items. The spoiled items were detected immediately before they were packaged. They had already passed the safety inspection. The marketing manager believes the items can be sold for $280 each. They had a cost at point of detection of $600 each. These costs included $300 for direct manufacturing labour, $200 for direct materials, and $100 for factory overhead. Required: a. Make the necessary journal entry, or entries, to record the spoiled units if the spoilage is normal and assigned to an overhead control account. b. Make the necessary journal entry, or entries, to record the spoiled units if the spoilage is assigned to job #101. Answer: a. Materials Control (16 × $280) 4,480 Manufacturing Dept. Overhead Control (Normal spoilage) (16 × ($600 - $280)) 5,120 Work-in-Process Control (Job # 101) 9,600 b. Materials Control Work-in-Process Control (Job # 101)
4,480 4,480
Diff: 2 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-5
11) A company manufactures leather jackets. Because of strict production specifications, the manufacturing department often has spoiled items. If the spoiled items are under 5 percent of a job's total items they are treated as normal spoilage. During February job #301 for 200 jackets had 8 spoiled items. The spoiled items were detected immediately before they were packaged. They had already passed the safety inspection. The marketing manager believes the items can be sold for $150 each. They had a cost at point of detection of $500 each. These costs included $250 for direct manufacturing labour, $200 for direct materials, and $50 for factory overhead. Required: a. Make the necessary journal entry, or entries, to record the spoiled units if the spoilage is normal and assigned to an overhead control account. b. Make the necessary journal entry, or entries, to record the spoiled units if the spoilage is assigned to job #301. Answer: a. Materials Control (8 × $150) 1,200 Manufacturing Dept. Overhead Control (Normal spoilage) (8 × ($500 - $150)) 2,800 Work-in-Process Control (Job # 301) 4,000 b. Materials Control Work-in-Process Control (Job # 301)
1,200 1,200
Diff: 2 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-5
12) A company manufactures shoes. Because of strict production specifications, the manufacturing department often has spoiled items. If the spoiled items are less than or equal to 5 percent of a job's total then the items are treated as normal spoilage. During February job #402 for 100 pairs of shoes had 7 spoiled items. The spoiled items were detected immediately before they were packaged. The marketing manager believes the spoiled items can be sold for $20 each. They had a cost at point of detection of $75 each. These costs included $25 for direct manufacturing labour, $45 for direct materials, and $5 for factory overhead. Required: 1. Make the necessary journal entry, or entries, to record the spoiled units. If the spoilage is normal it is assigned to an overhead control account. Assume the spoiled units can be sold for $20 each. 2. Make the necessary journal entry, or entries, to record the rework cost. If the spoilage is normal it is assigned to an overhead control account. Assume the spoiled units can be reworked for $20 each: direct materials $5; labour $12; manufacturing overhead $3. Answer: 1. Materials Control (5 × $20) 100 Manufacturing Dept. Overhead Control (Normal spoilage) (5 × ($75 - $20)) 275 Loss from Abnormal Spoilage (2 × $75) 150 Work-in-Process Control (Job # 402) 525 2. Manufacturing Dept. Overhead Control (5 × $20) Loss from Abnormal Spoilage (2 × $20) Materials Control Wages Payable Manufacturing Overhead Allocated
100 40 35 84 21
Diff: 2 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-5; 19-6
13) Shazam Machines produces numerous types of money change machines. All machines are made in the same production department and many use exactly the same processes. Because customers have such different demands for the machine characteristics, the company uses a job costing system. Unfortunately, some of the production managers have been upset for the last few months when their jobs were charged with the spoilage that occurred over an entire processing run of several types of machines. Some of the best managers have even threatened to quit unless the accounting system is changed. Required: What recommendations can you suggest to improve the accounting for spoilage? Answer: Since the manufacturing process uses similar workstations for the products, it may be best to let the spoilage be considered a manufacturing problem rather than a job problem. With this assumption, the spoilage will be spread over the entire production process with each job being charged an appropriate amount of spoilage, thereby relieving some jobs of bearing the entire burden of spoilage just because they were being worked on when the machines or process malfunctioned. Diff: 2 Type: ES CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-5
19.6 Apply cost allocation procedures to account for reworked units and scrap. 1) An example of rework is when a shoe manufacturer uses leftover leather from shoes to make leather watch bands. Answer: FALSE Explanation: Reworks are unacceptable units of production that are subsequently reworked into good units and sold. Diff: 2 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-6
2) Accounting for rework in process-costing requires that abnormal rework be distinguished from normal rework. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-6
3) One of the major aspects of accounting for scrap is inventory costing, which includes when and how scrap affects operating income. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-6
4) There is no cost attached to scrap. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-6
5) Scrap has no value (or minimal value) therefore it is not traced back to specific jobs. Answer: FALSE Explanation: Scrap may be traced to individual jobs when the tracing can be done in an economically feasible way. Diff: 2 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-6
6) Reworked goods are unacceptable units of production usually not capable of being repaired or converted into a salable product. Answer: FALSE Explanation: Reworked goods are unacceptable units of production that can be repaired into a salable product. Diff: 2 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 19-6
7) When rework is normal and NOT attributable to a specific job, the costs of rework are charged to manufacturing overhead and are spread, through overhead allocation, over all jobs. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-6
8) What is the effect of the following journal entry?
Manufacturing Overhead Control (rework) Materials Control Wages Payable Manufacturing Overhead Control Allocated
125 30 80 15
A) to allocate $125 of overhead as rework costs B) to expense $125 of overhead as rework costs C) to set up rework costs on the balance sheet D) to record $125 of overhead as rework costs E) to accumulate rework costs so they can be assigned to a specific job Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-6
9) Which of the following entries reflects the original cost assignment before production items are reworked? A) Work-in-Process Control XXX Materials Control XXX Wages Payable Control XXX Mfg. Overhead Allocated XXX B) Finished Goods Control Work-in-Process Control
XXX
C) Mfg. Overhead Allocated Materials Control Work-in-Process Control
XXX XXX
D) Materials Control Wages Payable Control Work-in-Process Control Mfg. Overhead Allocated E) Work-in-Process Control Materials Control Wages Payable Control Mfg. Overhead Allocated
XXX
XXX
XXX XXX XXX XXX
XXX XXX XXX XXX
Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-6
10) Which of the following entries would correctly record costs associated with reworked items? A) Work-in-Process Control XXX Materials Control XXX Wages Payable Control XXX Mfg. Overhead Allocated XXX B) Finished Goods control Work-in-Process Control
XXX
C) Mfg. Overhead Allocated Materials Control Work-in-Process Control
XXX XXX
D) Materials Control Wages Payable Control Work-in-Process Control Mfg. Overhead Allocated E) Work-in-Process Control Materials Control Wages Payable Control Mfg. Overhead Allocated
XXX
XXX
XXX XXX XXX XXX
XXX XXX XXX XXX
Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-6
11) When abnormal rework is distinguished from normal rework, and charged to a separate loss account, which of the following is a likely result? A) Prices will have to increase on the company's products accordingly. B) The amount of normal spoilage unfavourable efficiency variances will be less. C) The amount of normal spoilage unfavourable efficiency variances will be more. D) The amount of normal spoilage unfavourable efficiency variances will be unchanged. E) The abnormal spoilage variance will be closed to cost of goods manufactured. Answer: B Diff: 3 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 19-6
12) Which of the following is NOT a consideration when accounting for scrap? A) the timing of the recognition of proceeds from disposal B) inventory costing, including when and how to affect operating income C) planning and control includes physical tracking D) decisions as to whether to group scrap with reworked units E) the reduction from theft Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-6
13) Which of the following journal entries could appropriately record the cash sale of scrap? A) Cash XXX Materials control XXX B) Sales of Scrap Accounts Receivable
XXX
C) Manufacturing Dept. Overhead Control Accounts Payable
XXX
D) Cash
XXX
XXX
XXX Accounts Payable
E) Cash
XXX
XXX Manufacturing Overhead Allocated
XXX
Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-6
14) Sales of scrap may be traced to the individual jobs in which it occurred when the ________ system is used. A) budgeted costing B) job-costing C) process costing D) revenue costing E) weighted-average costing Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-6
15) Which account is debited when scrap is reused as direct material? A) work-in-process-control B) materials control C) manufacturing overhead control D) scrap inventory E) manufacturing overhead allocated Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-6
16) When scrap is returned to the storeroom, so that it may be used as direct material, which account is debited? A) work-in-process control B) materials control C) manufacturing overhead control D) scrap inventory E) sales of scrap Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-6
17) Assume the amount of scrap is material and the scrap is sold immediately after it is produced. If the scrap attributable to a specific job is sold on account, the journal entry is A) Work-in-Process Control Cash B) Work-in-Process Control Accounts Receivable C) Accounts Receivable Work-in-Process Control D) Work-in-Process Control Accounts Payable E) Cash Work-in-Process Control Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-6
18) If scrap, common to all jobs, is returned to the storeroom and the time between the scrap being inventoried and its disposal is quite lengthy, the journal entry is: A) Work-in-Process Control Materials Control B) Materials Control Work-in-Process Control C) Manufacturing Overhead Control Materials Control D) Materials Control Manufacturing Overhead Control E) Materials Control Manufacturing Overhead Allocated Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-6
Answer the following questions using the information below: Johnson Corporation uses job costing in its metal fabrication plant. During February, Job 117 was completed and the scrap generated was not usable by other jobs. Job 124 was also completed in February, and the scrap created was usable by other jobs. 19) Which journal entry correctly records the sale of scrap from Job 117 for $250? A) Cash 250 Work-in-Process 250 B) Cash
250 Sales of Scrap
C) Cash
250
250 Materials Control
D) Cash
250
250 Manufacturing Overhead Control
E) Cash
250
250 Cash Manufacturing Overhead Allocated
250
Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-6
20) Which of the following is the correct journal entry if Job 124 created scrap that is common to all jobs? A) Accounts Receivable 90 Work-in-Process Control 90 B) Materials Control Work-in-Process Control
90
C) Work-in-Process Control Manufacturing Overhead Control
90
D) Materials Control Manufacturing Overhead Control
90
E) Cash Work-in-Process Control
90
90
90
90
90
Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-6
21) Which of the following is the correct journal entry if the scrap created by Job 124 is subsequently used by another job? A) Materials Control 90 Manufacturing Overhead Control 90 B) Work-in-Process Control Manufacturing Overhead Control
90
C) Manufacturing Overhead Allocated Manufacturing Overhead Control
90
D) Work-in-Process Control Manufacturing Overhead Allocated
90
E) Work-in-Process Control Materials Control
90
90
90
90
90
Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-6
22) Fahmy Company uses a job costing system. During October, the following costs are incurred on Job 110 to manufacture 200 motors: Original costs: Direct materials Direct manufacturing labour Manufacturing overhead allocated (150% of direct manufacturing labour) Total
12,000 $26,600
Direct cost of reworking 10 motors: Direct materials Direct manufacturing labour Total
$1,000 1,600 $2,600
$6,600 8,000
Required: a. Prepare the journal entry to record the rework costs, assuming the rework is attributable specifically to Job 110. b. Compute the cost per finished motor for Job 110, assuming the rework is attributable specifically to this job. c. Prepare the journal entry to record the rework costs, assuming the rework is common to all jobs. d. Compute the cost per finished motor for Job 110, assuming the rework is common to all jobs. Answer: a. Work-in-Process Control 5,000 Materials Control 1,000 Wages Payable Control 1,600 MOH Allocated($1,600 × 150%) 2,400 b.
Cost per finished motor = $26,600 + $5,000/200 = $158
c.
MOH Control 5,000 Materials Control Wages Payable Control MOH Allocated($1,600 × 150%)
1,000 1,600 2,400
d. Cost per finished motor = $26,600/200 = $133 Diff: 3 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-6
23) Carriage Florists operate a flower shop. Because most of the orders are via telephone, fax, or email, numerous orders have to be reworked. The average cost of the reworked orders is $4: $2.50 for labour, $1 for more flowers, and $0.50 for overhead. This ratio of costs holds for the average original order and includes a provision for rework common to all jobs. On a recent day, the shop reworked 32 orders out of 166. The original cost of the 32 orders totalled $480. The average cost of all orders is $12.50, including rework, with an average selling price of $20. Required: Prepare the necessary journal entry, or entries, to record the rework for the day if the shop charges such activities to Arrangement Department Overhead Control. Prepare a journal entry to transfer the finished goods to Finished Goods Inventory. Answer: Arrangement Department Overhead Control $128 Materials Control (32 × $1) $32 Wages Payable Control (32 × $2.50) 80 Shop Overhead Control (32 × $0.50) 16 Finished Goods Work-in-Process Control
$480 $480
Diff: 2 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-6
24) Dad's Bottling Company often has bottles that do not meet customer specifications although it does not allow for spoilage. Some of the rejects are immediately crushed and recycled while others are held for future use in other jobs. During May the company had bottles costing $1,000 that were recycled and $1,600 worth of bottles that were placed into finished goods inventory for later sale; these bottles were sold in June for $2,000. Required: Record the journal entries associated with the above activities. Assume saleable scrap items are returned to inventory when rejected during inspection. Answer: Finished Goods Inventory $1,600 Work-in-Process Control $1,600 (To record cost of reject items placed into finished goods inventory) No journal entry for scrap returned to storeroom. Memo of quantity received and related to job is entered into the inventory record. Cash/Accounts Receivable Sales
$2,000
Cost of Goods Sold Finished Goods Inventory (To record sale of scrap inventory.)
$1,600
$2,000
$1,600
Diff: 3 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-6
25) Robotoys Incorporated manufactures and distributes small robotic toys. Reworked units are common. The average cost of the reworked orders is $11.30: $4.15 for labour, $5.00 for more materials, and $2.15 for overhead. This ratio of costs holds for the average original order. On a recent day, the shop reworked 83 orders out of 700. The original cost of the 83 orders totaled $1,909. The average cost of all orders is $24.34, including rework, with an average selling price of $34.50. Required: Prepare the necessary journal entry to record the rework for the day if the shop charges such activities to Robo Department Overhead Control. Prepare journal entries to record all relevant rework charges as well as to transfer the reworked items finished goods to Finished Goods Inventory. Answer: Robo Department Overhead Control 937.90 Materials Control (83 × $5.00) 415.00 Wages Payable Control (83 × $4.15) 344.45 Shop Overhead Control (83 × $2.15) 178.45 Finished Goods Work-in-Process Control
1,909 1,909
Diff: 2 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-6
26) Bluefish Machine Shop is a manufacturer of motorized cars for golf clubs. Leona Pez, the plant manager of Bluefish, obtained the following information for Job #99 in July 2018. A total of 50 units were started, and 3 spoiled units were detected and rejected at final inspection. The spoiled units were considered to be normal spoilage. Costs prior to the inspection point are $1,200 per unit. The current disposal price of the spoiled units is $600 per unit. When spoilage is detected, the spoiled units are inventoried at $600 per unit. Required: 1. Prepare journal entries to record the normal spoilage, assuming: a. The spoilage is related to a specific job. b. The spoilage is common to all jobs. c. The spoilage is considered to be abnormal spoilage. 2. Assume that 2 spoiled units can be reworked for a total cost of $800. A total cost of $2,400 associated with these units has already been assigned to job #99 before the rework. Prepare journal entries for the rework assuming: a. The rework is related to a specific job. b. The rework is common to all jobs. c. The rework is considered to be abnormal.
Answer: 1 (a) The spoilage is related to a specific job. Materials Control (3 × $600) 1,800 Work-in-Process Control (Job #99)
1,800
1 (b) The spoilage is common to all jobs. Materials Control Manufacturing Overhead Control Work-in-Process Control (Job #99)
1,800 1,800 3,600
1 (c) The spoilage is considered to be abnormal spoilage. Materials Control Loss from Abnormal Spoilage Work-in-Process Job #99
1,800 1,800 3,600
2 (a) The rework is related to a specific job. Work-in-Process Control (Job #99) Various Accounts
800 800
2 (b) The rework is common to all jobs. Manufacturing Overhead Control Various Accounts 2 (c)
800 800
The rework is considered to be abnormal.
Loss from Abnormal Rework Various Accounts
800 800
Diff: 3 Type: SA CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Applying Objective: LO 19-6
27) Marvin Randall had a background in the manufacturing of building bricks. The building brick industry used clay and other material which were first mixed, then aged. After aging, they were molded into shapes, retouched and fired in kilns. The materials were fairly durable and spoilage was not significant. As a result, any spoilage that did occur was not specifically accounted for. Marvin saw the similarities between brick and tile manufacturing and felt that he could apply his knowledge successfully in tile manufacturing and started his business, Randall Tile Ltd. on July 1. In tile manufacturing, as it brick manufacturing, the process starts with the selection of the raw materials including clays. However feldspar, sand, and other materials are used. In the initial stages, it is important that all materials are homogenized; this is done through a wet grinding process. The material output of this process is known as slip. Water content is then removed from the slip through spray-drying . After, the material is moulded , pressed and dried before the tiles are fired. Hydraulic presses are used to guarantee maximum compaction. Consistency in the press cycle time is critical to ensure the tiles have the correct moisture content. If the water content is too high, the tiles will crack or break. Unglazed tiles proceed to firing, whereas glazed tiles must first be covered with one or more layers of glaze. Firing time and temperature are important in the firing process to ensure the resulting product meets required specifications for strength, stability, resistance and easy cleaning. After firing, tiles are inspected for quality. Irregularities in size, shape or colouring will lead to spoiled units. The final step is packing the ceramic tiles. Randall Tile was organized into 4 main departments.: 1) Mixing & Grinding, 2) Moulding & Pressing, 3) Glazing & Firing and 4) Inspecting & Packing. Randall was not manufacturing many glazed tiles, so any glazing that was required was done in the Firing department. The weighted average method of process costing was used in each department, however spoilage was not tracked. Marvin quickly realized that, although the processes in brick and tile manufacturing processes were similar, tile manufacturing required much more precision. After 3 months of operations, he estimated that he had a 50% defect rate when considering all stages of manufacturing. Employees were frustrated by the constant changes in manufacturing as pressing times, firing times, and temperatures were all altered in attempts to improve quality. Furthermore, Marvin believed that both frustration and nervousness led to high spoilage in the packing process. Required: What factors might have contributed to the high defect rate that Marvin noted? What steps might Marvin have taken prior to starting production to minimize defects? What recommendations would you make to Marvin regarding the management accounting system at Randall Tile?
Answer: The question is intended to be open-ended. Instructors can gauge points that they feel should be brought up by students based on the sequencing of material. Some factors that may have contributed to the high defect rate: 1. Inexperience of workers and Randall specifically in the tile business. This inexperience could cause inefficiencies not only in each stage of production, but also in purchasing appropriate direct materials. Students might refer to learning curves. 2. Inappropriate training. Any deficiencies in training affects productivity directly and indirectly through job dissatisfaction. The frustration and nervousness may be a result of workers feeling inadequate. This especially might be the case if the workers' compensation is adversely affected by the defect rate. (Relate to budgets, management control systems) 3. Poor plant layout/conditions. It is possible that conditions in the plant itself are affecting productivity. For example, if humidity is not properly controlled, it will affect the moisture content of the tiles and result in more breakage. Steps Prior to Production: 1. The problem refers to Marvin's experience in the brick industry. Perhaps he was not as familiar as he had hoped with the differences between the two production processes. He could have observed tile production, taken additional training, hired staff with experience in the tile industry, formed a strategic alliance or joint venture with another tile manufacturer. 2. The problem does not outline how much training the press operators and other production workers received. Students can identify additional training as an appropriate step. 3. Target spoilage rates could have been set and spoilage monitored. This would have allowed Marvin to know now much spoilage was occurring and might have permitted corrective actions to be taken early. (Relate to budgeting and performance management) 4. The company could have done small trial runs on different sizes and types of tiles rather than experimenting with the different variables (temperature etc.) during production. Recommendations: 1. Set target normal spoilage rates and ensure that the accounting system is accounting for normal and abnormal spoilage. 2. Depending on the size of production runs, evaluate whether job costing or process costing should be used. 3. Set up a quality reporting system and evaluate whether there are testing procedures that can be used earlier in the production process to minimize the loss from spoiled units. (Costs of quality) 4. Assess the workers' morale and evaluate the alternative performance measures and rewards that may be used to assess and motivate the workers. (Budgets and performance management) If there is a learning curve, target performance to improvements in productivity or defect rates, rather than absolute measures. Note: Other valid points may be raised by students. The above comments are suggested points for discussion. Diff: 3 Type: ES CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Analyzing Objective: Cumulative
28) When a unit has to be reworked, the rework may be classified in three ways. What are those ways, and how does the accounting for each differ? Answer: The rework may be (1) normal rework attributable to a specific job; (2) normal rework common to all jobs; or (3) abnormal rework. If the rework is attributable to a specific job, then the cost of such rework should be charged to that job. If the rework is common to all jobs, then the cost of the rework should be charged to manufacturing overhead and spread across all jobs. If the rework is abnormal rework then the cost of the rework should be charged as a loss to the period in which the rework is required. Diff: 2 Type: ES CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-6
29) There are two alternative points in time for recognizing scrap in the accounting records. What are these two points in time? Explain why a company might choose one over the other. Answer: The two points are 1)time of sale and 2) time of production. Recognizing the scrap at time of sales is the easier of the two approaches and is acceptable because, by definition, scrap has minimal sales value and hence is not material. However, if the value of the scrap is significant, and there is a delay between its occurrence and its sale, then it is appropriate to value the scrap at a conservative value. This permits better matching. Diff: 2 Type: ES CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 19-6
30) How can a company account for scrap? Include in your explanation a discussion of the two aspects of accounting for scrap. Answer: Since scrap is a residual material that results from manufacturing a product, it has a low sales value as compared to the actual value of the product. The aspects of accounting for scrap are (1) planning and control of the scrap (which includes the physical tracking), and (2) inventory costing (which includes when and how scrap affects operating income). Regarding the planning and control of the scrap it is important to measure how much scrap is being generated (by weighing or counting the pieces) and then keep records to indicate where the scrap is keeping a log of quantity and location. This will help to develop records that can be used to compare the amount of scrap generated to the expected amount generated based on budgets and units of good product completed. Also, since scrap has a value, it will reduce the likelihood that the scrap gets stolen. In terms of the cost accounting for the scrap there are two options regarding when the scrap is potentially recognized in the accounting records: (1) at the time the scrap is produced, or (2) at the time the scrap is sold. If the dollar value of the scrap is immaterial, the simplest accounting method is to record the quantity of scrap returned to the storage area and then regard the scrap sales as a separate line item in the income statement. If the scrap is material in value, then it can be recognized at the time of its production and can have journal entries returning it to a materials control asset account (as a debit) and then credited when it later gets sold. Diff: 2 Type: ES CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Understanding Objective: LO 19-6
Cost Accounting: A Managerial Emphasis - Cdn. Ed., 9e (Datar) Chapter 20 Inventory Cost Management Strategies 20.1 Evaluate relevant data and decide on the economic order quantity (EOQ). 1) Ordering costs consist of the costs of goods acquired from suppliers including freight and transportation costs. Answer: FALSE Explanation: Purchasing costs consist of the acquisition costs of goods acquired from suppliers including freight-in, the transportation costs. Diff: 1 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-1
2) Purchasing costs consist of the costs of preparing and issuing a purchase order. Answer: FALSE Explanation: Ordering costs consist of the cost to prepare and issue an purchase order. Diff: 1 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-1
3) Carrying costs arise when a customer demands a unit of product and that unit is not readily available. Answer: FALSE Explanation: Stockout costs occur when a company runs out of an item for which there is customer demand. Diff: 1 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-1
4) The economic order quantity decision model aids in the calculation of the optimal quantity of inventory to order. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-1
5) The reorder point is simplest to compute when either demand or lead time is certain. Answer: FALSE Explanation: The reorder point is simplest to compute when BOTH demand and lead time are certain. Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-1
6) Safety stock is the buffer inventory held as a cushion against unexpected increases in demand or lead time, and unexpected unavailability of stock from suppliers. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-1
7) Inventory management is the planning, organizing, and controlling activities that focus on the flow of materials into, through, and from the organization. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-1
8) Purchasing costs generally include the freight and transportation costs on goods acquired from suppliers. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-1
9) Expediting costs of a stockout include the additional ordering costs, plus any associated transportation costs. Answer: TRUE Explanation: Expediting costs include the associated transportation costs. Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-1
10) Shrinkage costs result from water damage to clothing and other soft goods. Answer: FALSE Explanation: Shrinkage costs result from theft by outsiders, embezzlement by employees, misclassifications, and clerical errors. Diff: 1 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-1
11) Shrinkage is measured by comparing the cost of inventory on the books to the cost of inventory physically counted. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-1
12) All inventory costs are available in financial accounting systems. Answer: FALSE Explanation: Opportunity costs are rarely recorded in formal accounting systems and they are often a very significant cost component. Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-1
13) To determine the Economic Order Quantity, the relevant ordering costs are minimized and the relevant carrying costs are maximized. Answer: FALSE Explanation: We minimize both the relevant ordering costs and the relevant carrying costs. Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-1
14) The Economic Order Quantity increases with demand and ordering costs and decreases with carrying costs. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-1
15) The annual relevant total costs are at a minimum where relevant ordering costs and their relevant carrying costs are equal. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-1
16) When retailers are uncertain about demand for their products or availability of their products from the suppliers, they often hold a fixed level of safety stock to make sure they will be able to fulfill the customers' needs. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-1
17) The annual relevant carrying costs of inventory consist of incremental costs plus the opportunity cost of capital. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-1
18) The opportunity cost of the stockout includes lost contribution margin on the sale NOT made plus any contribution margin lost on future sales due to customer ill will. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-1
19) Purchase order lead time is the time between the placement of an order and it delivery. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-1
20) Costs associated with holding inventories and the resulting opportunity cost of the investment tied up in inventory fall into which of the following categories? A) carrying costs B) ordering costs C) quality costs D) stockout costs E) stockin costs Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-1
21) Costs incurred when preparing and issuing purchase orders are included in which of the following categories? A) carrying costs B) ordering costs C) purchasing costs D) stockout costs E) stockin costs Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-1
22) An important component in several of the cost categories which are not typically recorded in accounting systems is A) labour costs. B) opportunity costs. C) ordering costs. D) quality costs. E) quantity costs. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-1
23) The simplest version of the economic order quantity decision model assumes all of the following EXCEPT A) the same fixed quantity is ordered at each reorder point. B) demand ordering costs and carrying costs are certain. C) purchase order lead time is certain. D) no stockouts occur. E) purchasing costs per unit depend on the quantity ordered. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-1
24) Which of the following statements is TRUE of the economic order quantity decision model? A) The economic order quantity increases with higher demand and higher carrying costs and decreases with higher ordering costs. B) The simplest version of the economic order quantity model assumes there are only ordering costs, carrying costs, stockout costs, and purchasing costs. C) It assumes the purchase order lead time is not known with certainty. D) The larger the order quantity is, the lower the annual relevant ordering costs and the higher the annual relevant carrying costs. Answer: D Diff: 3 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 20-1
25) The purchase order lead time is A) the difference between the time an order is placed and delivered. B) the difference between the products ordered and the products received. C) the discrepancies in purchase orders. D) the time required to correct errors in the products received. E) the discrepancies in inventory sheets. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-1
Use the information below to answer the following question(s). Entertainment Time is a distributor of DVDs. Video Mart is a local retail outlet that sells blank and recorded DVDs. Video Mart purchases DVDs from Entertainment Time at $5.00 each, and the units are shipped in packages of 25. Movie Time pays all incoming freight, and Video Mart does not inspect the DVDs due to Movie Time's reputation for high quality. Annual demand is 104,000 DVDs at a rate of 2,000 units per week. Video Mart earns 15% on its cash investments. The purchase order lead time is one week. The following cost data are available: Relevant ordering costs per purchase order Carrying costs per package per year: Relevant insurance, materials handling, breakage, etc., per year
$94.50
$3.50
26) What is the economic order quantity? A) 874 packages B) 652 packages C) 200 packages D) 198 packages E) 188 packages Answer: E Explanation: $5.00 × 25 = $125 = package cost Opportunity cost per package = $125 × 15% = $18.75 EOQ = EOQ = 188 packages Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
27) What are the total relevant inventory costs? A) $6,150.50 B) $4,182.56 C) $2.560.20 D) $1,951.70 E) $2,462.41 Answer: B Explanation: TRC =
+
= $2,091.06 + $2,091.50 = $4,182.56 (slight
difference due to rounding up of 188 packages) Diff: 3 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
28) How many deliveries will be made during each time period? A) 22 deliveries B) 26 deliveries C) 29 deliveries D) 32 deliveries E) 30 deliveries Answer: A Explanation: (104,000/25)/188 = 22 deliveries Diff: 3 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
29) Among the different types of costs associated with inventory, the costs of obtaining purchase approvals are ________. A) purchasing costs B) ordering costs C) stockout costs D) carrying costs Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-1
Use the information below to answer the following question(s). Office Supply House purchases 4,160 reams of paper per year, ordered in lots of 80 reams per week at $150 per ream. The vendor covers all shipping costs. Office Supply House is not required to inspect the shipment upon entry. Office Supply House earns 20% on its cash investments. The purchase order lead time is two weeks. The following cost data are available: Relevant ordering costs per purchase order Relevant insurance, materials handling, breakage, and so on, per year
$53.75 $4.25
30) What is the economic order quantity? A) 324 reams B) 235 reams C) 114 reams D) 100 reams E) 110 reams Answer: C Explanation: $150 × 20% = $30 opportunity cost per ream EOQ = EOQ = 114 reams Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
31) What are the total relevant inventory costs at the economic order quantity?
A) $3,913.65 B) $3,948.50 C) $4,975.86 D) $6,238.62 E) $4,862.84 Answer: A Explanation: TRC =
+
= $1,961.40 + $1,952,.25 = $3,913.65 (slight difference between
ordering and carrying costs due to rounding of 114 reams as EOQ) Diff: 3 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
32) What are the total relevant costs assuming the quantity ordered equals 80 reams? A) $3,913.65 B) $3,948.50 C) $4,075.25 D) $4,165.00 E) $5,326.49 Answer: D Explanation: TRC =
+
= $2,795 + $1,370 = $4,165.00
Diff: 3 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
33) How many deliveries will be required at the economic order quantity level? A) 18 deliveries B) 37 deliveries C) 42 deliveries D) 52 deliveries E) 20 deliveries Answer: B Explanation: 4,160/114 = 36.5 deliveries, rounded up to 37 Diff: 3 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
34) The level of inventory which should trigger a new order is called A) the customer demand level. B) the supply equal demand level. C) the stockout level. D) the reorder point. E) the inventory level. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-1
35) Disc Company sells 400 discs per week. Purchase order lead time is 3 weeks and the economic order quantity is 900 units. What is the reorder point? A) 950 units B) 1,200 units C) 3,500 units D) 4,500 units E) 5,600 units Answer: B Explanation: 400 × 3 = 1,200 units Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
Answer the following question(s) using the information below: Super-King Company sells optical equipment. Lens Company manufactures special glass lenses. SuperKing Company orders 5,200 lenses per year, 100 per week at $20 per lens. Lens Company covers all shipping costs. Super-King Company earns 30% on its cash investments. The purchase order lead time is 2.5 weeks. Super-King Company sells 125 lenses per week. The following data is available: Relevant ordering costs per purchase order Relevant insurance, materials handling, breakage, and so on, per year
$21.25 $2.50
36) What is the economic order quantity for Super-King Company? A) 325 lenses B) 297 lenses C) 210 lenses D) 161 lenses E) 92 lenses Answer: D Explanation: EOQ = EOQ = 161 lenses Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
37) What is the reorder point for Super-King Company? A) 220 lenses B) 312 lenses C) 397 lenses D) 415 lenses E) 561 lenses Answer: B Explanation: 125 lenses × 2.5 weeks = 312.5 lenses, round down to 312 Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
Answer the following question(s) using the information below: The following information has been gathered for Product ABC: Annual demand Purchase price per unit Orders per year Average daily demand Lead time in days Cost of placing an order Relevant insurance, handling, etc., costs Required return
760 units $300 10 2.5 units 10 $40 $8 10%
38) What is the economic order quantity for Product ABC? A) 9 units B) 10 units C) 20 units D) 40 units E) 46 units Answer: D Explanation: EOQ = EOQ = 40 Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
39) What are the annual carrying costs for Product ABC if the company orders at the EOQ amount? A) $80 B) $320 C) $760 D) $160 E) $1,520 Answer: C Explanation: EOQ = EOQ = 40 Relevant carrying costs = (10% × $300) + $8 = $38 per unit (40 units × $38)/2 = $760 Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
40) What are the annual ordering costs for Product ABC if the company orders at the EOQ amount? A) $320 B) $160 C) $1,520 D) $80 E) $760 Answer: E Explanation: (760/40) × $40 = $760 Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
41) What is the reorder point for Product ABC? A) 38 B) 25 C) 30 D) 80 E) 100 Answer: B Explanation: Reorder point = 10 × 2.5 = 25 Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
42) The inventory that is held to offset unexpected increases in demand or lead time and unexpected unavailability of stock from suppliers is primarily known as A) inventory stock. B) over-supply stock. C) safety stock. D) surplus stock. E) obsolete stock. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-1
43) Which of the following statements is TRUE? A) The reorder point is the point at which the amount of inventory on hand equals the amount needed to cover sales during the lead time. B) The reorder point is the minimum level of inventory allowed during a particular period. C) The safety stock is the amount of stock that must be on hand to cover sales during lead time. D) The safety stock is the minimum level of inventory that must remain on hand at all times. E) The safety stock is the minimum level of inventory that must remain at the customers. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-1
44) What are the major relevant costs in maintaining safety stock? A) carrying costs and purchasing costs B) ordering costs and purchasing costs C) ordering costs and stockout costs D) stockout costs and carrying costs E) stockout costs and purchasing costs Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-1
45) The total annual relevant cost equation, TRC, includes all of the following inputs EXCEPT A) ordering costs per purchase order. B) demand in units. C) reorder point. D) carrying cost per unit. E) EOQ. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-1
46) The economic order quantity decision model A) calculates the amount of inventory that may be purchased with the monetary constraint. B) determines the minimum amount of inventory to purchase. C) determines the maximum amount of inventory to keep on hand. D) determines the optimal amount of inventory to order. E) calculates the numbers of employees needed. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-1
Answer the following question(s) using the information below: Randy's Golf Supplies is a local retail outlet that sells golf balls. Randy's purchases the golf balls from Green Grass Incorporated at $0.75 per ball; the golf balls are shipped in cartons of 72, FOB destination. Annual demand is 172,800 golf balls at a rate of 3,322 balls per week. Randy's Golf Supplies earns 12% on its cash investments. The purchase order lead time is one week. The following cost data are available: Relevant ordering costs per purchase order Relevant insurance, materials handling, breakage, etc., per year
$125.00 $0.77
47) If Randy's Golf Supplies makes an order (1/12 of annual demand) once per month, what are the relevant total costs? A) $1,500.00 B) $2,085.67 C) 2,225.00 D) $3,000.00 E) $680.00 Answer: C Explanation: Order Quantity = Annual Demand/12 = 172,800/12 = 14,400 balls/month = 14.400/72 = 200 cartons per month RTC = Ordering Costs + Carrying Costs Carrying Cost per carton = price × invest rate + insurance/handling Carrying Cost per carton = ($.75 × 72 × 12%) + $0.77 = $7.25 RTC = (12 × $125.00) + ((200/2) × $7.25) = $1,500 + $725 = $2,225.00 Diff: 3 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
48) What is the economic order quantity for Randy's golf ball purchases? A) 200 cartons B) 288 cartons C) 300 cartons D) 883 cartons E) 218 cartons Answer: B Explanation: Annual Demand/172,800/72 = 2,400 cartons Carrying Cost per carton = ($.75 × 72 × 12%) + $0.77 = $7.25 EOQ = The square root of [(2 × (172,800/72) × $125.00)/($7.25)] EOQ = 287.7 cartons - round to 288 Diff: 3 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
49) Purchasing at the EOQ recommended level, how many deliveries will be made to Randy's Golf Supplies during each time period? A) 2 deliveries B) 6 deliveries C) 9 deliveries D) 12 deliveries E) 3 deliveries Answer: C Explanation: Annual Demand/172,800/72 = 2,400 cartons Carrying Cost per carton = ($.75 × 72 × 12%) + $0.77 = $7.25 EOQ = The square root of [(2 × (172,800/72) × $125.00)/($7.25)] EOQ = 287.7 cartons Deliveries = Annual Demand/EOQ = 8.3 rounded up to 9 Diff: 3 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
50) When purchasing at the EOQ recommended level, what are the relevant total costs? A) $1,500.00 B) $2,085.67 C) $2,225.00 D) $3,000.00 E) $680.00 Answer: B Explanation: Annual Demand/172,800/72 = 2,400 cartons Carrying Cost per carton = ($.75 × 72 × 12%) + $0.77 = $7.25 EOQ = The square root of [(2 × (172,800/72) × $125.00)/($7.25)] EOQ = 287.7 cartons RTC =
+
= $1,042.75 + $1,042.92 = $2,085.67
(Your solution might be slightly different based on rounding.) Diff: 3 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
Answer the following question(s) using the information below: Solid Wood Furniture Company produces a specialty wood furniture product and has the following information available concerning its inventory items: Relevant ordering costs per purchase order Relevant carrying costs per year: Required annual return on investment Required other costs per year
$150 10% $1.40
Annual demand is 10,000 packages per year. The purchase price per package is $16. 51) What is the economic order quantity for Solid Wood Furniture Company? A) 150,000 units B) 1,000 units C) 75,000 units D) 5,000 units E) 1,464 units Answer: B Explanation: Unit carrying costs = ($16 × 0.10) + $1.40 = $3 EOQ = The square root of [(2 × 10,000 × $150)/$3] = 1,000 units Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
52) What are the Solid Wood Furniture Company's annual relevant total costs at the economic order quantity? A) $1,000 B) $1,500 C) $3,000 D) $3,500 E) $2,050 Answer: C Explanation: Unit carrying costs = ($16 × 0.10) + $1.40 = $3 EOQ = The square root of [(2 × 10,000 × $150)/$3] = 1,000 units RTC =
= $3,000
Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
53) What are the Solid Wood Furniture Company's annual total relevant costs, assuming the quantity ordered equals 500 units? A) $3,500 B) $500 C) $4,000 D) $3,750 E) $3,350 Answer: D Explanation: RTC =
= $3,750
Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
54) How many deliveries will Solid Wood Furniture Company require at the economic order quantity? A) 1.0 delivery B) 5.1 deliveries C) 8.2 deliveries D) 10.0 deliveries E) 6.8 deliveries Answer: D Explanation: 10,000/1,000 = 10 deliveries Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
55) Wilson's Deli can predict with virtual certainty the demand for its products. Wilson's sells 20 hams per week. Purchase order lead time is 2 weeks and the economic order quantity is 50 hams. What is the reorder point? A) 20 hams B) 30 hams C) 40 hams D) 50 hams E) 100 hams Answer: C Explanation: 20 × 2 = 40 hams Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
56) If Ferry Company has a safety stock of 160 units and the average daily demand is 20 units, how many days can be covered if the shipment from the supplier is delayed by 12 days? A) 12.0 days B) 10.0 days C) 8.0 days D) 6.7 days E) 13.33 days Answer: C Explanation: 160/20 = 8 days Diff: 1 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
57) If Jackson Collectibles, Inc. has a safety stock of 35 units and the average weekly demand is 14 units, how many days can be covered if the shipment from the supplier is delayed? A) 2.5 days B) 17.5 days C) 21 days D) 35 days E) 7.0 days Answer: B Explanation: 35/2 = 17.5 days Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
Answer the following question(s) using the information below: Sandrington Ltd. operates a retail bicycle shop. Wheel covers are popular with customers. Sandrington purchases these covers for $48 per pair, and expects to sell 5,000 pairs per year. Ordering costs are estimated at $180 per order and relevant insurance handling etc. costs are estimated at $3.60 per month. The company has established a 14% annual return on investment. 58) The EOQ quantity for Sandrington is: A) 418 units B) 506 units C) 2,449 units D) 707 units E) 24 units Answer: A Explanation: Annual relevant insurance etc. costs = $0.30 × 12 = $3.60 Opportunity costs = 14% × $48 = $6.72 Total carrying costs = $3.60 + $6.72 = $10.32 EOQ = EOQ = 418 Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
59) At the EOQ quantity, Sandrington's total annual relevant inventory costs would be: A) $2,546 B) $3,557 C) $735 D) $4,310 E) $6,467 Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
60) Which of the following factor(s) would cause an increase in the EOQ? A) long-run purchasing arrangements, fixing price and quality B) electronic commerce C) increasing use of purchase order cards D) labour intensive procurement methods E) increase in carrying cost [C] Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-1
61) The EOQ model is designed to emphasize the tradeoff between which of the following factors? A) carrying costs and ordering costs B) purchasing costs and carrying costs C) stockout costs and carrying costs D) purchasing costs and ordering costs E) stockout costs and ordering costs Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-1
Answer the following questions using the information below: The following information applies to Labs Plus, which supplies microscopes to laboratories throughout the country. Labs Plus purchases the microscopes from a manufacturer which has a reputation for very high quality in its manufacturing operation. Annual demand (weekly demand= 1/52 of annual demand) Lead time in weeks Cost of placing an order Carrying cost per unit
20,800 units 2 weeks $100 $1.25
62) What is the economic order quantity at Labs Plus? A) 789 units B) 1,289 units C) 23 units D) 1,825 units E) 1,387 units Answer: D Explanation: EOQ = = 1,824.28 Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
63) What is the reorder point at Labs Plus? A) 800 units B) 500 units C) 400 units D) 1,600 units E) 200 units Answer: A Explanation: (20,800/52) × 2 = 800 units Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
64) What are the total annual relevant costs at Labs Plus? A) $2,280 B) $3,421 C) $1,790 D) $2,425 E) $2,670 Answer: A Explanation: [(20,800/1,825) × $100] + [(1,825/2) × 1.25] Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
65) The annual demand for red, medium polo shirts, for Clothes, Inc. is 25,000 units. The cost of placing an order is $80, and the cost of carrying one unit in inventory for one year is $25. Required: a. Use the economic order quantity model to determine the optimal order size. b. Determine the reorder point assuming a lead time of 10 days, and a work year of 250 days. c. Assuming the maximum lead time is 20 days and the maximum daily demand is 125 units, determine the safety stock required to prevent stockouts. Answer: a. /$25 = 400 units b.
Daily demand = 25,000/250 = 100 units Reorder point = 100 units per day × 10 days = 1,000 units
c.
Max. demand per day Max. lead time
125 units × 20 days
Max. lead time demand Reorder point without safety stocks
2,500 units 1,000 units
Safety stock
1,500 units
Diff: 2 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
66) An inventory item of XYZ Manufacturing has an average daily demand of 10 units with a maximum daily demand of 12 units. The economic order quantity is 200 units. The reorder point is 50 units. Safety stocks are set at 94 units. Required: a. Determine the inventory level at the time of reordering. b. Determine the purchase order lead time. d. Determine the maximum purchase order lead time that the company can experience before it has a stockout. Answer: a. Reorder point 50 units Safety stock 94 units Inventory at reorder point 144 units b.
50 units at reorder point/10 units a day = 5 days
c.
Reorder point with safety stocks is 144 Maximum demand is 12 Maximum purchase order lead time = 144/12 = 12 days
Diff: 2 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
67) Ralph was in the process of completing the quarterly planning for the purchasing department when a major computer malfunction lost most of his data. For direct material XXX he was able to recover the following: Average inventory level of XXX Orders per year Average daily demand Working days per year Annual ordering costs Annual carrying costs
??? 40 48 250 $4,000 $30/unit
Ralph purchases at the EOQ quantity level. Required: Determine the annual demand, the cost of placing an order, the economic order quantity and the annual total costs of inventory. Answer: Annual demand = 48 × 250 = 12,000 Cost of placing an order
= $4,000/40 = $100 per order
EOQ = The square root of (2 × 12,000 × $100)/$30 = 282.8427 units rounded to 283 Total ordering costs at EOQ = 12,000/283 × $100 = $4,240,28 Total carrying costs = 283/2 × $30 = $4,245 Total costs of inventory = $4,240.28 + $4,245 = $8,485.28 Note carrying costs do not exactly equal ordering costs due to rounding. Diff: 3 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
68) The IBP Grocery orders most of its items in lot sizes of 10 units. Average annual demand per side of beef is 720 units per year. Ordering costs are $25 per order with an average purchasing price of $100. Annual inventory carrying costs are estimated to be 40 percent of the unit cost. Required: a. Determine the economic order quantity. b. Determine the annual cost savings if the shop changes from an order size of 10 units to the economic order quantity. c. Since the shelf life is limited the IBP Grocery must keep the inventory moving. Assuming a 360-day year, determine the optimal lot size under each of the following: (1) a 20-day shelf life and (2) a 10-day shelf life. Answer: a. /$40 = 30 units b.
Current 10 unit order: Ordering costs ($25 × 720/10) Carrying costs ($100 × 0.40 × 10/2)
$1,800 200
$2,000
EOQ 30 unit order: Ordering costs ($25 × 720/30) Carrying costs ($100 × 0.40 × 30/2)
600 600
1,200
Annual savings c.
$800
Average daily demand = 720/360 = 2 per day Average days' supply in EOQ = 30/2 = 15 days
1. 2.
20-day shelf life allows for up to 40 units (20 × 2), EOQ is acceptable. 10-day shelf life allows for up to 20 units (10 × 2), EOQ is not acceptable.
Diff: 3 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
69) For supply item ABC, Andrews Company has been ordering 125 units based on the recommendation of the salesperson who calls on the company monthly. A new purchasing agent has been hired by the company who wants to start using the economic order quantity method and its supporting decision elements. She has gathered the following information: Annual demand in units Days used per year Lead time, in days Ordering costs Annual unit carrying costs
250 250 10 $100 $20
Required: Determine the EOQ, average inventory, orders per year, average daily demand, reorder point, annual ordering costs, and annual carrying costs. Answer: EOQ = The square root of [(2 × 250 × $100)/$20] = 50 Average inventory
= 50/2 = 25
Orders per year
= 250/50 = 5
Average daily demand = 250/250 = 1 unit Reorder point
= 10/1 = 10 units
Annual ordering costs
= 5 × $100 = $500
Annual carrying costs
= 25 × $20 = $500
Diff: 2 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
70) A jeweller orders gems in lot sizes of 1,250 gems. The annual demand for emeralds is 6,250 gems. Ordering costs are $200 per order and carrying costs are $10 per unit annually. Required: a. Determine the economic order quantity. b. Determine the amount of annual cost savings if the company changes from an order size of 1,250 units to the economic order size. c. One supplier offers a discount of $2 per unit off the purchase price of orders in lots of 625 units or more. What impact would this have on the EOQ and should the order size be changed? Answer: a. /$10 = 500 units b. Current 1,250 unit order: Ordering costs ($200 × 6,250/1,250) Carrying costs ($10 × 1,250/2)
$1,000 6,250
$7,250
EOQ 500 unit order: Ordering costs ($200 × 6,250/500) Carrying costs ($10 × 500/2)
$2,500 2,500
5,000
c.
Annual savings
$2,250
EOQ 500 unit order from (b) 625 unit orders: Ordering costs ($200 × 6,250/625) Carrying costs ($10 × 625/2)
$5,000 $2,000 3,125
5,125
Increased costs Purchase savings (6,250 × $2)
$ 125 12,500
Advantage of offer
$12,375
Conclusion: Accept the offer of 625 units per order. Diff: 3 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
71) The annual demand for a company's product is 3,750 units, and monthly demand varies from 200 to 400 units with the following probability of demand: 200 units have a 25 percent probability 300 units have a 50 percent probability 400 units have a 25 percent probability The EOQ model provides an optimal order quantity of 250 units. The opportunity costs of being out of stock are $2 per unit, with a carrying cost of $13 per unit, and the reorder point is 250 units. Required: a. Prepare a table showing stockouts, expected stockout costs, related carrying costs, and total costs, at each level of demand if the selected safety stocks are: 0, 50, 100 and 150. b. What is the best level of safety stock to carry? Answer: a. Relevant Expected Relevant Safety Stockouts Stockout Stockout Carrying Total Stock Demand in Units Prob Costs Orders Costs Costs Costs 0 0.25 300 50 0.50 $100 15 $750 400 150 0.25 300 15 $1,125 $1,875 50 0.25 0.50 400 100 0.25 $200 15 $750 $650 $1,400 100 400 150
50
0.25 0.50 0.25 0.25 0.50 0.25
$100
15
$375
15
$1,950
$1,300
$1,675
$1,950
b. The safety stock of 50 units is the best with the lowest total cost. Diff: 3 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
72) Hawthorne Ltd. purchases 1,500,000 units of its product every year. The ordering costs are $30 per order and the annual carrying cost of one unit is $1.60. Under its current inventory policy, it purchases the units 150 times during the year, in batches of 10,000 units per order. Required: a. Calculate the EOQ for Hawthorne Ltd. b. By ordering at the EOQ, how much in inventory costs will Hawthorne Ltd. save per year? Answer: a. EOQ = = 7,500 units b. Current Policy: Average inventory = 10,000/2 = 5,000 (150 orders × $30/order) + [(10,000/2) × $1.60] $4,500 + $8,000 = $12,500 At EOQ: # of orders = 1,500,000/7,500 = 200 orders (200 × $30) + [(7,500/2) × $1.60] = $12,000 The company will save $500 [$12,500 - 12,000] by using the EOQ. Diff: 2 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
73) Stanford Ltd. purchases 1,600,000 units of its product every year. The ordering costs are $50 per order and the annual carrying cost of one unit is $1.60. Under its current inventory policy, it purchases the units 80 times during the year, in batches of 20,000 units per order. Required: a. Calculate the EOQ for Stanford Ltd. b. By ordering at the EOQ, how much in inventory costs will Stanford Ltd. save per year? Answer: a. EOQ = = 10,000 units b. Current Policy: Average inventory = 20,000/2 = 10,000 Order costs = 80 orders × $50 = $4,000 Carrying = 10,000 × $1.60 = $16,000 Total costs = $4,000 + $16,000 = $20,000 At EOQ: # of orders = 1,600,000/10,000 = 160 orders Average inventory = 5,000 units (160 × $50) + (5,000 × $1.60) = $8,000 + $8,000 = $16,000 The company will save $4,000 [$20,000 - $16,000] by using the EOQ. Diff: 2 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
74) Peckford Ltd. purchases 900,000 units of its product every year. The ordering costs are $125 per order and the annual carrying cost of one unit is $1.50. Under its current inventory policy, it purchases the units 60 times during the year, in batches of 15,000 units per order. Required: a. Calculate the EOQ for Peckford Ltd. b. By ordering at the EOQ, how much in inventory costs will Peckford Ltd. save per year? Answer: a. EOQ = = 12,247.45 rounded up to 12,248 units b. Current Policy: Average inventory = 15,000/2 =7,500 Order costs = 60 orders × $125 = $7,500 Carrying = 7,500 × $1.50 = $11,250 Total costs = $7,500 + $11,250 = $18,750 At EOQ: # of orders = 900,000/12,248 = 73.48, round up to 74 orders Average inventory = 12,248/2 = 6,124 units (74 × $125) + (6,124 × $1.50) = $9,250 + $9,186 = $18,436 The company will save $314 [$18,750 - $18,436] by using the EOQ. Diff: 2 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
75) Morrissette Ltd. sells 240,000 units a year. Its carrying costs are $0.10 per unit and its ordering costs are $187.50 per order. Required: a. Calculate the economic order quantity. b. The supplier has offered a $0.02 discount per unit (on all units) if the order size is 80,000 units. Should Morrissette increase its order size? Answer: a. EOQ = = 30,000 units At the EOQ, the company will place 240,000/30,000 = 8 orders b. Total annual cost at EOQ: = (8 orders @ $187.50) + (15,000 × $0.10) = $1,500 + $1,500 = $3,000 Total annual cost at 80,000 unit order size: New Order Size of 80,000 requires 240,000/80,000 or 3 orders = (3 orders @ $187.5) + (40,000 × $0.10) = $562.50 + $4,000 = $4,562.50 Savings on unit price = 240,000 × $0.02 = $4,800 $4,800 - $4,562.50 = $237.50 savings Yes Morrissette should increase its order size. Diff: 2 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
76) Jambalaya Ltd. sells 120,000 units a year. Its carrying costs are $0.35 per unit and its ordering costs are $127 per order. Required: a. Calculate the economic order quantity. b. The supplier has offered a $0.05 discount per unit (on all units) if the order size is 20,000 units. Should Morrissette increase its order size? Answer: a. EOQ = = 9,331.97 round up to 9,332 units At the EOQ, the company will place 120,000/9,332 =12.86 orders; round up to 13 b. Total annual cost at EOQ: = (13 orders @ $127) + (4,666 × $0.35) = $1,651.00 + $1,633.10 = $3,284.10 Total annual cost at 20,000 unit order size: New Order Size of 20,000 requires 120,000/20,000 or 6 orders = (6 orders @ $127) + (10,000 × $0.35) = $762.00 + $3,500.00 = $4,262.00 Savings on unit price = 240,000 × $0.02 = $4,800 $3,284.10 - $4,262.00 = $977.90 extra cost Jambalaya should not increase its order size. Diff: 2 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
77) Acme Industries is currently experiencing problems with its inventory of anvils. Its manager, Willy Coy currently orders the anvils in batches of 10,000. Four orders are placed during the year to meet the estimated sales demand of 40,000 units. Each order costs $20 and each unit costs $2 to carry. Mr. Coy maintains a safety stock of 500 anvils. Required: a. What are Acme's total annual costs (TC) of inventory under its current ordering policy? b. What is the Economic Order Quantity for Acme Industries? c. What is the average inventory if Acme uses the EOQ calculated in part b) and it still maintains its 500 units of safety stock? d. What is Acme's annual savings in inventory costs by using the EOQ and maintaining its safety stock? Answer: a. TC = ordering + carrying TC = [4 × $20] + [5,000 × $2] + [500 × $2] TC = $80 + $10,000 +1,000 = $11,080 total costs under current policy b.
EOQ =
=
c.
(895/2) + 500 = 448 + 500 = 948
d.
# of orders placed = 40,000/895 = 44.69 TC = [44.69 × $20] + [448 × $2] + [500 × $2] = $893.80 + $896 + $1,000 = $2,789.80 total costs under EOQ $11,080 - $2,789.80 = $8,290.20 savings.
= 894.43 round up to 895
Diff: 2 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
78) Beta Industries is currently experiencing problems with its inventory of hammer heads. Its manager, Laura Engles currently orders the hammer heads in batches of 6,000. Six orders are placed during the year to meet the estimated sales demand of 36,000 units. Each order costs $75 and each unit costs $0.50 to carry. Ms. Engles maintains a safety stock of 1,000 hammer heads. Required: a. What are Beta's total annual costs (TC) of inventory under its current ordering policy? b. What is the Economic Order Quantity for Beta Industries? c. What is the average inventory if Beta uses the EOQ calculated in part b) and it still maintains its 1,000 units of safety stock? d. What is Beta's annual savings in inventory costs by using the EOQ and maintaining its safety stock? Answer: a. TC = ordering + carrying TC= [6 × $75] + [3,000 ×$0.50] + [1,000 × $0.50] TC= $450 + $1,500 + $500 = $2,450 total costs under current policy b.
EOQ =
= 3,286.34 round up to 3,287
c.
(3,287/2) + 1,000 = 2,644
d.
# of orders placed = 36,000/3,287 = 10.95 round to 11 TC = [11 × $75] + [2,644 × $0.50] = $825 + $1,322 = $2,147 total costs under EOQ $2,450 - $2,147 = $303 savings.
Diff: 2 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
79) Delta Industries is currently experiencing problems with its inventory of hammer handles. Its manager, Laura Engles currently orders the hammer handles in batches of 500. Six orders are placed during the year to meet the estimated sales demand of 3,000 units. Each order costs $75 and each unit costs $0.10 to carry. Ms. Engles maintains a safety stock of 50 hammer heads. Required: a. What are Beta's total annual costs (TC) of inventory under its current ordering policy? b. What is the Economic Order Quantity for Beta Industries? c. What is the average inventory if Beta uses the EOQ calculated in part b) and it still maintains its 50 units of safety stock? d. What is Beta's annual savings in inventory costs by using the EOQ and maintaining its safety stock? Answer: a. TC = ordering + carrying TC = [6 × $75] + [250 × $0.10] + [50 × $0.10] TC = $450 + $25 + $5 = $480 total costs under current policy b.
EOQ =
= 2,121.32 round up to 2,122
c.
(2,122/2) + 50 = 1,111
d.
# of orders placed = 3,000/2,122 = 1.41 round to 2 TC = [2 × $75] + [1,111× $0.10] = $150 + $111 = $261 total costs under EOQ $480 - $150 = $330 savings.
Diff: 2 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-1
80) The executive vice president of Robotics, Inc., is concerned because the cost of materials has not been in line with the budget for several periods, even after implementing an EOQ model. The company has the normal direct material variance computations of price and efficiency at the end of each month. The price variance of the direct materials used is usually near expectations. The vice president does not understand how the budget differences are always larger than the material price variances. Required: What explanation can you give for the evaluation problems presented? Answer: An EOQ model does not solve all inventory related problems. The first problem is the timing of material price variance computations. They should be at the time of purchase, not at the time of usage. By changing when the variance is computed, the responsibility is placed where it should be, in purchasing, not in production. Also, the timing of when materials are used could explain the difference between the budget variances and the material price variances. Materials may be purchased in one period and not used until another period. Also, material usage may include items purchased during several previous periods. Diff: 3 Type: ES CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-1
81) You are the new controller at Ralston Industries and you have noticed that the company seems to carry a lot of inventory, both in direct materials and in finished goods. At a recent management meeting, you raised this observation. The managers agreed with your observation but stated that it was company policy to carry large inventories. Required: Provide three reasons these managers might offer in support of carrying large inventories? Answer: Some reasons for carrying large inventories include: ∙ To reduce ordering costs ∙ To satisfy customer demand ∙ To guard against fluctuating customer demand ∙ To guard against production problems (breakdowns, labour problems) (company will have sufficient stock on hand) ∙ To hedge against future price increases of raw materials ∙ To take advantage of discounts for buying in larger quantities ∙ To guard against late deliveries by suppliers ∙ To ensure availability of direct materials ∙ To guard against potential defective direct materials Diff: 2 Type: ES CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-1
82) Discuss considerations that should be fully taken into account when developing inventory related relevant costs for use in an economic order quantity (EOQ) model. Answer: It is crucial that the costs be incremental. Consider incremental carrying costs. If they are costs that will change with the quantity of inventory held, then they are relevant. If there are costs that would be unchanged regardless of how much inventory was in the warehouse (such as a clerical salary or material handler who was working at below full capacity), then those costs are not relevant for decision-making purposes. Relevant carrying costs are likely to be costs like shrinkage, breakage, obsolescence, and costs of hiring extra employees (or having existing employees work overtime) if higher levels of inventory will make those costs increase. Consider incremental opportunity cost of capital. If there is a decision to carry more inventory, then there will be money spent to purchase the inventory. The opportunity cost of capital is what would the other most beneficial use of the money be if it wasn't needed to purchase the higher level of inventory. It is calculated by multiplying the company's required rate of return by the per unit costs and then by the number of units purchased for the inventory and incurred at the time the units are received. Stockout costs require an estimate of the lost contribution margin on sales lost because of a stockout. Ordering costs are only those that change with the numbers of orders placed. Diff: 3 Type: ES CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Analyzing Objective: LO 20-1
Due to unprecedented growth during the year Denise's Flowers decided to use some of its surplus cash to increase the size of several inventory order quantities that had been previously determined using an EOQ model. Required: For each of the following items tell whether the increase in order size caused an increase, a decrease, or no change. A) decrease B) no change C) increase 83) average inventory Diff: 2 Type: MA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-1
84) cost of goods sold Diff: 2 Type: MA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-1
85) number of orders per year Diff: 2 Type: MA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-1
86) total annual carrying costs Diff: 2 Type: MA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-1
87) total annual ordering costs Diff: 2 Type: MA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-1
Answers: 83) C 84) B 85) A 86) C 87) A
20.2 Resolve conflicts that can arise from the results of EOQ and performance models. 1) Goal-congruence problems may occur when an inconsistency evolves between the decision model used and the model used to evaluate the performance of the person implementing the decision. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-2
2) If annual carrying costs are excluded when evaluating the performance of managers, the managers may favour purchasing in larger order quantities. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-2
3) Companies can achieve significant gains by sharing information and coordinating activities throughout the supply chain. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-2
4) In the EOQ formula the square root increases the sensitivity of the decision to errors in predicting its inputs. Answer: FALSE Explanation: In the EOQ formula the square root reduces the sensitivity of the decision to errors in predicting its inputs. Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-2
5) When there is an inconsistency between the decision model and the model used to evaluate the performance of the person implementing the model, ________ arise. A) evaluation point issues B) goal-congruence issues C) labour issues D) performance issues E) management issues Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-2
6) Which of the following costs is a relevant inventory carrying cost of carrying inventory? A) the lost contribution margin on future sales forgone as a result of customer dissatisfaction in product quality B) the lost contribution margin on sales forgone because of the shortage of inventory C) the costs of storage space owned that cannot be used for other profitable purposes when inventories decrease D) the costs of shrinkage Answer: D Diff: 3 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 20-1
7) The possibility of a conflict between the order quantity that an EOQ model recommends and the order quantity that the purchasing manager regards as optimal is increased with A) inventory costs which are computed with the FIFO method. B) lower priced inventory items. C) the absence of opportunity costs not being recorded in conventional accounting systems. D) competitive quotes from suppliers. E) lower priced costs of goods sold. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-2
8) Cute Animals orders 10,400 stuffed tigers per year at $10 per tiger, FOB destination. Cute Animals earns 12% on its cash investments. The purchase order lead time is 3 weeks. The following data are available: Estimated ordering costs per purchase order Estimated insurance, materials handling, breakage, and so on, per year Actual ordering costs per order
$10 $3 $15
What is the cost of the prediction error? A) $19.58 B) $23.12 C) $1,144.82 D) $1,167.85 E) $1,237.92 Answer: B Explanation: EOQ = EOQ = 223 EOQ = EOQ = 273 $10 × 12% = $1.20 Carrying costs = $3 + $1.20 = $4.20 TRC =
+
= $699.55 + $468.30 =
$1,167.85
TRC =
+
= $571.43 + $573.30 =
$1,144.73 $23.12
Diff: 3 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-2
9) Cute Animals orders 5,200 stuffed giraffes per year at $6 per giraffe, FOB destination. Cute Animals earns 3% on its cash investments. The purchase order lead time is 4 weeks. The following data are available: Estimated ordering costs per purchase order Estimated insurance, materials handling, breakage, and so on, per year Actual ordering costs per order
$35 $2 $55
Required: What is the cost of the prediction error? Answer: EOQ = EOQ = 409 EOQ = EOQ = 513 $6 × 3% = $0.18 Carrying costs = $2 + $0.18 = $2.18 TRC =
+
= $699.27 + $445.81 =
$1,145.08
TRC =
+
= $557.50 + $559.17 =
$1,116.67 $28.41
Diff: 2 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-2
10) Cute Animals orders 3,000 stuffed hippos per year at $4 per hippo, FOB destination. Cute Animals earns 2% on its cash investments. The purchase order lead time is 3 weeks. The following data are available: Estimated ordering costs per purchase order Estimated insurance, materials handling, breakage, and so on, per year Actual ordering costs per order
$25 $0.25 $30
Required: What is the cost of the prediction error? Answer: EOQ = EOQ = 675 EOQ = EOQ = 739 $4 × 2% = $0.08 Carrying costs = $0.25 + $0.08 = $0.33 TRC =
+
= $133.33 + $111.38 =
$244.71
TRC =
+
= $121.79 + $121.94 =
$243.73 $0.98
Diff: 2 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-2
20.3 Analyze the relevant benefits and costs of JIT alternatives. 1) Just-in-Time (JIT) Production is also called "lean production." Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-3
2) Just-in-Time (JIT) Production is a system in which each component on a production line is produced immediately as needed by the next step in the production line. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-3
3) The lack of buffer inventory in a demand-pull system means production staff has extra time to solve problems. Answer: FALSE Explanation: A buffer inventory ensures that there is no down time due to lack of inventory. Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-3
4) Financial performance measures are the predominant measures of control in a Just-in-Time system. Answer: FALSE Explanation: There are many more nonfinancial measures than financial measures. Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-3
5) Companies implementing just-in-time production systems manage inventories by minimizing or eliminating them. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-3
6) Just-in-time purchasing is the purchase of goods or materials such that delivery immediately precedes demand or use. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-3
7) Just-in-time purchasing requires organizations to place smaller purchase orders with their suppliers. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-3
8) Just-in-time purchasing is guided solely by the economic order quantity. Answer: FALSE Explanation: Inventory management also includes purchasing costs, stockout costs, and quality costs. Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-3
9) A financial benefit of a just-in-time system is that inventory carrying costs are reduced. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-3
10) Quality control is more important when a just-in-time inventory systems is in use. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-3
11) Which of the following methods is used when production is driven by downstream workstations?
A) an activity-based systems B) a just-in-time system C) a product-need system D) a station-priority system E) safety system Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-3
12) All of the following are potential financial benefits of just-in-time EXCEPT A) lower investments in inventories. B) higher investments in "efficient" storage space. C) reducing the risk of rework. D) reducing the handling costs of inventories. E) reducing manufacturing lead time. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-3
13) Which of the following would NOT be typical when a JIT production system is used? A) manufacturing cells B) emphasis on reducing setup time C) workers who specialize in one function or operation D) managing safety stock effectively E) JIT purchasing Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-3
14) Which of the following statements is TRUE of just-in-time (JIT) purchasing? A) In JIT purchasing, the optimal safety-stock level is the quantity of safety stock that minimizes the sum of annual relevant stockout and carrying costs. B) JIT purchasing is guided solely by the EOQ model because that model emphasizes the tradeoff between relevant carrying and ordering costs. C) In JIT purchasing, raw materials (or goods) are purchased so products are delivered just as needed for production or sales. D) The only disadvantage of JIT purchasing is the higher level of carrying and inspection costs. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 20-3
15) The management accountant must design performance measures to evaluate and control JIT production. One of the dominant sources of information that the management accountant might use for this would be the personal observations of production line workers and team leaders. Another dominant source of information would be A) inventory turnover ratio. B) nonfinancial measures of time, inventory and quality. C) material cost variances. D) number of units sent to scrap/total scrap costs. E) total setup time for machines/total number of units started and completed. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-3
16) When goods and/or materials are purchased in such a manner as to immediately precede demand or use, it is specifically called A) inventory purchasing. B) just-in-time purchasing. C) materials purchasing. D) stock purchasing. E) safety purchasing. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-3
17) Factors that are relevant in a JIT system, but not for the EOQ model, include A) quality of materials. B) timeliness of deliveries. C) stockout costs. D) carrying costs. E) quality of materials, timeliness of deliveries, and stockout costs. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-3
18) Primary components that manufacturers would use to evaluate suppliers under a just-in-time system would include all of the following EXCEPT A) on-time delivery. B) production lead time. C) purchase price. D) quality costs. E) long-term partnerships. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-3
19) The Jarvis Corporation produces bucket loader assemblies for the tractor industry. The product has a long term life expectancy. Jarvis has a traditional manufacturing and inventory system. Jarvis is considering the installation of a just-in-time inventory system to improve its cost structure. In doing a full study using its manufacturing engineering team as well as consulting with industry JIT experts and the main vendors and suppliers of the components Jarvis uses to manufacture the bucket loader assemblies, the following incremental cost-benefit relevant information is available for analysis: The Jarvis cost of investment capital hurdle rate is 15%. One time cost to rearrange the shop floor to create the manufacturing cell workstations is $275,000. One time cost to retrain the existing workforce for the JIT required skills is $60,000. Anticipated defect reduction is 40%. Currently there is a cost of quality defect assessment listed as $150,000 per year. The setup time for each of the existing functions will be reduced by 67%. Currently the forecast for setup costs are $225,000 per year. Jarvis will expect to save $200,000 per year in carrying costs as a result of having a lower inventory. The suppliers will require a 15% premium over the current level of prices in order to position themselves to supply the material on a smaller and more frequent schedule. Currently the materials purchases are $1,500,000 per year. Required: Determine whether it is in the best interest of Jarvis Corporation to install a JIT system.
Answer: 1. Initial Investment = $275,000 + 60,000 = $335,000 2.
Annual Savings: Defect Cost Reduction = 40% of $150,000 = $60,000 Setup Cost Reduction = 67% of $225,000 = $150,750 Carrying Cost reduction = $200,000 Total Savings = (60,000 + 150,750 + 200,000) = $410,750
3.
Annual Increased Costs: Vendor Premium = 15% of $1,500,000 = $225,000
4.
Net Annual Savings = (410,750 - 225,000) = $185,750
5.
Savings/Initial Investment = (185,750/335,000) = 55%
Since the net savings is returning 55% per year on the initial investment (which is far in excess of the companies hurdle rate of 15%), the JIT project should be implemented. Diff: 3 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-3
20) The manufacturing manager of New Technology Company is concerned about the company's newest plant. When the plant began operations three years ago it had the best of everything. It had modern equipment, well-trained employees, engineered work and assembly stations and a controlled environment. During the first two years the evaluation results were very good with almost all cost variances being favourable. However, recently things have turned negative. In recent months everything seems to be operating in a crisis management mode. Although most cost variances remain favourable, the plant's segment contribution is declining and customers are complaining about poor quality and slow delivery. Several customers have suggested that they may take their business elsewhere if things do not improve. The shop floor is in continual turmoil. In-process inventory is everywhere, production employees have difficulty finding jobs that need to be worked on, and scheduling has requested a larger computer to keep track of work-in-process. The vice president of sales does not know where to begin with solving the customers' problems. It seems that everyone is working very hard and the plant has the best facilities and trained employees in the industry. Required: What is the nature of the plant's problems? What recommendation would you make to help improve the situation? Answer: The basic problem appears to be too much work-in-process inventory and a lack of control over the flow of this inventory. Since the plant had two good years of production, it may be that increased demands are pushing the plant near its capacity and management has lost control of how to manage a near-capacity situation. Although the employees are well-trained and skilled in what they do, that is not enough to ensure the production process runs smoothly. All activities must be organized to be efficient. A beginning recommendation is to implement a materials required planning system where each workstation controls what it produces and pushes it to the next workstation. This can be accomplished by tighter controls over the scheduling of production units by workstation. This would be incorporated with a master production schedule, bill of materials, and timely inventory system. Diff: 2 Type: ES CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-3
21) Sudbury Ore Company mines nickel ore for production into various metal products. During recent years the company has had large fluctuations in its inventories of metal ingots. Much of the volatility of the inventory levels is due to the variability of demand by the company's largest customers, automobile manufacturers. For large orders the company has the technology to quickly shift production from one product to another. Required: Explain how the company can improve its inventory control system and give the advantages of whatever you recommend. Answer: The company can probably benefit from changing to a just-in-time system for inventory control. This would allow the company to be responsive to actual needs rather than stockpiling finished goods inventory. The advantages would be: 1. 2. 3. 4.
Lower inventory investments. Reductions in carrying and handling costs of inventories. Reduction in risks of obsolete inventories. Emphasis on reducing manufacturing lead time.
JIT systems mean that there are minimal inventories at each stage of production, therefore, defects arising at one stage can quickly affect subsequent stages of production. It is therefore important in JIT systems, to also have a policy of TQM, solving problems and eliminating defects as soon as possible. Note: If mining is a routine operation without much variability, you may consider selling extra inventory—a reverse JIT process. Diff: 2 Type: ES CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-3
22) London Company makes extensive use of financial performance reports for each of its departments. Although most departments have been reporting favourable cost variances with the company's current inventory system, management is concerned about the overall performance of the purchasing and production departments. For example, the following information is for the purchasing of materials for a product the company has been manufacturing for several years:
Year 1 2 3 4 5 6
Quantity used 40,000 60,000 60,000 50,000 54,000 58,000
Average inventory 8,000 15,000 20,000 12,500 18,000 23,200
Purchase price variance $1,000 F 10,000 F 12,000 F 20,000 U 8,000 F 9,500 F
Required: a. Compute the inventory turnover for each year. Can any conclusions be drawn for a yearly comparison of the purchase price variance and the inventory turnover? b. Identify problems likely to be caused by evaluating purchasing only on the basis of the purchase price variance. c. Management has been relying almost exclusively on variances for performance measurement. What recommendations can you suggest to improve the evaluation process?
Answer: a. Year Quantity used 1 40,000 2 60,000 3 60,000 4 50,000 5 54,000 6 58,000
Average inventory 8,000 15,000 20,000 12,500 18,000 23,200
Turnover 5.0 4.0 3.0 4.0 3.0 2.5
Favourable purchase prices appear to be associated with decreases in inventory turnover and increases in average inventory levels. Decreases in inventory turnover are a possible signal of the buildup of excess inventory. Excess inventory will reduce the return on investment of the company and the above information indicates a need for a just-in-time inventory system. b. To achieve quantity discounts and favourable materials price variances, purchasing may be ordering excess inventory, thereby increasing subsequent storage, obsolescence, and handling costs. To obtain a low price, purchasing may be ordering from a supplier whose goods have inferior quality, which may in turn lead to increased inspection, rework, and perhaps dissatisfied customers. c. It appears that two items may help improve the situation. First, consider the change to a just-in-time inventory system which would greatly improve the inventory turnover and reduce the amount of inventory carried. Second, additional measures should be used in the evaluation of the purchasing department. Either other financial measures should be used or the addition of nonfinancial measures should be implemented. Several measures are mentioned in the text, for example, manufacturing lead time, units produced per hour, days' inventory on hand. Diff: 3 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-3
23) What are five features of a just-in-time manufacturing system? Answer: A just-in-time (JIT) system has many positive features. It organizes production in manufacturing cell groups which allow for all equipment used for a given product to be grouped together. This reduces material handling costs and sequences the production process. A second feature of a JIT system is that workers are trained to be multi-skilled. They are trained to operate various machines as well as to do light maintenance and repairs on the machines. A third feature of JIT is that it aggressively works to eliminate defects. Because there is a tight link between the steps, defects are quickly noticed in the next step and addressed before large numbers of units become backlogged. A fourth feature of a JIT system is that it reduces setup time and manufacturing lead time. Reduced setup costs make it more practical to produce smaller batches and react faster to changes in customer demand. A fifth feature of a JIT system is the firm only uses suppliers who are capable of meeting delivery demands in a timely fashion. This also causes an increase in the quality of the goods being received by the firm. Diff: 2 Type: ES CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-3
20.4 Differentiate a materials requirements planning (MRP) strategy from an enterprise resource planning (ERP) strategy of supply-chain management. 1) The term, supply-chain, describes the flow of goods, services and information from cradle to grave, regardless of whether those activities occur in the same organization or in other organizations. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-4
2) An Enterprise Resource Planning (ERP) System comprises a single database that collects data and feeds it into software applications supporting all of a company's business activities. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-4
3) A "demand-pull" system, often described as a materials requirement planning system, focuses first on the forecasted amount and timing of finished goods and then determines the demand for materials components and subassemblies at each of the prior stages of production. Answer: FALSE Explanation: The narrative describes a push-through system. Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-4
4) Which of the following would be expected when using a supply-chain approach to inventory management? A) more stockouts (but at a lower cost overall) B) less manufacturing of goods not subsequently ordered C) fewer rush orders for manufacturing D) more stockouts, less manufacturing of goods not subsequently ordered, and fewer rush orders for manufacturing E) fewer rush orders for manufacturing, less manufacturing of goods not subsequently ordered, and lower inventory levels Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-4
5) Which of the following is NOT a component in a materials requirement planning system? A) lead times of all items to be purchased B) master production schedule C) bill of materials filed D) standard construction times for all components produced externally E) demand forecasts for finished goods Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-4
6) The management accountant aids in MRP by A) doing journal entries as requested. B) preparing plant appropriation requests. C) maintaining accurate records of inventory and its costs. D) contacting vendors to make sure they can deliver the materials in time. E) calculating EOQ Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-4
7) A system that comprises a single database that collects data and feeds it into software applications supporting all of a company's business activities is known as a(n) A) economic order quantity (EOQ) system. B) enterprise requirements planning (ERP) system. C) just-in-time (JIT) system. D) material requirements planning (MRP) system. E) total quality management (TQM). Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-4
8) Which of the following statements best defines a just-in-time production system? A) a push-through system that manufactures finished goods for inventory on the basis of demand forecasts B) a push-through system in which each component in a production line is produced immediately as needed by the next step in the production line C) a demand-pull system that manufactures finished goods for inventory on the basis of demand forecasts D) a demand-pull system in which each component in a production line is produced immediately as needed by the next step in the production line Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-4
9) Windsor Ltd. makes musical instruments. One of their products is an acoustic guitar that has an annual demand of 4,000 units. The setup cost for each production batch is $1,500; it costs $12 to carry a guitar in inventory for one year. Required: 1. What is the total annual relevant batch set up and carrying cost if the company uses the economic order quantity? Assume that setup costs are the same as ordering costs. 2. The company is switching to a just-in-time system. The average order size is 200 guitars. What is the total annual relevant batch set up and carrying cost? 3. Compare the Enterprise Resource Planning EOQ model with the JIT model. What are the advantages and disadvantages of each? Answer: 1. EOQ = EOQ = 1,000 Total orders per year = 4,000/1,000 = 4 Average inventory = 1,000/2 = 500 TC = ordering + carrying TC = [4 × $1,500] + [500 × $12] = $12,000 2. Total orders per year = 4,000/200 = 20 orders per year Average inventory = 200/2 = 100 TC = ordering + carrying TC = [20 × $1,500] + [100 × $12] = $31,200 3. The EOQ system resulted in the lowest costs. However, the EOQ model, in this case, limits production to only once every three months. This would not allow managers to react quickly to changing market demand or economic conditions. The JIT model provides management with much more flexibility. JIT systems might also lead managers to improve processes, reduce costs and increase quality. Diff: 3 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Analyzing Objective: LO 20-2; 20-4
10) Windsor Sound Ltd. makes musical instruments. One of their products is a banjo that has an annual demand of 3,000 units. The setup cost for each production batch is $900; it costs $15 to carry a banjo in inventory for one year. Required: 1. What is the total annual relevant batch set up and carrying cost if the company uses the economic order quantity? Assume that setup costs are the same as ordering costs. 2. The company is switching to a just-in-time system. The average order size is 200 banjos. What is the total annual relevant batch set up and caring cost? 3. Compare the Enterprise Resource Planning EOQ model with the JIT model. What are the advantages and disadvantages of each? Answer: 1. EOQ = EOQ = 600 Total orders per year = 3,000/600 = 5 Average inventory = 600/2 = 300 TC = ordering + carrying TC = [5 × $900] + [300 × $15] = $9,000 2. Total orders per year = 3,000/200 = 15 orders per year Average inventory = 200/2 = 100 TC = ordering + carrying TC = [15 × $900] + [100 × $15] = $15,000 3. The EOQ system resulted in the lowest costs. However, the EOQ model, in this case, limits production to only once every three months. This would not allow managers to react quickly to changing market demand or economic conditions. The JIT model provides management with much more flexibility. JIT systems might also lead managers to improve processes, reduce costs and increase quality. Diff: 3 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Analyzing Objective: LO 20-2; 20-4
11) What is a supply chain, and what are the benefits of a supply chain analysis? Provide an example of these benefits. Answer: The supply chain describes the flow of goods, services, and information from the initial sources of materials and services to the delivery of products to customers, regardless of whether these activities occur in the same organization or in other organizations. Utilizing supply chain analysis allows companies to coordinate their activities and reduce inventories throughout the supply chain. An example of the benefits of supply chain analysis might be the emergence of supplier or vendor-managed inventories such as the relationship between Procter & Gamble and Walmart. Diff: 3 Type: ES CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-4
20.5 Evaluate and decide upon an appropriate backflush costing method. 1) Sequential tracking refers to a method of costing in which the accounting system entries occur at the same order as actual purchases and products. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-5
2) Backflush costing describes a costing system that omits recording some journal entries. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-5
3) Backflush costing is an example of sequential tracking. Answer: FALSE Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-5
4) Backflush costing uses normal or standard costs. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-5
5) A trigger point in backflush costing refers to the inventory level at which a reorder is generated. Answer: FALSE Explanation: A trigger point refers to the point at which a journal entry is made. Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-5
6) A firm using a backflush costing system will always use actual costs rather than standard costs. Answer: FALSE Explanation: A firm using a backflush costing system can use standard costs as well as actual costs. Diff: 1 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-5
7) The "flush" in backflush refers to the fact that there are no variances in a backflush costing system using standard costs. Answer: FALSE Explanation: The "flush" in backflush refers to the fact that costs are "flushed" out of the system after the product has been produced or sold. Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-5
8) Companies that have fast manufacturing lead times usually find that a version of backflush costing will report cost numbers similar to what a sequential costing approach would report. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-5
9) A positive aspect of backflush costing is the presence of a continuous inventory audit trail. Answer: FALSE Explanation: In backflush costing, the visible audit trail diminishes. Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-5
10) Activity-based costing systems enhance backflush costing accounting because of the relatively more accurate budgeted conversion cost per unit for different products. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-5
11) Lean accounting is a costing method that supports creating value for customers by costing the value streams, as distinguished from individual products or departments,thereby eliminating waste in the accounting process. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-5
12) Traditional normal and standard costing systems usually use 4 trigger points to record the flow of costs through the production system. Such costing is called ________. A) backflush costing B) delayed costing C) variable tracking D) sequential tracking Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 19 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions Skill: Remembering Objective: LO 20-5
13) Traditional budgeted and standard costing systems use A) backflush costing. B) delayed costing. C) post-deduct costing. D) synchronous tracking. E) variable costing. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-5
Use the information below to answer the following question(s). Fun 'N' Games manufactures various board games. For January there were no beginning inventories of direct materials, and no beginning or ending work-in-process. Only one indirect manufacturing cost category is currently in use, "Conversion Costs." Journal entries are recorded when materials are purchased and when conversion costs are allocated under backflush costing. Actual Conversion costs - January Direct materials purchased - January Units produced - January Units sold - January
$400,000 $1,070,000 58,800 41,800
14) Which of the following journal entries properly records the purchase of direct materials at Fun 'N' Games? A) Accounts Payable Control 1,070,000 Inventory: Raw and in Process Control 1,070,000 B) Inventory: Raw and in Process Control Accounts Payable Control
1,070,000
C) Inventory: Raw and in Process Control Conversion Costs
1,070,000
D) Conversion Costs Inventory: Raw and in Process Control
1,070,000
E) Accounts Payable Control Finished Goods Inventory
1,070,000
1,070,000
1,070,000
1,070,000
1,070,000
Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-5
15) Which of the journal entries properly records the incurrence of conversion costs? A) Conversion Costs 400,000 Various accounts 400,000 B) Various accounts Conversion Costs
400,000
C) Conversion Costs Inventory: Direct Materials
400,000
D) Inventory: Direct Materials Conversion Costs
400,000
E) Cost of Goods Sold Conversion Costs
400,000
400,000
400,000
400,000
400,000
Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-5
16) Which of the following entries properly records the cost of goods sold for the month? A) Finished Goods Control 1,045,000 Work in Process 1,045,000 B) Cost of Goods Sold Finished Goods Control
1,045,000
C) Finished Goods control Cost of Goods Sold
1,045,000
D) Cost of Goods Sold Work in Process
1,045,000
E) Cost of Goods Sold Finished Goods Control
1,470,000
1,045,000
1,045,000
1,045,000
1,470,000
Answer: B Explanation: $1,070,000 + $400.000 = $1,470,000 $1,470,000 × 41,800/58,800 = $1,045,000 Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-5
Use the information below to answer the following question(s). Enjoy Sports Ltd. manufactures various skateboards. For March, there were no beginning inventories of direct materials and no beginning or ending work-in-process. Only one indirect manufacturing cost category is currently in use, "Conversion Costs." Journal entries are recorded when materials are purchased and when conversion costs are allocated under backflush costing. The following is financial information for March. Actual conversion costs Direct materials purchased Units produced Units sold
$300,000 $195,000 9,900 9,100
17) Which of the following journal entries properly records the purchase of direct materials at Enjoy Sports Ltd.? A) Accounts Payable Control 195,000 Inventory: Raw and in Process Control 195,000 B) Conversion Costs Accounts Payable Control
195,000
C) Inventory: Raw and in Process Control Conversion Costs
195,000
D) Inventory: Raw and in Process Control Accounts Payable Control
195,000
E) Accounts Payable Control Finished Goods Inventory
195,000
195,000
195,000
195,000
195,000
Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-5
18) Which of the journal entries properly records the incurrence of conversion costs? A) Conversion Costs 300,000 Inventory: Direct Materials 300,000 B) Various accounts Conversion Costs
300,000
C) Conversion Costs Various accounts
300,000
D) Inventory: Direct Materials Conversion Costs
300,000
E) Cost of Goods Sold Conversion Costs
300,000
300,000
300,000
300,000
300,000
Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-5
19) Which of the following entries properly records the cost of goods sold for the month? A) Finished Goods Control 455,000 Work in Process 455,000 B) Cost of Goods Sold Finished Goods Control
455,000
C) Finished Goods control Cost of Goods Sold
455,000
D) Cost of Goods Sold Work in Process
455,000
E) Cost of Goods Sold Finished Goods Control
495,000
455,000
455,000
455,000
495,000
Answer: B Explanation: $300,000 + $195,000 = $495,000 $495,000 × (9,100/9,900) = $455,000 Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-5
Answer the following questions using the information below: Acme Inc. manufactures air compressors. For July there were no beginning inventories of direct materials, and no beginning or ending work-in-process. Only one indirect manufacturing cost category is currently in use, "Conversion Costs." Journal entries are recorded when materials are purchased and when units are transferred to finished goods inventory. Acme Inc. uses backflush costing. Variances are written off against Cost of Goods Sold when units are transferred to finished goods inventory. The following data pertains to July: Conversion costs - July Direct materials purchased - July Units produced - July Units sold - July Direct materials variance Conversion cost variance
$350,000 $650,000 100,000 90,500 $100,000 Favourable $50,000 Unfavourable
20) Which of the following journal entries properly reflects Acme's conversion costs allocated including the disposition of the variance? A) Work-in-Process Control 350,000 Conversion Costs Control 350,000 B) Conversion Costs Control Conversion Costs Allocated Cost of Goods Sold
350,000 300,000 50,000
C) Conversion Costs Control Conversion Costs Allocated
350,000
D) Conversion Costs Allocated Cost of Goods Sold Conversion Costs Control
300,000 50,000
E) Cost of Goods Sold Conversion Costs Control
350,000
350,000
350,000
350,000
Answer: D Explanation: Write off requires a debit to conversion costs allocated and a credit to conversion costs control. Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-5
21) Which of the following journal entries properly records Acme's direct material costs placed into production for the month of July? A) Work-in-Process Control 650,000 Direct Materials Control 650,000 B) Finished Goods Inventory Direct Materials Control Cost of Goods Sold
688,250 588,250 100,000
C) Finished Goods Inventory Direct Materials Control
650,000
D) Finished Goods Inventory Cost of Goods Sold Direct Materials Control
550,000 100,000
E) Cost of Goods Sold Direct Materials Control
650,000
650,000
650,000
650,000
Answer: B Explanation: Actual direct material costs placed into production: ($650,000/100,000) × 90,500 = $588,250 Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-5
Answer the following question(s) using the information below: A1 Microfilm Products manufactures microfilm cameras. For October, there were no beginning inventories of direct materials and no beginning or ending work-in-process. Only one indirect manufacturing cost category is currently in use, "Conversion Costs." Journal entries are recorded when materials are purchased and when units are sold using backflush costing. Conversion costs - October Direct materials purchased - October Units produced - October Units sold - October Selling price
$90,400 $250,400 80,000 units 75,000 units $10.00 each
22) Which of the following journal entries would be recorded for the units that are sold by A1 Microfilm Products in October? A) Cost of Goods Sold 319,500 Inventory Control 319,500 B) Cost of Goods Sold Inventory Control Conversion Costs Allocated C) Inventory Control Conversion Costs Allocated Cost of Goods Sold D) Cost of Goods Sold Inventory Control Conversion Costs Allocated E) Cost of Goods Sold Conversion Costs Allocated
319,500 234,750 84,750
234,750 84,750 319,500
319,500 229,500 90,000
319,500 319,500
Answer: B Explanation: DM credit = $250,400 × 75,000/80,000 = $234,750 C/C allocated = $90,400 × 75,000/80,000 Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-5
23) Which of the following entries would occur at A1 Microfilm Products if the only trigger point is the production of finished units? A) Cost of Goods Sold 319,500 Inventory: Raw and In-Process Control 229,500 Conversion Costs Allocated 90,000 B) Inventory: Raw and In-Process Control Cost of Goods Sold C) Finished Goods control Accounts Payable Control Conversion Costs Allocated
319,500 319,500
340,800 250,400 90,400
D) Accounts Payable Control Conversion Costs Allocated Finished Goods control
250,400 90,400
E) Accounts Payable Control Cost of Goods Sold
90,400
340,800
90,400
Answer: C Diff: 3 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-5
24) A backflush costing system that journalizes only when raw materials are purchased and when finished goods are sold, will have which of the following results? A) It will encourage managers to produce safety stock. B) Conversion costs become period costs. C) Income is increased if managers produce more output than is sold. D) increased inventoriable costs E) Produce more safety stock, and conversion costs become period costs. Answer: B Diff: 3 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-5
25) Criticism of backflush accounting included all of the following EXCEPT A) WIP exists but is not recorded. B) ASPE/IFRS is not followed for external reporting purposes. C) there is an absence of audit trails. D) the accounting system cannot pinpoint the uses of resources. E) managers can keep track of operations by personal observation. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-5
26) A trigger point is defined as A) a stage in the cycle going from the purchase of direct materials to the sale of finished goods at which point journal entries are made in the accounting system. B) a stage in the cycle going from the purchase of accounting software to the sale of finished goods at which point journal entries are made in the new accounting system. C) a stage in the cycle going from the sale of finished goods at which point journal entries are made in the accounting system. D) a stage in the cycle going from the purchase of direct materials at which journal entries are made in the accounting system. E) a stage in the cycle going from the purchase of direct materials to the sale of finished goods at which no journal entries are made in the accounting system. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Remembering Objective: LO 20-5
Answer the following question(s) using the information below. Walton Industries uses backflush costing. For March, there were no beginning inventories of direct materials and no beginning or ending work-in-process. Conversion costs is the only indirect manufacturing cost category currently used. Journal entries are recorded when actual costs are incurred, at completion of finished goods, and at sale of finished goods, under backflush costing. Conversion costs — March Direct materials purchased — March Units produced — March Units sold — March
$800,000 $2,140,000 117,600 83,600
27) Which of the following journal entries properly records the purchase of direct materials at Walton Industries? A) Accounts Payable Control 2,140,000 Inventory: Raw and In-Process Control 2,140,000 B) Inventory: Raw and In-Process Control Accounts Payable Control
2,140,000
C) Inventory: Raw and In-Process Control Conversion Costs Allocated
2,140,000
D) Conversion Costs Control Inventory: Raw and In-Process Control
2,140,000
E) Conversion Costs Allocated Inventory: Raw and In-Process Control
2,140,000
2,140,000
2,140,000
2,140,000
2,140,000
Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-5
28) Which of the journal entries properly records conversion costs at Walton Industries? A) Conversion Costs Control 800,000 Various Accounts 800,000 B) Various Accounts Conversion Costs
800,000
C) Conversion Costs Allocated Inventory: Raw and In-Process Control
800,000
D) Inventory: Direct Materials Conversion Costs
800,000
E) Conversion Costs Control Inventory: Raw and In-Process Control
800,000
800,000
800,000
800,000
800,000
Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-5
29) Which of the journal entries properly records the finished goods trigger point at Walton Industries? A) Finished Goods Inventory 2,940,000 Work-in-Process Inventory 2,940,000 B) Work-in-Process Inventory Finished Goods Inventory C) Finished Goods Inventory Inventory: Raw and In-Process Control Conversion Costs Allocated D) Finished Goods Inventory Work-in-Process Inventory E) Finished Goods Inventory Inventory: Raw and In-Process Control Conversion Costs Allocated
2,940,000 2,940,000
2,940,000 2,140,000 800,000
2,090,000 2,090,000
2,090,000 1,521,29 568,7073
Answer: E Explanation: ($800,000 + $2,140,000)/117,600 = $25.00; $25.00 × 83,600 = $2.090,000 Diff: 2 Type: MC CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-5
30) Tornado Electronics manufactures CD players. All processing is initiated when an order is received. For April there were no beginning inventories. Conversion costs and direct materials are the only manufacturing cost accounts. Direct materials are purchased under a just-in-time system. Journal entries are recorded at three trigger points using backflush costing: purchase of direct materials, completion of finished goods, and sale of product. Variances are offset to cost of goods sold. Additional information is as follows: Actual direct material costs Actual conversion costs Standard materials costs per unit Standard conversion cost per unit Units produced Units sold
$208,000 $232,000 $60 $80 3,200 2,800
Required: Record all journal entries for the monthly activities related to the above transactions based on backflush costing.
Answer: Inventory: Raw and In-Process Control Accounts Payable To record direct material purchases.
208,000 208,000
Conversion Costs Control Various Accounts To record actual conversion costs.
232,000
Finished Good Inventory Control Inventory: Raw and In-Process Control Conversion Costs Allocated To record finished goods.
448,000
Cost of Goods Sold (2,800 × $140) Finished Good Inventory Control To record sale of product.
392,000
Inventory: Raw and In-Process Control Conversion Costs Allocated Cost of Goods Sold To adjust cost of goods sold to actual cost.
40,000
232,000
192,000 256,000
392,000
24,000 16,000
Diff: 2 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-5
31) Corry Corporation manufactures filters for cars, vans, and trucks. A backflush costing system is used and standard costs for a filter are as follows: Direct materials Conversion costs Total
$2.60 4.20 $6.80
Filters are scheduled for production only after orders are received, and are shipped immediately upon completion. This results in product costs being charged directly to cost of goods sold. In December, 3,000 filters were produced and shipped. Materials were purchased at a cost of $8,450 and actual conversion costs of $13,650 were recorded. Variances are written off to Cost of Goods Sold. Required: Prepare journal entries to record December's cost transactions for the production and sale of the filters. Answer: Inventory: Raw and In-Process Control 8,450 Accounts Payable 8,450 Conversion Costs Control Various Accounts
13,650
Cost of Goods Sold Inventory: Raw and In-Process Control Conversion Costs Allocated
20,400
Cost of Goods Sold Inventory: Raw and In-Process Control Conversion Costs Allocated
1,700
13,650
7,800 12,600
650 1,050
Note if price variances are recognized at purchase, then the original entry to record the materials would be a debit to Materials in Process of only $7,800 and a debit to Materials Price Variance of $650. Then the price variance would be adjusted to Cost of Goods Sold. Diff: 2 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-5
32) Dutch Oven is a bakery company. All processing is in batches of 6 dozen. For March, there were no beginning inventories. Conversion costs and direct materials are the only baking cost accounts. Direct materials are purchased under a just-in-time system. The company uses backflush costing with three trigger points: at purchase of raw materials, completion of finished goods, and sale of finished goods. Additional information for the month is as follows: Actual direct materials Actual conversion costs Standard materials cost per batch Standard conversion cost per batch Batches produced Batches sold
$82,000 $65,000 $10.00 $8.00 8,000 7,500
Required: Record all journal entries for the monthly activities related to the above transactions assuming that backflush costing is used. The company uses a standard costing system for recording the purchase and use of direct materials; and, the recording of conversion costs. Material price variances are recorded at the time of purchase then closed to cost of goods sold; all other variances are recorded at the completion of finished goods trigger point as a direct charge, or credit to Cost of Goods Sold.
Answer: Direct Materials and In Process Inventory (8,000 × $10.00) Direct Materials Price Variance Accounts Payable Control
80,000 2,000 82,000
To record purchase of direct materials at standard. Conversion Costs Control (8,000 × $8.00) Cost of Goods Sold Accounts Payable Control
64,000 1,000 65,000
To record actual conversion costs at standard with variance to Cost of Goods Sold. Finished Goods (8,000 × $18) 144,000 Direct Materials and In Process Inventory (8,000 × $10.00) Conversion Costs Allocated (8,000 × $8.00)
80,000 64,000
To record completion of 8,000 batches of finished goods. Cost of Goods Sold Finished Goods (7,500 × ($10.00 + $8.00))
135,000 135,000
To record sale of 7,500 batches. Cost of Goods Sold Direct Materials Price Variance
2,000 2,000
To close the materials price variance account. Diff: 3 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-5
33) Key Smith Company manufactures all types of locks for exterior doors. All processing is in batches of 100 and is initiated when an order is received. For August there were no beginning inventories. Each type of knob uses the same direct materials although the processing steps are slightly different. Conversion costs and direct materials are the only manufacturing cost accounts. Direct materials are purchased under a just-in-time system. Standard costs and actual costs were the same for the month. Backflush costing is used with purchase and sale trigger points. Additional information for the month is as follows: Standard materials cost per batch Standard conversion cost per batch Batches produced Batches sold
$50 $40 7,000 6,000
Required: Record all journal entries for the monthly activities related to the above transactions based on backflush costing. Answer: Raw and In Process Inventory (7,000 × $50) 350,000 Accounts Payable Control 350,000 To record purchase of direct materials. Conversion Costs Control (7,000 × $40) Accounts Payable (Various accounts)
280,000 280,000
To record actual conversion costs. Cost of Goods Sold (6,000 × $90) Raw and In Process Inventory (6,000 × $50) Conversion Cost Allocated (6,000 × $40)
540,000 300,000 240,000
To record sale of 6,000 batches. Conversion Cost Allocated Cost of Goods Sold Conversion Costs Control
240,000 40,000 280,000
To close conversion cost accounts to Cost of Goods Sold assuming this was the end of the fiscal period. Diff: 2 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-5
34) Cyclone Electronics manufactures automobile radios. All processing is initiated when an order is received. For March there were no beginning inventories. Conversion costs and direct materials are the only manufacturing cost accounts. Direct materials are purchased under a just-in-time system and there was no variance. Backflush costing is used with trigger points at completion of finished goods and sale of product. Additional information for the month is as follows: Actual conversion costs Standard materials cost per unit Standard conversion cost per unit Units produced Units sold
$116,000 $30 $70 1,600 1,400
Required: Record all journal entries for the monthly activities related to the above transactions based on backflush costing. Answer: Conversion Costs Control 116,000 Various Accounts 116,000 To record actual conversion costs. Finished Goods Inventory (1,600 × $100) 160,000 Accounts Payable Control (1,600 × $30) Conversion Costs Allocated (1,600 × $70)
48,000 112,000
To record finished goods. Cost of Goods Sold (1,400 × $100) Finished Goods Inventory Conversion Costs Allocated
144,000 140,000 4,000
To record sale of 1,400 units. Diff: 2 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-5
35) Vision Enterprises manufactures converter boxes for high definition TVs. All processing is initiated when an order is received. For March there were no beginning inventories. Conversion costs and direct materials are the only manufacturing cost accounts. Direct materials are purchased under a just-in-time system and there was no variance. Backflush costing is used with trigger points at completion of finished goods and sale of product. Additional information for the month is as follows: Actual conversion costs Standard materials costs per unit Standard conversion cost per unit Units produced Units sold
$435,000 $115 $85 7,900 7,600
Required: Record all journal entries for the monthly activities related to the above transactions based on backflush costing. Answer: To record actual conversion costs: Conversion Costs Various Accounts
435,000 435,000
To record finished goods: Finished Goods Inventory (7,900 × $200) Inventory - Materials and In Process Control (7,900 × 115) Conversion Costs Allocated (7,900 × 85)
1,580,000 908,500 671,500
To record sale of 7,600 units: Cost of Goods Sold Conversion Costs Allocated Finished Goods Inventory
1,343,500 236,500 1,580,000
Diff: 2 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-5
36) Dolls "R" Us manufactures children's plastic dolls. For January there were no beginning inventories of direct materials, and no beginning or ending work-in-process. Conversion costs and direct materials are the only manufacturing cost accounts. Journal entries are recorded at three trigger points using backflush costing: purchase of direct materials, completion of finished goods, and sale of product. Since February is the first month of the fiscal year, all actual costs are as budgeted. Additional information for the month is as follows: February Standard materials cost per unit Standard conversion cost per unit Units produced Units sold
$6.00 $4.00 200,000 190,000
Required: Record all journal entries for the monthly activities related to the above transactions based on backflush costing. Answer: a. Direct Materials and In Process Inventory 1,200,000 Accounts Payable Control 1,200,000 b. Conversion Costs Control Accounts Payable Control
800,000 800,000
c. Finished Goods Inventory 2,000,000 Direct Materials and In Process Inventory Conversion Costs Allocated
1,200,000 800,000
d. Cost of Goods Sold Finished Goods
1,900,000
e. Cost of Goods Sold Direct Materials and In Process Inventory Conversion Costs Allocated
1,900,000
100,000 60,000 40,000
Diff: 2 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-5
37) Falcon Industries manufactures customized industrial compounds. All processing is initiated when an order is received. For April there were no beginning inventories. Conversion costs and direct materials are the only manufacturing cost accounts. Direct materials are purchased under a just-in-time system. Journal entries are recorded at three trigger points using backflush costing: purchase of direct materials, completion of finished goods, and sale of product. Additional information is as follows: Actual direct material costs Actual conversion costs Standard materials costs per unit Standard conversion cost per unit Units produced Units sold
$190,000 $478,000 $30 $78 6,200 5,800
Required: Record all journal entries for the monthly activities related to the above transactions assuming that backflush costing is used. The company uses a standard costing system for recording the purchase and use of direct materials; and, the recording of conversion costs. Material price variances are recorded at the time of purchase then closed to cost of goods sold; all other variances are recorded at the completion of finished goods trigger point as a direct charge, or credit to Cost of Goods Sold.
Answer: Direct Materials and In Process Inventory (6,200 × $30.00) Direct Materials Price Variance Accounts Payable Control
186,000 4,000 190,000
To record purchase of direct materials at standard. Conversion Costs Control (6,200 × $78.00) Cost of Goods Sold Accounts Payable Control
483,600 5,600 478,000
To record actual conversion costs at standard with variance to Cost of Goods Sold. Finished Goods (6,200 × $108) 669,600 Direct Materials and In Process Inventory (6,200 × $30.00) Conversion Costs Allocated (6,200 × $78.00)
186,000 483,600
To record completion of 6,200 units of finished goods. Cost of Goods Sold (5,800 × $108) Finished Goods Inventory
626,400 626,400
To record sale of 7,500 batches. Cost of Goods Sold Direct Materials Price Variance
4,000 4,000
To close the materials price variance account. Diff: 3 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-5
38) Arrow Manufacturing Ltd. distributes golf clubs. Its annual demand for next year is forecasted at 14,000 sets at an average cost of $425 per set. In reviewing its historical ordering costs for the past 3 years it noted that costs were $12,900, $16,400 and $20,100 at order volumes of 20, 50 and 80 respectively. Arrow is forecasting an increase of 10% in its fixed ordering costs and a 15% increase in its variable ordering costs. The fixed ordering costs relate to allocations of supervisory time, computer time, and warehouse space. In addition to the order processing, the company must receive and inspect the units. Receiving and inspecting activities require 5 hours per order at a direct labour rate of $12 per hour. Variable overhead related to receiving and inspecting activities is applied at a rate of 40% of direct labour dollars. In reviewing its other activities, Arrow came up with the following estimates for next year: Annual storage costs Estimated annual damage/loss Annual inventory insurance costs Annual building insurance costs Opportunity cost
$12.50 per set $0.80 per set $1.50 per set $1.20 per set (allocated based on square metres) 12%
The company is closed for two weeks in the summer and again for 2 weeks over Christmas. This results in 48 work weeks in the year and the company operates 5 days per week. Required: a. Determine the Economic Order Quantity (EOQ) for Arrow for next year. What are the total annual inventory costs at the EOQ? b. Determine the reorder point in units assuming that the lead time is 7 days. c. Now assume the company has found a new supplier that is willing to supply on a just-in-time basis. Inspection and receiving time would be lowered to 1.5 hours per order and the annual estimated damage would be cut by 75%. Storage and inventory insurance would drop to $4.50 and $0.60 respectively. The variable ordering cost would drop to $65 due to integrated ordering systems. However, the annual cost to purchase the golf sets will increase to $428. Determine the new EOQ. Should the company go with the new supplier or maintain its current arrangements?
Answer: a. To determine the total ordering costs we need to identify all the component costs of ordering. These include the ordering itself and the receiving activities associated with the orders. To determine the variable vs. fixed costs of the order processing, the high low method may be used. [$20,100 - $12,900]/[80 - 20] = $7,200/60 = $120 variable costs of ordering Using the high point fixed costs would be $20,100 - [120 × 80] = $20,100 - $9,600 = $10,500 Forecasted fixed ordering costs are irrelevant since they represent allocations. $120 × 1.15 = $138 variable Total ordering costs = $138 + (5 × $12) + (5 × $12 × 40%) = $138 + $60 + $24 = $222 Total carrying costs = $12.50 + $0.80 + $1.50 + (12% × $425) = $65.80 (the building insurance is not relevant) The EOQ = Square root of [(2 × 14,000 × $222)/$65.80] = 307 sets The total inventory costs would be: # of orders = 14,000/307 = 45.6, average inventory = 307/2 = 153.5 Total costs = (45.6 × $222) + (153.5 × $65.8) = $10,123.20 + $10,100.30 = $20,223.50 b. The daily demand = 14,000/[48 × 5] = 14,000/240 = 58.33 sets Reorder point = 58.33 × 7 = 409 units c. Total ordering costs = $65 + (1.5 × $12) + (1.5 × $12 × 40%) = $65 + $18 + $7.20 = $90.20 Total carrying costs = $4.50 + ($0.80 × 25%) + $0.60 + (12% × $428) = $4.50 + $0.20 + $0.60 + $51.36 = $56.66 The EOQ = Square root of [(2 × 14,000 × $90.2)/$56.66] = 211 sets # of orders = 14,000/211 = 66.35 orders, average inventory = 105.5 Total costs = (66.35 × $90.20) + (105.5 × $56.66) = $5,984.77 + $5,977.63 = $11,962.40 The company will save $20,223.50 - $11,962.40 = $8,261.10 in its inventory costs. It will pay an additional 14,000 × ($428 - $425) = $42,000. No it should not accept the new suppliers offer. (on quantitative considerations). Students can discuss the apparent improvement in quality as having additional benefits. Diff: 3 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Analyzing Objective: Cumulative
39) Garden Equipment Manufacturing Ltd. (GEM) has introduced a just-in-time production process and is considering the adoption of lean accounting principles to support its new production philosophy. The company has two product lines: lawnmowers and weed whackers. Two individual products are made in each line. The company's traditional cost accounting system allocates all plant-level overhead costs to individual products. Product-line overhead costs are traced directly to product lines, and then allocated to the two individual products in each line. Equipment costs are directly traced to products. The latest accounting report using traditional cost accounting methods included the following information (in thousands of dollars). Lawnmowers Weed Whackers Product A Product B Product C Product D Sales $400 $500 $200 $250 Direct materials 125 135 55 60 Direct labour 75 75 65 65 Equipment costs 25 30 25 30 Allocated product-line overhead 20 25 20 25 Allocated plant-level overhead 65 45 30 35 Operating income $ 90 $190 $ 5 $ 35 GEM has determined that each of the two product lines represents a distinct value stream. It has also determined that $90,000 of the allocated plant-level overhead costs represents plant occupancy costs associated with the products. Of this Product A occupies 30% of the plant's square footage, Product B occupies 30%, Product C occupies 20%, and Product D occupies 20%. The remaining square footage is occupied by plant administrative functions or is not being used. Finally GEM has determined that direct materials should be expensed in the period in which they are purchased, rather than when the material is used. According to purchasing records, direct material purchase costs during the year were:
Direct material purchases
Lawnmowers Weed Whackers Product A Product B Product C Product D $155 $100 $50 $60
Required: a. What are the cost objects in GEM's lean accounting system? Which of GEM's costs would be excluded when computing operating income for these cost objects? b. Compute the operating income for the cost objects identified in requirement b. using lean accounting principles. Why does operating income differ from the operating income computed using traditional accounting methods? c. Which competitive strategy is best served by lean accounting principles?
Answer: a. The cost objects are the two product lines. Cost that do not add value to a product line are excluded. GEM would not include plant-level overhead associated with administration and unused capacity. b. Sales Direct material purchases Direct labour Equipment costs Allocated product-line overhead Allocated plant-level overhead Operating income
Lawnmowers $900 255 150 55 45 54 $341
Weed Whackers $450 110 130 55 45 36 $ 74
With lean accounting only value added costs are included. This often will lead to certain overhead not being allocated as was done in this example with unused capacity. Direct material costs are expensed rather than inventoried to draw attention to this cost in an effort to motivate managers to become more efficient. c. The management of costs along the value chain is important for all competitive strategies; however, lean accounting principles best serve companies employing a cost leadership strategy. Lean accounting principles draw managements attention to costs that are not creating value. The activities that drive these costs will be identified more readily so that management can take action. Diff: 3 Type: SA CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Applying Objective: LO 20-5; 14-1
40) Backflush costing does not strictly adhere to generally accepted accounting principles. Explain why. Also, describe the types of businesses that might use backflush costing. Answer: The principal reason why backflush costing does not strictly adhere to ASPE/IFRS is that the work-in-process accounts are not recognized in the accounting records. Work-in-process consists of unfinished goods. Substantial business resources were dedicated to their production, and should be recognized in the accounts as an asset. This approach to costing is usually used by companies that adopt JIT production methods. While not totally devoid of inventories, such companies seek to minimize inventories thus minimizing the problems associated with no work-in-process accounts. The type of business which would use backflush costing would be firms that use JIT production, have fast manufacturing lead times, or have very stable inventory levels from period to period. For these companies, backflush costing will report cost numbers similar to what a sequential costing approach would report. Diff: 3 Type: ES CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-5
41) What are the principles of lean accounting? Are there any limitations? Discuss. Answer: Lean accounting is a costing method that supports creating value for the customer by costing the entire value stream, not individual products or departments, thereby eliminating waste in the accounting process. If there are multiple, related products made in a single value stream, then product costs for the individual products are not even computed. It is a simpler means by which to calculate values and costs consistent with the emphasis of JIT and remaining focused on the supply chain concept. Regarding limitations of the lean accounting: (1) it does not compute costs for individual products— this may restrict its value for certain types of decisions; (2) it excludes many of the support costs and unused capacity costs; (3) it does not account for inventories under generally accepted accounting principles. Proponents of lean accounting argue that by focusing on the specific value stream and allocating all other costs that do not directly contribute to the value stream, those other costs will be highlighted in a way that will cause managers to reduce those costs and/or find other alternative uses for the excess capacity that may contribute to them. Diff: 3 Type: ES CPA Competencies: Chapter 20 3.1.2 Evaluates the types of information systems used and the role they play in an organization, 3.1.3 Recommends improvements to reporting systems to meet information needs, 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations, 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.3.3 Recommends changes identified by applying process improvement methodologies, 5.2.1 Evaluates the entity's cash flow and working capital Skill: Understanding Objective: LO 20-5
Cost Accounting: A Managerial Emphasis - Cdn. Ed., 9e (Datar) Chapter 21 Capital Budgeting: Methods of Investment Analysis 21.1 Apply the concept of the time value of money to capital budgeting decisions. 1) In capital budgeting decisions, revenues and costs are analyzed over the short-run. Answer: FALSE Explanation: Capital projects are usually long-term. Diff: 1 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-1
2) Accrual accounting measures income on a year-to-year basis. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-1
3) Cost systems with an exclusive period-by-period focus are more likely to identify project costs over multiple periods. Answer: FALSE Explanation: Cost systems that track life-cycle costs are more likely to identify project costs over multiple periods. Diff: 1 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-1
4) Identify capital expenditures relevant to accomplishing strategic goals is the first step in the capital budgeting decision process model. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-1
5) Both financial and nonfinancial factors associated with proposed capital budgeting opportunities need to be considered as part of the capital budgeting decision process. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-1
6) Capital budgeting emphasizes the role of financial information in investment decisions. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-1
7) The net present value method is a discounted cash flow method that concentrates on cash accruals. Answer: FALSE Explanation: ...concentrates on cash flows. Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-1
8) Capital budgeting focuses on projects over their entire lives to consider all the cash flows or cash savings from investing in a single project. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-1
9) Sources of funding for capital projects include the proceeds of debt and equity securities sold in capital markets as well as internally generated cash. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-1
10) Financing opportunities are always investigated prior to the formal analyses of the costs and benefits of various investments. Answer: FALSE Explanation: Often simultaneously, also after the project has been selected. Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-1
11) Cost analysis has two dimensions, which are A) financial and non-financial. B) present and the future. C) project and financial. D) project and non-financial. E) project and time. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-1
12) Life cycle costing is the accounting system that corresponds to A) the non-financial dimension of costs analysis. B) the project dimension of costs analysis. C) the cost dimension of costs analysis. D) the financial dimension of costs analysis. E) the time dimension of costs analysis. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-1
13) Which of the following is NOT a part of the capital budgeting decision process model? A) Determine which investment yields the greatest benefit and the least cost to the organization. B) Track realized cash flows, compare against estimated numbers, and revise plans if necessary. C) Forecast all potential cash flows attributable to the alternative projects. D) Manage the control of non-quantitative factors. E) Identify potential capital investments that agree with the organization's strategy. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-1
14) The consequences of capital expenditures are A) quantitative and financial. B) quantitative and qualitative. C) qualitative and nonfinancial. D) appropriate and inappropriate. E) nonfinancial and irrelevant. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-1
15) In selecting capital projects, organizations choose A) the alternative that matches the RRR. B) the alternative that has revenues that exceed its costs. C) the alternative that has the highest revenues. D) the alternative that has the longest time horizon, but also exceeds the RRR. E) the alternative that provides benefits that exceed predicted costs by the greatest amount. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-1
16) Which of the following is a stage of the capital budgeting process that indicates potential capital investments that agree with an organization's strategy? A) identify projects stage B) make predictions stage C) obtain information stage D) implement the decision, evaluate performance, and learn stage Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-1
17) The first step in the capital budgeting decision process model is to A) Establish assumptions common for each potential capital investment. B) Obtain appropriate sources of financing for investments. C) Identify potential capital investments that agree with the organization's strategy. D) Manage the control of non-quantitative factors. E) Analyze the present value of future cash inflow and outflow and relevant qualitative factors. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-1
18) Opportunity cost is a cost of capital for which of the following sources of funds? A) common shares B) short-term debt sold at a discount C) long-term debt D) internally generated cash flow E) preferred shares Answer: D Diff: 3 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-1
19) Cast Iron Stove Company wants to buy a molding machine that can be integrated into its computerized manufacturing process. It has received three bids for the machine and related manufacturer's specifications. The bids range from $3,500,000 to $3,550,000. The estimated annual savings of the machines range from $260,000 to $270,000. The payback periods are almost identical and the net present values are all within $8,000 of each other. The president just doesn't know what to do about which vendor to choose since all of the selection criteria are so close together. Required: What suggestions do you have for the president with regard to specific qualitative factors that could be considered? Answer: The president needs to consider nonfinancial and qualitative factors between the three vendors. Quality of output units, manufacturing flexibility, and cycle time are all additional factors that can be considered about the machines. Other items might include worker safety, ease of learning and using, and ease of maintenance. Diff: 2 Type: ES CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-1
20) Explain capital budgeting, and list each of the five steps of the capital budgeting decision process model. Include both phases for step five. Answer: Capital budgeting is long-run planning for investment projects that usually have a life that is greater than one year. Step 1 Step 2 Step 3 Step 4 Step 5
Identify potential capital investments that agree with the organization's strategy. Gather information from all parts of the value chain to evaluate alternative projects . Forecast all potential cash flows attributable to the alternative projects. Determine which investment yields the greatest benefit and the least cost to the organization. Phase 1: Obtain funding and make the investments selected in step 4. Phase 2: Track realized cash flows, compare against estimated numbers, and revise plans if necessary. Diff: 3 Type: ES CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-1
21) Which of the following methods utilizes discounted cash flows when analyzing potential capital expenditures? Methods: 1. Accrual accounting rate-of-return 2. Internal Rate of Return (IRR) 3. Payback Period 4. Net Present Value (NPV) A) 1 only B) 1 and 2 C) 1 and 3 D) 2 and 4 Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-1
21.2 Evaluate discounted cash flow (DCF) and non-DCF methods to calculate rate of return (ROR). 1) Internal rate of return is a method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time. Answer: FALSE Explanation: IRR calculates the discount rate at which the present value of all expect cash inflows equals the present value of all expected cash outflows. Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-2
2) The primary advantage of the internal rate of return method is that the end result of the computation is in dollars instead of percentages. Answer: FALSE Explanation: End result is in percentages. Diff: 1 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-2
3) The net present value method is preferable over the internal rate of return method when an organization does not require the same rate of return each year of the project. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-2
4) A capital budgeting project is accepted if the required rate of return equals or exceeds the internal rate of return. Answer: FALSE Explanation: A capital budgeting project is accepted if the internal rate of return equals or exceeds the required internal rate of return. Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-2
5) The net present value method can on occasion indicate erroneous decisions as it implicitly assumes that project cash flows can be reinvested at the project's rate of return. Answer: FALSE Explanation: The internal rate of return method implicitly assumes that project cash flows can be reinvested at the project's rate of return. The net present value method accurately assumes that project cash flows can only be reinvested at the company's required rate of return. Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-2
6) If the internal rate of return is less than the hurdle rate, the net present value of the project will be negative. Answer: TRUE Diff: 3 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-2
7) Discounted cash flow methods measure all the expected future cash inflows and outflows of a project as if they occurred at equal intervals over the life of the project. Answer: FALSE Explanation: As if they occurred at a single point in time. Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-2
8) Discounted cash flow methods focus on operating income. Answer: FALSE Explanation: Discounted cash flow methods focus on cash inflows and cash outflows. Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-2
9) A capital budgeting project will have a positive net present value if its return is less than the hurdle rate. Answer: FALSE Explanation: A capital budgeting project will have a positive net present value if its return is greater than the hurdle rate. Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-2
10) The net present value method calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time using the hurdle rate. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-2
11) Discounted cash flow measures the cash inflows and outflows of a project as if they occurred at a
single point in time in order to facilitate a proper comparison. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-2
12) The required rate of return is the minimum acceptable percentage return on an investment and is set by the suppliers of investment funds. Answer: FALSE Explanation: The RRR is set by the company's management. Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-2
13) An advantage of the internal rate of return method is that it can be used when the required rate of return varies over the life of the project. Answer: FALSE Explanation: This is an advantage of the net present value method. Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-2
14) The internal rate of return method may result in erroneous decisions when used to compare mutually exclusive projects with unequal lives or unequal levels of initial investment. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-2
15) Assume your goal in life is to retire with $2,800,000. How much would you need to save at the end of each year if interest rates average 10% and you have a 30-year work life? (Round the final answer to the nearest whole dollar.) A) $9333 B) $17,022 C) $186,667 D) $160,464 Answer: B Explanation: Savings × (164.49) = $2,800,000 Savings = $17,022.31 Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-2
16) The discount rate, hurdle rate, or (opportunity) cost of capital all refer to the A) required rate of return. B) internal rate of return. C) net present value. D) discounted cash flow. E) payback period. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-2
17) When all future cash inflows and outflows are discounted to the present using the required rate of return, the method used is A) capital budgeting. B) discounted cash flow. C) net present value. D) required rate of return. E) payback method. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-2
18) If the net present value analyses of a project resulted in a positive value and the company does not accept the project, it may be assumed that A) qualitative factors outweigh the benefit of the investment. B) an alternative project has a lower NPV. C) the net initial investment cannot be recovered. D) the return is greater than that required by the company. E) quantitative factors outweigh the benefit of the investment. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-2
19) When the present value of expected cash inflows from a project equals the present value of expected cash outflows of a project, the discount rate is the A) universal rate. B) internal rate of return. C) required rate. D) net present value rate. E) inflation rate. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-2
Use the information below to answer the following question(s). Wet Water Company drills residential and commercial wells. The company is in the process of analyzing the purchase of a new drill. Information on the proposal is provided below: Initial investment: Asset Working capital Operations (per year for four years): Cash receipts Cash expenditures Disinvestment: Salvage value of drill (end of year four) Discount rate 10 percent
$80,000 $16,000 $81,000 $44,000 $8,000
Note: Other than the initial investment, cash flows are end of period. The working capital is returned at the end of the investment period. 20) In what range is the internal rate of return for the Wet Water Company's new drill? A) 8 percent to 12 percent B) 12 percent to 16 percent C) 16 percent to 20 percent D) 20 percent to 24 percent E) greater than 24 percent Answer: D Explanation: Calculator: IRR = 21.93% 20 percent $37,000 × 0.833 $37,000 × 0.694 $37,000 × 0.579 $45,000 × 0.482
24 percent $37,000 × 0.806 $37,000 × 0.650 $37,000 × 0.524 $45,000 × 0.423
$30,821 25,678 21,423 21,690 $99,612
$29,822 24,050 19,388 19,035 $92,295
Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2
21) What is the net present value for the Wet Water Company's new drill?
A) $96,000 B) $1,722.83 C) $12,651.05 D) $23,579.26 E) $26,749.13 Answer: E Explanation: Calculator $26,749.13 Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2
22) Red Zone Corporation recently purchased a new machine for $339,013.20. The new equipment has a useful life of 10 years. Net cash flows will be $60,000 per year, end of year payments. What is the internal rate of return? A) 10 percent B) 12 percent C) 14 percent D) 16 percent E) 18 percent Answer: B Explanation: $339,013.20 = $60,000 F F = 5.65022 Chart criteria: 10 years 5.65022 results in 12 percent Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2
23) Solo Manufacturing Company provides vending machines for soft drink manufacturers. The company has been investigating a new piece of machinery for its production department. The old equipment has a remaining life of 1 year and no sales value. The new equipment has a value of $52,650 with a three-year life. The expected additional cash inflows are $25,000 per year, end of year payments. What is the internal rate of return? A) 24 percent B) 20 percent C) 16 percent D) 12 percent E) 8 percent Answer: B Explanation: $52,650 = $25,000F F = 2.106 Chart criteria: 3 years 2.106 results in 20 percent Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2
24) Which of the following is TRUE, concerning NPV? A) When the NPV is positive, the sum of the cash flows from the project equal the initial investment. B) When the NPV is negative, the sum of the cash flows from the project must also be negative. C) The project just recovers the initial investment, discounted by the hurdle rate. D) The IRR is less than the RRR when the NPV is positive, after using the RRR as the discount rate. E) When the NPV is positive, the project recovers the initial investment and earns a return greater than the RRR. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-2
25) In NPV analysis, if the IRR exceeds the RRR A) the project should be rejected. B) the NPV will be negative (when discounted at the IRR). C) the NPV is positive when project cash flows are discounted at the IRR. D) the NPV is positive when project cash flows are discounted at the RRR. E) the NPV is negative when project cash flows are discounted at the RRR. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-2
26) In situations where the required rate of return is not constant for each year of the project, it is advantageous to use A) the adjusted rate of return method. B) the internal rate of return method. C) the net present value method. D) sensitivity analysis. E) the payback method. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-2
27) The net present value method is better than the internal rate of return because A) managers generally find the NPV method easier to understand. B) it always yields the same result as IRR. C) IRR focuses more on accounting income. D) it considers the source of cash flows. E) the NPV's of different projects can be added together, and investments may have multiple required rates of return. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-2
28) A "what-if" technique that examines how a result will change if the original predicted data are not achieved, or if an underlying assumption changes, is called A) sensitivity analysis. B) net present value analysis. C) internal rate of return analysis. D) adjusted rate of return analysis. E) payback method. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-2
29) Alberta Ltd. is considering the purchase of new machinery which costs $147,800. The machine is expected to save $42,300 in operating costs annually for the next 7 years. By how much can the annual cost savings fall (to the nearest hundred dollars) and still provide a 16% return? Ignore income taxes. A) $5,700 B) $36,600 C) $21,200 D) $42,300 E) $0 Answer: A Explanation: -$147,800PV; 7n; 16%i; $0FV; CPT PMT = $36,597.15 Annual Cash Flows can drop $42,300 - $36,600 = $5,700 Diff: 3 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 21-2
30) Peter Ltd. wants to automate one of its production processes. The new equipment will cost $180,000. In addition, Saturn will incur installation and testing costs of $5,000 and $8,500, respectively. The expected life of the equipment is 8 years, and the salvage value of the equipment is estimated at $18,000. The annual cash savings are estimated at $32,000. The company's required rate of return is 14%. Ignore income taxes. What is the net present value of this investment? A) ($25,246) B) $80,500 C) ($11,746) D) ($45,056) E) ($38,746) Answer: E Explanation: Cost of equipment = $180,000 + $5,000 + $8,500 = $193,500 Annual cash flows = $32,000 over 8 years. PV = $148,443.64 PV of salvage value of $18,000 = $6,310.06 NPV = ($193,500) + $148,443.64 + $6,310.06 = ($38,746.30) Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 21-2
Use the information below to answer the following question(s). Neptune Ltd. wants to expand its operations by manufacturing a new product line. New equipment will cost $225,000. Incremental sales are estimated at $150,000 per year for 6 years. Variable costs of producing the new product line are 52% of sales and incremental annual fixed costs are $25,000. The equipment can be salvaged after 6 years for 16% of its original cost. The company's required rate of return for new projects is 18%. Ignore income taxes. 31) What is the net present value of the Neptune Ltd. investment? A) ($26,291) B) ($47,277) C) $225,536 D) ($60,613) E) $93,000 Answer: B Explanation: Initial investment = $225,000 Annual cash flows = [$150,000 × 48%] - $25,000 = $47,000 [PV 6 years = $164,387.32] Salvage value = $225,000 × 16% = $36,000 [PV = $13,335.54] NPV = -$225,000 + $164,387.32 + $13,335.54 = ($47,277.14) Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2
32) What is the internal rate of return of the Neptune Ltd. investment? A) 13.62% B) 12.75% C) 10.00% D) 6.86% E) 18.00% Answer: C Explanation: Initial investment = $225,000 Annual cash flows = [$150,000 × 48%] - $25,000 = $47,000 [PV 6 years = $164,387.32] Salvage value = $225,000 × 16% = $36,000 [PV = $13,335.54] NPV = -$225,000 + $164,387.32 + $13,335.54 = ($47,277.14) IRR = 10.00% Diff: 3 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 21-2
33) The time value of money A) is equal to the rate of inflation. B) includes the rate of inflation. C) is the same value for all companies. D) is equal to the bank prime rate. E) is the opportunity cost of not having the money today. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-2
34) The time value of money refers to the concept that A) saving money has value for the business. B) both time and money are valuable resources to any organization. C) money invested today will grow. D) the value of a monetary unit today is worth less than the same unit in the future. E) the value of a monetary unit today is worth more than the same unit in the future. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-2
35) Net present value is calculated using the A) internal rate of return. B) required rate of return. C) rate of return required by the investment bankers. D) after tax cost of debt. E) coupon interest rate on the firm's debt. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-2
Use the information below to answer the following question(s). Five Star Cleaners has been considering the purchase of an industrial dry-cleaning machine. The existing machine is operable for three more years and will have a zero disposal price. If the machine is disposed of now, it may be sold for $30,000. The new machine will cost $200,000, an additional cash investment in working capital of $60,000 will be required and will be returned at the end of the project. The machine is expected to last 3 years and has an estimated disposal value at that time of $20,000. The new machine will reduce the average amount of time required to wash clothing and will decrease labour costs. The investment is expected to net $50,000 in additional cash inflows during the year of acquisition and $150,000 for each additional year of use. These cash flows will generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in this problem. 36) What is the net present value (rounded to the nearest thousand) of the investment, assuming the required rate of return is 10 percent? Would Five Star Cleaners want to purchase the new machine? A) $112,000; yes B) $52,000; yes C) $(52,000); no D) $(67,000); no E) $127,000; yes Answer: A Explanation: CF 0 = -$200,000 + $30,000 - $60,000 = -$230,000 CF 1 = $50,000; PV = $45,454.55 CF 2 = $150,000; PV = $123,966.94 CF 3 = $150,000 + $20,000 + $60,000 = $230,000; PV = $172,802 NPV = -$230,000 + $342,224 = $112,224 Diff: 3 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2
37) What is the net present value (rounded to the nearest thousand) of the investment, assuming the required rate of return is 24 percent? Would Five Star Cleaners want to purchase the new machine? A) $57,000; yes B) $(57,000); no C) $(3,000); no D) $29,000; yes E) $(13,000); no Answer: D Explanation: CF 0 = -$200,000 + $30,000 - $60,000 = -$230,000 CF 1 = $50,000; PV = $40,322.58 CF 2 = $150,000; PV = $97,554.63 CF 3 = $150,000 + $20,000 + $60,000 = $230,000; PV = $120,632 NPV = -$230,000 + $258,209 = $28,509 Diff: 3 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2
38) Blue Sky Company wants to purchase a new cutting machine for its sewing plant. The investment is expected to generate annual cash inflows of $300,000, recognized at the end of each year. The required rate of return is 12 percent and the new machine is expected to last for 4 years. What is the maximum dollar amount Blue Sky Company would be willing to spend for the machine? A) $507,000 B) $720,600 C) $791,740 D) $911,205 E) $957,600 Answer: D Explanation: 0 = -1X+ [($300,000 × 0.893) + ($300,000 × 0.797) + ($300,000 × 0.712) + ($300,000 × 0.636)] X = $911,400; calculator $911,204.80 Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2
39) When the net present value method is used, only projects with ________ are ________. A) negative net present value; acceptable B) negative net future value; not acceptable C) positive net future value; acceptable D) positive net present value; acceptable E) positive net value; not acceptable Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-2
40) Which of the following statements about the net present value method is TRUE? A) Projects with higher net present values are preferred when all other factors are equal. B) Projects with negative NPV are acceptable, if no positive NPV projects are available. C) It focuses on operating income. D) The origination of cash flows is not important in the analysis. E) Acceptable projects are those with the highest discount rate. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-2
41) Which of the following results of net present value analyses is the LEAST acceptable? A) $(15,000) B) $(1,000) C) $12,000 D) $0 E) $20,000 Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-2
42) Project XYZ is under consideration. Annual cash flows equal $50,000 per year for 5 years. During the first three years, the required rate of return is 2 percent. The required rate of return for cash flows in the final two years is 10 percent. What is the present value of cash inflows? A) $250,000 B) $247,730 C) $235,650 D) $209,391 E) $203,642 Answer: D Explanation: Yr 1. $50,000 × 0.980 = $49,000 Yr 2. $50,000 × 0.961 = $48,050 Yr 3. $50,000 × 0.942 = $47,000 Yr 4. $50,000 × 0.683 = $34,150 Yr 5. $50,000 × 0.621 = $31,050 $209,350 Calculator $50,000PMT 3n 2i $0FV = $144,194 $50,000PMT 2n10i$0FV = $86,777 at end of year 3PV $65,197Total = $209,391 Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2
43) Use the following information to determine which machines to purchase based on net present value.
Initial investment Annual cash inflows Useful lives
Machine 1 Machine 2 $225,000 $235,000 $50,000 $50,000 5 years 4 years
Machine 3 $210,000 $50,000 8 years
Cost of capital is 10 percent. A) purchase machine 3 B) purchase machine 2 C) purchase machine 1 D) purchase machines 2 and 3 E) purchase machines 1 and 3 Answer: E Explanation: Machine 1 Initial investment <$225,000>
Machine 2 <$235,000>
Machine 3 <$210,000>
NPV cash inflows NPV of investment
$158,494 <$76,506>
$266,747 $56,747
$189,540 $35,460
Machine 1 $50,000 × 3.79079 = $189,539.50 Machine 2 $50,000 × 3.16987 = $158,493.50 Machine 3 $50,000 × 5.33493 = $266,746.50 Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2
44) Difend Cleaners has been considering the purchase of an industrial dry-cleaning machine. The existing machine is operable for three more years and will have a zero disposal price. If the machine is disposed of now, it may be sold for $170,000. The new machine will cost $360,000, and an additional cash investment in working capital of $170,000 will be required. The new machine will reduce the average amount of time required to wash clothing and will decrease labour costs. The investment is expected to net $130,000 in additional cash inflows during the first year of acquisition and $290,000 each additional year of use. The new machine has a three-year life and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in this problem. The working capital investment will not be recovered at the end of the asset's life. What is the net present value of the investment, assuming the required rate of return is 6%? Would the company want to purchase the new machine? A) $264,290; yes B) $243,489.592; yes C) $($243,489.592); no D) $($264,290); no Answer: A Explanation: Yr. 0 ($170,000 - $360,000 - $170,000) × 1.000 = $(-360,000) Yr. 1 $130,000 × 0.943 = 122,590 Yr. 2 $290,000 × 0.890 = 258,100 Yr. 3 $290,000 × 0.840 = 243,600 Net present value at 6% $264,290 Diff: 3 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-2
45) Investment A requires a net investment of $600,000. The required rate of return is 10 percent for the three-year annuity. What are the annual cash inflows if the net present value equals 0? A) $184,842 B) $241,269 C) $249,791 D) $271,316 E) $360,000 Answer: B Explanation: Calculator: $241,268.88 2.487 × ACI - $600,000 = $0 ACI = $241,254.52 Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2
46) Upper Darby Park Department is considering a new capital investment. The following information is available on the investment. The cost of the machine will be $150,000. The annual cost savings if the new machine is acquired will be $40,000. The machine will have a 5-year life, at which time the terminal disposal value is expected to be $20,000. Upper Darby Park Department is assuming no tax consequences. If Upper Darby Park Department has a required rate of return of 10%, which of the following is closest to the net present value of the project? A) $1,632 B) $12,418 C) $14,050 D) $150,000 E) $16,050 Answer: C Explanation: ($40,000 × 3.791) + ($20,000 × .621) - $150,000 = $14,050 Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2
47) Which of the following is another term for required rate of return? A) hurdle rate B) total cost rate C) variance rate D) predetermined overhead rate Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-2
48) Zoro Corporation wants to purchase a new machine for its factory operations at a cost of $950,000. The investment is expected to generate $350,000 in annual cash flows for a period of four years. The required rate of return is 14%. The old machine can be sold for $50,000. The machine is expected to have zero value at the end of the four-year period. Income taxes are not considered. What is the net present value of the investment? A) $119,799 B) $69,799 C) $1,019,550 D) $326,750 E) $500,000 Answer: A Explanation: Year 0 = ($50,000 - $950,000) = $(900,000) Year 1 = $350,000 × 0.877 = 306,950 Year 2 = $350,000 × 0.769 = 269,150 Year 3 = $350,000 × 0.675 = 236,250 Year 4 = $350,000 × 0.592 = 207,200 $119,550 On calculator NPV = $119,799 Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2
49) Warner Ltd. is considering investing in a new piece of equipment for its factory. It estimates that annual cash flows would be $17,000, and the equipment would last for 8 years. The company's required rate of return is 12%. What is the most the company should be willing to invest in this equipment? (Ignore income taxes.) A) $84,450 B) $136,000 C) $61,280 D) $128,115 E) $94,580 Answer: A Explanation: $17,000PMT 8n 12i $0FV PV = $84,450 Diff: 3 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 21-2
50) Solid Machine Ltd. is considering investing in a new piece of machinery for its factory. The machine costs $340,000 and is expected to last 7 years. It estimates that annual cash flows would be $82,000, and the equipment would have a salvage value of $13,000. The company's hurdle rate is 11%. What is the net present value of this investment? (Ignore income taxes.) A) $87,625 B) $46,400 C) $52,662 D) $234,000 E) $247,000 Answer: C Explanation: CF0 = ($340,000) CF 1-6 = $82,000 CF 7 = $95,000 NPV = $52,661.65 Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2
51) Warner Ltd. is considering investing in a new piece of equipment for its factory. It estimates that the machine will generate an additional $120,000 per year in revenues. The contribution margin on these incremental revenues is estimated at 40%. Incremental annual fixed costs are estimated to be $8,200. The equipment would have a salvage value of $14,000 at the end of 6 years. The company's required rate of return is 13%. What is the net present value of this investment if the equipment costs $250,000? (Ignore income taxes.) A) $2,800 B) ($51,393) C) $204,803 D) $11,768 E) ($84,173) Answer: E Explanation: Annual cash flows: CM = 40% × $120,000 = $48,000 Incremental Annual CF = $48,000 - $8,200 = $39,800 (years 1-5) [PV = $139,986] Year 6 CF = $39,800 + $14,000 = $53,800 [PV = $25,841] PV of Cash in = $165,827 Cash In - Initial investment = $165,827 - $250,000 = ($84,173) Diff: 3 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2
Answer the following questions using the information below: London Hospital has been considering the purchase of a new x-ray machine. The existing machine is operable for five more years and will have a zero disposal price. If the machine is disposed of now, it may be sold for $90,000. The new machine will cost $650,000, and an additional cash investment in working capital of $20,000 will be required. The new machine will reduce the average amount of time required to take x-rays and will allow an additional amount of business to be done at the hospital. The investment is expected to net $60,000 in additional cash inflows during the year of acquisition and $230,000 for each additional year of use. The new machine has a five-year life and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in this problem. The working capital investment will not be recovered at the end of the asset's life. 52) What is the net present value of the investment, assuming the required rate of return is 12%? Would the hospital want to purchase the new machine? A) $(97,340); no B) $51,430; no C) $ 97,340; yes D) $166,830; yes Answer: C Explanation: Yr. 0 ($90,000 - $650,000 - $20,000) × 1.000 = $(580,000) Yr. 1 $ 60,000 × 0.893 = 53,580 Yr. 2 $230,000 × 0.797 = 183,310 Yr. 3 $230,000 × 0.712 = 163,760 Yr. 4 $230,000 × 0.636 = 146,280 Yr. 5 $230,000 × 0.567 = 130,410 $ 97,340 Diff: 3 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2
53) What is the net present value of the investment, assuming the required rate of return is 20%? Would the hospital want to purchase the new machine? A) $33,910; yes B) $(33,910); no C) $(33,910); yes D) $50,700; yes Answer: B Explanation: Yr. 0 ($90,000 - $650,000 - $20,000) × 1.000 = $(580,000) Yr. 1 $ 60,000 × 0.833 = 49,980 Yr. 2 $230,000 × 0.694 = 159,620 Yr. 3 $230,000 × 0.579 = 133,170 Yr. 4 $230,000 × 0.482 = 110,860 Yr. 5 $230,000 × 0.402 = 92,460 $(33,910) Diff: 3 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2
54) A1 Machine Company is evaluating a capital expenditure proposal that requires an initial investment of $20,960 and has predicted cash inflows of $5,000 per year for 10 years. It will have no salvage value. Required: a. Using a required rate of return of 16%, determine the net present value of the investment proposal. b. Determine the proposal's internal rate of return. Answer: a. Initial investment $(20,960.00) Pmt = 5,000; n = 10, i = 16 24,166.14 Net present value $3,206.14 b.
Present value factor of an annuity of $1.00 = $20,960/$5,000 = 4.192.
From the annuity table, the 4.192 factor is closest to the 10-year row at the 20% column. Therefore, the IRR is 20%, or, using a calculator, 20.0033% Diff: 2 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2
55) Mo Service Centre is considering purchasing a new computer network for $82,000. It will require additional working capital of $13,000. Its anticipated eight-year life will generate additional client revenue of $33,000 annually with operating costs, excluding depreciation, of $15,000. At the end of eight years, it will have a salvage value of $9,500 and return $5,000 in working capital. Taxes are not considered. Required: a. If the company has a required rate of return of 14%, what is the net present value of the proposed investment? b. What is the internal rate of return? Answer: a. Predicted PV of Cash Cash Flows Year(s) PV Factor Flows Initial investment $(95,000) 0 1.000 $(95,000) Annual operations, net 18,000 1 - 8 4.639 83,502 Salvage value, work cap 14,500 8 0.351 5,090 Net present value $(6,408) b. Trial and error is necessary. You know it is below 14% because the answer to Part A was negative and, therefore, less than the discount rate. Therefore, let's try 12%.
Initial investment Annual operations, net Salvage value, work cap Net present value
Predicted PV Of Cash Flows Year(s) PV Factor Cash Flows $(95,000) 0 1.000 $(95,000) 18,000 1 - 8 4.968 89,424 14,500 8 0.404 5,858 $ 282
The (almost) zero net present value indicates an internal rate of return of approximately 12%. Diff: 2 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2
56) Mississauga Equipment Manufacturing produces equipment for the natural gas industry. The company management is considering purchasing new controllers for the fabricating machines. The new controllers are expected to increase efficiency and product quality. The engineering staff estimate that annual net cash savings from increased efficiency will be $35,000 per year for four years. The existing controllers can be sold for $8,000. The new controllers have a purchase price of $75,000 and will require installation costs in the amount of $4,500. The annual software contract for the new controllers is $1,700; the controllers will be depreciated using the straight-line method. The salvage value of the new controllers at the end of four years is estimated to be $10,000. The company has a required rate of return of 15%. Required: a. Determine the net present value of the investment in the new controllers. b. Calculate the internal rate of return of the investment in the new controllers. Answer: CF0 = $8,000 - $75,000 - $4,500 = - $ 71,500 CF1-3 = $35,000 - $1,700 = $ 33,300 CF4 = $33,300 + $10,000 = $ 43,300 a. b.
NPV calculator = $ 29,288.31 IRR calculator = 33.3%
Diff: 2 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2
57) Tiger Enterprises Inc. is evaluating 3 investment alternatives. Each alternative requires a cash outflow of $102,000. The cash inflows are summarized below (ignore taxes):
Year 1 Year 2 Year 3 Year 4 Year 5
Project A $55,000 $40,000 $20,000 $5,000 $2,000
Project B $30,000 $30,000 $30,000 $30,000 $30,000
Project C $0 $0 $45,000 $55,000 $65,000
The company has a required rate of return of 9%. Required: Evaluate and rank each alternative using net present value (NPV). Answer: Project A NPV = $2,411.57 CF0 - $102,000 CF1 = $55,000 CF2 = $40,000 CF3 = $20,000 CF4 = $5,000 CF5 = $2,000 Or individual cash flows PV = $50,458.72 + $33,667.20 + $15,443.67 + $3,542.13 + $1,299.86 = $104,411.58 $104,411.58 - $102,000 = $2,411.58 Project B NPV = $14,689.54 CF0 - $102,000 CF1 to 5 = $30,000 or PV of $30,000 annuity 5n 9% = $116,689.54 $116,689.54-$102,000 = $14,689.54 Project C NPV = $13,957.18 CF0 - $102,000 CF1 to 2 = $0 CF3 = $45,000 CF4 = $55,000 CF5 = $65,000 or individual cash flows PV = $0 + $0 + $34,748.26 + $38,963.39 + $42,245.54 = $115,957.19 $115,957.19 - $102,000 = $13,957.19 Ranking B #1, C #2, A #3 Diff: 2 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2
58) He and She Company is evaluating a capital expenditure proposal that requires an initial investment of $16,004 and has predicted cash inflows of $4,000 per year for 15 years. It will have no salvage value. Required: a. Using a required rate of return rate of 14 percent, determine the net present value of the investment proposal. b. Determine the proposal's internal rate of return. Answer: a. Predicted Year or PV PV of cash flows years factor cash flows Initial investment $(16,004) 0 1.000 $(16,004) Annual operations 4,000 15 6.142 24,568 Net present value $8,564 b. Present value factor of an annuity of $1.00 = $16,004/$4,000 = 4.001 From the annuity table, the 4.001 factor is found on the 15-year row at the 24 percent column. Therefore, the IRR is 24 percent. Diff: 2 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2
59) Mercury Ltd. is considering purchasing laser equipment for $72,000. The machine will require additional working capital of $8,000. Its anticipated seven-year life will generate additional revenue of $31,000 annually with operating costs, excluding depreciation, of $14,000. At the end of seven years it will have a salvage value of $9,760 and return $8,000 in working capital. Required: a. If the company has a required rate of return of 12 percent, what is the net present value of the proposed investment? b. What is the internal rate of return? Answer: a. Predicted Year or PV PV of cash flows years factor cash flows Initial investment $(80,000) 0 1.000 $(80,000) Annual operations, net 17,000 1-7 4.564 77,588 Salvage value, work cap. 17,760 7 0.452 8,028 Net present value $5,616 b. Trial and error or use calculator. You know it is above 12 percent because the answer to Part A was positive and therefore greater than the discount rate. Therefore, let's try 14 percent. Predicted cash flows Initial investment $(80,000) Annual operations, net 17,000 Salvage value, work cap. 17,760 Net present value
Year or years 0 1-7 7
PV factor 1.000 4.288 0.400
PV of cash flows $(80,000) 72,896 7,104 $ -0-
The zero net present value indicates an internal rate of return of exactly 14 percent. Diff: 2 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2
60) Pluto Medical Ltd. is considering purchasing ultrasound equipment for $110,000. The machine will require additional working capital of $6,000. Its anticipated seven-year life will generate additional revenue of $22,000 annually with operating costs, excluding depreciation, of $1,500. At the end of seven years it will have a salvage value of $15,000 and return $6,000 in working capital. Required: a. If the company has a required rate of return of 9 percent, what is the net present value of the proposed investment? b. What is the internal rate of return? Answer: a. Predicted Year or cash flows years Initial investment $(116,000) 0 Annual operations, net 20,500 1-6 Salvage value, work cap. 41,500 7 Net present value by calculator is $(1,336.75) b. IRR by calculator 8.68% Diff: 2 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2
61) What conflicts can arise between using discounted cash flow methods for capital budgeting decisions and accrual accounting for performance Answer: Using accrual accounting to evaluate the performance of a manager may create conflicts with using discounted cash flow (DCF) methods for capital budgeting because frequently a project using a DCF method will not report strong operating income results in the early years of the project under accrual accounting. If this is the case, a manager might be tempted not to use DCF methods even though the decisions based on them might be in the best interests of the company over the long run. The conflict can be reduced by evaluating managers on a project-by-project basis and by looking at their ability to achieve the amounts and timing of forecasted cash flows. Diff: 2 Type: ES CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-2
62) Retail Outlet is looking for a new location near a shopping mall. It is considering purchasing a building rather than leasing, as it has done in the past. Three retail buildings near a new mall are available but each has its own advantages and disadvantages. The owner of the company has completed an analysis of each location which includes considerations for the time value of money. The information is as follows: Location A Internal rate of return 13% Net present value $25,000
Location B 17% $40,000
Location C 20% $20,000
The owner does not understand how the location with the highest percentage return has the lowest net present value. Required: Explain to the owner the probable cause(s) of the comparable differences. Answer: Location C may have a much lower initial investment than the other two. Therefore, it could show a higher rate of return with fewer dollars of inflow. Unfortunately, this may cause it to have the lowest net present value since this model is presented in dollar terms. Location C could also have a shorter life which could give it a higher percentage return during its life but fewer dollars overall. Diff: 2 Type: ES CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2
63) A capital investment project typically has three categories of cash flows: (1) net initial investment; (2) cash flow from operations; and (3) terminal disposal and recovery of investment(s) Required: Complete the following list of components for each category: Net initial investment 1. cost of asset acquisition 2. ________ 3. ________ Cash flow from operations 1. ________ 2. ________ Terminal disposal and recovery of investment(s) 1. ________ 2. ________ Answer: Net initial investment 1. cost of asset acquisition 2. initial working capital investment 3. after-tax cash flow from current disposal of old asset Cash flow from operations 1. annual after-tax cash flow from recurring operations 2. income tax cash savings from annual CCA Terminal disposal and recovery of investment(s) 1. after-tax cash flow from terminal disposal of machines 2. after-tax cash flow from terminal recovery of working capital investment Diff: 2 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-2
21.3 Analyze the impact of income taxes on discounted cash flows and capital budgeting decisions. 1) After-tax savings from an operating cash inflow are calculated by multiplying the cash flow by (1 - t), where t = the tax rate. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-3
2) The Income Tax Act does not permit a company to deduct depreciation expense in the calculation of taxable income. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-3
3) Capital cost allowance is the income tax version of financial reporting depreciation. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-3
4) A Canadian corporation can deduct a full year's worth of CCA on any asset acquired in the year. Answer: FALSE Explanation: Half-year rule applies. Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-3
5) The half-year rule assumes that all net additions are purchased in the middle of the year, and thus only one-half of the stated CCA rate is allowed in the first year. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-3
6) Capital Cost Allowance (CCA) is a cash flow. Answer: FALSE Explanation: CCA times the marginal tax rate is the cash flow from tax savings. Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-3
7) CCA reduces taxable income, and therefore reduces tax payments and increases the firm's cash flow. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-3
8) The Income Tax Act classifies every amortizable asset into one of several classes. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-3
9) The acquisition cost of the assets in a class, minus the CCA claimed to date for that class, is referred to as the UCC of a particular class. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-3
10) Capital cost allowance tax deductions result in tax savings that partially offset the cost of acquiring the capital asset. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-3
11) The use of an accelerated method of depreciation for tax purposes would usually increase the present value of the investment. Answer: TRUE Diff: 3 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-3
12) In the net present value (NPV) method, after-tax cash flows should be used instead of pre-tax cash flows when taxes are a consideration. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-3
13) A decrease in the tax rate will decrease the net present value (NPV) for a given capital budgeting project. Answer: FALSE Explanation: A decrease in the tax rate will increase the net present value (NPV) for a given capital budgeting project. Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-3
14) The tax effects are significant in capital budgeting decisions. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-3
15) Businesses may opt not to claim the full amount of available capital cost allowance. Answer: TRUE Explanation: The available CCA represents a maximum not a minimum. Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-3
16) The disposal of a machine (or any depreciable asset) results in a lost tax shield. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-3
17) In capital budgeting the relevant tax rate is the average tax rate for the company. Answer: FALSE Explanation: The relevant tax rate is the marginal tax rate for the company. Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-3
18) The minimum capital cost allowance (CCA) that a corporation may claim in a given year is the undepreciated capital cost of a particular pool times the CCA rate for that pool. Answer: FALSE Explanation: The minimum is zero, the maximum is as presented except for the year of acquisition. Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-3
19) After-tax cash operating flows are equal to A) (one minus the tax rate) times (net income). B) (one minus the tax rate) times (operating income) plus CCA. C) (one minus the tax rate) times (sales less costs excluding CCA). D) sales less (one minus the tax rate) times (cash costs). E) (one minus the tax rate) times (sales less costs including CCA). Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-3
20) When considering the net cash inflows resulting from a capital budgeting decision, taxes will A) reduce the amount of the cash savings by (1 + tax rate). B) increase the amount of the cash savings by the tax rate. C) increase the amount of the cash savings by (1 - tax rate). D) reduce the amount of the cash savings by (1 - tax rate). E) increase the amount of the cash savings by (1 + tax rate). Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-3
21) A capital proposal is projected to result in annual savings of $25,000. What is the after-tax cash flow if the tax rate is 35%? A) $25,000 B) $16,250 C) $8,750 D) $7,500 E) $33,750 Answer: B Explanation: $25,000 × (1 - .35) = $16,250 Diff: 1 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-3
22) Wolf Company acquired an additional Class 10 (30% declining balance) asset for $70,000. The UCC at the beginning of the year was $100,000. The maximum CCA in the current year is ________. A) $48,000 B) $24,000 C) $45,000 D) $37,500 E) $40,500 Answer: E Explanation: ($100,000 + (.5 × $70,000)) × 30% = $40,500 Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-3
23) AMF Products Ltd. had annual net income of $20,000, CCA of $35,000, a 40 percent tax rate, a discount rate of 10 percent, and annual cash sales of $200,000. The depreciable assets of AMF Products belong in several different classes under the Income Tax Act, have a salvage value of zero at the end of six years, and were all bought new at the beginning of Year 1. What is the tax saving from CCA? A) $14,000 B) $24,000 C) $36,000 D) $56,000 E) $14,400 Answer: A Explanation: ($35,000 × 0.40) = $14,000 Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-3
24) If the appropriate tax rate is 40%, the after-tax effect of a single CCA deduction of $60,000 is ________. A) $39,000 net after-tax cash outflow B) $39,000 net after-tax cash inflow C) $24,000 net after-tax cash outflow D) $24,000 net after-tax cash inflow E) $81,000 net after-tax cash inflow Answer: D Explanation: $60,000 × .40 = $24,000 Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-3
25) Biermann Equipment is a publicly held corporation required to pay income taxes. For the current year it had revenues of $5,000,000 and cash expenses of $3,000,000, and claimed CCA of $200,000. The company has a 30 percent tax rate. What would be the net cash flow for the current year if all revenues and expenses were in cash? A) $1,190,000 B) $1,260,000 C) $1,460,000 D) $1,800,000 E) $2,000,000 Answer: C Explanation: Revenue $5,000,000 Expenses other than CCA $3,000,000 Income taxes 540,000 3,540,000 Net cash flow $1,460,000 Income taxes = 30% × ($5,000,000 - $3,000,000 - $200,000) = $540,000 Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-3
26) The three factors that generally influence depreciation under IFRS/ASPE are: amount allowable for depreciation, allowable life of asset, and allowable methods of depreciation. In Canada, for tax purposes A) the amount allowable for CCA is the cost of the asset, and, the allowable life of asset and the amount of salvage value are determined by its Class under the Income Tax Act. B) the amount allowable for CCA is the cost of the asset; the tax-based depreciation rate is determined by the Class of the asset under the Income Tax Act, and neither the estimated life of asset nor the amount of estimated salvage value are relevant in calculating the CCA claim. C) the allowable depreciation for tax purposes (CCA) is increased for the first year only. D) depreciable assets are placed in various classes by the Income Tax Act, based on their estimated salvage value. E) in the year of acquisition of new assets into an existing pool the allowable CCA claim is based on 50% of all the assets in the pool. Answer: B Diff: 3 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-3
27) Which of the following statements is TRUE? A) The accounting book value for all assets in a class equals the UCC for that class. B) The CCA claimed does not affect cash outflows. C) The total CCA available over the life of the asset depends on the method of depreciation used. D) Since CCA does not involve a cash expenditure, it can be ignored in capital-budgeting decisions. E) The depreciation method used does not affect cash inflows from operations. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-3
28) A company purchased a class 8 asset (there were no disposals). If the asset cost $30,000, had an estimated salvage value of $5,000, and using the declining balance method with an allowable rate of 20%, the allowable CCA in the first and second years would be, respectively, ________. A) $1,500 and $2,700 B) $3,000 and $5,400 C) $2,000 and $4,000 D) $3,000 and $2,400 E) $4,000 and $4,000 Answer: B Explanation: First year ($30,000 × .5 × 20%) = $3,000 Second year ($30,000 - $3,000) × 20% = $5,400 Diff: 3 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-3
29) The income tax depreciation method referred to as CCA A) allows a corporation some flexibility in choosing the class to which an asset is assigned. B) ignores estimated salvage value. C) only applies to businesses organized as corporations. D) provides an organization some flexibility in choosing a method of amortization. E) allows amortization over the asset's useful life as determined by management. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-3
30) A project's net present value is increased if A) the CCA rate is decreased. B) the discount rate is increased. C) the CCA rate is increased. D) the company's net income is negative during the life of the project. E) the rate of inflation rises. Answer: C Diff: 3 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-3
31) Which of the following are not considered in capital-budgeting? A) initial machine investment B) depreciation C) cash flow from current disposal of old machine D) cash flow from terminal disposal of new machine E) recurring after-tax operating flows Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-3
32) Which of the following is NOT a relevant cash flow in capital budgeting? A) after-tax cash flow from current disposal of old asset B) after-tax cash flow from future disposal of asset at life's end C) after-tax cash flow from accumulated depreciation D) initial asset investment of the replacement machine E) after-tax annual cash flows relating to the new asset Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-3
33) A new machine will cost $500,000. It is in a CCA class pool that uses a declining balance rate of 30%. The company's tax rate is 40% and it requires a 15% rate of return on investments. Calculate the present value of the the tax shield the first year assuming the savings occur at year end. A) $126,998.42 B) $78,214.34 C) $52,173.91 D) $119,765.22 E) $26,086.96 Answer: E Explanation: Yr. 1 CCA $500,000 × 1/2 × 0.30 = $75,000; $75,000 × 0.40 = $30,000; PV = $26,086.96 Diff: 3 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-3
34) A new machine will cost $720,000. It is in a CCA class pool that uses a declining balance rate of 20%. The company's tax rate is 42% and it requires a 12% rate of return on investments. Calculate the present value of the the tax shield the first year assuming the savings occur at year end. A) $60,480.00 B) $54,000.00 C) $27,000.00 D) $30,240.00 E) $37,285.71 Answer: C Explanation: Yr. 1 CCA $720,000 × 1/2 × 0.20 = $72,000; $72,000 × 0.42 = $30,240; PV = $27,000 Diff: 3 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-3
35) A new machine will cost $1,800,000. It is in a CCA class pool that uses a declining balance rate of 30%. The company's tax rate is 38% and it requires a 9% rate of return on investments.Calculate the present value of the the tax shield the first year assuming the savings occur at year end. A) $153,577.98 B) $188,256.88 C) $167,400.00 D) $94,128.44 E) $102,600.00 Answer: D Explanation: Yr. 1 CCA $1,800,000 × 1/2 × 0.30 = $270,000; $270,000 × 0.38 = $102,600; PV = $94,128.44 Diff: 3 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-3
Use the information below to answer the following question(s). Albernie Ltd. purchased a CCA Class 8 (CCA rate of 20%) item of equipment for $80,000. The equipment was the only item in the Class 8 capital cost allowance pool. The equipment is expected to generate savings in the amount of $40,000 per year. The company uses straight-line depreciation and estimates a 3year useful life with $20,000 salvage value for the new equipment. The tax rate is 35%, and Albernie has a required rate of return of 9.0%. 36) What is the maximum capital cost allowance that Albernie Ltd. can claim in year 2 if the maximum was claimed in year 1? A) $11,200 B) $12,600 C) $18,000 D) $14,400 E) $16,200 Answer: D Explanation: UCC end of year 1: $80,000 - [($80,000 × 1/2) × 20%] = $72,000 CCA year 2: $72,000 × 20% = $14,400 Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-3
37) What is present value of the after-tax savings that Albernie Ltd. expects during the useful life of the equipment? A) $65,814 B) $101,252 C) $81,257 D) $50,370 E) $42,188 Answer: A Explanation: After tax savings = $40,000 × (1-35%) = $26,000 PV of three-year annuity of $26,000 at a discount rate of 9% = $65,813.66 Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-3
38) What is present value of the tax shield that Albernie Ltd. can expect from the equipment if Albernie purchased the equipment for $90,000? A) $18,124 B) $17,099 C) $12,816 D) $7,667 E) $10,222 Answer: B Explanation: = [($90,000 × 20% × 35%)/(20% + 9%)] × [(1 + (0.5 × 9%))/(1 + 9%)] [($20,000 × 20% × 35%)/(20% + 9%)] × [1/(1 + 9%) 3] = ($21,724.14 × .9587) - ($4,827.59 × 0.7721) = $17,099.49 Diff: 3 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-3
39) What is present value of the salvage value that Albernie Ltd. is expecting from the equipment? A) $15,897 B) $20,000 C) $15,444 D) $11,574 E) $14,169 Answer: C Explanation: FV = 20,000; i = 9; n = 3 $15,443.67 Diff: 1 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-3
40) What is the net present value of the Albernie Ltd. investment in equipment if Albernie purchased the equipment for $90,000? A) $1,480 B) $(1,075) C) $89,799 D) $8,357 E) $9,382 Answer: D Explanation: - $90,000 + $65,814 + $ 17,099 + $ 15,444 = $8,357 Diff: 3 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-3
41) Clock Manufacturing Company purchased a new piece of equipment at a cost of $60,000 at the beginning of the year. For tax purposes the machine is a Class 8 asset (20% declining balance). The company has a 34 percent income tax rate. Assume that the company has no other Class 8 assets during the period. Required: a. Compute the amount of tax savings from CCA for the first three years. b. Compute the amount of tax savings from CCA for the first three years using a required rate of return of 12 percent. Answer: a. Tax savings = total CCA × tax rate Calculation of CC
year 1 2 3 Total CCA
Ending Opening UCC Addition nil $60,000 54,000 0 43,200 0
Half Yr Rule 0.5 n/a n/a
CCA Rate .20 .20 .20
CCA 6,000 10,800 8,640 $25,440
UCC balance $54,000 43,200 34,560
Therefore, tax savings = $25,440 × 0.34 = $8,649.60 b. Calculation of present value of tax savings Present Value Tax savings Pv factor $2,040 0.893 3,672 0.797 2,938 0.712
year 1 2 3 Total By Calculator: $6,839.93
Tax Savings $1,822 $2,927 $2,092 $6,841
Diff: 2 Type: ES CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-3
42) Hardware Ltd. is considering purchasing a new asset. It has a cost of $1,350,000, an expected 6-year life, and a salvage value of $90,000. The equipment would qualify as a class 8 (20% CCA) asset, and Hardware has a required rate of return of 11% and an effective tax rate of 32%. Required: Calculate the tax shields that are generated from the purchase of this asset. Assume the asset will be placed in a pool and the pool will continue upon disposition. For tax purposes, the disposition will occur on day 1 of Year 7. What is the net tax effect of the asset acquisition? Answer: = [($1,350,000 × 20% × 32%)/(20% + 11%)] × [(1 + (0.5 × 11%))/(1 + 11%)] minus [($90,000 × 20% × 32%)/(20% + 11%)] × [1/(1 + 11%) 6] = =
($278,709.68 × 0.9505) minus (18,580.65 × 0. 5346) $254,965.77 (difference due to rounding)
Diff: 3 Type: ES CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-3
43) Johnson's Mini Mart is considering the purchase of a new electronic bar code scanner that will keep detailed records of every sale transaction. The scanner is likely to have little effect on operating revenues and expenses. Its acquisition is primarily for increasing management information about sales. The scanner costs $4,600 and would be included in Class 8 for tax purposes. Johnson's accountant has stated that due to the fast write-off of Class 8 assets (20% CCA rate), its real cost is less than $4,600. Due to technological obsolescence, it would have zero salvage value. Required: a. Since the bar code scanner cannot produce a profit or even show short run savings, should it even be evaluated as a capital budgeting expenditure? Explain. b. Explain whether or not the real cost is less than $4,600. c. If the company has a 40 percent tax rate and a 10% discount rate, compute the real cost of the bar code scanner. Assume there would be other assets in the class. Answer: a. Yes, it represents an expenditure that will produce benefits to the shop for a period beyond the current operating cycle. The benefits of long-run management information are generally difficult to quantify. b. The real cost is less than the $4,600 because the tax savings from CCA reduce the actual outlay of the asset, although the tax savings are in future years. c. Tax Shield = [($4,600 × 20% × 40%)/(20% + 10%)] × [(1 + (0.5 × 10%))/(1 + 10%)] = $1,170.91 Because the asset has a PV of tax savings of $1,170.91, its real cost is $4,600 - $1,170.91 or $3,429.09 Diff: 3 Type: ES CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-3
44) Windpower Systems Maintenance Ltd. purchased a CCA Class 10 (CCA rate of 30%) vehicle for $360,000. The vehicle was the only item in the Class 10 capital cost allowance pool. The vehicle is expected to generate net cash income, excluding any tax effects, in the amount of $70,000 per year. The company uses straight-line depreciation, estimates a 6 year useful life with a $40,000 salvage value for the new vehicle at the end of year 6. The marginal tax rate is 35% and the company's average tax rate is 25%. Management requires a rate of return of 15.0%. Assume that cash flows occur at the end of the year. Required: a. What is the unamortized capital cost at the beginning of year 2 if the maximum capital cost allowance that is allowed is taken in the first year? b. What is the net present value of the investment in the vehicle? Answer: a. $360,000 - [$360,000 × (30% × 1/2) = $306,000 b. Net present value 1.
PV of after-tax net cash income: pmt = $70,000 × (1 - 0.35); i = 15%; n = 6 = $172,194
2.
PV tax shield: = [($360,000 × 30% × 35%)/(30% + 15%)] × [(1 + (0.5 × 15%))/(1 +15%)] minus [($40,000 × 30% × 35%)/(30% + 15%)] × [1/(1 + 15%) 6] = =
3.
($84,000.00 × 0.9348) minus ($ 9,333.33 × 0.4323) $74,487 (difference due to rounding)
PV of salvage value: FV = $40,000; i = 15%; n = 6 = $17,293
NPV = - $360,000 + $172,194 + $74,487+ $17,293 = $(96,026) Diff: 3 Type: ES CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-3
45) Explain why the term tax shield is used in conjunction with amortization. Answer: Amortization tax deductions result in tax savings which offset the cost of acquiring the capital equipment. The more rapid for tax purposes an asset's costs can be written off for tax purposes, the earlier the reductions in taxes can be realized. The term tax shield refers to the reduction in the tax payments owed. Thus the faster the amortization, the earlier the reductions in taxes and the greater the net present value of the tax shield. Diff: 2 Type: ES CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-3
21.4 Apply the concept of relevance to DCF methods of capital budgeting. 1) Initial machine investment costs include cash outflows for installation and transportation. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-4
2) Relevant cash flows are expected future cash flows that differ among the alternative uses of investment funds. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-4
3) In determining whether to keep a machine or replace it, the original cost of the machine is always a relevant factor. Answer: FALSE Explanation: In determining whether to keep a machine or replace it, the original cost of the machine is a sunk cost and is not a relevant factor. Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-4
4) In determining whether to keep a machine or replace it, the net book value of the machine is irrelevant. Answer: TRUE Explanation: The net book value is comprised of historical (original) cost and accumulated depreciation. It is not a future cost and is thus irrelevant. Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-4
5) The after-tax cash inflow from the terminal disposal value of the investment is usually a significant factor in capital budgeting decision making. Answer: FALSE Explanation: Usually insignificant because the discounted value is usually small relative to the other cash flows. Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-4
6) The initial investment in working capital is usually recovered A) in year 0. B) in year 1. C) when the project is terminated. D) in equal portions, with the recovery of the initial investment, based on the matching of revenues and all costs. E) as soon as the RRR is achieved. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-4
7) In capital budgeting decisions, relevant cash flows A) are actual cash flows that differ between alternatives. B) are actual cash flows that do not differ between alternatives. C) are expected future cash flows that differ between alternatives. D) are expected future cash flows that do not differ between alternatives. E) are past cash flows lost. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-4
8) Which of the following is NOT a major category of cash flows in capital budgeting? A) initial investment in machines B) recurring operating cash flows C) cash flows from dispositions of assets D) management and labour allocation deductions E) initial working capital investment Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-4
9) A project has a net initial investment of $500,000 and the cash flows cover five years. The project involves replacing an old machine with a new machine at the same time. Which of the following is TRUE based on the above assumptions, in NPV analysis? A) The book value of the old machine is relevant. B) Recurring operating cash flows cannot be positive and negative. C) Incremental working capital investment is irrelevant. D) Any cash received from the disposal of the old machine would be a relevant cash flow for end of year 1. E) Errors in forecasting the terminal disposal price of the new machine are seldom critical on longduration projects. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-4
10) Depreciation charges A) are not relevant in capital budgeting decisions, because they are not discounted. B) are not relevant because they are not cash flows. C) are considered an element of cash flows, and are thus relevant. D) affect the ending balance of operating income, and are thus relevant. E) are relevant because they relate to capital items. Answer: B Diff: 3 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-4
11) The terminal disposal price of a replacement machine A) generally increases cash inflow in the year of disposal. B) is the total of the salvage values of the old machine and the new machine. C) is the salvage value of the old machine. D) is the NPV value of the new machine salvage value. E) is the NPV of the salvage value of the old machine. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-4
12) A company is considering purchasing a new machine, at a cost of $50,000. This amount will be written off over 5 years at $10,000 per year. In the first year the company will have to increase its accounts receivable by $4,000, and inventory by $8,000. The disposal value of the machine being replaced is $1,500 and will be used to offset the amount borrowed for the new machine. What is the initial working capital investment required for the purpose of capital budgeting? A) $8,000 B) $60,500 C) $10,500 D) $12,000 E) $4,000 Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-4
13) A company is considering purchasing new equipment. The equipment will allow the company to expand into a new product line. The equipment will be installed in the company's existing facility. Which of the following cash flows would NOT be relevant to the decision to acquire the new equipment? A) factory rent allocated to the new product line B) labour costs to operate the new equipment C) revenues from expanded production D) annual maintenance cost on the new equipment E) the salary of the manager hired to oversee the new product line Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-4
14) ABC Manufacturing company needs to overhaul its drill press or buy a new one. The facts have been gathered and are as follows: Current machine New Purchase price, new $80,000 $100,000 Current book value 30,000 Overhaul needed now 40,000 Annual cash operating costs 70,000 40,000 Current salvage value 20,000 Salvage value in five years 5,000 20,000 Required: Based on present value analysis, which alternative is the most desirable with a current required rate of return of 20 percent? Show cash flows; ignore tax effect. Answer: Present value of keeping current system:
Overhaul Annual operations Salvage value Net present value
Predicted cash flows $(40,000) (70,000) 5,000
Year or years 0 1-5 5
PV factor 1.000 2.991 0.402
Calculator
PV of cash flows $(40,000) (209,370) 2,010 $(247,360) $(247,333.46)
Present value of new system:
Investment Salvage value, old Annual operations Salvage value Net present value Calculator
Predicted cash flows $(100,000) 20,000 (40,000) 20,000
Year or years 0 0 1-5 5
PV factor 1.000 1.000 2.991 0.402
PV of cash flows $(100,000) 20,000 (119,640) 8,040 $(191,600) $(191,586.93)
Buying the new equipment is the most desirable by $55,760 ($247,360 - $191,600). Diff: 3 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-4
15) XYZ Manufacturing company needs to overhaul its sheet metal cutting machine or buy a new one. The facts have been gathered and are as follows: Current machine New Purchase price, new $120,000 $140,000 Current book value 30,000 Overhaul needed now 60,000 Annual cash operating costs 70,000 65,000 Current salvage value 20,000 Salvage value in five years 8,000 30,000 Required: Based on present value analysis, which alternative is the most desirable with a current required rate of return of 10 percent? Show cash flows; ignore tax effect. Answer: Present value of keeping current system: Predicted cash flows Overhaul CF 0 $(60,000) Annual operations CF 1-5(70,000) Salvage value CF 5 8,000 Net present value, calculator
$(320,387.70)
Present value of new system: Predicted cash flows Investment CF 0 $(140,000) Salvage value, old CF 0 20,000 Annual operations CF 1-5(65,000) Salvage value CF 5 30,000 Net present value, calculator $(347,773.50) Keeping the old equipment is the most desirable by $27,385.80 Diff: 3 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-4
16) ABC Boat Company is interested in replacing a moulding machine with a new improved model. The old machine has a salvage value of $20,000 now and a predicted salvage value of $4,000 in six years if rebuilt. If the old machine is kept, it must be rebuilt in one year at a predicted cost of $40,000. The new machine costs $160,000 and has a predicted salvage value of $28,000 at the end of six years. The new machine will generate cash savings of $40,000 for each of the first three years and $20,000 for each year of its remaining six-year life. Ignore income taxes. Required: What is the net present value of replacing the old machine if the company has a required rate of return of 14 percent? Answer: Predicted Year or PV PV of cash flows years factor cash flows Initial investment $(160,000) 0 1.000 $(160,000) Salvage of old 20,000 0 1.000 20,000 Annual operations 40,000 1-3 2.322 92,880 Annual operations 20,000 4-6 (3.889-2.322) 31,340 Save by not rebuilding 40,000 1 0.877 35,080 Incremental salvage of new 24,000 6 0.456 10,944 Net present value $30,244 Diff: 3 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-4
17) Connect Inc. is evaluating new machinery in its foundry. The machinery would replace existing equipment. The new machinery would cost $230,000, would last 5 years, and would have a salvage value of $28,000. The existing machinery currently has a net book value of $52,000 and could be sold for $38,000. If kept, the old machine would have a salvage value of $6,000 in 5 years' time. The new machinery is expected to lower direct labour costs by $18,000 per year. The current variable overhead rate is 120% of direct labour. Other annual cost savings are projected to be $30,000. Due to the reduction in the production cycle time, working capital requirements will decrease by $25,000 during the life of the new machine. Ignore income taxes. Required: a. Compute the net present value of replacing the existing equipment at a 9 percent required rate of return. b. Compute the internal rate of return. Answer: a. CF0 = ($167,000) = [-$230,000 + $38,000 + $25,000] CF 1 to 4 = $69,600 = [$18,000 +($18,000 × 120%) + $30,000] CF 5 = $66,600 = [$69,600 + $28,000 - $6,000 - $25,000] Initial investment Salvage of old Working capital ACF Incremental salvage Increase to working cap NPV
Increase CF $69,600 ann 5n 9% ($28,000-$6,000) 5n 9% ($25,000) 5n 9%
($230,000) $38,000 $25,000 $270,720 $14,298 ($16,248) $101,770
NPV = $101,769.93 b. IRR by calculator = 30.54% Diff: 3 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-4
18) Samuel Manufacturing Inc. is evaluating new machinery in its factory. The machinery would replace existing equipment. The new machinery would cost $430,000, would last 6 years, and would have a salvage value of $36,000. The existing machinery currently has a net book value of $72,000 and could be sold for $65,000. If kept, the old machine would have a salvage value of $5,000 in 6 years time. The new machinery is expected to lower direct labour costs by $22,000 per year. The current variable overhead rate is 120% of direct labour. Other annual cost savings are projected to be $15,000. Due to the reduction in the production cycle time, working capital requirements will decrease by $8,000 during the life of the new machine. Ignore income taxes. Required: a. Compute the net present value of replacing the existing equipment at a 12 percent required rate of return. b. Compute the internal rate of return. c. Comment on the efficacy of the use of internal rate of return versus net present value in making this decision. Answer: a. CF0 = ($357,000) = [-$430,000 + $65,000 + $8,000] CF 1 to 5 = $63,400 = [$22,000 + ($22,000 × 120%) + $15,000] CF 6 = $86,400 = [$63,400 + $36,000 - $5,000 - 8,000] Initial investment Salvage of old Working capital ACF Incremental salvage Increase to working cap NPV
Increase CF $63,400 annuity 6n 12% ($36,000-$5,000) 6n 12% ($8,000) 6n 12%
$(430,000) $65,000 $8,000 $260,663 $15,706 ($4,053) $(84,684)
NPV = $(84,684.26) b. IRR by calculator = 3.46% c. The calculated value of internal rate of return is erroneous as the NPV is negative. IRR rate of return can be erroneous or ambiguous when there are negative cash flows or when the NPV is negative. Diff: 3 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-4
21.5 Assess the complexities in capital budgeting within an interdependent set of value-chain business functions. 1) The payback method measures the time required to recoup the total dollars invested in the project through cash inflows. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-5
2) The payback method discounts cash flows prior to the payback date. Answer: FALSE Explanation: The payback method does not discount cash flows. Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-5
3) The accrual accounting rate of return is an accounting measure of income divided by an accounting measure of investment. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-5
4) The payback method allows for managers to highlight liquidity. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-5
5) The accrual accounting rate of return method has a significant weakness for use in making capital budgeting decisions because it does not track cash flows and it ignores the time value of money. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-5
6) Projects with shorter paybacks always generate more cash flows. Answer: FALSE Explanation: This false because payback ignores cash flows beyond the payback period. Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-5
7) Which of the following is NOT one of the methods that aid management in analyzing the expected results of capital budgeting decisions? A) accrual accounting rate of return B) net present value C) future-value cash flow D) payback method E) internal rate of return Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-5
8) The method that measures the time it will take to recoup, in the form of cash inflows, the total dollars invested in a project is called the A) the accrued accounting rate of return method. B) payback method. C) internal rate of return method. D) book-value method. E) the NPV. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-5
9) The net initial investment for a new mainframe computer is $2,000,000. Annual cash flows are expected to increase by $800,000 per year. The equipment has a 10-year useful life. What is the payback period? A) 4.00 years B) 2.50 years C) 2.00 years D) 1.75 years E) 0.75 years Answer: B Explanation: $2,000,000/$800,000 = 2.5 years Diff: 1 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-5
10) Advantages from using the payback method when capital budgeting include A) is useful when future cash flows in later years are uncertain. B) promotes long-term projects. C) neglects the time value of money. D) emphasizes short-term projects. E) considers only cash flows during the payback period. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-5
11) Which of the following is FALSE concerning the payback method of capital budgeting?
A) It uses the accrual accounting rate of return. B) The payback method highlights liquidity. C) Its major strength is that it that it is easy to use. D) It does not consider cash flows after the recovery of the initial investment. E) Shorter payback periods give an organization more flexibility. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-5
12) A company is considering purchasing two different high-speed photocopiers. The regular model costs $4,500 and the deluxe model costs $6,100. The company has projected cash savings of $800 for the first year, and then $850 annually thereafter for both models, but the vendor is claiming that the deluxe model is $400 cheaper per year to operate than the regular model. What are the payback periods for the Regular and Deluxe models respectively assuming that the vendor is correct? A) 4.88 years; 5.63 years B) 5.08 years; 5.29 years C) 5.29 years; 4.88 years D) 5.29 years; 5.63 years E) 5.35 years; 4.92 years Answer: E Explanation: At the end of 5 years, the Regular model has returned $800 + (4 × $850) = $800 + $3,400 = $4,200, leaving $300 to recover in the 5th year. $300/$850 = 0.35 more years. Total = 5.35 At the end of 4 years, the Deluxe model has returned $1,200 + (3 × $1,250) = $1,200 + $3,750 = $4,950 leaving $1,150 left to recover ($6,100 - $4,950). During the 5th year, the investment will be recovered in $1,150/$1,250 = 0.92 more years. Total = 4.92. Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-5
13) An accounting measure of income divided by an accounting measure of investment is called A) accrual accounting rate of return. B) bailout payback. C) book-value method. D) rate of return on assets method. E) net previous value. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-5
14) A rental company replaces its heavy drilling machine every four years (no salvage value). It is contemplating acquiring a larger machine, at a cost of $70,000, which is guaranteed to last for seven years. The current machine can be traded-in for a $3,000 down payment on the new machine, and the company expects annual savings in operating costs of $15,000. What is the AARR for the new machine? A) 2.86% B) 6.85% C) 7.14% D) 20.55% E) 21.43% Answer: C Explanation: Depreciation is $70,000 ÷ 7 years = $10,000 (no salvage) [($15,000 - $10,000) ÷ $70,000] = 7.14% Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-5
15) Return on investment (ROI) is also known as A) internal rate of return. B) accrual accounting rate of return. C) payback. D) net present value. E) time-adjusted rate of return. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-5
Use the information below to answer the following question(s). Singers Ltd. wants to automate one of its production processes. The new equipment will cost $180,000. In addition, Singers will incur installation and testing costs of $5,000 and $8,500, respectively. The expected life of the equipment is 8 years, and the salvage value of the equipment is estimated at $18,000. The annual cash savings are estimated at $32,000. The company uses straight-line depreciation and has a required rate of return of 14%. Ignore income taxes. 16) What is the payback period for the investment Singers Ltd. is considering? A) 5.63 years B) 5.78 years C) 6.05 years D) 5.26 years E) The project does not pay back. Answer: C Explanation: $193,500/$32,000 = 6.05 years Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-5
17) What is the accrual accounting rate of return for the investment Singers Ltd. is considering? A) 5.2% B) 16.5% C) 4.0% D) 5.9% E) 11.0% Answer: A Explanation: Annual depreciation is ($193,500 - $18,000)/8 years = $21,937.50 AARR = ($32,000 - $21,937.50)/$193,500 = 5.2% Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-5
18) What is the net present value for the investment Singers Ltd. is considering? A) $(45,056.36) B) $(31,556.36) C) $(25,246.29) D) $(38,746.29) E) $45,056.36 Answer: D Explanation: CF 0 = $(180,000) + $(5,000) + $(8,500) = $(193,500) CF 1-7 = $32,000 CF 8 = $32,000 + $18,000 = $50,000 Discount rate = 14% NPV by calculator = $(38,746.29) Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-5
Use the information below to answer the following question(s). Jupiter Ltd. wants to automate one of its production processes. The new equipment will cost $90,000. In addition, Jupiter will incur installation and testing costs of $5,000 and $4,500 respectively. The expected life of the equipment is 5 years and the salvage value of the equipment is estimated at $12,000. The annual cash savings are estimated at $29,000. The company uses straight-line depreciation and has a required rate of return of 9%. Ignore income taxes. 19) What is the payback period for the investment Jupiter Ltd. is considering? A) 3.43 years B) 3.10 years C) 5.0 years D) 3.02 years E) The project does not payback. Answer: A Explanation: ($90,000 + $5,000 + $4,500)/$29,000 = 3.43 years Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-5
20) What is the accrual accounting rate of return for the investment Jupiter Ltd. is considering? A) 14.2% B) 11.6% C) 9.5% D) 14.9% E) 11.0% Answer: B Explanation: Annual depreciation is ($90,000 + $5,000 + $4,500) - $12,000)/5 years = $17,500 AARR = ($29,000 - $17,500)/$99,500 =11.6% Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-5
21) What is the net present value for the investment Jupiter Ltd. is considering? A) $25,897.22 B) $22,799.89 C) $30,599.06 D) $13,299.89 E) $21,099.06 Answer: E Explanation: CF 0 = ($90,000 + $5,000 + $4,500) = $(99,500) CF 1-4 = $29,000 CF 5 = $29,000 + $12,000 = $41,000 Discount rate = 9% NPV by calculator = $21,099.06 Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-5
22) Which of the following is TRUE concerning capital budgeting analysis? A) The IRR and AARR consider the time value of money. B) The payback method and the AARR both consider profitability. C) NPV and IRR consider accruals. D) The payback method and the AARR both consider profitability, and NPV and IRR do not consider accruals. E) NPV and IRR do not consider accruals, and the IRR considers the time value, but AARR does not. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-5
23) Terrain Vehicle has received three proposals for its new vehicle painting machine. Information on each proposal is as follows: Proposal X Proposal Y Proposal Z Initial investment in equipment $180,000 $120,000 $190,000 Working capital needed 0 0 10,000 Annual cash saved by operations: Year 1 75,000 50,000 80,000 Year 2 75,000 48,000 80,000 Year 3 75,000 44,000 80,000 Year 4 75,000 8,000 80,000 Salvage value end of year: Year 1 100,000 80,000 60,000 Year 2 80,000 60,000 50,000 Year 3 40,000 40,000 30,000 Year 4 10,000 20,000 15,000 Working capital returned 0 0 10,000 Required: Determine each proposals payback period. Answer: Proposal X payback = $180,000/75,000 = 2.4 years Proposal Y Year 0 Year 1 Year 2 Year 3
Cash Savings $50,000 48,000 44,000
Savings accumulated $25,000 49,000 71,000
To be recovered $120,000 70,000 22,000 0
Payback = 2 years plus $22,000/$44,000 or 2.5 years Proposal Z payback = ($190,000 + $10,000)/80,000 = 2.5 years Diff: 2 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-5
24) Central Trailer Supply has received three proposals for its new trailer assembly line. Information on each proposal is as follows:
Initial investment in equipment Working capital needed Annual cash saved by operations: Year 1 Year 2 Year 3 Year 4 Salvage value end of year: Year 1 Year 2 Year 3 Year 4 Working capital returned:
Proposal X Proposal Y Proposal Z $115,000 $130,000 $145,0000 0 0 15,000 55,000 55,000 55,000 55,000
60,000 40,000 40,000 10,000
60,000 60,000 60,000 60,000
30,000 25,000 20,000 15,000 0
25,000 20,000 15,000 10,000 0
45,000 40,000 35,000 25,000 15,000
Required: Determine each proposals payback. Answer: Proposal X payback = $115,000/$55,000 = 2.09 years Proposal Y Year 0 Year 1 Year 2 Year 3
Cash Savings Savings Accumulated $60,000 40,000 40,000
To Be Recovered $130,000 $ 60,000 70,000 100,000 30,000 140,000 0
Proposal Y payback = 2 years plus $30,000/$40,000 or 2.75 years. Proposal Z payback = ($145,000 + $15,000)/$60,000 = 2.67 years Diff: 2 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-5
25) Fabian Company is considering the purchase of a piece of materials-handling equipment: Net initial investment Estimated Useful life Estimated terminal disposal price Estimated annual cash operating savings Required rate of return Depreciation method: straight line
$125,000 8 years $10,000 $35,000 10%
Required: a. Calculate the payback period. b. Calculate the accrual accounting rate of return. Answer: a. Payback = $125,000/$35,000 = 3.57 years b. Annual depreciation = ($125,000 - $10,000)/8 = $14,375 AARR = ($35,000 - $14,375)/$125,000 = $20,625/$125,000 = 16.5% Diff: 2 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-5
26) Jensen Manufacturing Ltd. is considering buying a laser machine which costs $250,000. It requires working capital of $25,000 which will be returned at the end of the project. Annual cash savings are anticipated to be $103,000 for five years. The salvage value at the end of five years is expected to be nil. The company uses straight-line depreciation. Required: Determine the accrual accounting rate of return of the investment. Answer: [($103,000 - ($250,000/5 years)) ÷ (250,000 + 25,000)] = 19.27% Diff: 2 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-5
27) Janet Manufacturing Ltd. is considering buying an automated machine that costs $500,000. It requires working capital of $50,000. Annual cash savings are anticipated to be $206,000 for five years. The company uses straight-line depreciation. The salvage value at the end of five years is expected to be $20,000. The working capital will be recovered at the end of the machine's life. Required: Compute the accrual accounting rate of return based on the initial investment. Answer: Accrual accounting income = $206,000 - (($500,000 - $20,000)/5) = $206,000 - $96,000 = $110,000 AARR with initial investment
= $110,000/($500,000 + $50,000) = $110,000/$550,000 = 20%
Diff: 2 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-5
28) East Coast Manufacturing Ltd. is considering buying an automated machine that costs $300,000. It requires working capital of $10,000. Annual cash savings are anticipated to be $80,000 for five years. The company uses straight-line depreciation. The salvage value at the end of five years is expected to be $20,000. The working capital will be recovered at the end of the machine's life. Required: 1. Compute the accrual accounting rate of return based on the initial investment. 2. Compute the internal rate of return. Answer: 1. Accrual accounting income = $80,000 - (($300,000 - $20,000)/5) = $80,000 - $56,000 = $24,000 AARR with initial investment
= $24,000/($300,000 + $10,000) = $24,000/$310,000 = 7.7%
2. IRR by calculator CF 0 $(310,000) CF 1-4 $80,000 CF 5 $110,000 IRR = 11.43% Diff: 2 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2; 21-5
29) West Coast Manufacturing Ltd. is considering buying an automated machine that costs $250,000. It requires working capital of $5,000. Annual cash savings are anticipated to be $55,000 for five years. The company uses straight-line depreciation. The salvage value at the end of five years is expected to be $10,000. The working capital will be recovered at the end of the machine's life. Required: 1. Compute the accrual accounting rate of return based on the initial investment. 2. Compute the internal rate of return. Answer: 1. Accrual accounting income = $55,000 - (($250,000 - $10,000)/5) = $55,000 - $48,000 = $7,000 AARR with initial investment
= $7,000/($250,000 + $5,000) = $7,000/$255,000 = 2.7%
2. IRR by calculator CF 0 $(255,000) CF 1-4 $55,000 CF 5 $70,000 IRR = 4.29% Diff: 2 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2; 21-5
30) Fisher Ltd. is considering the purchase of new equipment. Details of the investment follow: Net initial investment Estimated Useful life Estimated terminal disposal price Estimated annual cash sales Estimated annual cash operating expenses Required rate of return Depreciation method: straight line
$1,025,000 8 years $120,000 $520,000 $295,000 12%
Required: a. Calculate the payback period. b. Calculate the accrual accounting rate of return based on the initial investment. c. Calculate the net present value. Answer: a. Annual cash flows = $520,000 - $295,000 = $225,000 Payback = $1,025,000/$225,000 = 4.56 years b. Annual depreciation = ($1,025,000 - $120,000)/8 = $113,125 AARR = ($225,000 - $113,125)/$1,025,000 = 10.91% c. NPV = $141,184.93 CF0 = - $1,025,000 CF 1 to 7 = $225,000 CF8 = $345,000 or PV of ACF of $225,000 for 8 years at 12% = $1,117,718.95 PV of salvage value of $120,000 = $48,465.99 NPV = -$1,025,000 + $1,117,718.95 + $48,465.99 = $141,184.94 Diff: 2 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2; 21-5
31) Hiroshi Inc. is evaluating 3 investment alternatives. Each alternative requires an initial investment cash outflow of $176,000 and is to be depreciated on a straight-line basis ($6,000 salvage value). Ignore income taxes. Cash flows for the various investments are summarized below:
Year 1 Year 2 Year 3 Year 4 Year 5
Project A $87,000 $78,000 $65,000 $4,000 $2,000
Project B $52,600 $52,600 $52,600 $52,600 $52,600
Project C $0 $0 $89,000 $97,000 $109,000
The company has a required rate of return of 11.2% Required: a. rank each alternative based on NPV b. rank each alternative based on IRR c. rank each alternative based on accrual accounting rate of return using average annual cash flows d. evaluate each project based on the payback periods Answer: Project A Project B Project C NPV $19,908.99 $20,958.87 $19,799.36 IRR 17.60% 15.78% 14.20% Average cash flows $47,200 $52,600 $59,000 Depreciation $34,000 $34,000 $34,000 Investment $176,000 $176,000 $176,000 AARR 7.5% 10.57% 14.20% Payback 2.17 years 3.35 years 3.90 years Depreciation is the same for all projects: [$176,000-$6,000]/5 = $34,000 Investment is the same for all projects: $176,000
Project A: CF0 = -$176,000 CF1 = $87,000 CF2 = $78,000 CF3 = $65,000 CF4 = $4,000 CF5 = $8,000 or -$176,000 + $78,237.41 + $63,079.03 + $47,271.46 + $2,616.02 + $4,705.07 = $19,908.99 Average cash flows = total cash flows/5 Total cash flows= [$87,000 + $78,000 + $65,000 + $4,000 + $2,000] = $236,000 Average cash flows = $236,000/5 = $47,200 AARR = [$47,200 - $34,000]/$176,000 = 7.5% Payback: $176,000 - $87,000- $78,000 = $11,000 Payback = 2 years + $11,000/$65,000 = 2.17 years Project B: CF0 = -$176,000 CF1 to 4 = $52,600 CF 5 = $58,600 or -$176,000 + $193,430.07 + $3,528.80 (Investment + PV of ACF + PV of Salvage) = $20,958.87 Average cash flows = $52,600 (same each year) AARR = [$52,600 - $34,000]/$176,000 =10.57% Payback: Payback = $176,000/$52,600 = 3.35 years Project C: CF0 = -$176,000 CF1 to 2 = $0 CF3 = $89,000 CF4 = $97,000 CF5 = $115,000 or -$176,000 + $0 + $0 + $64,725.53 + $63,438.45 + $64,106.57 + $3,528.80 = $19,799.35 Average cash flows = total cash flows/5 Total cash flows = [$0 + $0 + $89,000 + $97,000 + $109,000] = $295,000 Average cash flows = $295,000/5 = $59,000 AARR = [$59,000 - $34,000]/$176,000 = 14.20% Payback: $176,000 -$0 - $0 - $89,000 = $87,000 Payback = 3 years + $87,000/$97,000 = 3.90 years Diff: 3 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2; 21-5
32) Supply the missing data for each of the following proposals. Proposal A Initial investment (a) Annual net cash inflow $60,000 Life in years 10 Salvage value $0 Payback period in year (b) Internal rate of return 12% Answer: a. Annual cash inflow Present value factor for 10 years Initial investment $339,013 by calculator. b.
Payback period = $339,000/$60,000 = 5.65
c.
Initial investment PV of salvage value ($10,000 × 0.275) Net PV of annual net cash inflow
Proposal B $62,900 (c) 6 $10,000 (d) 24%
Proposal C $226,000 (e) 10 $0 5.65 (f)
$60,000 × 5.650 $339,000
$62,900 (2,750) $60,150
Annual cash inflow = $60,150/3.020 = $19,917.22 ($19,913.82 by calculator) d. Payback = $62,900/$19,917.22 = 3.158 e.
Annual net cash inflow = $226,000/5.650 = $40,000
f.
PV factor for 10 years = $226,000/$40,000 = 5.650
Look up value, 5.650 in PV of annuity table under 10 years and the internal rate of return is 12 percent. Diff: 3 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 21-2; 21-5
33) Book & Bible Bookstore desires to buy a new coding machine to help control book inventories. The machine sells for $36,586 and requires working capital of $4,000. Its estimated useful life is five years and will have a salvage value of $4,000. Recovery of working capital will be $4,000 at the end of its useful life. Annual cash savings from the purchase of the machine will be $10,000. Ignore income taxes. Required: a. Compute the net present value at a 14 percent required rate of return. b. Compute the internal rate of return. c. Determine the payback period of the investment. Answer: a. Predicted Year or PV PV of cash flows years factor cash flows Investment $(36,586) 0 1.000 $(36,586) Working capital needed (4,000) 0 1.000 (4,000) Annual operations 10,000 1-5 3.433 34,330 Working capital returned 4,000 5 0.519 2,076 Salvage value 4,000 5 0.519 2,076 Net present value $( 2,104) b. Trial and error is required. Because net present value is negative in Part A, the internal rate of return is less than 14 percent. Start by trying 12 percent. Predicted cash flows Investment $(36,586) Working capital needed (4,000) Annual operations 10,000 Working capital returned 4,000 Salvage value 4,000 Net present value
Year or years 0 0 1-5 5 5
PV factor 1.000 1.000 3.605 0.567 0.567
PV of cash flows $(36,586) (4,000) 36,050 2,268 2,268 $-0-
With a zero net present value, the internal rate of return is 12 percent. c. Payback period = ($36,586 + $4,000)/$10,000 = 4.06 years. Diff: 2 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2; 21-5
34) Hentgen and Ferraro, baseball consultants, are in need of a microcomputer network for their staff. They have received three proposals, with related facts as follows:
Initial investment in equipment
Proposal A $90,000
Proposal B $90,000
Proposal C $90,000
80,000 10,000 45,000 0 3 yrs.
45,000 45,000 45,000 0 3 yrs.
90,000 0 0 0 1 yr.
Annual cash increase in operations: Year 1 Year 2 Year 3 Salvage value Estimated life
The company uses straight-line depreciation for all capital assets. Ignore income taxes. Required: a. Compute the payback period, net present value, and accrual accounting rate of return using average annual income, for each proposal. Use a discount rate of 14 percent. b. Rank each proposal 1, 2, and 3 using each method separately. Which proposal is best? Why? Answer: a. Payback for Proposal A: Year 1 $80,000 Year 2 10,000 Payback is 2 years
Payback for Proposal B:
$90,000
Year 1 Year 2
Payback is 2 years
Payback for Proposal C: Payback is 1 year
$45,000 45,000 $90,000
Year 1
$90,000
Predicted cash flows $(90,000)
Year or years 0
PV factor 1.000
PV of cash flows $(90,000)
80,000 10,000 45,000
1 2 3
0.877 0.769 0.675
70,160 7,690 30,375 $18,225
Net Present Value: Proposal A:
Investment Annual operations: Year 1 Year 2 Year 3 Net present value $18,243.83 by calculator. Proposal B:
Investment Annual operations: Year 1 Year 2 Year 3 Net present value $14,473.44 by calculator
Predicted cash flows $(90,000)
Year or years 0
PV factor 1.000
PV of cash flows $(90.000)
45,000 45,000 45,000
1 2 3
0.877 0.769 0.675
39,465 34,605 30,375 $14,445
Predicted cash flows $(90,000)
Year or years 0
PV factor 1.000
PV of cash flows $(90,000)
90,000
1
0.877
78,930 $(11,070)
Proposal C:
Investment Annual operations: Year 1 Net present value ($11,052.63) by calculator
Total cash increase
Proposal A $135,000
Proposal B $135,000
Proposal C $90,000
Total depreciation
90,000
90,000
90,000
Increase in income
$45,000
$45,000
$0
Average annual increase $15,000 Initial investment $90,000 Return = 0.167
$15,000 $90,000 = 0.167
$0 $90,000 = 0.0
b. Method Payback method ranks Net present value AARR
Proposal B 2.5 2.0 1.5
Proposal C 1.0 3.0 3.0
Proposal A 2.5 1.0 1.5
Even though Proposal C is number 1 for payback, it comes in last with the other two methods. Because the net present value method takes into account the time value of money, and the other proposals have no strong points, Proposal A would be the best alternative. Diff: 2 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2; 21-5
35) Jefferson Ltd. is considering the acquisition of new production equipment. If purchased, the new equipment would cost $1,850,000. Installation and testing costs would be $35,000 and $25,000
respectively. Once operational, the equipment will cause an increase in working capital of $120,000. The new equipment is expected to generate increased annual sales of $720,000. Variable costs to operate the machine are estimated at 42% of sales and annual fixed costs would be lowered by $75,000. The equipment has an estimate 6 year life and a salvage value of $90,000. The company requires an 11% return on its investments. Ignore income taxes. Required: a. Compute the net present value. b. Compute the internal rate of return. c. Determine the payback period of the investment. Answer: a. Initial investment = $1,850,000 + $35,000 + $25,000 = $1,910,000 Annual cash flows (ACF) = ($720,000 × 58%) + 75,000 = $417,600 + $75,000 = $492,600 Initial Investment Working Capital
see above
$492,600 ACF annuity 6n Salvage $90,000 6n Working Capital Return $120,000 NPV
($1,910,000) ($120,000) $2,083,963 $48,118 $64,157 $166,238
or CF0 = -$2,030,000 CF 1 to 5 = $492,600 CF 6 = $702,600 [$492,600 + $90,000 + $120,000] NPV = $166,237.52 b. IRR by calculator = 13.68% c. Payback period = $2,030,000/$492,600 = 4.12 years Diff: 2 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2; 21-5
36) Sam's Structures desires to buy a new crane and accessories to help move and install modular buildings. The machine sells for $75,000 and requires working capital of $10,000. Its estimated useful life is six years and it will have a salvage value of $17,560. Recovery of working capital will be $10,000 at the end of its useful life. Annual cash savings from the purchase of the machine will be $20,000. Required: a. Compute the net present value at a 12% required rate of return. b. Compute the internal rate of return. c. Determine the payback period of the investment. Answer: a. Predicted PV of Cash Cash Flows Year(s) PV Factor Flows Investment $(75,000) 0 1.000 $(75,000) Working capital needed (10,000) 0 1.000 (10,000) Annual operations 20,000 1-6 4.111 82,220 Working capital returned 10,000 6 0.507 5,070 Salvage value 17,560 6 0.507 8,903 Net present value $11,193 Calculator: $11,190.90 b. Trial and error is required. Because net present value is negative in part a, the internal rate of return is greater than 12%. Start by trying any % above 12% and the solution is listed below:
Investment Working capital needed Annual operations Working capital returned Salvage value Net present value
Predicted Cash Flows Year(s) $(75,000) 0 (10,000) 0 20,000 1-6 10,000 6 17,560 6
PV Factor 1.000 1.000 3.685 0.410 0.410
PV of Cash Flows $(75,000) (10,000) 73,700 4,100 7,200 $-0-
With a zero net present value, the internal rate of return is 16%. c.
Payback period = ($75,000 + $10,000)/$20,000 = 4.25 years.
Diff: 2 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 21-2; 21-5
37) Bock Construction Company is considering four proposals for the construction of new loading facilities that will include the latest in ship loading/unloading equipment. After careful analysis, the company's accountant has developed the following information about the four proposals:
Payback period Net present value Internal rate of return Accrual accounting rate of return
Proposal 1 4 years $80,000
Proposal 2 4.5 years $178,000
Proposal 3 6 years $166,000
Proposal 4 7 years $308,000
12%
14%
11%
13%
8%
6%
4%
7%
Required: How can this information be used in the decision making process for the new loading facilities? Does it cause any confusion? Answer: The managers can use the information to determine which proposal is best under the various alternatives. This may be accomplished by ranking each alternative. Also, the managers must determine the factors that are the most important to the company. For example, if short-run risk is high, a short payback period may be highly desirable. In this case proposal 1 is best. However, if total cash returned is critical to the company's operations, then proposal 4 is probably best. Any time that multiple measures are used there may be confusion because very seldom will one proposal appear to be the best with all models. In this case payback ranks proposal 1 the best, NPV ranks proposal 4 the best, IRR ranks proposal 2 the best, and AARR ranks proposal 1 the best. The importance of each ranking will depend upon the circumstances of the organization and the managers must be attuned as to what is most favourable. Diff: 3 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-5
38) What are the four alternative methods for evaluating capital budgeting projects? What is an advantage and disadvantage of each method? Answer: The four methods are: 1. Net Present Value (NPV); 2. Internal Rate of Return (IRR); 3. Payback; and 4. Accrual Accounting Rate of Return (AARR). NPV has advantages in that it uses discounted cash flows, and can deal with uneven cash flows, considers the inflows and outflows of the project. A disadvantage of NPV is that the results indicate if it achieves a particular cost of capital or not, but it does not indicate what the rate of return actually is. The IRR method generates an expected rate of return for the investment given the time of the project and the discounting of cash flows. A disadvantage of the IRR is that the results are expressed in the form of a percentage rather than in dollars and it is difficult to use when the project has uneven cash flows. The payback is simple to use, and adapts to both even and uneven cash flows. It also highlights the liquidity of a project. A disadvantage to the payback is that it does not consider either the time value of money, or the cash flows that occur after the payback time period. The AARR method uses the information that is most often found in financial statements – including net income and depreciation. A drawback is that the method does not take into account the time value of money or the cash Diff: 2 Type: ES CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-5
21.6 Apply the concept of defensive strategic investment to the capital budgeting process. 1) Net present value can be used to examine the effects of alternative ways of increasing customer loyalty. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-6
2) Defensive strategies can be difficult to quantify because opportunity costs are difficult to predict. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-6
3) Companies should make decisions concerning investing in computer-integrated technology, based solely on the relevant costs. Answer: FALSE Explanation: Qualitative factors such as response time, quality, and flexibility are also important considerations. Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-6
4) "Faster response to market changes" is a benefit of computer-integrated technology. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-6
5) Computer integrated technology may increase workers' knowledge of automation and facilitate future installations. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-6
6) In capital budgeting a single discount fits all alternative investment opportunities. Answer: FALSE Explanation: Discount rates often are different to adjust for project risk. Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-6
7) International Financial Reporting Standards (IFRS) require an annual post investment review. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-6
8) A comparison of year-to-year changes in customer net present value estimates A) is one way to be certain of the customer evaluation process. B) highlights whether managers have been successful in maintaining long-run profitable relationships with their customers. C) can be used to motivate customers. D) is difficult to calculate because of the need to know the customers' cost of capital. E) can be used in place of the payback method. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-6
9) Comparison of the actual results for a project to the costs and benefits expected at the time the project was selected is referred to as A) the audit trail. B) management control. C) a post-investment audit. D) a cost-benefit analysis. E) capital budgeting. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-6
10) Post-investment audits A) should be done as soon as possible after the investment is made. B) provide management with feedback about the performance of a project. C) include obtaining appropriation requests so that the funding will be authorized to purchase the equipment. D) are usually not feasible in a large project because the cost accounting system does not collect actual costs at the same level of detail as the initial plans had. E) should not be undertaken because they are too costly. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-6
11) The difference between the yield on local government bonds and the yield on corresponding domestic government treasury bonds is known as A) sovereign spread. B) the foreign discount rate. C) interest expense. D) the risk free rate. E) interest rate risk. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 21-6
12) Pender Ltd. is analyzing two proposals for cleaning contracts for the next 3 year period. The company has 200,000 square metres of floor space which is currently 75% occupied. It expects that occupancy will increase to 82% in year 2, and 90% in year 3. The proposal from Company A is as follows: Six janitors will be used at a budgeted annual salary of $26,000/each. These salaries are expected to remain static over the 3 year period. One supervisor will be used at an annual salary of $38,000. Salary increases for the supervisor will be $1,500 per year. Indirect labour costs are at 12.5% of salaries. Indirect material costs will be at a rate of $0.20 per square metre occupied. Fixed costs of $7,200 per year will also be charged to Pender by the contractor. The proposal from Company B is as follows: A rate of $1.40 per square metre occupied will be charged. In addition a part time supervisor will be required at an annual cost of $24,000 plus benefits at 15%. Fixed costs of $4,600 per year will be charged to Pender by Company B. No increases are forecast through the three year period. Additional information: Company A is the existing contractor. If the agency does not choose Company A, it must pay Company A a flat $8,000 on termination of its services. This payment would be made immediately. Assume cash flows occur at the end of the year unless otherwise stated. The discount rate to be used is 6% and is not expected to change in the next 3 years. Required: Evaluate these two proposals using the net present value method.
Answer: The cash flows and present value analysis for each of the two proposals are presented below: COMPANY A--PROPOSAL Square metres occupied Cleaning salaries (6 @ $26,000) Supervisor SUBTOTAL Indirect labour (12.5% of salaries) Indirect material ($0.20/sq m occupied) Fixed costs Total costs PV FACTOR 6%i PV ACF TOTAL PV ACF (all years)
Year 1 150,000 $156,000 $38,000 $194,000
Year 2 164,000 $156,000 $39,500 $195,500
Year 3 180,000 $156,000 $41,000 $197,000
$24,250
$24,438
$24,625
$30,000 $7,200 $255,450 0.9433962 $240,991
$32,800 $7,200 $259,938 0.8899964 $231,343
$36,000 $7,200 $264,825 0.8396193 $222,352 $694,686
Year 1 150,000 $24,000 $3,600
Year 2 164,000 $24,000 $3,600
Year 3 180,000 $24,000 $3,600
$210,000 $4,600 $242,200 0.9433962 $228,491
$229,600 $4,600 $261,800 0.8899964 $233,001
$252,000 $4,600 $284,200 0.8396193 $238,620 $700,111 $8,000 $708,111
And for Company B: COMPANY B--PROPOSAL Square metres occupied Supervisor Benefits (15% of salaries) Variable costs ($1.40/sq m occupied) Fixed costs Total Costs PV FACTOR 6%i PV ACF Subtotal all years Termination payment Total NPV
Pender should select Company A's proposal as it will save $13,425 [$708,111-$694,686] Diff: 3 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: Cumulative
13) Xanadu Manufacturing Ltd. (XML) has two main customers in its' Eastern Canada division. The current year is 2019 and the company is evaluating its' customers current and projected profitability taking the time value of money into consideration. XML has a required rate of return of 12%. The customer gross margins projected for the five year period ending 2020 are as follows:
Customer A Customer B
2016 $890,000 $500,000
2017 $900,000 $700,000
2018 2019 2020 $880,000 $920,000 $910,000 $900,000 $1,100,000 $1,300,000
XML has identified the following customer related activities and their rates: Activity Sales Order processing Product handling Special shipping
Cost Driver # of visits # of orders # of units # of shipments
Rate $650 $155 $72 $900
The company has the following information for 2016 regarding the three customers: Activity # of visits # of orders Product handling Special shipping
Customer A 52 126 650 96
Customer B 12 24 365 12
The ratio of activity costs to gross margin is expected to be the same for the years after 2016. Required: a. Determine the profitability of each customer for 2016 using activity-based costing. b. Present a table showing the contribution to profit of each customer for each year assuming that the 2016 ratio of activity costs to gross margin is maintained. Include a column for the five year total. c. Use the present value method to discount each customer's contribution to profit. Assume end of period payments. d. Provide two qualitative measures that can be effective in evaluating customers.
Answer: a. ABC for 2016 The customer related costs for each of the two customers are summarized below: Customer A 52 visits × $650 126 orders × $155 650 units × $72 96 shipments × $900
$33,800 $19,530 $46,800
Customer B 12 visits × $650 24 orders × $155 365 units × $72
$7,800 $3,720 $26,280
$86,400
12 shipments × $900
$10,800
Total customer hierarchy costs for Enbright are $21,600 and for Jackson, total costs are $25,260. Activity Gross margin Customer activity costs Customer margin Activity cost % of GM
Customer A $890,000 186,530 $ 703,470 21.0%
Customer B $500,000 48,600 $451,400 9.7%
b. Table of net contribution margins
Customer A Customer B c.
Total $3,555,370 $4,063,400
2016 $703,470 $451,400
2017 $711,000 $632,100
2018 $695,200 $812,700
2019 $726,800 $993,300
2020 $718,900 $1,173,900
PV Customer A = $2,559,550 PV Customer B = $2,782,768
d. Qualitative factors include measures such as: the amount of referral business, the potential to reduce costs from cooperative effort, the competitive position of the customers, the degree of loyalty, the systems compatibility, and so forth. Diff: 3 Type: SA CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 21-6; 17-2
14) Describe the purpose, features and benefits of a post investment audit for a capital budgeting project. Answer: A post investment audit compares the predictions of investment costs and outcomes made at the time the project was selected to the actual results. It provides management with feedback about the investments performance. Care should be exercised when performing a post investment audit. It should be done only after project outcomes have stabilized. Doing an audit early may give a misleading picture. Post investment audits of capital projects require information about project-specific costs and benefits. It can be extremely costly, however, to disentangle these actual outcomes as if they were independent from, instead of interdependent with, overall corporate outcomes. The absence of post investment audits can lead managers to overstate project cash inflows and to accept projects that should never have been undertaken. Implementation problems, such as not achieving budgeted revenues or exceeding budgeted costs, are a concern because the returns from the project will then be inadequate. Post investment audits can point to these areas of implementation that need improvement (such as better quality-control processes). Diff: 2 Type: ES CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-6
15) A Company wants to buy a moulding machine that can be integrated into its computerized manufacturing process. It has received three bids for the machine and related manufacturer's specifications. The bids range from $3,500,000 to $3,550,000. The estimated annual savings of the machines range from $260,000 to $270,000. The payback periods are almost identical and the net present values are all within $8,000 of each other. The president just doesn't know what to do about which vendor to choose; all the selection criteria are so close together. Required: What suggestions do you have for the president? Answer: The president needs to consider nonfinancial and qualitative factors that may distinguish the three vendors from each other. Quality of output units, manufacturing flexibility, and cycle time are all additional factors that can be considered about the machines. Other items might include worker safety, ease of learning and using, and ease of maintenance. Diff: 2 Type: ES CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-6
16) Many new capital projects are investments in new technologies. Both benefits and costs of these new technologies are hard to estimate. Required: Discuss some of the difficulties in quantifying the expected benefits and costs of new technologies. Answer: This is intended to be an open ended question. Some points for discussion follow: There are many uncertainties with new technology. On the market side, how will customers react? What impact with the technologies have on both price and volume? What is the impact on quality? What is the impact on utility? From a manufacturing perspective, there is a benefit to being able to respond more quickly to market changes, but how often will a company need to make responses? How will workers adapt to the new technology? Will there be benefits and/or costs resulting from worker motivations? It is stated that a benefit of technology is increased worker knowledge and this can benefit future installations. Again, how many future automation plans is the company pursuing? On the cost side, will failure to automate result in reduced competitive position? How can this be measured? What are the full costs of retraining (again consider motivational effects)? Can maintenance costs accurately be measured? What if the company invests in the wrong technology (consider Sony and Beta)? Diff: 2 Type: ES CPA Competencies: Chapter 21 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts, 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts, 3.2.3 Computes, analyzes, or assesses implications of variances, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 21-6
Cost Accounting: A Managerial Emphasis - Cdn. Ed., 9e (Datar) Chapter 22 Transfer Pricing and Multinational Management Control Systems 22.1 Integrate the accounting internal control system assurance framework with existing legislation. 1) A management control system is a means of gathering and using information to aid and coordinate the process of making planning and control decisions throughout the organization, and to guide employee behaviour. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-1
2) Subunit managers are better informed about their suppliers than top management is. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-1
3) A decentralized organizational structure may result in duplication of activities. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-1
4) The goal of a management control system is to improve the collective decisions in an organization in an economically feasible way. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-1
5) Management control systems reflect only financial data. Answer: FALSE Explanation: Management control systems also reflect nonfinancial data. Diff: 1 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-1
6) The essence of decentralization is the freedom for managers at lower levels of the organization to make decisions. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-1
7) A management control system would include both formal as well as informal control mechanisms. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-1
8) A well-designed management control system obtains all of its information from within the company. Answer: FALSE Explanation: Well-designed management control systems use information both from within the company and from outside the company, such as stock price and customer satisfaction measures. Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-1
9) Motivation is the desire to attain a selected goal combined with the resulting drive or pursuit toward that goal. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-1
10) Effort in terms of management control systems is defined in terms of physical exertion such as a worker producing at a faster rate. Answer: FALSE Explanation: Effort goes beyond physical exertion and includes both physical and mental actions. Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-1
11) Management control systems motivate managers and other employees to exert effort through a variety of rewards tied to the achievement of goals. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-1
12) A benefit of decentralization should be increased motivation of subunit managers. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-1
13) One benefit of centralization is an increase in development of an experienced pool of management talent to fill higher-level management positions. Answer: FALSE Explanation: Decentralization assists management development and learning and therefore will help the managers develop more responsibility so they can eventually fill the higher-level management positions. Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-1
14) Suboptimal decision making is also called congruent decision making. Answer: FALSE Explanation: It's also called incongruent decision making. Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-1
15) An important advantage of decentralized operations is that it improves corporate control. Answer: FALSE Explanation: Decentralized operations weaken controls. Diff: 1 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-1
16) The degree of freedom to make decisions is known as decentralization. Answer: FALSE Explanation: The degree of freedom to make decisions is known as autonomy. Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-1
17) Goal congruence occurs when managers act in their own best interest at the expense of the organization. Answer: FALSE Explanation: Goal congruence exists when individuals and groups work toward achieving the organization's goals. Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-1
18) An informal management control systems includes specific rules, procedures, and performance measures. Answer: FALSE Explanation: A formal system includes specific rules, procedures, and performance measures. Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-1
19) Management control systems collect which type of data? A) financial B) non-financial C) data from outside of the company D) financial and non-financial E) financial and non-financial, including data from both within the company and outside of the company Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-1
20) A management control system should have all of the following characteristics, EXCEPT A) it should motivate employees. B) it should be closely aligned to organizational goals and objectives. C) it should provide information for individual managers for decision making. D) it should motivate managers. E) it should always focus on customer satisfaction. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-1
21) The costs, as opposed to benefits, of decentralization include all of the following, EXCEPT A) management development and learning. B) duplication of output. C) increased costs of information-gathering. D) focus of manager's attention on the subunit rather than the company as a whole. E) suboptimal decision making. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-1
22) Which of the following is FALSE concerning profit centres and cost centres? A) A profit centre can exist within a centralized organization. B) A profit centre can exist within a decentralized organization. C) A cost centre can exist within a centralized organization. D) A cost centre can exist within a decentralized organization. E) If a profit centre exists within a centralized organization, there cannot be any cost centres in the organization. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-1
23) Which of the following would be an example of an element of an informal control system? A) procedures developed by first level managers to help guide staff in their daily work B) a policy that requires all employees to take at least two weeks of vacation each year C) shared values within an organization's culture D) the master budget Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-1
24) Which of the following is NOT a responsibility centre within an organization, whether centralized or decentralized? A) cost centre B) profit centre C) revenue centre D) savings centre E) investment centre Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-1
25) All of the following are benefits of decentralization EXCEPT A) it creates greater responsiveness to local needs. B) it decreases management and worker morale. C) it leads to quicker decision making. D) it sharpens the focus of managers. E) it leads to better supplier relationships. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-1
26) Physical exertion and mental action towards a goal can best be described as A) motivation. B) effort. C) goal congruence. D) incentive. E) loyalty. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-1
27) The degree of freedom to make decisions is A) decentralization. B) autonomy. C) centralization. D) motivation. E) goal congruence. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-1
28) An advantage of decentralization is that it A) creates greater responsiveness to local needs. B) focuses manager's attention on the organization as a whole. C) does not result in a duplication of activities. D) reduces the cost of gathering information. E) leads to decision making consistent with company goals. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-1
29) Which of the following statements is FALSE? A) A centralized structure does not empower employees to handle customer complaints directly. B) A decentralized structure forces top management to lose some control over the organization. C) Decentralization slows responsiveness to local needs for decision making. D) The extent to which decisions are pushed downward, and the types of decisions that are pushed down, provide a measure of the level of centralization/decentralization in an organization. E) Decentralization can increase motivation by allowing managers to exercise greater individual initiative. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-1
30) Informal management control systems include A) incentive plans. B) codes of conduct. C) qualitative measures of performance. D) policies. E) company culture. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-1
31) The president of Toronto Company has just returned from a week of professional development courses and is very excited that she will not have to change the organization from a centralized structure to a decentralized structure just to have responsibility centres. However, she is somewhat confused about how responsibility centres relate to centralized organizations where a few managers have most of the authority. Required: Explain how a centralized organization might allow for responsibility centres. Answer: It does not make any difference what type of organizational structure exists when it comes to defining responsibility centres. If a centralized organization desires to hold its managers responsible for their actions, it can design a reporting system that assigns all costs and revenues to their controllable managers. It's just that in a centralized organization, each manager may have more items to control than are reasonably possible. Diff: 2 Type: ES CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-1
32) Discuss the possible problems a corporation might have if its operations are totally decentralized. Answer: Senior management has the ultimate responsibility for the business. In a totally decentralized operation, senior executive management has little say about the conduct of the business. Another problem could be caused by the appointment of managers who are not capable of running their business. The lack of senior management control might result in problems developing and resulting in even bigger problems before anyone was aware of the incompetent managers. Certain types of activities belong centralized such as gathering information and certain human resource functions. Diff: 2 Type: ES CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-1
33) What is the purpose of the internal control system within an organization? Answer: The internal control system is the foundation of assurance. It is designed, implemented and maintained to provide reasonable assurance about the achievement of a company's objectives. Diff: 2 Type: ES CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Analyzing Objective: LO 22-1
34) Discuss some of the recent legislation and frameworks relating to assurance and internal controls. Answer: Assurance provided by financial accountants is governed by the Canadian Professional Engagement Manual (CPEM). The CPEM outlines how to identify risks and provide appropriate control over financial reporting. National Instrument 52-109 requires that CEOs and CFOs must personally evaluate and certify the effectiveness of the ICFR (Internal Control over Financial Reporting) and disclose their conclusions in the MD&A (Management Discussion & Analysis) section of the annual report. Diff: 2 Type: ES CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Analyzing Objective: LO 22-1
35) Provide a complete definition of a management control system. Answer: A management control system is a means of gathering and using information to aid and coordinate the planning and control decisions throughout an organization and to guide the behaviour of its managers and other employees. Diff: 2 Type: ES CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-1
For each of the following activities, characteristics, and applications, tell whether they are primarily labelled as being found in a centralized organization, a decentralized organization, or both types of organizations. A) decentralization B) centralization C) both 36) Freedom for managers at lower organizational levels to make decisions. Diff: 1 Type: MA CPA Competencies: Chapter 22 - 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-1
37) Gathering information may be very expensive. Diff: 1 Type: MA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-1
38) Greater responsiveness to user needs. Diff: 1 Type: MA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-1
39) Have few interdependencies among divisions. Diff: 1 Type: MA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-1
40) Maximum constraints and minimum freedom for managers at lowest levels. Diff: 1 Type: MA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-1
41) Maximization of benefits over costs. Diff: 1 Type: MA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-1
42) Minimization of duplicate functions. Diff: 1 Type: MA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-1
43) Minimum of sub optimal decision making. Diff: 1 Type: MA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-1
44) Multiple responsibility centres with various reporting units. Diff: 1 Type: MA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-1
45) Profit centres Diff: 1 Type: MA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-1
Answers: 36) A 37) A 38) A 39) A 40) B 41) C 42) B 43) B 44) C 45) C
22.2 Apply transfer-pricing processes. 1) Products transferred between subunits within an organization are considered intermediate products. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-2
2) Department A charges Department B $1,350 for copying services provided. The $1,350 is considered a transfer price. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-2
3) Examples of market-based transfer prices include variable manufacturing costs, full manufacturing costs, and full product costs. Answer: FALSE Explanation: Market-based transfer prices are based on market prices. Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-2
4) Negotiated transfer prices are always transacted at the top management levels. Answer: FALSE Explanation: In some cases, the subunits of a company are free to negotiate the transfer price between themselves and then to decide whether to buy and sell internally or deal with outside parties. Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-2
5) Market price is the only price that a firm should use when transferring goods from one subunit to another subunit. Answer: FALSE Explanation: For a corporation, however, the goal when selecting a transfer-pricing method should be to reflect the economic facts of operations. Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-2
6) The choice of a transfer-pricing method has minimal effect on the allocation of company-wide operating income among divisions. Answer: FALSE Explanation: The choice of a transfer-pricing method has a large effect. Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-2
7) No matter how low the transfer price, the manager of the selling division should sell the division's product to other company divisions in the interests of overall company profitability. Answer: FALSE Explanation: The manager of the selling division should maximize overall company profitability by selling the product at a price that promotes goal congruence. Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-2
8) Companies may approach tax authorities to obtain an Advanced Transfer Price Arrangement to ascertain if a proposed transfer pricing arrangement is acceptable. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-2
9) Market-based transfer prices are generally accepted by tax authorities because they represent arm's length prices. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-2
10) The Canada Revenue Agency has adopted International Financial Reporting Standards as the framework for transfer pricing regulations. Answer: FALSE Explanation: The CRA has adopted the OECD Hierarchy of Methods. Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-2
11) A product is know as ________ when it is transferred from one subunit to another subunit in the same organization. A) an interdepartmental product B) an intermediate product C) a subunit product D) a transfer product E) a secondary product Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-2
12) The price one subunit of an organization charges for a product or service supplied to another subunit of the same organization is called A) an interdepartmental product price. B) an intermediate product price. C) a subunit price. D) a transfer price. E) a fixed price. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-2
13) All of the following criteria may be used to choose a transfer-pricing method EXCEPT A) promotion of quality products. B) promotion of a sustained high level of management effort. C) promotion of a high level of subunit autonomy. D) promotion of goal congruence. E) help top management evaluate subunit performance. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-2
14) All of the following are general methods for determining transfer prices EXCEPT A) cost-based transfer prices. B) market-based transfer prices. C) negotiated transfer prices. D) taxation policies. E) multi-national transfer prices. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-2
15) A transfer pricing method should lead to which of the following results? A) managers always acting in their own best interest B) managers acting in their own best interest and their decisions being in the long-term best interest of the manager's subunit C) managers acting in their own best interest and their decisions being in the long-term best interest of the company D) managers not acting in their own best interest and their decisions being in the best interest of the company E) managers competing with each other so that they become more efficient Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-2
16) Subunits X and Y determined the price for interdepartmental services during the last monthly meeting, using the selling prices charged to outside parties. This is an example of A) subunit transfer prices. B) negotiated transfer prices. C) market-based transfer prices. D) cost-based transfer prices. E) multinational transfer pricing. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-2
17) Which of the following is TRUE of transfer pricing? A) It creates costs for the selling subunit. B) It creates revenues for the buying subunit. C) It helps top managers evaluate the performance of individual subunits. D) It makes managers' information-processing and decision-making tasks difficult. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-2
Use the information below to answer the following question(s). BlackGold Corp. has two divisions, Refining and Production. The company's primary product is Clean Oil. Each division's costs are provided below: Refining:
Variable costs per litre of oil Fixed costs per litre of oil
$30 $24
Production:
Variable costs per litre of oil Fixed costs per litre of oil
$6 $4
The Production Division is able to sell the oil to other areas for $24 per litre. The Refining Division has been operating at a capacity of 80,000 litres a day, using oil from the Production Division and oil purchased from other suppliers. The Refining Division usually purchases 50,000 litres of oil, on average, from the Production Division and 30,000 litres, on average, from other suppliers at $40/litre. 18) What is the transfer price per litre, assuming the method used is 175% of variable costs? A) $10.50 B) $12.00 C) $17.50 D) $24.50 E) $12.50 Answer: A Explanation: 1.75 × $6 = $10.50 Diff: 1 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
19) What is the transfer price per litre from the Production Division to the Refining Division, assuming the method is 120% of full costs? A) $16.80 B) $12.00 C) $9.50 D) $7.20 E) $12.50 Answer: B Explanation: 1.20 × ($6 + $4) = $12.00 Diff: 1 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
20) What is the transfer price per litre from production to refining if the market price method of pricing is used? A) $24 B) $32 C) $36 D) $40 E) $38 Answer: A Explanation: $24 — as given in the problem Diff: 1 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
21) What is the Production Division's operating income per 200 litres of oil reported under the 175% of variable costs method? A) $1,500 B) $880 C) $100 D) $(100) E) $1,200 Answer: C Explanation: Revenues: ($6 × 1.75) × 200 litres = $2,100 Less: Div. Variable Costs: ($6 × 200) = (1,200) Div. Fixed Costs: ($4 × 200) = (800) $100 Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
22) What is the Refining Division's operating income if 150 litres of oil are sold at $110/litre and 200 litres are transferred in? Assume the transfer price is based on 175% of variable costs. A) $16,500 B) $15,600 C) $525 D) $6,825 E) $8,500 Answer: D Explanation: Revenues: (150 × $110) = $16,500 TI cost: (150 × $10.50) = (1,575) D. VC: (150 × $30) = (4,500) D. FC: (150 × $24) = (3,600) $6,825 Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
Use the information below to answer the following question(s). Bon Accord uses two divisions in the production of soybean burgers. Division X sells soybean paste internally to Division Y, which, in turn, produces soybean burgers that sell for $5 per kilogram. Division X incurs costs of $0.75 per kilogram, while Division Y incurs additional costs of $2.50 per kilogram. 23) What is Division X's operating income per kilogram, assuming the transfer price of the soybean paste is set at $1.25 per kilogram? A) $0.500 B) $0.875 C) $1.250 D) $1.625 E) $1.525 Answer: A Explanation: $1.25 - 0.75 = $0.50 Diff: 1 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
24) What is Division Y's operating income per kilogram, assuming the transfer price of the soybean paste is set at $1.25 per kilogram? A) $0.500 B) $0.875 C) $1.250 D) $1.625 E) $1.525 Answer: C Explanation: $5.00 - $1.25 - $2.50 = $1.25 Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
25) What is Bon Accord's operating income per kilogram? A) $1.75 B) $1.25 C) $0.50 D) $0 E) $2.00 Answer: A Explanation: $5.00 - ($0.75 + $2.50) = $1.75 Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
Answer the following question(s) using the information below: Greenland Ltd. has two divisions, Distribution and Production. The company's primary product is fertilizer. Each division's costs are provided below: Production: Distribution:
Variable costs per kilogram Fixed costs per kilogram Variable costs per kilogram Fixed costs kilogram
$0.05 $0.25 $0.03 $0.02
The Distribution Division has been operating at a capacity of 4,000,000 kilograms a week and usually purchases 2,000,000 kilograms from the Production Division and 2,000,000 kilograms from other suppliers at $0.45 per kilogram. 26) What is the transfer price per kilogram from the Production Division to the Distribution Division, assuming the method used to place a value on each kilogram of fertilizer is 160% of variable costs? A) $0.05 B) $0.11 C) $0.08 D) $0.40 E) $0.48 Answer: C Explanation: 1.6 × $0.05 = $0.08 Diff: 1 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
27) What is the transfer price per kilogram from the Production Division to the Distribution Division, assuming the method used to place a value on each kilogram of fertilizer is 120% of full costs? A) $0.30 B) $0.36 C) $0.45 D) $0.55 E) $0.42 Answer: B Explanation: 1.20 × ($0.05 + $0.25) = $0.36 Diff: 1 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
28) Assume 100,000 kilograms are transferred from the Production Division to the Distribution Division for a transfer price of $0.40 per kilogram. The Distribution Division sells the 100,000 kilograms at a price of $0.55 each to customers. What is the company's operating income? A) $10,000 B) $15,000 C) $20,000 D) $25,000 E) $0 Answer: C Explanation: Revenues = ($0.55 × 100,000) = $55,000 Cost = ($0.05 + $0.25 + $0.03 + $0.02) × 100,0000 =(35,000) Operating income $20,000 Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
Answer the following question(s) using the information below. Delta Shoe Ltd. manufactures only one type of shoe and has two divisions, the Sole Division and the Assembly Division. The Sole Division manufactures soles for the Assembly Division, which completes the shoe and sells it to retailers. The Sole Division "sells" soles to the Assembly Division. The market price for the Assembly Division to purchase a pair of soles is $20. (Ignore changes in inventory.) The per unit fixed costs are based on the production of 60,000 pairs of shoes. Sole's costs per pair of soles are: Direct materials Direct labour Variable overhead Division fixed costs
$4 $3 $2 $1
Assembly's costs per completed pair of shoes are: Direct materials $6 Direct labour $2 Variable overhead $1 Division fixed costs $2 29) What is the market-based transfer price per pair of soles from the Sole Division to the Assembly Division? A) $9 B) $10 C) $20 D) $16 E) $27 Answer: C Explanation: $20 as given in the problem. Diff: 1 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
30) What is the transfer price per pair of soles from the Sole Division to the Assembly Division if the method used to place a value on each pair of soles is 180% of variable costs? A) $14.40 B) $12.60 C) $16.20 D) $28.80 E) $32.40 Answer: C Explanation: $9 × 1.8 = $16.20 Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
31) What is the transfer price per pair of soles from the Sole Division to the Assembly Division if the transfer price per pair of soles is 125% of full costs? A) $10.00 B) $12.50 C) $11.25 D) $20.00 E) $8.75 Answer: B Explanation: $10 × 1.25 = $12.50 Diff: 1 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
32) Assume the transfer price for a pair of soles is 180% of total costs of the Sole Division, and 40,000 of soles are produced and transferred to the Assembly Division. The Sole Division's operating income is ________. A) $300,000 B) $320,000 C) $248,000 D) $440,000 E) $400,000 Answer: A Explanation: Revenue ((1.8 × $10) × 40,000) = $720,000 Variable costs ($9 × 40,000) = (360,000) Fixed costs (60,000) Operating income $300,000 Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
33) If the Assembly Division sells 100,000 pairs of shoes at a price of $60 a pair to customers, what is the company's operating income? A) $4,400,000 B) $4,020,000 C) $3,900,000 D) $2,600,000 E) $2,400,000 Answer: B Explanation: Revenues = ($60 × 100,000) = $6,000,000 Variable costs = (($9 + $9) × 100,000) = 1,800,000 Fixed costs = 180,000 Operating income = $4,020,000 Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
Answer the following question(s) using the information below. Delta Footwear Ltd. manufactures only one type of sandal and has two divisions, the Sole Division and the Assembly Division. The Sole Division manufactures soles for the Assembly Division, which completes the sandal and sells it to retailers. The Sole Division "sells" soles to the Assembly Division. The market price for the Assembly Division to purchase a pair of soles is $18. (Ignore changes in inventory.) The per unit fixed costs are based on a production of 50,000 pairs of sandals. Sole's costs per pair of soles are: Direct materials Direct labour Variable overhead Division fixed costs
$5 $4 $3 $1
Assembly's costs per completed pair of sandals are: Direct materials $6 Direct labour $3 Variable overhead $2 Division fixed costs $2 34) What is the market-based transfer price per pair of soles from the Sole Division to the Assembly Division? A) $9 B) $10 C) $18 D) $16 E) $27 Answer: C Explanation: $18 as given in the problem. Diff: 1 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
35) What is the transfer price per pair of sandals from the Sole Division to the Assembly Division if the method used to place a value on each pair of soles is 150% of variable costs? A) $18.00 B) $19.50 C) $13.50 D) $16.50 E) $7.50 Answer: A Explanation: $12 × 1.5 = $18.00 Diff: 1 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
36) What is the transfer price per pair of sandals from the Sole Division to the Assembly Division if the transfer price per pair of soles is 125% of full costs? A) $15.00 B) $13.00 C) $26.25 D) $16.25 E) $8.75 Answer: D Explanation: $13 × 1.25 = $16.25 Diff: 1 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
37) Assume the transfer price for a pair of soles is 150% of total costs of the Sole Division, and 40,000 of soles are produced and transferred to the Assembly Division. The Sole Division's operating income is ________. A) $250,000 B) $260,000 C) $248,000 D) $300,000 E) $400,000 Answer: A Explanation: Revenue ((1.5 × $13) × 40,000) = $780,000 Variable costs ($12 × 40,000) = (480,000) Fixed costs (50,000) Operating income $250,000 Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
38) If the Assembly Division sells 100,000 pairs of sandals at a price of $35 a pair to customers, what is the company's operating income? A) $1,400,000 B) $1,950,000 C) $900,000 D) $2,200,000 E) $1,050,000 Answer: E Explanation: Revenues = ($35 × 100,000) = $3,500,000 Variable costs = (($12 + $11) × 100,000) = (2,300,000) Fixed costs = (150,000) Operating income = $1,050,000 Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
Answer the following question(s) using the information below. Cool Air Ltd. manufactures only one type of air conditioner and has two divisions, the Compressor Division, and the Assembly Division. The Compressor Division manufactures compressors for the Assembly Division, which completes the air conditioner and sells them to retailers. The Compressor Division "sells" compressors to the Assembly Division. The market price for the Assembly Division to purchase a compressor is $77. (Ignore changes in inventory.) The fixed costs for the Compressor Division are assumed to be the same over the range of 5,000-10,000 units. The fixed costs for the Assembly Division are assumed to be $15.00 per unit at 10,000 units. Compressor's costs per compressor are: Direct materials $34.00 Direct labour $14.50 Variable overhead $6.00 Division fixed costs $15.00 Assembly's costs per completed air conditioner are: Direct materials $300.00 Direct labour $125.00 Variable overhead $40.00 Division fixed costs $15.00 39) What is the market-based transfer price per compressor from the Compressor Division to the Assembly Division? A) $34.00 B) $54.50 C) $69.50 D) $77.00 E) $115.50 Answer: D Explanation: $77 as given in the problem Diff: 1 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
40) What is the transfer price per compressor from the Compressor Division to the Assembly Division if the method used to place a value on each compressor is 150% of variable costs? A) $81.75 B) $77.00 C) $9.00 D) $72.75 E) $51.00 Answer: A Explanation: $(34.00 + 14.50 + 6.00) × 1.5 = $81.75 Diff: 1 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
41) What is the transfer price per compressor from the Compressor Division to the Assembly Division if the transfer price per compressor is 110% of full costs? A) $84.70 B) $80.00 C) $76.45 D) $59.95 E) $77.00 Answer: C Explanation: $(34.00 + 14.50 + 6.00 + 15.00) × 1.10 = $76.45 Diff: 1 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
42) Assume the transfer price for a compressor is 150% of total costs of the Compressor Division and 1,000 of the compressors are produced and transferred to the Assembly Division. The Compressor Division's operating income is A) $31,750. B) $32,750. C) $34,750. D) $36,500. E) $49,750. Answer: C Explanation: Revenue ((1.5 × ($34.00 + $14.50 + $6.00 + $15) × 1,000) = $104,250 Costs ($69.50 × 1,000) = (69,500) Operating income $34,750 Diff: 3 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
43) If the Assembly Division sells 1,000 air conditioners at a price of $750.00 per air conditioner to customers, what is the company's operating income? A) $200,500 B) $207,000 C) $194,000 D) $165,750 E) $230,500 Answer: A Explanation: Revenues = ($750 × 1,000) = $750,000 Cost = ($69.50 + $480.00) × 1,000) = 549,500 Operating income = $200,500 Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
Answer the following question(s) using the information below. Easy Fit Ltd. manufactures heating, ventilation, and air conditioning (HVAC) equipment. The Manufacturing Division creates parts; and, the Assembly Division builds and sells the equipment. The Manufacturing Division "sells" furnace parts packages to the Assembly Division. The market price for the Assembly Division to purchase a mini furnace is $3,500. The fixed costs for the Manufacturing Division are assumed to be the same over the range of 2,000-5,000 units. The fixed costs for the Assembly Division are assumed to be $40.00 per unit at 5,000 units. Manufacturing costs per furnace are: Direct materials $1,300.00 Direct labour $350.00 Variable overhead $100.00 Division fixed costs $90.00 Assembly's costs per completed furnace are: Direct materials $25.00 Direct labour $150.00 Variable overhead $50.00 Division fixed costs $40.00 44) Assume the transfer price for a furnace is 130% of total costs of the Manufacturing Division and 5,000 of the furnaces are produced and transferred to the Assembly Division. The Manufacturing Division's operating income is A) $3,250,000. B) $1,175,000. C) $2,500,000. D) $2,625,000. E) $2,760,000. Answer: E Explanation: Revenue ((1.3 × ($1,300 + $350+ 100 + $90) × 5,000) = $11,960,000 Costs ($1,840 × 5,000) = (9,200,000) Operating income $2,760,000 Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
45) If the Assembly Division sells 1,000 furnaces at a price of $3,500 per unit to customers, what is the company's operating income? A) $3,250,000 B) $175,000 C) $1,660,000 D) $3,235,000 E) $1,395,000 Answer: E Explanation: Revenues = ($3,500 × 1,000) = $3,500,000 Cost = ($2,105 × 1,000) = 2,105,000 Operating income = $1,395,000 Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
46) Which of the following is an advantage of an Advance Transfer Price Arrangement (APA)? A) The Canadian Government provides APAs free of charge to promote Canadian exports. B) APAs save company's from the cost of keeping related party transfer records. C) They are always cost effective. D) An APA can reduce or eliminate the opportunity cost associated with a Canada Revenue Agency transfer price audit. E) An APA prevents companies from having to endure transfer price audits. Answer: D Diff: 3 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-2
Answer the following question(s) using the information below. Cool Air Ltd. manufactures only one type of air conditioner and has two divisions, the Compressor Division, and the Assembly Division. The Compressor Division manufactures compressors for the Assembly Division, which completes the air conditioner and sells them to retailers. The Compressor Division "sells" compressors to the Assembly Division. The market price for the Assembly Division to purchase a compressor is $77. (Ignore changes in inventory.) The fixed costs for the Compressor Division are assumed to be the same over the range of 5,000-10,000 units. The fixed costs for the Assembly Division are assumed to be $15.00 per unit at 10,000 units. Compressor's costs per compressor are: Direct materials $34.00 Direct labour $14.50 Variable overhead $6.00 Division fixed costs $15.00 Assembly's costs per completed air conditioner are: Direct materials $300.00 Direct labour $125.00 Variable overhead $40.00 Division fixed costs $15.00 47) If the Assembly Division sells 1,000 air conditioners at a price of $750.00 per air conditioner to customers, what is the company's operating income? A) $200,500 B) $207,000 C) $194,000 D) $165,750 E) $230,500 Answer: A Explanation: Revenues = ($750 × 1,000) = $750,000 Cost = ($69.50 + $480.00) × 1,000) = 549,500 Operating income = $200,500 Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
48) The Mill Flow Company has two divisions. The Cutting Division prepares timber at its sawmills. The Assembly Division prepares the cut lumber into finished wood for the furniture industry. No inventories exist in either division at the beginning of the year. During the year, the Cutting Division prepared 60,000 cords of wood at a cost of $660,000. All the lumber was transferred to the Assembly Division, where additional operating costs of $6 per cord were incurred. The 60,000 cords of finished wood were sold for $2,500,000. Required: a. Determine the operating income for each division if the transfer price from Cutting to Assembly is at cost. b. Determine the operating income for each division if the transfer price is $9 per cord. c. Since the Cutting Division sells all of its wood internally to the Assembly Division, does the manager care what price is selected? Why? Should the Cutting Division be a cost centre or a profit centre under the circumstances?
Answer: a. Revenue Cost of services: Incurred Transferred-in Total Operating income
Cutting $660,000*
Assembly $2,500,000
$660,000 0 $660,000
$360,000 660,000 $1,020,000
$0
$1,480,000
Cutting $540,000*
Assembly $2,500,000
$660,000 0 $660,000
$360,000 540,000 $900,000
$(120,000)
$1,600,000
* 60,000 cords × $11 = $660,000 b. Revenue Cost of service Incurred Transferred-in Total Operating income * 60,000 cords × $9 = $540,000 c. The manager of Cutting cares about the transfer price if the division is a profit centre but not if it is a cost centre. Under the circumstances, the division probably should be a cost centre and not worry about the profit it pretends to make by selling to another division. Diff: 2 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
49) Alsation Ltd. has two divisions:. The Machining Division prepares the raw materials into component parts, and the Assembly Division assembles the components into finished product. No inventories exist in either division at the beginning of the year. During the year the Machining Division prepared 80,000 square metres of sheet metal at a cost of $480,000. All production was transferred to the Assembly Division where the metal was converted into 80,000 units of finished product at an additional costs of $5 per unit. The 80,000 units were sold for $2,000,000. Required: a. Determine the operating income for each division if the transfer price from Machining to Assembly is at cost. b. Determine the operating income for each division if the transfer price is $5/square metre. c. Since the Machining Division has all of its sales internally to the Assembly Division, does the manager care what price is selected? Why? Should the Machining Division be a cost centre or a profit centre under the circumstances? Answer: a. Machining Assembly Revenue 480,000* $2,000,000 Cost of services:Incurred $480,000 $400,000 Transferred in 0 480,000 Total $480,000 $880,000 Operating income $0 $1,120,000 *80,000 square metres × $6 = $480,000 b. Revenue Cost of services:Incurred Transferred in Total Operating income
Machining $400,000* $480,000 0 $480,000 $(80,000)
Assembly $2,000,000 $400,000 400,000 $800,000 $1,200,000
* 80,000 square metres × $5 = $400,000 c. The manager of Machining cares about the transfer price if the division is a profit centre but not if it is a cost centre. Under the circumstances the division probably should be a cost centre and not worry about the profit it pretends to make by selling to another division. It does not control revenues. Diff: 2 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
50) Vancouver Valley Ltd. has two divisions, Computer Services and Management Advisory Services. In addition to its external customers, each division performs work for the other division. The external fees earned by each division in the past year were $200,000 for Computer Services and $350,000 for Management Advisory Services. Computer Services worked 3,000 hours for Management Advisory Services and Management Advisory Services in turn worked 1,200 hours for Computer Services. The total costs of external services performed were $110,000 by Computer Services, and $240,000 by Management Advisory Services. Required: a. Determine the operating income for each division and for the company as a whole if the transfer price from Computer Services to Management Advisory Services is $15 per hour and the transfer price from Management Advisory Services to Computer Services is $12.50 per hour. b. Determine the operating income for each division and for the company as a whole if the transfer price from each to the other is $15 per hour. c. What are the operating income results for each division and for the company as a whole if the two divisions net their hours worked for each other and charge $12.50 per hour for the one with the excess? Which division manager prefers this arrangement? Answer: a. Computer Management Company Revenue: External $200,000 $350,000 $550,000 Internal* 45,000 15,000 0 Total $245,000 $365,000 $550,000 Cost of services: Incurred $110,000 $240,000 $350,000 Transferred in 15,000 45,000 0 Total $125,000 $285,000 $350,000 Operating income $120,000 $80,000 $200,000 * Computer Services = 3,000 hours × $15 = $45,000 Management Advisory Services = 1,200 hours × $12.50 = $15,000 Revenue for one is an expense of the other.
b. Revenue: External Internal* Total Cost of services: Incurred Transferred in Total Operating income
Computer $200,000 45,000 $245,000
Management $350,000 18,000 $368,000
Company $550,000 0 $550,000
$110,000 18,000 $128,000 $117,000
$240,000 45,000 $285,000 $83,000
$350,000 0 $350,000 $200,000
* Computer Services = 3,000 hours × $15 = $45,000 Management Advisory Services = 1,200 hours × $15 = $18,000 Revenue for one is an expense of the other. c. Revenue: External Internal* Total Cost of services: Incurred Transferred in Total Operating income
Computer $200,000 22,500 $222,500
Management $350,000 0 $350,000
Company $550,000 0 $550,000
$110,000 0 $110,000 $112,500
$240,000 22,500 $262,500 $87,500
$350,000 0 $350,000 $200,000
* Computer Services net = (3,000 - 1,200) × $12.50 = $22,500 Revenue for one is an expense of the other. Neither manager is favoured all the time. It depends on the relative consumption of hours. Diff: 3 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
51) Bedtime Bedding Ltd. manufactures pillows. The Cover Division makes covers, and the Assembly Division makes the finished products. The covers can be sold separately for $5.00. The pillows sell for $6.00. The information related to manufacturing for the most recent year is as follows: Cover Division manufacturing costs External sales of covers by Cover Division Market value of covers transferred to Assembly Sales of pillows by Assembly Division Additional manufacturing of Assembly Division
$6,000,000 $4,000,000 $6,000,000 $7,200,000 $1,500,000
Required: Compute the operating income for each division and the company as a whole. Use market value as the transfer price. Are all managers happy with this concept? Explain. Answer: Cover Assembly Company Revenue: External $4,000,000 $7,200,000 $11,200,000 Internal 6,000,000 0 0 Total $10,000,000 $7,200,000 $11,200,000 Cost of goods: Incurred Transf'd in Total
$6,000,000 0 $6,000,000
$1,500,000 6,000,000 $7,500,000
$7,500,000 0 $7,500,000
Operating income
$4,000,000
$(300,000)
$3,700,000
The Assembly manager is probably not happy because the division is showing a loss. The manager would probably argue for a transfer price at something less than cost. However, since the market is open and competitive, the market price can be justified. The division needs to either increase its price or reduce its costs if it expects to show a profit. Diff: 2 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
52) Sportswear Ltd. manufactures socks. The Athletic Division sells its socks for $6 a pair to outsiders. Socks have manufacturing variable and fixed costs of $2.50 and $1.50, respectively. The division's total fixed manufacturing costs are $105,000 at the normal volume of 70,000 units. The European Division has offered to buy 15,000 socks at the full cost of $4. The Athletic Division has excess capacity and the 15,000 units can be produced without interfering with the current outside sales of 70,000. The 85,000 volume is within the division's relevant operating range. Explain whether the Athletic Division should accept the offer. Answer: Sales $4.00 Variable costs 2.50 Contribution margin $1.50 The proposal should be accepted because it makes a contribution to fixed costs and profits of $1.50 per unit. This would increase the division's operating income by $22,500 = ($1.50 × 15,000 units). Diff: 2 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
53) Tech Clothing Ltd. manufactures t-shirts. The Athletic Division sells its t-shirts for $9 to outsiders. Tshirts have manufacturing variable and fixed costs of $2.75 and $0.75, respectively. The division's total fixed manufacturing costs are $37,500 at the normal volume of 50,000 units. The Mountain Wear Division has offered to buy 5,000 t-shirts at the full cost of $3.50. They can sell the shirts for $10. The Athletic Division does not have excess capacity but could produce the 5,000 t-shirts using overtime. This would increase variable costs by $0.25 per unit and fixed costs by $6,250. Required: Determine the effect on corporate operating income if the Athletic division: a. Reduces regular sales to create the needed capacity b. Uses overtime to produce the 5,000 t-shirts Answer: a. Replace existing sales Mountain Wear Division revenue (5,000 × $10) $50,000 Lost contribution margin 5,000 × ($9.00 - $2.75) (31,250) Variable cost 5,000 × ($2.75 + $0.25) (15,000) Incremental fixed cost (6,250) Net effect on corporate income $(2,500) b. Use overtime Mountain Wear Division revenue (5,000 × $10) Variable cost 5,000 × ($2.75 + $0.25) Incremental fixed cost Net effect on corporate income
$50,000 (15,000) (6,250) $28,750
Diff: 3 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Analyzing Objective: LO 22-2
54) Tech Clothing Ltd. manufactures socks. The Athletic Division sells its socks for $13 a pair to outsiders. Socks have manufacturing variable and fixed costs of $3.50 and $1.25, respectively. The division's total fixed manufacturing costs are $62,500 at the normal volume of 50,000 units. The Mountain Wear Division has offered to buy 5,000 pairs of socks at the full cost of $4.75. They can sell the socks for $15. The Athletic Division does not have excess capacity but could produce the 5,000 pairs of socks using overtime. This would increase variable costs by $0.75 per unit and fixed costs by $8,900. Required: Determine the effect on corporate operating income if the Athletic division: a. Reduces regular sales to create the needed capacity b. Uses overtime to produce the 5,000 t-shirts Answer: a. Replace existing sales Mountain Wear Division revenue (5,000 × $15) $75,000 Lost contribution margin 5,000 × ($13.00 - $4.75) (41,250) Variable cost 5,000 × ($3.50 + $0.75) (21,250) Incremental fixed cost (8,900) Net effect on corporate income $3,600 b. Use overtime Mountain Wear Division revenue (5,000 × $15) Variable cost 5,000 × ($3.50 + $0.75) Incremental fixed cost Net effect on corporate income
$75,000 (21,250) (8,900) $44,850
Diff: 3 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Analyzing Objective: LO 22-2
55) Xenon Autocar Company manufactures automobiles. The Fastback Car Division sells its cars for $50,000 each to the general public. The fastback cars have manufacturing costs of $25,000 each for variable and $15,000 each for fixed costs. The division's total fixed manufacturing costs are $75,000,000 at the normal volume of 5,000 units. The Coupe Car Division has been unable to meet the demand for its cars this year. It has offered to buy 1,000 cars from the Fastback Car Division at the full cost of $40,000. The Fastback Car Division has excess capacity and the 1,000 units can be produced without interfering with the current outside sales of 5,000. The 6,000 volume is within the division's relevant operating range. Explain whether the Fastback Car Division should accept the offer. Answer: Unit Sales $40,000 Variable costs 25,000 Contribution margin $15,000 The proposal should be accepted because it makes a contribution to fixed costs and profits of $15,000 per unit. This would increase the division's operating income by $15,000,000 = ($15,000 × 1,000 units). Diff: 2 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
56) Centralia Components Ltd. manufactures cable assemblies used in transportation, recreational products and medical industries . The capacity of the Manufacturing Division is currently 200,000 units and it sells 160,000 units to the outside market at an average price of $96/unit. Cost to manufacture the cable assemblies are $42 variable and $8 fixed. Fixed costs per unit are based on its normal volume of 160,000 units. Centralia's Mobility Division uses cable assemblies in the manufacture of wheelchairs. It has offered to buy 25,000 units from the Manufacturing Division at $48 per unit. Calculate the operating income of the Manufacturing Division with and without the offer from the Mobility Division. Should the Manufacturing Division management accept the offer? Answer: Selling price per unit $48 Variable costs per unit $42 Contribution margin on Mobility offer $6.00 While the offer by the Mobility Division is lower than full cost, its operating income will increase by $150,000 ($6/unit × 25,000). Operating Income without the offer. External sales 160,000 × $96 Variable costs 160,000 × $42 Fixed costs 160,000 × $8 Operating income
$15,360,000 ($6,720,000) ($1,280,000) $7,360,000
Operating Income with the offer External sales 160,000 × $96 Internal sales 25,000 × $48 Variable costs 185,000 × $42 Fixed Costs 160,000 × $8 Operating Income
$15,360,000 $1,200,000 ($7,770,000) ($1,280,000) $7,510,000
Increase to operating income = $7,510,000 - $7,360,000 = $150,000 Diff: 3 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
57) The Brownshoe Company has three specialized divisions. The Casual Shoe Division has asked the Sole Division to supply it with a large quantity of soles. The Sole Division is currently at capacity. The Sole Division sells soles outside for $5.00 each. The Casual Shoe Division, which is operating at 50 percent capacity, has offered to pay $4.00 per sole. The Sole Division has a variable cost of $3.60 per sole. The Casual Shoe Division has the following cost structure: Direct materials, except soles Soles Conversion costs Fixed overhead Total cost per pair of shoes
$60.00 4.00 36.00 20.00 $120.00
The manager of Casual Shoe believes that the $4 price from Sole is necessary if the division is to compete in the market for casual shoes. Required: a. As manager of Sole Division, would you recommend that your division supply the soles to Casual Shoe? Why? b. Would it be desirable for the division to supply Casual Shoe with the soles for $4 assuming the Sole Division had excess capacity? Why? c. What would be the corporate position assuming the Sole Division has excess capacity? Answer: a. No, because production is at capacity and there is no need to lower the price. It would reduce our operating income, an undesirable outcome. b. Yes, the variable costs are less than $4, thereby providing a positive contribution margin. c. The corporate position would be to require the internal sale because the company benefits from not having to buy from outside. As an incentive, the company might establish a dual pricing policy which would be acceptable to both managers Diff: 3 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-2
58) Sandra's Sheet Metal Company has two divisions. The Raw Material Division prepares sheet metal at its warehouse facility. The Fabrication Division prepares the cut sheet metal into finished products for the air conditioning industry. No inventories exist in either division at the beginning of 2018. During the year, the Raw Material Division prepared 450,000 square metres of sheet metal at a cost of $1,800,000. All the sheet metal was transferred to the Fabrication Division, where additional operating costs of $1.50 per square metre were incurred. The 450,000 square metres of finished fabricated sheet metal products were sold for $3,875,000. Required: a. Determine the operating income for each division if the transfer price from Raw Material to Fabrication is at a cost of $4 per square metre. b. Determine the operating income for each division if the transfer price is $5 per square metre. c. Since the Raw Materials Division sells all of its sheet metal internally to the Fabrication Division, does the Raw Materials manager care what price is selected? Why? Should the Raw Materials Division be a cost center or a profit center under the circumstances?
Answer: a. Revenue Cost of services: Incurred Transferred-in Total Operating income * 60,000 cords × $11 = $660,000
Raw Material $1,800,000*
Fabrication $3,875,000
$1,800,000 0 $ 1,800,000
$ 675,000 1,800,000 $2,475,000
$0
$1,400,000
Cutting $2,250,000*
Assembly $3,875,000
$1,800,000 0 $1,800,000
$ 675,000 2,250,000 $2,925,000
$450,000
$950,000
b. Revenue Cost of services: Incurred Transferred-in Total Operating income * 450,000 metres × $5 = $2,250,000
c. The manager of Raw materials cares about the transfer price if the division is a profit center but not if it is a cost center. Under the circumstances, the division probably should be a cost center and should not worry about the profit it pretends to make by selling to another division. However, the Fabrication Division and corporate management will be interested in transfer pricing as there is an external market for sheet metal. Diff: 2 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
59) Better Food Company recently acquired an olive oil processing company that has an annual capacity of 2,000,000 litres and that processed and sold 1,400,000 litres last year at a market price of $4 per litre. The purpose of the acquisition was to furnish oil for the Cooking Division. The Cooking Division needs 800,000 litres of oil per year. It has been purchasing oil from suppliers at the market price. Production costs at capacity of the olive oil company, now a division, are as follows: Direct materials per litre Direct processing labour Variable processing overhead Fixed processing overhead based on capacity Total
$1.00 0.50 0.24 0.40 $2.14
Management is trying to decide what transfer price to use for sales from the newly acquired company to the Cooking Division. The manager of the Olive Oil Division argues that $4, the market price, is appropriate. The manager of the Cooking Division argues that the cost of $2.14 should be used, or perhaps a lower price as fixed overhead cost should not be relevant. Any output of the Olive Oil Division not sold to the Cooking Division can be sold to outsiders for $4 per litre. Required: a. Compute the operating income for the Olive Oil Division using a transfer price of $4. b. Compute the operating income for the Olive Oil Division using a transfer price of $2.14. c. What transfer price(s) do you recommend? Justify your answer.
Answer: a. Sales: External (1,200,000 × $4) Internal (800,000 × $4) Cost of goods sold: Variable (2,000,000 × $1.74) Fixed (2,000,000 × $0.40) Operating income b. Sales: External (1,200,000 × $4) Internal (800,000 × $2.14) Cost of goods sold: Variable (2,000,000 × $1.74) Fixed (2,000,000 × $0.40) Operating income
$4,800,000 3,200,000 $3,480,000 800,000
$4,800,000 1,712,000 $3,480,000 800,000
$8,000,000
4,280,000 $3,720,000
$6,512,000
4,280,000 $2,232,000
c. The current external demand of 1,400,000 litres should be met at the market price in order to maximize corporate profit. The excess capacity of 600,000 litres can be transferred at any price between the variable cost of $1.74 and the market price of $4.00. Diff: 3 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-2
60) Explain what transfer prices are, and what are the four criteria used to evaluate them? Answer: Transfer prices are the prices that one subunit of the firm charges another subunit of the firm for a good or service. Transfer prices are evaluated based on firm goal congruence, management efforts, subunit performance evaluations, and the subunit autonomy. Diff: 2 Type: ES CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-2
61) Briefly explain each of the three general methods used to determine a transfer price. Answer: Transfer prices can be calculated using an external market price. They could be calculated using a cost basis, and perhaps including a markup. They could also be calculated using a negotiated price between the buying and selling divisions. Diff: 2 Type: ES CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-2
62) Briefly describe the arm's length principle and how it applies to transfers among international divisions. Answer: The arm's length principle maintains that a transfer price would be same as it would be if the divisions were independent companies. The costs to the purchasing division is tax deductible and the revenue to the supplying division is taxable. Efforts could be made to manipulate the transfer price to move income (through increased revenues or lower costs) into the division that is operating in the lowest tax jurisdiction. National taxation authorities can deny this tax benefit and enforce an appropriate price. Diff: 2 Type: ES CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-2
63) Transfer prices among divisions within Canada are irrelevant. Do you agree with this statement? Explain. Answer: This statement is false. Different tax jurisdictions exist within Canada and the thus the arm's length principle applies and has relevance. The arm's length principle maintains that a transfer price would be same as it would be if the divisions were independent companies. The costs to the purchasing division is tax deductible and the revenue to the supplying division is taxable. Efforts could be made to manipulate the transfer price to move income (through increased revenues or lower costs) into the division that is operating in the lowest tax jurisdiction. National and provincial taxation authorities can deny this tax benefit and enforce an appropriate price. Diff: 2 Type: ES CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-2
For each of the following transfer price descriptions or operating situations, tell which of the general methods of transfer pricing it is most appropriate. A) market-based B) negotiated C) any method D) cost-based 64) Bargaining between selling and buying units Diff: 1 Type: MA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-2
65) Budgeted costs Diff: 1 Type: MA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-2
66) 145% of full costs Diff: 1 Type: MA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-2
67) Internal product transfers are required if goods are available internally Diff: 1 Type: MA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-2
68) Manufacturing plus marketing plus distribution plus customer service costs Diff: 1 Type: MA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-2
69) Prices listed in a trade journal Diff: 1 Type: MA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-2
70) Selling price less normal sales commissions Diff: 1 Type: MA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-2
71) Variable manufacturing cost plus a mark-up Diff: 1 Type: MA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-2
Answers: 64) B 65) D 66) D 67) C 68) D 69) A 70) A 71) D
22.3 Assess the market-based transfer price method. 1) When the intermediate market is perfectly competitive, interdependencies of subunits are minimal, and there are additional costs to the corporation as a whole then using the market price as the transfer price results in optimal decision making. Answer: FALSE Explanation: True when there are no additional costs. Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-3
2) When demand outstrips supply, market prices may drop below historical averages. These prices are known as distress prices. Answer: FALSE Explanation: Distress prices occur when supply outstrips demand. Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-3
3) Under distress pricing conditions, long run average prices may be used in setting transfer prices. Such actions negatively affect the supplying division. Answer: FALSE Explanation: Long run prices negatively affect the buying division since it could purchase at lower prices on the open market. Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-3
4) Market-based transfer prices are ideal in perfectly competitive markets when there is idle capacity in the selling division. Answer: FALSE Explanation: Market-based transfer prices are ideal when there is no idle capacity. Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-3
5) In the short run, the manager of the supplier division should meet the distress price as long as it exceeds the incremental costs of supplying the product or service. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-3
6) Market-based transfer prices are helpful when ________. A) the product is specialized B) the internal product is different from the products available externally in terms of its quality C) the interdependencies of subunits are minimal D) the markets are not perfectly competitive Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-3
7) A market is said to be perfectly-competitive when A) there is no opportunity costs incurred by the vendor nor by the buyer. B) the market may be dominated by one or two major companies, but there are many smaller companies also in the market. C) there is a homogeneous product, equivalent buying and selling prices, and no individual buyers or sellers can affect those prices by their own actions. D) there are any number of products, equivalent buying and selling prices, and individual buyers or sellers can affect those prices by their own actions. E) there are any number of products, equivalent buying and selling prices, and individual buyers or sellers can affect those prices by their own actions, but there are no opportunity costs for buyers or sellers. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-3
8) In a time of distress prices, which of the following is TRUE? A) The vendor division should set the transfer price at the distress price on a long-term basis for stability within the overall company. B) The vendor division should cease production. C) The purchasing division should pay normal prices. D) In the short-term, the transfer price should be the distress price as long as this exceeds the incremental costs. E) The distress price should be ignored as it is a function of the market, not of the internal capacities of the overall company. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-3
9) When industry has excess capacity, market prices may drop sizably below their historical average. If this drop is temporary, it is called A) distress pricing. B) dropped pricing. C) low-average pricing. D) substitute pricing. E) fire sale. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-3
10) A benefit of using a market-based transfer price is that the A) profits of the transferring division are sacrificed for the overall good of the corporation. B) profits of the division receiving the products are sacrificed for the overall good of the corporation. C) decision making is optimal when the subunits depend on each other. D) can be additional costs but the costs are less than the benefits. E) economic viability and profitability of each division can be evaluated individually. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-3
11) Briefly describe the conditions that should be met for market-based transfer pricing to lead to optimal decision making among subunits of a large organization. Answer: The conditions for which market-based transfer pricing is likely to lead to optimal decision making are: (1) the market for the intermediate product is perfectly competitive, (2) interdependencies of the subunits are minimal, and (3) there are no additional costs or benefits to the company as a whole from buying or selling in the external market instead of transacting internally. In a perfectly competitive market, the market-based transfer prices promote goal congruence, motivate the management to take the same actions as if they were transacting externally, evaluate subunit performance, and preserve subunit autonomy. Diff: 2 Type: ES CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-3
22.4 Apply relevant costs and tax considerations to evaluate the selection of cost-based and negotiated transfer prices. 1) Outlay costs are defined as the maximum contribution foregone by the supply division if the products or services are transferred internally. Answer: FALSE Explanation: Opportunity costs are defined as the maximum contribution foregone by the supply division if the products or services are transferred internally. Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-4
2) Full-cost transfer prices are adequate and lead to goal congruence for decisions that require knowledge of short-run variable costs. Answer: FALSE Explanation: Variable cost basis are adequate and lead to goal congruence for decisions that require knowledge of short-run variable costs. Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-4
3) Full-cost transfer pricing may be used because it yields relevant costs for short-run decisions even though full-cost allocations may lead to poor long-run decisions. Answer: FALSE Explanation: Variable based costing is relevant for short-term decisions because fixed costs are irrelevant. Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-4
4) There is seldom a single transfer price that simultaneously meets the criteria of goal congruence, management effort, and subunit autonomy. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-4
5) Some companies use dual pricing, using two separate transfer-pricing methods to price each interdivisional transaction. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-4
6) Dual pricing is widely used as it reduces the goal-congruence problems associated with a pure costplus based transfer-pricing method. Answer: FALSE Explanation: Dual pricing supports goal congruence. Diff: 1 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-4
7) Opportunity costs represent the cash flows directly associated with the production and transfer of the products and services. Answer: FALSE Explanation: Opportunity costs are the maximum contribution forgone by the selling division if the products or services are transferred internally. Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-4
8) If the product sold between divisions has no intermediate market, the opportunity cost of supplying the product internally is the variable cost of the product. Answer: FALSE Explanation: The opportunity cost of supplying the product internally is zero. Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-4
9) The general guideline for setting a minimum transfer price adds the full cost plus the opportunity cost to arrive at the minimum transfer price. Answer: FALSE Explanation: Adds the incremental cost with the opportunity cost Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-4
10) A transfer price based on the full cost plus a markup may lead to suboptimal decisions because ________. A) it leads the buying division to regard the fixed costs and the markup of the selling division as a variable cost B) it leads the buying division to regard the variable costs and the markup of the selling division as a fixed cost C) it leads the buying division to regard the fixed costs and the markup of the selling division as total costs D) it leads the buying division to regard the variable costs and the markup of the selling division as total costs Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-4
Use the information below to answer the following question(s). Soft Cushion Company is highly decentralized. Each division is empowered to make its own sales decisions. The Assembly Division can purchase cushion stuffing from the Production Division or from external suppliers. The Production Division has been the major supplier of stuffing in recent years. The Assembly Division has announced that two external suppliers will be used to purchase the stuffing at $20 per kilogram for the next year. The Production Division recently increased its unit price to $40. The manager of the Production Division presented the following information; variable cost $32, fixed cost $8, to top management in order to attempt to force the Assembly Division to purchase the stuffing internally. The Assembly Division purchases 20,000 kg per month. 11) The Production Division has no alternative use for the facilities used to manufacture the stuffing. What is the monthly operating income advantage (disadvantage) if the goods are purchased internally? A) $400,000 B) $640,000 C) $240,000 D) $(240,000) E) $(400,000) Answer: D Explanation: Purchase cost: (20,000 kg × $20) $400,000 Outlay cost: (20,000 kg × $32) (640,000) Opportunity cost: 0 Advantage/(Disadvantage) $(240,000) Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-4
12) What is the monthly operating advantage (disadvantage) of purchasing the goods internally assuming the Production Division is able to utilize the facilities for other operations resulting in monthly cash-operating savings of $40,000? A) $440,000 B) $40,000 C) $280,000 D) $(280,000) E) $(360,000) Answer: D Explanation: Purchase cost: (20,000 kg × $20) $400,000 Outlay cost: (20,000 kg × $32) (640,000) Opportunity cost: (40,000) Advantage/(Disadvantage) $(280,000) Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-4
13) What would be the monthly operating advantage (disadvantage) of purchasing the goods internally assuming the external supplier increased its price to $50 per kilogram and the Production Division is able to utilize facilities for other operations, resulting in a monthly cash-operating savings of $30 per kilogram? A) $1,000,000 B) $360,000 C) $(240,000) D) $(400,000) E) $(640,000) Answer: C Explanation: Purchase cost: (20,000 kg × $50) $1,000,000 Outlay cost: (20,000 kg × $32) (640,000) Opportunity cost: (20,000 kg × $30) (600,000) Advantage/(Disadvantage) $(240,000) Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-4
14) In analyzing transfer prices A) the buyer will not willingly purchase a product for less than the incremental costs incurred to manufacture the product internally. B) the seller should not sell a product for less than the incremental costs incurred to make the product. C) the buyer will willingly pay more than the ceiling transfer price. D) the buyer will not pay less than the ceiling transfer price. E) the buyer will not pay the incremental costs. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-4
15) Cash outflows that are directly associated with the production and transfer of the products and services are called A) additional costs. B) opportunity costs. C) outlay costs. D) transfer costs. E) variable costs. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-4
16) The profit foregone by the seller if the products or services are transferred internally instead of selling them externally are called A) additional costs. B) opportunity costs. C) outlay costs. D) transfer costs. E) variable costs. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-4
17) The seller of product A has no idle capacity and can sell all it can produce at $20 per unit. Outlay cost is $4. What is the opportunity cost assuming the seller sells internally? A) $4 B) $16 C) $20 D) $24 E) $44 Answer: B Explanation: $20 - $4 = $16 Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-4
18) The seller of product A has idle capacity and has no alternative use for the excess capacity. The seller can sell each unit at $10. Outlay cost is $2. What is the opportunity cost of selling internally? A) $0 B) $8 C) $10 D) $12 E) $16 Answer: A Explanation: idle capacity exists Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-4
19) The general guideline for determining the minimum transfer price is A) cover all employee costs incurred in production. B) fixed cost plus opportunity costs per unit to the vendor division. C) variable cost plus opportunity costs per unit to the vendor division. D) fixed cost plus incremental costs per unit up to the point of transfer. E) additional incremental costs per unit up to the point of transfer, plus opportunity costs per unit to the vendor division. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-4
20) The Transportation Division of Petrolia Paint Company can purchase paint from an independent producer at $12.60 per litre. The company has three divisions: Production, Transportation, and Paint. The company's Transportation Division is currently buying paint from the Paint Division for $24 per litre. Transfer prices are based on 125 percent of full cost. Which of the following would occur if the company uses dual pricing to record the Transportation Division purchases of paint from the Paint Division? A) debit the Paint Division for $24.00 B) credit the corporate cost account for $11.40 C) debit the Transportation Division for $12.60 D) credit the Paint Division for $12.60 E) credit the Paint Division for $32.40 Answer: C Diff: 3 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-4
21) Under what conditions would transferring products or services at market prices lead to optimal decisions within the organization? A) when the immediate market is a monopoly B) when there is interdependence between subunit divisions C) when there is excess capacity D) when the immediate market is not perfectly competitive, and there is interdependence between subunit divisions E) when the immediate market is only somewhat competitive and there is excess capacity Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-4
Use the information below to answer the following question(s). Crush Company makes internal transfers at 180% of full cost. The Soda Refining division purchases 30,000 containers of carbonated water per day, on average, from a local supplier, who delivers the water for $30 per container via an external shipper. In order to reduce costs the company located an independent producer in Manitoba who is willing to sell 30,000 containers at $20 each, delivered to Crush Company's shipping division in Manitoba. The company's Shipping Division in Manitoba can ship the 30,000 containers at a variable cost of $2.50 per container and a full cost, based on practical capacity, of $4.00 per container. When the company's Manitoba shipping division ships for external customers is charges $6.00 per container. 22) What is the total cost to Crush Company if the carbonated water is purchased from the local supplier? A) $900,000 B) $1,200,000 C) $975,000 D) $1,080,000 E) $1,620,000 Answer: A Explanation: 30,000 containers × $30 = $900,000 Diff: 1 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-4
23) What is the total incremental cost of purchasing the water from the independent producer and shipping it to the Soda Division if the company's Manitoba shipping division has idle capacity? A) $600,000 B) $675,000 C) $720,000 D) $816,000 E) $780,000 Answer: B Explanation: 30,000 containers × ($2.50 + $20.00) = $675,000 Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-4
24) What is the opportunity cost for Crush Company from continuing to purchase the water from the local supplier if the company's Manitoba shipping division has sufficient idle capacity? A) $600,000 B) $60,000 C) $105,000 D) $180,000 E) $0 Answer: E Explanation: None as no external sales will be lost Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-4
25) What is the daily operating advantage (disadvantage) of purchasing the water from the independent producer and using the company's Manitoba shipping department, assuming the shipping department is currently shipping 50,000 containers per day for external customers? A) $0 B) $45,000 C) $225,000 D) $120,000 E) $165,000 Answer: D Explanation: Current cost $ 900,000 Internal transfer variable cost (30,000 × $2.50) Purchase cost (30,000 × $20) Opportunity cost (30,000 × ($6.00 - $2.50) Total
$ 75,000 600,000 105,000 $780,000
Savings = $900,000 - $780,000 = $120,000 Diff: 3 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-4
26) One reason companies use full-cost transfer pricing is that it provides relevant costs for A) long-run decisions even though poor short-run decisions may result. B) long-run decisions and for short-run decisions. C) short-run decisions but not for long-run decisions. D) short-run decisions at the expense of the company. E) long-run decisions and for employee staffing decisions. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-4
27) When companies are unable to choose a transfer-pricing method which meets the requirements of the divisions concerned, they may use A) cost pricing. B) dual pricing. C) situational pricing. D) market pricing. E) pro-rating pricing. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-4
28) When the vendor division receives full cost plus a mark-up, and the buying division pays the market price, this is referred to as A) dual pricing. B) market pricing. C) single pricing. D) prorated transfer pricing. E) competition pricing. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-4
Use the information below to answer the following question(s). The Burnaby Division of Mississauga Ltd. produces and sells component parts. Its variable costs per unit are $80 for direct materials, $32 for direct labour, and $18 for variable factory overhead. It currently can sell its components on the outside market at a price of $165/unit. Fixed overhead costs are $22 per unit based on a denominator volume of 180,000 units. 29) The Surrey Division of Mississauga Ltd. has approached the Burnaby Division and requested that it supply 25,000 units of the component at a transfer price of $150. Assuming Burnaby Division has idle capacity, what is the transfer price the Burnaby Division should agree to accept? A) $165 B) $150 C) $152 D) $130 E) $118 Answer: B Explanation: The outlay cost in the Burnaby Division is $80 + $32 + $18 = $130, and there is no opportunity cost since there is idle capacity. While the guideline suggests a transfer price of $130, there is a firm offer from Surrey of $150. It should accept the offer. Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-4
30) The Surrey Division of Mississauga Ltd. has approached the Burnaby Division and requested that it supply 25,000 units of the component at a transfer price of $150. Assuming Burnaby Division has no idle capacity, what is the minimum transfer price the Burnaby Division should agree to accept? A) $165 B) $150 C) $152 D) $130 E) $118 Answer: A Explanation: The outlay cost in the Burnaby Division is $80 + $32 + $18 = $130 but there is an opportunity cost since Burnaby can sell all of its output to the external market. Minimum transfer price = $130 + ($165 - $130) = $165 Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-4
31) The Surrey Division of Mississauga Ltd. has approached the Burnaby Division and requested that it supply 25,000 units of the component at a transfer price of $150. The Burnaby Division will save $3 per unit of direct materials costs for the components manufactured for the Surrey Division. Assuming Burnaby Division has no idle capacity, what is the minimum transfer price the Burnaby Division should agree to accept? A) $165 B) $150 C) $162 D) $130 E) $127 Answer: C Explanation: The outlay cost in the Burnaby Division is $80 - $3 + $32 + $18 = $127, but there is an opportunity cost since Burnaby can sell all of its output to the external market. Minimum transfer price = $127 + ($165 - $130) = $162 Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-4
32) The Surrey Division of Mississauga Ltd. has approached the Burnaby Division and requested that it supply 25,000 units of the component. The Burnaby Division will save $3 per unit of direct materials costs for the components manufactured for the Surrey Division. Assuming Burnaby Division has idle capacity, what is the minimum transfer price the Burnaby Division should agree to accept? A) $165 B) $150 C) $162 D) $130 E) $127 Answer: E Explanation: The outlay cost in the Burnaby Division is $80 - $3 + $32 + $18 = $127. There is no opportunity cost since Burnaby has idle capacity. Minimum Transfer price = $127. Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-4
33) Mar Company has two decentralized divisions, X and Y. Division X has been purchasing certain component parts from Division Y at $75 per unit. Because Division Y plans to raise the price to $100 per unit, Division X desires to purchase these parts from external suppliers for $75 per unit. The following information is available: Division Y variable cost per unit Division Y annual fixed costs Division Y annual production of parts for Division X
$70 $15,000 1,000 units
If Division X buys from an external supplier, the facilities Division Y uses to manufacture these parts will be idle. Assuming Division Y's fixed costs cannot be avoided, what is the result if Mar requires Division X to buy from Division Y at a transfer price of $100 per unit? Answer: If Mar requires transfers be made at $100 per unit, Division X pays Division Y 1,000 × $100 = $100,000. This transaction is intracompany (interdivisional) in nature (that is, money goes out of one corporate pocket into another corporate pocket). The $100,000 therefore, has no effect on operating company as a whole. The effect of purchasing externally on the operating income of the company as a whole is: Total relevant costs of external purchase 1,000 × $75 $75,000 Deduct total relevant costs of internal purchase: Avoidable costs, 1,000 × $70 $70,000 Opportunity costs to the selling division 0 70,000 Difference in favour of buying internally
$5,000
This analysis shows operating income of the company as a whole is $5,000 higher if Division X buys from Division Y. Given that transfers are required, this conclusion holds regardless of the transfer price used. Performance evaluation of the subunit managers is likely to be affected by the transfer price used. Diff: 2 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-4
34) A company has two divisions. The Bottle Division produces products that have variable costs of $3 per unit. For the current year, sales were 150,000 to outsiders at $5 per unit and 40,000 units to the Mixing Division at 140 percent of variable costs. Under a dual transfer pricing system, the Mixing Division pays only the variable cost per unit. The fixed costs of Bottle Division were $125,000 per year. Mixing sells its finished products to outside customers for $11.50 per unit. Mixing has variable costs of $2.50 per unit in addition to the costs from Bottle. The annual fixed costs of Mixing were $85,000. There were no beginning or ending inventories during the year. Required: What are the operating incomes of the two divisions and the company as a whole for the year? Explain why the company operating income is less than the sum of the two divisions' total income. Answer: Bottle Mixing Company Revenue: External $750,000 $460,000 $1,210,000 Internal* 168,000 0 0 Total $918,000 $460,000 $1,210,000 Variable costs: Incurred Transferred in Total
$570,000 0 $570,000
$100,000 120,000 $220,000
$670,000 0 $670,000
Contribution margin Fixed costs Operating income
$348,000 125,000 $223,000
$240,000 85,000 $155,000
$540,000 210,000 $330,000
*40,000 × $3 × 1.40 = $168,000 The internal sales are included in the company's statement because the company cannot sell to itself. Therefore, it has to adjust $48,000 of dual pricing out of its income. Diff: 2 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-4
35) The Home Office Company makes all types of office desks. The Computer Desk Division is currently producing 10,000 desks per year with a capacity of 15,000. The variable costs assigned to each desk are $300 and annual fixed costs of the division are $900,000. The computer desks sell for $400. The Executive Division wants to buy 5,000 desks at $280 for its custom office design business. The Computer Desk manager refuses the order because the price is below variable cost. The Executive manager argues that the order should be accepted because it will lower the fixed cost per desk from $90 to $60 and will take the division to its capacity, thereby causing operations to be at their most efficient level. Required: a. Should the order from Executive Division be accepted by Computer Desk? Explain why or why not. b. From the perspective of the Computer Desk Division and the company, should the order be accepted if the Executive Division plans on selling the chairs in the outside market for $420 after incurring additional costs of $100 per desk? c. What action should the company president take? Answer: a. Sales $280 Variable costs 300 Contribution margin $(20) The manager should not accept the order because it is below variable costs. It will generate a loss of $100,000 (5,000 units × $(20)). This is a losing proposition in both the short-run and long-run. b. What the Executive Division does with the Desks after receiving them is of no consequence to the Computer Desk Division. However, the division will still object to the transfer price of $280. The company, on the other hand, will encourage the offer because it increases total company operating income by $100,000 (5,000 × ($420 - ($300 + $100))). c. If it wants the Executive Division to have the new business it should arrange a dual pricing system or else have negotiated prices between divisions. Dual pricing would allow the selling division to get a market value for the transfer and the buying division to get some type of cost-plus transfer price. The negotiated price would allow the buying and selling divisions to feel like they had a part in the final price decision. Diff: 3 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Analyzing Objective: LO 22-4
36) Bradford Manufacturing Ltd. manufactures custom metal perforating and fabricating. Its Fabricating Division can transfer the perforated metal components to Bradford's Automotive Division or it can sell its products on the external market. Fabricating currently produces and sells 350,000 units per year to the external market at an average price of $38 per unit. Variable costs of production average $22.50 and fixed costs of $6.50/unit. Fabricating incurs $2.50 of variable selling costs on external sales. Fixed costs are based on the practical capacity of the plant which is 400,000 per year. The Automotive Division is interested in acquiring up to 50,000 units per year. Required: a. From the standpoint of Bradford Manufacturing Ltd., should the units be transferred? Determine the financial benefit or cost of your recommendation. b. Using the general guidelines for transfer pricing, what is the minimum transfer price Fabricating should accept? c. What is the range of acceptable transfer prices? d. Now assume that demand in the external market for the components is expected to increase by 8%. The Automotive Division has negotiated with an external supplier to supply 50,000 units at a price of $34.50/unit. However, if the Automotive Division reduces its volume below the 50,000 unit volume, it must pay $39 per unit. What is the optimum sourcing arrangement for the company?
Answer: a. Yes the units should be transferred. The outlay cost to produce = $22.50 (the selling costs are not incurred on the internal transfer). The Automotive Division would have to pay $38 per unit on the market to obtain the component. Bradford will save $38 - $22.50 or $15.50/unit. On a volume of 50,000, the total savings will be $15.5 × 50,000 = $775,000. b. The minimum transfer price is outlay + opportunity. Opportunity costs are zero since Fabricating has 50,000 units of excess capacity. The minimum transfer price = $22.50. c. The range of acceptable transfer prices is $22.50 - $40.50. The upper boundary recognizes that the Fabricating Division must incur $2.50 of selling costs if it sells externally. d. The new anticipated demand = 350,000 × 1.08 = 378,000 The company's choices are as follows: 1) Source all 50,000 components externally. 2) Source all 50,000 components internally. 3) Transfer the excess capacity of 22,000 and outsource the remaining required 28,000 externally. 1) Source all 50,000 units externally. In this case the cost per unit will be $34.50/unit and the company will have outlay costs of $34.50 × 50,000 units = $1,725,000 2) Source all 50,000 components internally. In this case, the company's outlay costs will be $22.50/unit on 50,000 units or $1,125,000. However, it will also forego the CM on the 28,000 (378,000 - 350,000) that it needs to pull from the external market place. The Unit CM on the external sales = $38.00 - $22.50 - $2.50 = $13. The total lost CM = $364,000 ($13 × 28,000). The total cost of option 2 is then $1,125,000 + $364,000 = $1,489,000. 3) Transfer 22,000 and Outsource the 28,000. In this case, the cost of the units from the internal transfer = 22,000 × $22.50 = $495,000. The remaining 28,000 units must be purchased at $39/unit for a total cost of $1,092,000. This option costs $1,587,000. The optimum course of action for the company is to source all 50,000 units internally. Diff: 3 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Analyzing Objective: LO 22-4
37) Walton Industries has two divisions: Machining and Assembly. The Assembly Division is looking to source 20,000 units annually of specialized component product from Machining Division. The special components have variable costs of $260 per unit in variable production costs. The Machine Products Division has a bid from an outside supplier of $445 per unit. However, to meet the requirements of the Assembly Division, Machining would have to cut back production of an existing product. This product sells for $565 per unit, and requires $369 per unit in variable production costs. Packaging and shipping costs of the existing product are $12 per unit, but these would be slashed by 75% for the specialized component for Assembly. Machining currently sells 120,000 units of the existing product and this volume would have to be reduced by 25% to meet the Assembly Division's demand. Required: Should the transfer take place, and if so, what would be the range of acceptable transfer prices? Answer: The costs to outsource the specialized component equal $445 per unit or $8,900,000 in total for 20,000 units. To produce the order internally, Walton would have to forego production of 30,000 of its existing product (120,000*25%). The existing product has a CM of $565 - $369 - $12 = $184/unit. Total lost CM = $184 × 30,000 units = $5,520,000. The outlay costs for the order are $260 + ($12 × 25%) = $263/unit or $5,260,000 in total. Total costs of internal sourcing = $10,780,000. The company should outsource to save $1,880,000 ($10,780,000 - $8,900,000). Diff: 3 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Analyzing Objective: LO 22-4
38) Payne Ltd. has two divisions. The Compound Division makes QZ54, an industrial compound, which is then transferred to the Processing Division. The Processing Division further processes the QZ54 and sells the final product to customers at $87/kg. Capacity in the Compound Division is 800,000 kg. QZ54 can be obtained on the external market at $50/kg Data regarding the costs per kilogram in each division are presented below: Compound Division Direct material Direct labour Manufacturing overhead*
$8 $12 $28
Processing Division $6 $12 $18
*In the Compound Division the variable overhead is 80% of the total, and in Processing variable overhead represents 65% of the total. Fixed overhead rates are based on capacity of 800,000 kg. in each division. In addition to the manufacturing costs, the Compound Division would incur $2 per kilogram of selling costs which would be avoided on internal transfers. Similarly the Processing Division would avoid $3/kg. of ordering costs on internal purchases. Required: a. Calculate the operating incomes for each division assuming 800,000 kg. of QZ54 are transferred and the company uses a market transfer price. b. Calculate the operating incomes for each division assuming 800,000 kg. of QZ54 are transferred and the company uses a transfer pricing policy based on 125% of absorption manufacturing cost. c. Comment on your calculations in a and b in terms of the respective division managers preferences. d. Should the company transfer its 800,000 kg. assuming the Compound Division can sell all of its output on the external market?
Answer: a. Market based Transfer Price Selling price Direct material Direct labour Variable overhead Fixed overhead Transferred in costs Operating income/unit Volume Total Operating income
Compound $50.00 $8.00 $12.00 $22.40 $5.60 $0 $2.00 800,0000 $1,600,000
Processing $87.00 $6.00 $12.00 $11.70 $6.30 $50.00 $1.00 800,000 $800,000
b. Compound absorption manufacturing cost = $8 + $12 + $28 = $48 $48 × 1.25 = $60 Compound Processing Selling price $60.00 $87.00 Direct material $8.00 $6.00 Direct labour $12.00 $12.00 Variable overhead $22.40 $11.70 Fixed overhead $5.60 $6.30 Transferred in costs $0 $60.00 Operating income/unit $12.00 ($9.00) Volume 800,0000 800,000 Total Operating income $9,600,000 ($7,200,000) c. The Processing Manager will be in favour of the market based transfer price as income will be higher under this method. On the other hand, the Compound Manager will favour the cost based transfer price as it boosts that division's operating income. d. Outlay costs to manufacture the compound: $8 + $12 + $22.40 = $42.40 CM on sale of the intermediate product: $50 - $42.40 - $2.00 = $5.60 Outlay costs to manufacture the final product: $8 + $12 + $22.40 + $6 + $12 + $11.70 = $72.10 CM on final product if manufactured = $87.00 - $72.10 = $14.90 CM on final product if compound is purchased = $87 - $50 - $3 - $6 - $12 - $11.70 = $4.30 Total CM if intermediate product is sold on the external market = $5.60 × 800,000kg = $4,480,000 Total CM on final product with purchased compound = $4.30 × 800,000 = $3,440,000 Total CM = $4,480,000 + $3,440,000 = $7,920,000 CM from manufacture of compound and transfer to Processing: $14.90 × 800,000 = $11,920,000 Company should transfer the compound. Diff: 3 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Analyzing Objective: LO 22-4
39) The Micro Division of Silicon Computers produces computer chips that are sold to the Personal Computer Division and to outsiders. Operating data for the Micro Division are as follows:
Sales: 300,000 chips at $10 200,000 chips at $12 Variable expenses at $4 Contribution margin Fixed cost (allocated on units) Operating income
Internal Sales $3,000,000 1,200,000 $1,800,000 1,500,000 $300,000
External Sales $2,400,000 800,000 $1,600,000 1,000,000 $600,000
The Personal Computer Division has just received an offer from an outside supplier to furnish chips at $8.60 each. The manager of Micro Division is not willing to meet the $8.60 price. She argues that it costs her $9.00 to produce and sell each chip. Sales to outside customers are at a maximum of 200,000 chips. Required: a. Verify the Micro Division's $9.00 unit cost figure. b. Should the Micro Division meet the outside price of $8.60? Explain on a per unit basis. c. Prepare a Micro Division income statement for the sale to the Personal Computer Division assuming that the unit selling price of $8.60 is agreed. Comment on the allocation of fixed costs. Answer: a. Variable costs $4.00 Fixed costs (($1,500,000 + $1,000,000)/500,000 units) 5.00 Total unit costs $9.00 b. Yes, because the contribution margin is positive ($8.60 - $4.00 = $4.60). If it loses the internal business the other sales would have to absorb the fixed costs which would force even higher external prices. The Micro Division manager does not have much bargaining power since the external sales are already at a maximum. c. Sales (300,000 × $8.60) Variable costs (300,000 × $4) Contribution margin Fixed costs (300,000 × $5.00) Operating income
$2,580,000 1,200,000 $1,380,000 1,500,000 $(120,000)
Internal sales will not show a profit. This assumes the fixed costs are still allocated at $5.00 per unit. These costs are sunk and should not be considered in the decision. Diff: 3 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-4
40) The Assembly Division of Canadian Car Company has offered to purchase 90,000 batteries from the Electrical Division for $104 per unit. At a normal volume of 250,000 batteries per year, production costs per battery are as follows: Direct materials Direct manufacturing labour Variable factory overhead Fixed factory overhead Total
$40 20 12 40 $112
The Electrical Division has been selling 250,000 batteries per year to outside buyers at $136 each. Capacity is 350,000 batteries per year. The Assembly Division has been buying batteries from outside sources for $130 each. Required: a. Should the Electrical Division manager accept the offer as is, make a counter offer, or reject the offer? Explain. b. From the company's perspective, will the internal sales be of any benefit? Explain Answer: a. Sales to Assembly $104 Variable costs ($40 + $20 + $12) 72 Contribution margin $32 Because the Electrical Division is not at capacity, it should sell to the Assembly Division up to 100,000 units at $104. This will add $2,880,000 (90,000 × $32) at the current level to its operating income without reducing its outside sales. b. The internal sales would be beneficial to the company because the internal variable manufacturing costs of $72 per battery are less than the external price of $130 currently being paid by Assembly Division. The company would be saving $5,220,000 (90,000 × ($130 - $72)) per year. Diff: 3 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-4
41) River Road Paint Company has two divisions. The Production Division produces base colours used by the Mixing Division. The Production Division had external sales of 200,000 units at $8.00 per unit; and, transferred 60,000 units to the Mixing Division. The variable costs in the Production Division were $5 per unit and the fixed costs were $520,000 based on a practical capacity of 260,000 units. The Mixing Division sells its finished product to customers for $11.20 per unit. The Mixing Division had variable costs of $2.50 per unit and the annual fixed costs were $150,000. There were no beginning or ending inventories during the year. Required: Prepare the general journal entry for the transfer assuming that a dual pricing arrangement has been agreed to that requires the Mixing Department to pay the variable cost and the Production Department to receive the market price. Answer: Dr. Mixing Division Cost(60,000 × $5) 300,000 Dr. Corporate Cost Account 180,000 Cr. Production Division Revenue (60,000 × $8) 480,000 Diff: 2 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-4
42) The Cumberland Paint Company has two divisions. The Production Division produces base colours used by the Mixing Division. The Production Division had external sales of 300,000 units at $9.00 per unit; and, transferred 50,000 units to the Mixing Division. The variable costs in the Production Division were $6 per unit and the fixed costs were $520,000 based on a practical capacity of 260,000 units. The Mixing Division sells its finished product to customers for $11.20 per unit. The Mixing Division had variable costs of $2.50 per unit and the annual fixed costs were $150,000. There were no beginning or ending inventories during the year. Required: Prepare the general journal entry for the transfer assuming that a dual pricing arrangement has been agreed to that requires the Mixing Department to pay the variable cost and the Production Department to receive the market price. Answer: Dr. Mixing Division Cost(50,000 × $6) 300,000 Dr. Corporate Cost Account 150,000 Cr. Production Division Revenue (50,000 × $9) 450,000 Diff: 2 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-4
43) Sonora Manufacturing Inc. designs and builds off-road vehicles. The Frame Division builds frames that are used by the Assembly Division, and also sells frames externally to companies that produce vehicles such as golf carts. The Frame Division has an annual practical capacity of 5,000 units; a theoretical capacity of 7,300 units; and, a master-budget capacity of 4,000 units. The master-budget capacity is composed of 2,500 units produced for internal requirements, and the remainder sold externally for $800 per unit. The Frame Division has $150,000 of fixed costs. The variable costs for the units produced for internal purposes are $900 per unit, and for external sales $475. Sonora Manufacturing Inc. company policy is that internal transfers are to be done at full cost. The Frame Division has been approached by a golf cart manufacturer who has offered to purchase 3,000 frames as a one-time special order for $650 per unit. This is an all or none order. The Assembly Division can contract out the production of frames for $1,050 per unit. Required: a. Determine Frame Division's full cost per unit for the frames produced for internal use and the frames that a produced for external sales. Justify your choice of denominator activity level when calculating the fixed cost per unit. b. Using the general guidelines for transfer pricing, what is the minimum transfer price the Frame Division should accept? Hint: There will be separate minimum transfer prices for the existing external customers and the one-time special order. c. From a corporate point of view should the one-time special offer be accepted. Justify your answer on quantitative and qualitative considerations. Answer: a. Full cost per unit calculations Internal External Frame Frame Variable cost $ 900 $ 475 Fixed cost* 30 30 Full cost $ 930 $ 505 * $150,000 divided by practical capacity of 5,000 units Using practical capacity includes the cost of idle capacity in the fixed overhead cost rate. This allows for the identification of the production-volume variance. For internal performance measurement and product pricing this denominator level is superior to others at predicting recoverable costs. The drawback is that neither IFRS/ASPE or the CRA accept this denominator for external reporting purposes. Using master-budget capacity is appropriate for evaluating the marketing managers performance and is the method required by the CRA. The master-budget capacity level has the disadvantages of: 1.) potentially creating a downward demand spiral; and, 2.) not being useful for evaluating production managers. Theoretical capacity creates a large production-volume variance that is not useful in assessing the efficiency of the production. As the Frame Division is predominantly an internal supply division the most appropriate denominator activity level is practical capacity.
b.
General guideline for transfer-pricing situations
The contribution margin on the one-time special order is $175 ($650 - $475); on the sales to the existing customers $325 ($800 - 475). Both of these are larger than the incremental cost from the Assembly Division contracting out, $150 ($1,050 - $900). Therefore, qualitative factors notwithstanding both sets of customers will be satisfied before the Assembly Division. Minimum transfer price = $900 + ($800 - $475) = $1,225, in relation to units sold to existing external customers. Minimum transfer price = $900 + ($650 - $475) = $1,075, in relation to the units sold to the one-time special order. c.
Accept or reject the one-time special order
If only financial consideration applies then the order should be accepted as it has an overall positive contribution of $125 per unit ($650 - $475 - $50). However, qualitative factors will also need to be considered. For example, the effect on existing customers upon learning about the discounted price, the loss of manufacturing expertise and quality control on the frames for the Assembly Division. Diff: 3 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Analyzing Objective: LO 22-4; 9-1; 9-2
44) What is the role of unused capacity within the selling division in the determination of a negotiated transfer price to another division? Answer: Unused capacity within the selling division affects the opportunity cost of an internal transfer. If there is unused capacity within a selling division, there are no opportunity costs involved in an internal transfer price situation. In this situation, the transfer price is likely to be in the lower range, covering only the outlay costs involved in the production of the product. Diff: 3 Type: ES CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-4
22.5 Analyze income tax considerations in multinational transfer pricing. 1) Additional factors that arise in multinational transfer pricing include tariffs and customs duties levied on imports of products into a country. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-5
2) It is possible to increase the overall after-tax profit of a multinational corporation by adjusting transfer prices. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-5
3) Sales between multi-national corporation subunits are termed arm's-length transactions. Answer: FALSE Explanation: Sales between corporate subunits are called sales between related parties. Diff: 1 Type: TF CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-5
4) A Canadian company has subsidiaries in France, England, Canada, and in the USA. The company is somewhat vertically-integrated in that the Canadian subsidiary sells some of its output to the USA subsidiary which further processes the material. If the market is fully-competitive, which price is best for goal congruence? A) market-based price B) full cost no markup C) negotiated price D) distress price E) either market-based or full cost Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-2, 5
5) A Canadian company has subsidiaries in France, England, Canada, and in the USA. The company is somewhat vertically-integrated in that the Canadian subsidiary sells some of its output to the USA subsidiary. Which further processes the material. If the market is fully-competitive, which transfer price would likely be used, given Canada Revenue Agency's published policy on transfer pricing? A) market-based price B) full cost plus a markup C) negotiated price D) distress price E) either market-based or full cost Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-5
6) Which of the following types of taxes are NOT relevant to international transfer pricing? A) income taxes B) payroll taxes C) customs duties D) value-added taxes E) property taxes Answer: E Diff: 1 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-5
7) Full-cost transfer prices will maximize overall corporate income when transferring products from
divisions operating A) in a low tax area to a high tax area. B) in a high tax area to a low tax area. C) between high tax areas. D) between low tax areas. E) in a high tax area to a tax exempt area. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-5
8) A(n) ________ is a binding agreement between a multinational and the taxing authority to obtain approval for a specific transfer price for a number of years. A) Tax Treaty B) Advanced Transfer Pricing Arrangement C) Revenue Ruling D) Dual Price Ruling E) International Transfer Price Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-2, 5
9) Which of the following best describes an Advanced Pricing Agreement (APA)? A) It is an agreement between a corporation and a foreign subsidiary as to what method, cost or marketbased, will be used to set a transfer price for products. B) It is a binding agreement between a foreign government's taxing authority, the CRA, and a U.S. based corporation to help avoid disputes related to transfer pricing. C) It is an agreement under CRA code that requires a company to utilize market-based transfer prices and to document them for tax return purposes. D) It is a binding agreement between the CRA and a corporation to help avoid disputes related to transfer pricing. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-5
10) Global Giant, a multinational corporation, has a producing subsidiary in a low tax rate country and a marketing subsidiary in a high tax country. If Global Giant wants to minimize its worldwide tax liability, we would expect Global Giant to A) stop producing in the low tax rate country. B) stop marketing in the high tax rate country. C) establish a low transfer price when the producing unit sells to the marketing unit. D) establish a high transfer price when the producing unit sells to the marketing unit. E) be indifferent as to its transfer pricing policy. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-5
11) The resale price method of transfer pricing requires a company to A) understand the value added functions of each related party. B) transfer at the full cost of the product plus a markup. C) determine the market-based price. D) calculate the arm's-length resale price. E) calculate the return on assets. Answer: D Diff: 3 Type: MC CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Remembering Objective: LO 22-5
12) Empire Ltd. has two divisions. Division C is located in Canada where the income tax rate is 40%. Division K is located in Korea where the income tax rate is 30%. Division C produces an intermediate product at a variable cost of $100 per unit and transfers the product to Division K where it is finished and sold for $500 per unit. Variable costs in Division K are $80 per unit. Fixed costs are $75,000 per year in Division C and $90,000 per year in Division K. Assume 1,000 units are produced and transferred annually and the minimum transfer price allowed by the Canadian tax authorities is the variable cost. Also assume operating income in each country is equal to taxable income. Required: a. What transfer price should be set for Empire to minimize its total income taxes? Show your calculations. b. If Empire desires to minimize its total income taxes, calculate the amount of tax liability in each country. Answer: a. To minimize its total income taxes, the company should report no operating income in Canada, the country with the higher income tax rate. This outcome occurs if the transfer price is set at full cost: $100 + ($75,000 /1,000) = $175 per unit. b. Using the $175 transfer price from part (a), the company's tax liability in Canada is $0 and in Korea is $46,500: Division C (Canada) Revenues 1,000 × $175 $175,000 Variable costs 1,000 × $100(100,000) Fixed Costs (75,000) Operating income 0 Income tax 40% 0 Net income $0
Division K (Korea) Revenues 1,000 × $500 $500,000 Transferred-in costs (175,000) Variable costs 1,000 × $80 (80,000) Fixed Costs (90,000) Operating income $155,000 Income tax 30% (46,500) Net income $108,500
Diff: 3 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-4; 22-5
13) Dominion Ltd. has two divisions. Division C is located in Canada where the income tax rate is 40%. Division I is located in Ireland where the income tax rate is 20%. Division C produces an intermediate product at a variable cost of $90 per unit and transfers the product to Division I where it is finished and sold for $400 per unit. Variable costs in Division I are $60 per unit. Fixed costs are $75,000 per year in Division C and $20,000 per year in Division I. Assume 1,000 units are produced and transferred annually and the minimum transfer price allowed by the Canadian tax authorities is the variable cost. Also assume operating income in each country is equal to taxable income. Required: a. What transfer price should be set for Empire to minimize its total income taxes? Show your calculations. b. If Empire desires to minimize its total income taxes, calculate the amount of tax liability in each country. Answer: a. To minimize its total income taxes, the company should report no operating income in Canada, the country with the higher income tax rate. This outcome occurs if the transfer price is set at full cost: $90 + ($75,000 /1,000) = $165 per unit. b. Using the $165 transfer price from part (a), the company's tax liability in Canada is $0 and in Ireland is $46,500: Division C (Canada) Revenues 1,000 × $165 $165,000 Variable costs 1,000 × $90 (90,000) Fixed Costs (75,000) Operating income 0 Income tax 40% 0 Net income $0
Division K (Ireland) Revenues 1,000 × $400 $400,000 Transferred-in costs (165,000) Variable costs 1,000 × $60 (60,000) Fixed costs (20,000) Operating income $155,000 Income tax 20% (31,000) Net income $124,000
Diff: 3 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-4; 22-5
14) Stavanger Ltd. is a Canadian company with a fully owned subsidiary in Ireland. The Irish subsidiary produces a component for off shore gas compressors that are sold in Canada. The components have a variable cost of 1,700 Euros and a full cost of 2,100 Euros. The 2,000 components required can be purchased in Canada for $3,500. Assume the minimum transfer price allowed by the Canadian tax authorities is the variable cost and the maximum is the market value. Also assume operating income in each country is equal to taxable income. One Euro is worth $1.45 Canadian. The marginal tax rate in Canada is 25% and in Ireland 12.5%. Required: a. What transfer price should be set for Stavanger Ltd. to minimize its total income taxes? Show your calculations. b. If Stavanger Ltd. desires to minimize its total income taxes, calculate the amount of tax liability in each country in Canadian dollars. Answer: a. To minimize its total income taxes, the company should report no operating income in Canada, the country with the higher income tax rate. This outcome occurs if the transfer price is set at the market rate of $3,500 per unit. b. Using the $3,500 transfer price from part (a), the company's tax liability in Canada is $0 and in Ireland is $: Irish Subsidiary Revenues (2,000 × $3,500 ) $7,000,000 Full cost (2,000 × $3,045) (6,090,000) Operating income $910,000 Income tax 12.5% (113,750) Net income $796,250
Canadian Parent Revenues 2,000 × $3,500 $7,000,000 Transferred-in costs (7,000,000) Operating income $0 Income tax 25% (0) Net income $0
Diff: 3 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Applying Objective: LO 22-5
15) Hendricks Ltd. of Calgary manufactures and sells computers. The Manufacturing Division is located in China and transfers 75% of its output to the Assembly Division in the Philippines. The balance of the product is sold in the local market at 2,100 yuan/unit. The Philippines division sells 20% of its output in the local market at 31,500 pesos/unit, with the balance shipped to Calgary. The Calgary operation packages the units and sells the final product at $1,900 Canadian per unit. The following budget data are available: China Philippines Variable cost 490 yuan 7,650 pesos Fixed cost 700 yuan 9,000 pesos
Canada $190 $350
Exchange rates are: $1 Canadian = 7 yuan and $1 Canadian = 45 pesos Tax rates are 45% in China, 20% in the Philippines and 40% in Canada. Income taxes are not included in the calculation of cost-based transfer prices. Assume that Hendricks does not pay Canadian tax on amounts already taxed in foreign jurisdictions. Take each calculation to 2 decimal places. Required: The company has determined that it may transfer units at 250% of variable cost or at market and comply with all existing tax legislation. Which transfer pricing method should the company pursue? Support your recommendation with appropriate calculations.
Answer: First translate the foreign currencies into Canadian dollars:
Variable cost Fixed cost
China 490 yuan = $70 700 yuan = $100
Philippines 7,650 pesos = $170 9,000 pesos = $200
Canada $190 $350
Exchange rates are: $1 Canadian = 7 yuan and $1 Canadian = 45 pesos Selling price in China = 2,100/7 = $300 Selling price in the Philippines = 31,500/45 = $700 Market Based Transfer Price: Market Selling price Divisional variable costs Transferred in costs Contribution margin Fixed Costs Operating Income Tax rate Taxes Net Income
China $300.00 ($70.00) $0.00 $230.00 $100.00 $130.00 45% ($58.50) $71.50
Philippines $700.00 ($170.00) ($300.00) $230.00 $200.00 $30.00 20% ($6.00) $24.00
Canada $1,900.00 ($190.00) ($700.00) $1,010.00 $350.00 $660.00 40% ($264.00) $396.00
Total company net income = $71.50 + $24.00 + $396.00 = $491.50/unit 250% Variable Cost: Based Transfer Price: Transfer price from China = $70 × 2.5 = $175 Transfer price from the Philippines = ($175 + $170) × 2.5 = $862.50 250% Variable Cost Selling price Divisional variable costs Transferred in costs Contribution margin Fixed Costs Operating Income Tax rate Taxes Net Income
China $175.00 ($70.00) $0.00 $105.00 $100.00 $5.00 45% ($2.25) $2.75
Philippines $862.50 ($170.00) ($175.00) $517.50 $200.00 $317.50 20% ($63.50) $254.00
Canada $1,900.00 ($190.00) ($862.50) $847.50 $350.00 $497.50 40% ($199.00) $298.50
Total company net income = $2.75 + $254.00 + $298.50 = $555.25 The company should pursue the 250% of Variable Cost transfer price as it results in higher net income of $63.75 per unit ($555.25 - $491.50) Diff: 2 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Analyzing Objective: LO 22-5
16) Clark Industries Ltd. manufactures monochromators that are used in a variety of applications. The Monochromator Division (M Division) sells its monochromators both internally and externally. It is operating at 80% of its 250,000 unit capacity and internal sales account for approximately 20% of its current sales volume. Internally the monochromators are transferred into the Aerospace Division (A Division) at a transfer price of $11,250 each. Variable production costs are the same for internal and external sales. The income statement for the M Division is presented below: Sales Variable costs Contribution Margin Fixed Costs Operating Income
$2,850,000,000 $900,000,000 $1,950,000,000 $1,360,000,000 $590,000,000
The A Division uses one component in the production of its final product that sells for $75,000/unit. Other variable costs in the A Division are 40% of sales. and fixed costs per unit at its current capacity of 40,000 units are $17,250. The Aerospace Division is operating at its full capacity of 40,000 units and is evaluating whether it should invest to increase capacity. The investment would cost $900,000,000 and would have a useful life of 3 years. The equipment could be sold for $800,000 at the end of its useful life. For tax purposes it would be sold on January 1 of year 4. The machine would be used to manufacture a variation of its current product with the same transfer price. This new product would sell for $68,000 per unit. The variable cost ratio will be 45% of the selling price. The additional capacity of the new machine would be 14,000 units. It would qualify for a 30% CCA rate and the company would continue to have assets in the pool. Required: a. Evaluate the current transfer pricing policy from the standpoint of each division manager as well as the company as a whole. b. Using net present value (NPV) analysis, would the A Division manager want to invest in the new equipment if the required rate of return is 12% and the tax rate is 25%? c. If the investment is evaluated from a corporate perspective using NPV analysis and the 12% discount rate, does the decision change? Explain. Answer: a. The M Division currently charges the Aerospace Division $11,250 on the transfer. An analysis of M Division's income statement reveals that this price is below both market price and full absorption cost. The total sales of the division are $2,850,000,000 based on 200,000 units (80% of 250,000). The internal transfers account for revenue of $450,000,000 (200,000*20%*$11,250). External sales are therefore $2,400,000,000 for 160,000 units (200,000*80%). The market price of the monochromators is $15,000 ($2,400,000,000/160,000). The variable costs of the monochromator per unit are $900,000,000/200,000 or $4,500. Fixed costs per unit are $1,360,000,000/200,000 or $6,800. In evaluating the transfer from the M Division manager, he/she would believe the A Division is getting a good deal. The transfer price of $11,250 is $3,750 or 25% below the market price of $15,000 and is below full absorption cost of $11,300 ($4,500 + $6,800). The transfer price appears to be based on 250% of variable cost ($11,250/$4,500 = 2.5).
On the other hand, the A Division manager would argue that since the M division is not operating at capacity, the M Division could transfer at its outlay cost of $4,500. From the standpoint of the company as
a whole, the transfer should take place because the final product has a positive CM ($75,000 - $4,500 - (.40 × $75,000)) = $40,500 and covers its fixed costs of $17,250/unit. The transfer price does not affect the company's bottom line unless it motivates the managers to take actions that are not in the best interest of the company. b. The variable costs of the new product are $30,600 ($68,000 × 45%). Given the existing transfer price of $11,250. from A Division's perspective the CM is $68,000 - $11,250 - $30,600 = $26,150/unit. The total annual CM on sales of 14,000 units = $366,100,000 before tax or $274,575,000 after tax. Initial investment Annual cash flows $274,575,000PMT 3n 12i Salvage $800,000FV 3n 12i Tax Shield on investment Lost Tax Shield Net present value
($900,000,000) 659,482,821 569,424 152,104,592 (101,683) ($87,945,026)
PV tax shield: = [($900,000,000 × 30% × 25%)/(30% + 12%)] × [(1 + (0.5 × 12%))/(1 +12%)] minus [(800,000 × 30% × 25%)/(30% + 12%)] × [1/(1 + 12%) 3] = =
$152,104,.591.84 minus $101,682.89 $152,002,908.95
Division A manager would not want to invest in the new equipment as it has a negative NPV. c. From the standpoint of the company, the relevant CM should be $68,000 - $4,500 - $30,600 or $32,900 per unit. This would yield a total CM of $32,900 × 14,000 = $460,600,000 before tax or $345,450,000 after tax. This would increase the PV of the annual cash flows to $829,712,612 or an increase of $170,229,791. This would result in a positive NPV of the investment of $82,284,765 ($170,229,791-$87,945,026). The transfer pricing policy is leading to the wrong decision in this case. Diff: 3 Type: SA CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Analyzing Objective: LO 22-5; 21-3
17) What are some of the factors, other than income taxation, that companies should consider when setting international transfer prices? Answer: In evaluating international transfer pricing policies considerations should be given to customs and duties, foreign currency exchange rates and fluctuations, currency repatriation restrictions as well as the legal and political environments of the various countries. The transfer price affects the reported profitability in each geographic territory and can affect business relations including the relationships with the governments, suppliers, customers, employees. Diff: 2 Type: ES CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-5
18) A company has a plant in a high tax jurisdiction that produces products for a facility in a low tax jurisdiction. Suggest a strategy, including transfer prices, which will result in the lowest tax for the overall corporation. Answer: The overall corporate objective would be to report high costs and low revenue in the high tax jurisdiction, and low costs and high revenue in the low tax jurisdiction. In this situation, a low transfer price from the high tax jurisdiction facility will allocate more profit to the low tax jurisdiction. This will decrease total taxes paid by the corporation. Diff: 2 Type: ES CPA Competencies: Chapter 22 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions, 3.4.1 Evaluates sources and drivers of revenue growth, 3.7.1 Analyzes the implications of management incentive schemes and employee compensation methods Skill: Understanding Objective: LO 22-5
Cost Accounting: A Managerial Emphasis - Cdn. Ed., 9e (Datar) Chapter 23 Multinational Performance Measurement and Compensation 23.1 Analyze and evaluate alternative measures of financial performance. 1) Many common performance measures rely on internal financial and accounting information. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
2) Some companies present financial and non-financial performance measures for various organization units in a single report called the financial performance scorecard. Answer: FALSE Explanation: balanced scorecard Diff: 2 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
3) In establishing performance measures and compensation policy, the issues are interdependent and the decision maker may proceed through a series of decisions several times before selecting the performance measure(s). Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
4) ROI, residual income, and economic value-added, can be used as performance measures. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
5) There are three basic ingredients in profitability: investment, revenue, and debt. Answer: FALSE Explanation: investment, revenue, costs Diff: 2 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
6) Return on investment highlights the benefits that managers can obtain by reducing their investments in current or fixed assets. Answer: TRUE Explanation: Some firms use total assets in the denominator; others use total assets minus current liabilities. Diff: 2 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
7) Imputed costs are costs recognized in particular situations that are not regularly recognized by accrual accounting procedures. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
8) The imputed cost of an investment is the required rate of return times the investment. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
9) Residual income is income plus an imputed interest charge for the investment. Answer: FALSE Explanation: "minus" the imputed interest charge Diff: 1 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
10) Economic value added is after-tax operating income minus (required rate of return times total assets). Answer: FALSE Explanation: ...minus (w/a cost of capital × (total assets - current liabilities) Diff: 3 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
11) The first step in designing accounting based performance measures is to choose performance measures that align with top management's financial goals. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
12) Return on investment is also called the accrual accounting rate of return. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
13) Investment turnover is calculated by dividing investment by revenues. Answer: FALSE Explanation: Investment turnover is calculated by dividing revenues by investment. Diff: 2 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
14) Return on sales is calculated by dividing net income by revenues. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
15) The three alternatives for increasing return on investment include increasing assets such as receivables, increasing revenues, and decreasing costs. (In all cases assume that all other items stay the same.) Answer: FALSE Explanation: Increasing receivables does not increase return on investment. Diff: 2 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-1
16) Most Canadian and U.S. companies use the Sarbanes-Oxley Act (SOX) as a framework for evaluating their internal control. Answer: FALSE Explanation: Use the new internal control framework issued in 2013 by COSO (Committee on Sponsoring Organizations of the Treadway Commission). Diff: 2 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
17) Pay for performance measures in the best interests of shareholders would, logically, exclude longterm achievement and deferred compensation. Answer: FALSE Explanation: "include" Diff: 2 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-1
18) A report that measures financial and nonfinancial performance measures for various organization units in a single report is called a (n) A) balanced scorecard. B) financial report scorecard. C) imbalanced scorecard. D) unbalanced scorecard. E) non-financial scorecard. Answer: A Diff: 1 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
19) An example of a performance measure with a long time horizon is ________. A) direct materials efficiency variances B) overhead spending variances C) the number of new patents developed D) the quality of room service Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
20) The average number of repeat visits to a spa unit is a ________ measure on a balanced scorecard. A) customer perspective B) financial perspective C) learning-and-growth perspective D) internal-business-process perspective Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
21) Assume you are evaluating a manufacturing company. Match the various organizational activities and concepts with the performance measures listed. Some items may have more than one match. Activities: 1. Change in revenues 2. Cycle time 3. Economic order quantity 4. Manufacturing defects 5. Market share 6. New products 7. On-time delivery 8. Operating income 9. Product reliability 10. Time-to-market Performance measure: ________
a. Profitability
________
b. Customer satisfaction
________
c. Innovation
________ Answer: 1, 8
d. Efficiency, quality, and time a.
Profitability
5, 7, 9
b.
Customer satisfaction
6, 10
c.
Innovation
2, 3, 4, 7, 9, 10
d. Efficiency, quality, and time
Diff: 2 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
22) Bouvous Corp has two regional offices. The data for each are as follows:
Revenues Operating assets Net operating income
Maryland $293,000 2,900,000 1,200,000
New Jersey $298,000 4,700,000 1,200,000
What is the return on investment for the New Jersey Division? A) 6.3% B) 25.5% C) 41.4% D) 19.2% Answer: B Explanation: ROI = $1,200,000 / $4,700,000 = 25.5% Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
23) Which of the following is the LEAST typical balanced scorecard measure? A) customer satisfaction measures B) direct materials measures C) innovation measures D) time measures E) profitability measures Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-1
24) What the first step in selecting appropriate performance measures? A) Decide on the level of relevance and urgency of feedback. B) Decide on measurement alternatives for each performance measure. C) Decide on components n each performance measure. D) Decide on criteria targets against which to measure performance. E) Identify and align accounting performance measures with financial goals. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
25) Deciding if all subunits should have the same required rate of return is an example of A) deciding on the level of relevance and urgency of feedback. B) deciding on measurement alternatives for each performance measure. C) deciding on components n each performance measure. D) deciding on criteria targets against which to measure performance. E) identifying and aligning accounting performance measures with financial goals. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-1
26) Which of the following approaches include investment in the performance measure? A) ROI and RI B) ROI and ROS C) ROS and RI D) EVA and ROI E) ROI, EVA, and RI Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-1
27) Which of the following incorporates the amount of investment into the performance measure? A) dividend income B) residual income C) return on investment D) both residual income and return on investment E) both dividend income and residual Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-1
Use the information below to answer the following question(s). Light Publishing has two divisions which operate autonomously. Their results for the past year were as follows:
Sales Contribution margin Operating income Investment base (total assets)
Toronto $5,000,000 2,500,000 2,000,000 6,500,000
Vancouver $6,000,000 3,000,000 3,500,000 7,500,000
The company's desired rate of return is 15%. 28) What are the respective return on investment ratios for the Toronto and Vancouver divisions? A) 0.04; 0.58 B) 0.31; 0.47 C) 0.38; 0.40 D) 0.77; 1.25 E) 0.38; 0.45 Answer: B Explanation: Toronto: $2,000,000/$6,500,000 = 0.31 Vancouver: $3,500,000/$7,500,000 = 0.47 Diff: 1 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
29) What are the respective residual incomes for the Toronto and Vancouver divisions? A) $975,000; $1,125,000 B) $1,025,000; $1,125,000 C) $1,025,000; $2,375,000 D) $2,375,000; $1,025,000 E) $1,075,000; $1,125,000 Answer: C Explanation: Toronto Vancouver Investment base $6,500,000 $7,500,000 Minimum rate × 0.15 × 0.15 Minimum return $975,000 $1,125,000 Income Minimum return Residual Income
$2,000,000 975,000 $1,025,000
$3,500,000 1,125,000 $2,375,000
Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
30) Which of the following is TRUE concerning the ROI performance measure? A) ROI is based on cash flow. B) Is also called the accounting rate of return. C) Some companies use net assets (assets minus liabilities) as the numerator. D) The usual formulation is [total assets/ income ]. E) Net assets are sometimes used as the denominator, and net assets are sometimes used as the numerator. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-1
31) For the past year, Badger Company had a net income of $175,000. What is the ROI if the investment is $25,000? A) 0.142 B) 2.500 C) 5.140 D) 7.000 E) 5.450 Answer: D Explanation: $175,000/$25,000 = 7 Diff: 1 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
32) The most popular approach to incorporating the investment base into a performance measure is A) income on return. B) opportunity cost. C) return on investment. D) residual income. E) economic value added. Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
33) Pyramids Company provided the following information for the year that just ended. Revenue Operating assets Net operating income Total assets
$200,000 70,000 110,000 104,500
What is the return on investment? A) 2.25 B) 1.57 C) 1.05 D) 0.59 E) 0.55 Answer: C Explanation: $110,000/$104,500 = 1.05 Diff: 1 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
Use the information below to answer the following question(s). Thacker Company has two regional offices. The information for each is as follows:
Revenues Total assets Net operating income
Edmonton $290,000 $2,900,000 $600,000
Sarnia $298,000 $4,500,000 $1,200,000
34) What is the Edmonton Division's return on investment? A) 0.21 B) 0.27 C) 0.48 D) 2.06 E) 0.25 Answer: A Explanation: $600,000/$2,900,000 = 0.21 Diff: 1 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
35) What is the return on investment for the Sarnia division? A) 0.21 B) 0.27 C) 0.48 D) 2.06 E) 0.25 Answer: B Explanation: $1,200,000/$4,500,000 = 0.27 Diff: 1 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
36) Keeping all other factors constant, which of the following would NOT cause an increase in the return on investment? A) actions that increase revenues B) actions that increase liabilities C) actions that decrease investments D) actions that decrease expense E) actions that increase sales Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-1
37) An automotive dealership, with a book value of $3,000,000, and total assets of $5,000,000, has a long history of earning 18%. Last year, the company earned $900,000. The owner is considering acquiring another dealership in a nearby town. If the expansion increases income by 50%, what is the maximum amount of investment the owner can make in the new dealership in order to maintain his desired 18% return? A) $1,350,000 B) $9,000,000 C) $5,000,000 D) $3,000,000 E) $2,500,000 Answer: E Explanation: $450,000/investment = .18 (.18) × investment = $450,000 investment = $450,000/.18 investment = $2,500,000 Diff: 3 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 23-1
38) The DuPont method of profitability analysis is A) TA - CL/operating income. B) ROI × WACC. C) [revenue/investment] × [income/revenue]. D) ROI/WACC. E) ROI × RI. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
Use the information below to answer the following question(s). The top management at Montreal Company, a manufacturer of computer games, is attempting to recover from a flood, which destroyed some of its accounting records. The main computer system was also severely damaged. The following information was salvaged:
Sales Net operating income Total assets Return on investment Return on sales Investment turnover
Alpha Division Beta Division Gamma Division $2,500,000 (a) $1,150,000 $1,500,000 $650,000 $575,000 (b) (c) $766,667 0.25 0.15 (d) (e) 0.10 0.5 (f) (g) 1.5
39) What is the value of the total assets belonging to the Alpha Division? A) $4,333,333 B) $6,000,000 C) $6,500,000 D) $7,151,800 E) $6,434,434 Answer: B Explanation: $1,500,000/.25 = $6,000,000 Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
40) What is the value of the total assets belonging to the Beta Division? A) $4,333,333 B) $5,952,380 C) $6,500,000 D) $7,151,800 E) $4,654,252 Answer: A Explanation: .15 = $650,000/X X = $4,333,333 Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
41) What is the Alpha Division's return on sales? A) 0.25 B) 0.42 C) 0.60 D) 0.75 E) 0.80 Answer: C Explanation: $1,500,000/$2,500,000 = 0.60 Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
42) What were the sales for Beta Division? A) $4,333,333 B) $5,952,380 C) $6,500,000 D) $7,151,800 E) $6,326,787 Answer: C Explanation: 0.10 = $650,000/X X = $6,500,000 Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
43) What is the Gamma Division's return on investment? A) 0.25 B) 0.42 C) 0.60 D) 0.75 E) 0.80 Answer: D Explanation: 0.5 × 1.5 = 0.75 or $575,000/$766,667 = 0.75 Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
44) What is the Alpha Division's investment turnover? A) .50 B) 1.0 C) 2.4 D) 3.5 E) 0.42 Answer: E Explanation: Investment Turnover = Sales/Assets Step 1 is to calculate the Assets. ROI = Net Income/Assets Assets = net Income/ROI Assets = $1,500,000/0.25 = $6,000,000 Then, Investment Turnover = $2,500,000/$6,000,000 = 0.42 Diff: 3 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 23-1
45) What is the Beta Division's investment turnover? A) .50 B) 0.75 C) 0.67 D) 2.5 E) 1.5 Answer: E Explanation: Return on Investment = Return on Sales × Investment Turnover Investment Turnover = Return on Investment/Return on Sales = .15/.10 = 1.5 Diff: 3 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
46) The Cybertronics Corporation reported the following information for its Cyclotron Division: Revenues Operating costs Operating assets
$2,300,000 1,700,000 1,100,000
Income is defined as operating income. What is the Cyclotron Division's return on investment? A) 35.3% B) 70.6% C) 27.3% D) 54.5% Answer: D Explanation: ROI = $600,000 / $1,100,000 = 54.5% Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
Use the information below to answer the following question(s). The top management at Niagara Company, a manufacturer of lawn and garden equipment, is attempting to recover from a flood, which destroyed some of its accounting records. The main computer system was also severely damaged. The following information was salvaged:
Sales Net operating income Total assets Return on investment Return on sales Investment turnover
Tractor Division Tiller Division Digger Division $10,000,000 (a) $2,400,000 $1,000,000 $1,440,000 $600,000 (b) (c) $2,000,000 0.20 0.10 (d) (e) 0.12 0.25 (f) (g) 1.2
47) What were the sales for the Tiller Division? A) $9,600,000 B) $12,000,000 C) $15,000,000 D) $15,500,000 E) $14,400,000 Answer: B Explanation: Return on Sales = Net Inc/Sales .12 = $1,440,000/S S = $1,440,000/.12 = $12,000,000 Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
48) What is the value of the total assets belonging to the Tractor Division? A) $3,500,000 B) $4,000,000 C) $4,500,000 D) $5,000,000 E) $2,000,000 Answer: D Explanation: ROI = Net Income/Assets Assets = Net Income/ROI Assets = $1,000,000/0.20 = $5,000,000 Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
49) What is the value of the total assets belonging to the Tiller Division? A) $10,000,000 B) $12,000,000 C) $14,400,000 D) $15,000,000 E) $16,000,000 Answer: C Explanation: ROI = Net Income/Assets Assets = Net Income/ROI Assets = $1,440,000/0.10 = $14,400,000 Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
50) What is the Digger Division's return on investment? A) .25 B) .30 C) .45 D) .60 E) .20 Answer: B Explanation: ROI = Net Income/Net Assets = Return on Sales × Asset Turnover 0.25 × 1.2 = .30 Can verify by dividing Net Income/Assets = $600,000/$2,000,000 = .30 Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
51) What is the Tractor Division's return on sales? A) 0.10 B) 0.12 C) 0.15 D) 0.20 E) 0.25 Answer: A Explanation: $1,000,000/$10,000,000 = 0.10 Diff: 1 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
52) What is the Tractor Division's investment turnover? A) .50 B) 1.0 C) 2.0 D) 2.5 E) 3.0 Answer: C Explanation: Investment Turnover = Sales/Assets Step 1 is to calculate the Assets. ROI = Net Income/Assets Assets = net Income/ROI Assets = $1,000,000/0.20 = $5,000,000 Then, Investment Turnover = $10,000,000/$5,000,000 = 2.0 Diff: 3 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 23-1
53) What is the Tiller Division's investment turnover? A) .50 B) 1.333 C) 1.2 D) 1.5 E) .833 Answer: E Explanation: Return on Investment = Return on Sales × Investment Turnover Investment Turnover = Return on Investment/Return on Sales = .10/.12 = .833 Diff: 3 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
54) The cost of capital that is recognized in a residual income calculation is also call the A) opportunity cost. B) imputed cost. C) cash accounting cost. D) incremental cost. E) operating income cost. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
55) A corporation has a required rate of return of 13% for all subsidiaries. The Calgary subsidiary earned residual income of $200,000 in year 1, and $300,000 in year 2 on an investment base of $4,500,000. What rate of return did the Calgary subsidiary earn in years 1 and 2 respectively? A) 17.4% and 19.7% B) 4.4% and 6.7% C) 13.0% and 13.0% D) 7.9% and 10.9% E) 10.00% and 13.00% Answer: A Explanation: Year 1: OI - (0.13 × $4,500,000) = $200,000 OI = $785,000 ROI = ($785,000/$4,500,000) = 17.4% Year 2: OI - (0.13 × $4,500,000) = $300,000 OI = $885,000 ROI = ($885,000/$4,500,000) = 19.7% Diff: 3 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 23-1
56) What disadvantage is there in using ROI and/or RI as performance measures? A) A manager's bonus will decrease when ROI decreases. B) ROI may decrease when business expands if income does not increase in line with the new investment. C) RI and ROI are both single-period measures. D) RI is measured in absolute dollars but ROI is in percentages. E) Imputed costs that are deducted in the RI calculation, are not recognized in accrual accounting, and are therefore not included in the operating figure used in calculating ROI. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-1
57) A company has total assets of $500,000, a required rate of return of 10%, and operating income for the year was $200,000. What is the residual income? A) $150,000 B) $200,000 C) $250,000 D) $480,000 E) $175,000 Answer: A Explanation: $200,000 - ($500,000 × 0.10) = $150,000 Diff: 1 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-1
58) Which of the following performance measures is more likely to promote goal congruence? A) inventory turnover B) marginal income C) residual income D) return on investment E) contribution margin Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-1
59) The Auto Division of Speed Corporation has $2.5 million in total assets and $200,000 in liabilities, while the Transportation Division has $5 million in total assets and $3 million in liabilities. What are the imputed costs of the Auto division and the Transportation division, respectively, if the corporation has a required rate of return of 11%? A) $275,000 and $550,000 B) $253,000 and $330,000 C) $297,000 and $880,000 D) $275,000 and $330,000 E) $200,000 and $3,000,000 Answer: A Explanation: 11% × $2,500,000 = $275,000 11% × $5,000,000 = $550,000 Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
60) Royal Medical Services provided the following information for its operations in the Hospital Bed Division. Revenues Accounts receivable Required rate of return Operating assets Net operating income Taxable income Total assets
$2,000,000 500,000 11% 1,500,000 800,000 520,000 $6,500,000
What is the Hospital Bed's residual income? A) $30,000 B) $85,000 C) <$195,000> D) $1,285,000 E) <$250,000> Answer: B Explanation: $800,000 - ($6,500,000 × .11) = $85,000 Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
61) Which of the following is NOT a reason for evaluating subunits over a multi-year time horizon? A) Benefits of actions taken in the current period may not show up in a short-term performance measure. B) Managers may curtail R & D or plant maintenance in order to increase short-term results. C) Investments may actually decrease ROI and or RI in the short-term. D) The NPV of the cash flows over the life of an investment equals [total assets ÷ ROI]. E) Investments may actually decrease ROI and or RI in the short-term, and benefits of actions taken in the current period may not show up in a short-term performance measure. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-1
Use the information below to answer the following question(s). Brandon Company has two sources of funds: long term debt with a market and book value of $9 million issued at an interest rate of 10 percent, and equity capital that has a market value of $6 million (book value of $2 million). The cost of equity capital is 5 percent, while the tax rate is 30 percent. Brandon Company has profit centres in the following locations with the following data:
Ottawa St. Johns Regina
Before-Tax Operating Income $480,000 $600,000 $1,020,000
Total Assets $2,000,000 $4,000,000 $6,000,000
Current Liabilities $100,000 $300,000 $600,000
62) What is the EVA for Ottawa? A) $218,200 B) $362,200 C) $163,200 D) $480,000 E) $140,000 Answer: A Explanation: After tax cost of debt = 7% WACC = [9/15 × 7%] + [6/15 × 5%] = 6.2% Ottawa (EVA) = ($480,000 × 0.7) - [0.062 × (2,000,000 - $100,000)] = $218,200 Diff: 3 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
63) What is the EVA for St. Johns? A) $142,200 B) $190,600 C) $310,600 D) $200,000 E) $145,000 Answer: B Explanation: After tax cost of debt = 7% WACC = [9/15 × 7%] + [6/15 × 5%] = 6.2% St. Johns (EVA) = ($600,000 × 0.7) - [0.062 × ($4,000,000 - $300,000)] = $190,600 Diff: 3 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
64) What is the EVA for Regina? A) $685,200 B) $342,000 C) $379,200 D) $648,000 E) $218,200 Answer: C Explanation: After tax cost of debt = 7% WACC = [9/15 × 7%] +[6/15 × 5%] = 6.2% Regina (EVA) = ($1,020,000 × 0.7) - [0.062 × ($6,000,000 - $600,000)] = $714,000 - $334,800 = $379,200 Diff: 3 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
65) A company's weighted-average cost of capital [WACC] was 9.6% last year. The company has $6,000,000 of bonds payable (its only debt) with a 9.25% coupon, and has $9,000,000 in equity capital. The tax rate is 35%. What is the company's cost of debt funding? A) 6.01% B) 6.25% C) 6.50% D) 9.25% E) 12.00% Answer: A Explanation: 0.0925 × (1 - .35) = .06 Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 23-1
66) A company's weighted-average cost of capital [WACC] was 9.6% last year. The company has $6,000,000 of bonds payable (its only debt) with a 9.25% coupon, and has $9,000,000 in equity capital. The tax rate is 35%. What is the company's cost of equity capital? A) 6.00% B) 6.25% C) 6.50% D) 9.25% E) 12.00% Answer: E Explanation: WACC = [(.06 × $6,000,000) + (Y × $9,000,000)]/$15,000,000 = .096 360,000 + (Y × $9,000,000) = 1,440,000 Y × $9,000,000 = 1,080,000 Y = 1,080,000/9,000,000 Y = .12 Diff: 3 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 23-1
Answer the following question(s) using the information below: Springflowers Corporation, whose tax rate is 40%, has two sources of funds: long-term debt with a market value of $8,000,000 and an interest rate of 8%, and equity capital with a market value of $12,000,000 and a cost of equity of 12%. Springflowers has two operating divisions, the Blue division and the Gold division, with the following financial measures for the current year:
Blue Div. Gold Div.
Total Assets Current Liabilities Operating Income $9,500,000 $2,800,000 $1,055,000 $11,000,000 $2,200,000 $1,200,000
67) What is the Economic Value Added (EVA) for the Blue Division? A) -$233,400 B) $21,960 C) $188,600 D) $433,960 E) -$63,800 Answer: B Explanation: After tax cost of debt = 60% × 8% = 4.8% WACC = [8/20 × 4.8%] + [12/20 × 12%] = 1.92% + 7.2% = 9.12% EVA = ($1,055,000 × (1 - .4)) - (($9,500,000 - $2,800,000) × .0912) = $21,960 Diff: 3 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
68) What is Economic Value Added (EVA) for the Gold Division? A) -$283,200 B) -$82,560 C) $196,800 D) $397,440 E) -$195,200 Answer: B Explanation: After tax cost of debt = 60% × 8% = 4.8% WACC = [8/20 × 4.8%] + [12/20 × 12%] = 1.92% + 7.2% = 9.12% EVA = ($1,200,000 × (1 - .4)) - (($11,000,000 - $2,200,000) × .0912) = $720,000 - $802,560 = -$82,560 Diff: 3 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
Answer the following question(s) using the information below: Scarbrough Company has two sources of funds: long-term debt with a market and book value of $15 million issued at an interest rate of 10%, and equity capital that has a market value of $9 million (book value of $5 million). Scarbrough Company has profit centres in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 15%, and the tax rate is 30%. Operating Income Bish Bash Falls $815,000 Brooksville $1,100,000 Stonybrook $2,450,000
Assets Current Liabilities $3,750,000 $800,000 $5,000,000 $1,200,000 $9,250,000 $3,180,000
69) What is the EVA for Bish Bash Falls? A) $338,563 B) $305,000 C) $275,500 D) $255,500 E) $220,188 Answer: C Explanation: WACC = [(.10 × (1 - .30) × $15,000,000) + (0.15 × $9,000,000)]/$24,000,000 = 0.100 Bish Bash Falls (EVA) = ($815,000 × (1 - .30)) - [0.100 × ($3,750,000 - $800,000)] = $570,500 - $295,000 = $275,500 Diff: 3 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
70) What is the EVA for Brooksville? A) $476,250 B) $428,000 C) $415,525 D) $390,000 E) $318,750 Answer: D Explanation: WACC = [(.10 × (1 - .30) × $15,000,000) + (0.15 × $9,000,000)]/$24,000,000 = 0.100 Brooksville (EVA) = ($1,100,000 × (1 - .30)) - [0.100 × ($5,000,000 - $1,200,000)] = $770,000 - $380,000 = $390,000 Diff: 3 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
71) What is the EVA for Stonybrook? A) $1,108,000 B) $1,168,700 C) $1,315,063 D) $1,403,063 E) $994,188 Answer: A Explanation: WACC = [(.10 × (1 - .30) × $15,000,000) + (0.15 × $9,000,000)]/$24,000,000 = 0.100 Stonybrook (EVA) = ($2,450,000 × (1 - .30)) - [0.100 × ($9,250,000 - $3,180,000)] = $1,715,000 - $607,000 = $1,108,000 Diff: 3 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
72) Novella Ltd. reported a return on investment of 16%, an asset turnover of 6, and income of $190,000. On the basis of this information, the company's invested capital was ________. A) $1,187,500 B) $7,125,000 C) $1,140,000 D) $197,917 E) $182,400 Answer: A Explanation: $190,000/Assets = 16% Assets = $1,187,500 Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
73) For the period just ended, Trident Ltd. reported profit of $22.6 million and invested capital of $250 million. Assuming an imputed interest rate of 8%, which of the following choices correctly denotes Trident's return on investment (ROI) and residual income respectively? A) 8.32%; $20.792 million B) 9.04%; $20,792 million C) 9.76%; $4.408 million D) 9.04%; $2.6 million E) 9.76%; $2.6 million Answer: D Explanation: ROI = $22.6/$250 = 9.04% RI = $22.6 - [$250 × 8%] = $22.6 - $20 = $2.6 Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
74) Which two ratios are used in the DuPont method of profitability analysis to create return on assets? A) profit margin and asset turnover B) asset turnover and return on investment C) profit margin and operating leverage D) profit margin and return on sales E) return on sales and return on assets Answer: A Explanation: DuPont = Income/Sales × Sales/Asset = Profit Margin (or ROS) × Asset turnover Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
Answer the following question(s) using the information below: Miller Medical Services provided the following information for it past year's operations in its Hospital Bed Division. Revenues Accounts receivable Total assets Operating income Taxable income
$2,000,000 500,000 1,500,000 800,000 520,000
75) What is the Hospital Bed Division's return on sales if income is defined as operating income? A) 0.40 B) 0.53 C) 0.92 D) 1.33 E) 2.50 Answer: A Explanation: $800,000/$2,000,000 = 40% Diff: 1 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
76) What is the Hospital Bed Division's asset turnover? A) 0.00 B) 0.53 C) 0.92 D) 1.33 E) 2.50 Answer: D Explanation: $2,000,000/$1,500,000 = 1.33 Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
Use the information below to answer the following question(s). A division within a firm has an average return on assets employed of 12% and is considering purchasing a new asset. The new asset is expected to generate cash flows of $17,000 per year for the next seven years but these have a beta coefficient of 1.3 compared to the portfolio return on the other assets in the division. The risk free rate of return is 2%; the weighted average cost of capital is 9%; and, the cost of the new asset is $170,000. 77) If the division manager's bonus depends on division ROI will she be likely to purchase the asset? A) Yes, because ROI is greater than the division average return on assets employed. B) No, because the ROI is less than the division average return on assets employed. C) No, because the ROI is less than both the division average return on assets employed and the weighted average cost of capital. D) Yes, because the ROI is greater than both the division average return on assets employed and the weighted average cost of capital. E) Yes, because the net present value is positive when basing the discount rate on the weighted average cost of capital minus the risk free rate of return. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
78) What is the residual income? A) $(3,400) B) $5,100 C) $0 D) $6,800 E) $15,300 Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
79) Batman Abstract Company has three divisions that operate autonomously. Their results for the current year were as follows:
Sales Contribution margin Operating income Investment base
Riddler $5,000,000 1,440,000 1,000,000 9,000,000
Joker $7,000,000 1,700,000 1,750,000 10,000,000
The company's desired rate of return is 20%. Required: a. Compute each division's ROI. b. Compute each division's residual income. c. Rank each division by both ROI and residual income.
Penguin $10,000,000 3,500,000 2,520,000 14,000,000
Answer: a. Riddler ROI Joker ROI Penguin ROI
= $1,000,000/$9,000,000 = $1,750,000/$10,000,000 = $2,520,000/$14,000,000
= 0.111 = 0.175 = 0.180
b. Investment base Minimum rate Minimum return
Riddler $9,000,000 × 0.20 $1,800,000
Joker $10,000,000 × 0.20 $2,000,000
Penguin $14,000,000 × 0.20 $2,800,000
Income Minimum return Residual income
$1,000,000 1,800,000 $(800,000)
$1,750,000 2,000,000 $(250,000)
$2,520,000 2,800,000 $(280,000)
c. ROI Rank: Penguin # 1 Joker # 2 Riddler # 3 RI Rank: Joker #1 Penguin #2 Riddler #3 Diff: 2 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
80) Hargrave Products has three divisions which operate autonomously. Their results for the current year were as follows:
Sales Cost of goods sold Operating income Investment base
East $30,000,000 15,000,000 4,500,000 30,000,000
West International $40,000,000 $50,000,000 25,000,000 37,000,000 4,750,000 5,000,000 30,500,000 31,000,000
The company's desired rate of return is 15 percent. Required: a. Compute each division's ROI. Round to three decimal places. b. Compute each division's residual income. c. Rank each division by both ROI and residual income. Answer: East ROI = $4,500,000 /$30,000,000 = 0.150 West ROI = $4,750,000/$30,500,000 = 0.156 International = $5,000,000/$31,000,000 = 0.161 b. Investment base Minimum rate
East $30,000,000 × 0.15
West $30,500,000 × 0.15
International $31,000,000 × 0.15
Minimum return
$4,500,000
$4,575,000
$4,650,000
Income Minimum return
$4,500,000 4,500,000
$4,750,000 4,575,000
$5,000,000 4,650,000
Residual income
$0
$175,000
$350,000
c. ROI Rank: Int'l # 1 West # 2 East # 3 RI Rank: Int'l # 1 West # 2 East # 3 Diff: 2 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
81) Kase Tractor Company allows its divisions to operate as autonomous units. Their results for the current year were as follows:
Revenues Current assets Capital assets Current liabilities Net operating income After-tax income Weighted average cost of capital
Plows $2,250,000 800,000 1,000,000 350,000 220,000 143,000 8.5%
Required: For each division compute the a. return on sales b. return on investment based on total assets employed c. economic value added d. residual income based on net operating income
Tractors $500,000 152,500 400,000 75,000 60,000 39,000 8.5%
Combines $4,800,000 1,435,000 1,750,000 540,000 480,000 312,000 8.5%
Answer: a. Return on Sales: Plows Tractors Combines b.
= 0.10 = 0.12 = 0.10
= $220,000/$1,800,000 = $60,000/$552,500 = $480,000/$3,185,000
= 12.2% = 10.9% = 15.1%
ROI: Plows Tractors Combines
c.
= $220,000/$2,250,000 = $60,000/$500,000 = $480,000/$4,800,000
EVA: Plows
Tractors
Combines
$143,000 $123,250 $19,750
$39,000 $40,588 $(1,588)
$312,000 $244,825 $87,175
Total assets - current liabilities $1,450,000 WACC 8.5% *Sub-totals $123,250
$477,500 8.5% $40,588
$2,645,000 8.5% $244,825
After-tax income Less: sub-totals* Economic value-added
d. Residual income: Plows Tractors Combines
= $220,000 - (.085 × $1,800,000) = = $60,000 - (.085 × $552,500) = = $480,000 - (.085 × $3,185,000) =
$ 67,000 $ 13,038 $ 209,275
Diff: 2 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
82) Jim's Quality Pre-owned Auto Sales Ltd. allows its divisions to operate as autonomous units. Their results for the current year were as follows:
Revenues Current assets Capital assets Current liabilities Net operating income After-tax income Weighted average cost of capital
SUVs $1,650,000 210,000 870,000 275,000 235,000 186,000 9.5%
Required: For each division compute the a. return on sales b. return on investment based on total assets employed c. economic value added d. residual income based on net operating income
Trucks $900,000 152,500 630,000 127,000 70,000 55,404 9.5%
Cars $5,800,000 419,000 1,590,000 399,000 560,000 443,234 9.5%
Answer: a. Return on Sales: SUVs Trucks Cars b.
= 0.14 = 0.08 = 0.10
= $235,000/$1,080,000 = $70,000/$782,500 = $560,000/$2,009,000
= 21.8% = 8.9% = 27.9%
ROI: SUVs Trucks Cars
c.
= $235,000/$1,650,000 = $70,000/$900,000 = $560,000/$5,800,000
EVA: SUVs
Trucks
Cars
$186,000 $76,475 $109,525
$55,404 $62,273 $(6.869)
$443,234 $152,950 $290,284
Total assets - current liabilities $805,000 WACC 9.5% *Sub-totals $76,475
$655,500 9.5% $62,273
$1,610,000 9.5% $152,950
After-tax income Less: sub-totals* Economic value-added
d. Residual income: SUVs Trucks Cars
= $235,000 - (.095 × $1,080,000) = = $70,000 - (.095 × $782,500) = = $560,000 - (.095 × $2,009,000) =
$ 132,400 $ (4,338) $ 369,145
Diff: 2 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
83) Museum Corporation uses the investment centre concept for the museums that it manages. Select operating data for three of its museums for the current year are as follows: Montreal Revenue $300,000 Total assets 150,000 Net operating income 25,500
Toronto $375,000 125,000 28,000
Vancouver $450,000 175,000 29,500
Required: a. Compute the return on investment for each division. b. Which museum manager is doing best based only on ROI? c. What other accounting performance measures are available when evaluating the managers? Answer: a. Montreal = $25,500/$150,000 = 0.170 Toronto = $28,000/$125,000 = 0.224 Vancouver = $29,500/$175,000 = 0.169 b. Toronto was doing the best because the ROI was the highest, and as compared to Vancouver was doing better with fewer assets. c. The company could consider examining the DuPont method, residual income, and EVA, and ROS, and also consider the time horizon of whatever performance it chooses. Diff: 2 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
84) The Coffee Division of Canadian Products is planning the operating budget for next year. Average total assets of $1,500,000 will be used during the year and unit selling prices are expected to average $100 each. Variable costs of the division are budgeted at $400,000 while fixed costs are set at $250,000. The company's required rate of return is 18%. Required: a. Compute the volume necessary to achieve a 20% ROI. b. The division manager receives a bonus of 50% of the residual income. What is his anticipated bonus for next year assuming he achieves the targeted operating income in part a. and the required return is based on 18%? Answer: a. Target Operating income = 0.20 × $1,500,000 = $300,000 Operating income $300,000 Variable costs 400,000 Fixed costs 250,000 Target revenues $950,000 Sales volume = $950,000/$100 = 9,500 units b. Asset base $1,500,000 Minimum rate × 0.18 Required return $270,000 Target operating income $300,000 Required return 270,000 Residual income $30,000 Bonus = $30,000 × 0.50 =
$15,000
Diff: 3 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 23-1
85) The Tea Division of Canadian Products is planning the operating budget for next year. Average total assets of $1,700,000 will be used during the year and unit selling prices are expected to average $250 each. Variable costs of the division are budgeted at $600,000 while fixed costs are set at $450,000. The company's required rate of return is 10%. Required: a. Compute the volume necessary to achieve a 15% ROI. b. The division manager receives a bonus of 50% of the residual income. What is his anticipated bonus for next year assuming he achieves the targeted operating income in part a. and the required return is based on 10%? Answer: a. Target Operating income = 0.15 × $1,700,000 = $255,000 Operating income $255,000 Variable costs 600,000 Fixed costs 450,000 Target revenues $1,305,000 Sales volume = $1,305,000/$250 = 5,220 units b. Asset base $1,700,000 Minimum rate × 0.10 Required return $170,000 Target operating income $255,000 Required return 170,000 Residual income $85,000 Bonus = $85,000 × 0.50 =
$42,500
Diff: 3 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 23-1
86) LaserLife Printer Cartridge Company is a decentralized organization with several autonomous divisions. The division managers are evaluated, in part, on the basis of the change in their return on invested assets. Operating results for the Packer Division for the upcoming year are budgeted as follows: Sales Less variable costs Contribution margin Less fixed expenses Net operating income
$5,000,000 2,500,000 $2,500,000 1,800,000 $700,000
Total assets for the division are currently $3,600,000. For next year the division can add a new product line for an investment of $600,000. The new product line will generate sales of $1,600,000 and will incur fixed expenses of $600,000 annually. Variable costs of the new product will average 60 percent of selling price. Required: a. What will be the company's ROI after accepting the new product line? b. If the company's required rate of return is 6 percent, and residual income is used to evaluate managers, would this encourage the division to accept the new product line? Explain and show computations.
Answer: a. New investment: Sales Variable costs Fixed costs Operating income
$1,600,000 $960,000 600,000
1,560,000 $40,000
Current ROI = $700,000/$3,600,000 = 0.194 New investment ROI = $40,000/$600,000 = 0.067 Combined ROI = $740,000/$4,200,000 = 0.176 Accepting the new product line will reduce the division's ROI. This would make the manager reluctant to make the investment. b. Investment Minimum return Required amount
$600,000 × 0.06 $36,000
Income Required amount Residual income
$40,000 36,000 $4,000
Manager would accept investment because income is increased by $4,000. Diff: 3 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 23-1
87) Capital Investments has three divisions. Each division's required rate of return is 15 percent. Planned operating results for next year are: Division A B C
Operating income $15,000,000 25,000,000 11,000,000
Investment $100,000,000 125,000,000 50,000,000
The company is planning an expansion requiring each division to increase its investments by $25,000,000 and its income by $4,500,000. Required: a. Compute the current ROI for each division. b. Compute the current residual income for each division. c. Rank the divisions according to their current ROIs and residual incomes. d. Determine the effects after adding the new project to each division's ROI and residual income. e. Which Divisions are pleased with the addition and which ones are unhappy assuming the managers are evaluated on a combination of ROI and residual income? Is a combination of ROI and residual income appropriate for the divisions?
Answer: a. A ROI = $15,000,000/$100,000,000 = 0.15 B ROI = $25,000,000/$125,000,000 = 0.20 C ROI = $11,000,000/$50,000,000 = 0.22 b. A RI = $15,000,000 - ($100,000,000 × 0.15) = $0 B RI = $25,000,000 - ($125,000,000 × 0.15) = $6,250,000 C RI = $11,000,000 - ($50,000,000 × 0.15) = $3,500,000 c. ROI Rank: 1. C 2. B 3. A
RI Rank: 1. B 2. C 3. A
d. A ROI = $19,500,000/$125,000,000 = 0.156 B ROI = $29,500,000/$150,000,000 = 0.197 C ROI = $15,500,000/$75,000,000 = 0.207 A RI = $19,500,000 - ($125,000,000 × 0.15) = $750,000 B RI = $29,500,000 - ($150,000,000 × 0.15) = $7,000,000 C RI = $15,500,000 - ($75,000,000 × 0.15) = $4,250,000 e. Everyone is pleased that only residual income is used because their residual incomes go up. However, it is difficult to evaluate on a comparative basis because the investment base is very different for the divisions. Only the manager of A is pleased with the new investment if ROI is used because that is the only division where ROI increased. In the case of additional investments which are required by corporate management, residual income may be the best to use for evaluating each manager individually but not collectively. Diff: 2 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
88) Provide the missing data for the following situations:
Sales Net operating income Total assets Return on investment Return on sales Answer: Red Division: $200,000 ÷ 0.16 Total assets = $1,250,000
Red Division $? $200,000 $? 0.16 0.04
White Division $10,000,000 $400,000 $? 0.10 ?
Blue Division $? $288,000 $1,600,000 ? 0.12
ROS = Income/Sales 0.04 = $200,000/Sales Sales = $5,000,000 White Division: ROS = $400,000/$10,000,000 = 0.04 TA = NI ÷ ROI = $400,000 ÷ 0.10 = $4,000,000 Blue Division: Sales = NI ÷ ROS = 288,000 ÷ 0.12 = $2,400,000 ROI = (2,400,000 ÷ 1,600,000) × (288,000 ÷ 2,400,000) = 0.18 Diff: 3 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
89) Coptermagic Company supplies helicopters to corporate clients. Coptermagic has two sources of funds: long term debt with a market and book value of $32 million issued at an interest rate of 10%, and equity capital that has a market value of $18 million and book value of $8 million. The cost of equity capital for Coptermagic is 15%, and its tax rate is 30%. Coptermagic has profit centres in four divisions that operate autonomously. The company's results for the past year are as follows:
Brandon Hamilton Penticton Halifax
Operating Income $1,750,000 2,400,000 4,675,000 4,200,000
Assets $11,500,000 9,000,000 27,500,000 25,000,000
Current Liabilities $2,500,000 3,500,000 9,500,000 8,000,000
Required: a. Compute Coptermagic's weighted average cost of capital. b. Compute each division's Economic Value Added. c. Rank the divisions by EVA. Answer: a. WACC = [(.10 × (1 - .30) × $32,000,000) + (.15 × $18,000,000)]/$50,000,000 = 9.88 % b.
Brandon (EVA) = [($1,750,000 × (1 - .30)] - [0.0988 × ($11,500,000 - $2,500,000)] = $1,225,000 - $889,200 = $335,800 Hamilton (EVA) = [($2,400,000 × (1 - .30)] - [0.0988 × ($9,000,000 - $3,500,000)] = $1,680,000 - $543,400 = $1,136,600 Penticton (EVA) = [($4,675,000 × (1 - .30)] - [0.0988 × ($27,500,000 - $9,500,000)] = $3,272,500 - $1,788,400 = $1,494,100 Halifax (EVA) = [($4,2000,000 × (1 - .30)] - [0.0988 × ($25,000,000 - $8,000,000)] = $2,940,000 - $1,679,600 = $1,260,400
c.
Rank: Penticton # 1 Halifax # 2 Hamilton # 3 Brandon #4
Diff: 2 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
90) Last year Reynolds Ltd. reported the following results:
Sales Cost of Goods Sold Operating Expenses Assets
$1,450,000 870,000 230,000 2,187,500
Required: a. Using the DuPont method, calculate the company's return on investment for the year just ended. b. Assuming the company's sales, operating expenses, and assets remain the same as last year, by how much would the gross margin percentage have to increase to achieve a 20% return on investment? c. Assume the company sets a minimum required return of 13%, what would the residual income be? Answer: a. ROI = Income/Sales × Sales/Assets Income = $1,450,000 - $870,000 - $230,000 = $350,000 ROI = $350,000/$1,450,000 × $1,450,000/$2,187,500 = 24.14% × 0.6629 = 16% b.
Target ROI = 20% × $2,187,500 = $437,500 Sales - CGS - Operating Expenses = $437,500 $1,450,000 - X - $230,000 = $437,500 X = $782,500 = CGS CGS/Sales = $782,500/$1,450,000 = 53.97% Gross Margin = 1 - 53.97% = 46.03% Current GM = $1,450,000 - $870,000 = $580,000; GM% = $580,000/$1,450,000 = 40% GM % would have to increase by 6.03%
c.
Residual Income = $350,000 - (.13 × $2,187,500) = $350,000 - $284,375 = $65,625
Diff: 3 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 23-1
91) Chaucer Ltd. has current assets of $450,000 and capital assets of $630,000. Its budgeted production volume for the next fiscal year is 200,000 units. Fixed costs are projected at $400,000 and variable unit costs for the one product produced total $5/unit. The company defines ROI as Operating Income/Total Assets and its required rate of return is 14%. Required: a. What selling price should Chaucer charge for its product if it wishes to achieve a 25% ROI? What is the operating income at this price? b. The general manager for Chaucer receives a bonus equal to 12% of the residual income for the period. Calculate the amount of the bonus assuming the selling price calculated in part a). c. Prepare a brief memo to the President of Chaucer outlining the advantages and disadvantages of ROI and Residual Income. Include your recommendations for the most appropriate method for calculating the bonus. Answer: a. Total assets = $450,000 + $630,000 = $1,080,000 Target OI = 25% × $1,080,000 = $270,000 SP = [200,000 × X] - [200,000*$5] - $400,000 = $270,000 200,000X = $1,670,000 X = $8.35 b. Residual Income = $270,000 - (14% × $1,080,000) = $270,000 - $151,200 = $118,800 Bonus = 12% × $118,800 = $14,256
c. Memo To: President Chaucer Inc. From: xxxxx Re: Evaluation of Performance Measures Our company is currently evaluating the use of return on investment and residual income as performance measures. Both of these measures are appropriate in evaluating the performance of managers in investment centres, that is, managers that have control over revenues, costs and the asset base. Return on investment (ROI) is a common performance measure that is well understood. It calculates a result in percentage terms which is useful when comparing divisions or organizations of different sizes. However it is important to note that one must be careful when comparing organizations in different industries as asset bases are impacted by the nature of the industry. For example, automated industries are likely to have high investment bases in facilities and equipment. The DuPont method is particularly useful in ROI calculations as it breaks down the ROI into the profit margin and the asset turnover. This allows examination of the drivers of the ROI. Is ROI improving (or declining) due to profitability (as measured by the profit margin) or asset productivity (as measured by the asset turnover). The problem with ROI is that it can lead to goal incongruent behaviour. This occurs when investment opportunities are available, but their returns fall short of the current ROI. Managers will have a disincentive to pursue these opportunities as they will lower the ROI and potentially bonuses. Residual income addresses this problem of goal incongruence. Residual income uses a minimum required rate of return in its calculation. This ensures that investment opportunities that meet this corporate target will be accepted as all opportunities that exceed the minimum return will improve residual income and improve bonuses. Hence managers will be motivated to pursue these investments. Residual income is calculated as a dollar amount and therefore highlights magnitude of the dollar return. Recommendations: Students' recommendations should be assessed based on their support of their position. The selection of performance measures should align with corporate goals. Generally RI is considered superior due to the issue of goal congruence as outlined in the memo above. Students should also discuss the use of nonfinancial performance measures. Diff: 3 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 23-1
92) Randall Ltd. reported the following results for its two divisions: Division A Sales Operating Income Investment
2015 $260,000 19,240 98,000
2016 $260,000 18,460 96,000
Division B Sales Operating Income Investment
2015 $416,000 30,784 192,400
2016 $416,000 29,536 192,400
Required: a. Using the DuPont method, calculate the return on investment for each division for each year. b. Comment on the performance of each division. Answer: a. Division A: 2015: $19,240/$260,000 × $260,000/$98,000 = 7.4% × 2.653 = 19.63% 2016: $18,460/$260,000 × $260,000/$96,000 = 7.1% × 2.708 = 19.23% Division B: 2015: $30,784/$416,000 × $416,000/$192,400 = 7.4% × 2.162= 16% 2016: $29,536/$416,000 × $416,000/$192,400 = 7.1% × 2.162=15.35% b. Both divisions experienced the similar profit margins in both years. Both experienced a decline in their profit margins from 2015 to 2016. Division B maintained its asset turnover in 2016, while Division A reported an increase in its asset turnover. Note this may be artificial as it may be a result of depreciation on the investment base. Diff: 2 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
93) The following table presents information related to three divisions of Bacchus Ltd.:
Sales Operating Income Profit Margin Asset Turnover ROI Investment Residual Income
Alpha Division Beta Division Delta Division $12,000,000 E I $2,640,000 F $450,000 A 24% 25% B G 1.2 times C 19.2% J $6,600,000 H K D $138,000 L
The company's required rate of return is 10%. Required: Solve for the unknowns.
Answer: Bacchus Ltd.: Sales Operating Income Profit Margin Asset Turnover ROI Investment Residual Income
Alpha Division Beta Division Delta Division $12,000,000 E = $1,200,000 I = $1,800,000 $2,640,000 F = $288,000 $450,000 A = 22% 24% 25% B = 1.818 G = 0.8 1.2 times C = 40% 19.2% J = 30% $6,600,000 H = $1,500,000 K = $1,500,000 D = $1,980,000
$138,000
L = $300,000
Alpha Division: A = $2,640,000/$12,000,000 = 22% B = $12,000,000/$6,600,000 = 1.818 times C = $2,640,000/$6,600,000 = 40% or 1.818 × 22% = 40% D = $2,640,000 - (10% × $6,600,000) = $1,980,000 Beta Division: ROI = Profit Margin × Asset Turnover 19.2% = 24% × Asset Turnover Asset Turnover = 0.8 times = G Residual Income = $138,000 = (19.2% × investment) - (10% × investment) $138,000/0.092 = $1,500,000 = H Income = 19.2% × $1,500,000 = $288,000 = F Sales/Assets = 0.8 E/$1,500,000 = 0.8 Sales = $1,200,000 = E Delta Division Income/Sales = Profit Margin $450,000/I = 25% I = $1,800,000 Asset turnover = Sales/Assets $1,800,000/K = 1.2 K = $1,500,000 ROI = Income/Investment J = $450,000/$1,500,000 = 30% L = $450,000 - (.10 × $1,500,000) = $300,000 Diff: 3 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
94) Stratton Industries has two divisions. These divisions reported the following results for the year just ended: Division 1 Division 2 Operating Income $840,000 $180,000 Assets $4,200,000 $750,000 Required: a. Calculate the ROI for each division. Which division would you consider to be the most successful? Why? b. Now assume that the company requires a 14% minimum rate of return. Calculate the residual income for each division. Which division would you consider to be the most successful? Why? Answer: a. ROI Division 1 = $840,000/$4,200,000 = 20% ROI Division 2 = $180,000/$750,000 = 24% Using ROI as a performance measure, Division 2 would appear to be more successful as its ROI outperformed Division 1. However in absolute dollars, Division 1 outperformed Division 2. To assess performance more completely, we would need to consider the company's cost of capital. b. RI Division 1 = $840,000 - (.14 × $4,200,000) = $840,000 - $588,000 = $252,000 RI Division 2 = $180,000 - (.14 × $750,000) = $180,000 - $105,000 = $75,000 Using Residual Income as the criterion to evaluate success, Division 1 is more successful. Diff: 1 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
95) Consolidated Gas Supply Corporation uses the investment center concept for the gasoline stations that it manages in the city. Consolidated has a 15% required rate of return on investment in order for a branch station to be viable. Select operating data for three of its stations for the current year are as follows:
Revenue Operating assets Current liabilities Net operating income
Maple Street $17,000,000 7,000,000 300,000 960,000
Oak Street Hickory Street $13,500,000 $15,000,000 7,000,000 5,000,000 250,000 360,000 1,150,000 910,000
Required: a. Compute the return on investment for each station. b. Which station manager is doing best based only on ROI? c. Are any of the stations under performing? d. Should the required rate of return be the same for each station if the business risks are different? Explain. Answer: a. Maple = $960,000/$7,000,000 = 0.137 Oak = $1,150,000/$7,000,000 = 0.164 Hickory = $910,000/$5,0,000 = 0.182 b.
Hickory Street was doing the best because the ROI was the highest.
c. Maple Street is in danger of being shut down because it is only making a return on its investment base of 13.7%. This is less than the required rate of return of 15%. d. If the risks are different then the company should use a risk adjusted ROR for each station to account for the different risk profiles. Diff: 2 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1
96) Gasfield Maintenance Ltd. purchased equipment for $225,000 that was CCA Class 8 (CCA rate of 20%). The vehicle was the only item in the Class 8 capital cost allowance pool. The vehicle is expected to generate net cash income, prior to tax effect, in the amount of $75,000 per year. The company uses straight-line depreciation, estimates a 5 year useful life with a $25,000 salvage value for the new equipment at the end of year 5. The marginal tax rate is 35% and the company's average tax rate is 25%. Management requires a rate of return of 15.0%. Assume that cash flows occur at the end of the year. Required: a. What is the net present value of the investment in the vehicle? Include the effect of taxes in your calculation. b. What is the anticipated residual income for the first year? The company uses net cash income for its' RI calculations. c. What is the expected ROI for years one, two, and three assuming the company uses operating income and net book value for the calculations. What is the likely effect from using net book value in the ROI calculation on the management bonus system?
Answer: a. Net present value 1. PV of after-tax net cash income: pmt = $75,000 × (1-0.35); i = 15%; n = 5 = $163,418 2. PV tax shield: = [($225,000 × 20% × 35%)/(20% + 15%)] × [(1 + (0.5 × 15%))/(1 +15%)] minus [($25,000 × 20% × 35%)/(20% + 15%)] × [1/(1 + 15%) 5] = = 3.
($45,000 × 0.9348) minus ($5,000 × 0.4972) $44,552 (difference due to rounding)
PV of salvage value: FV = $25,000; i= 15%; n = 5 = $12,429
NPV = - $225,000 + $163,418 + 44,552+ $12,429 = $(4,601) b. Residual income = $75,000 - ($225,000 × 0.15) = $41,250 c.
ROI
BV beginning Depreciation BV ending Operating income ROI
Year 1 $225,000 40,000 $185,000 $35,000 18.9%
Year 2 $185,000 40,000 $145,000 $35,000 24.1%
Year 3 $145,000 40,000 $105,000 $35,000 33.3%
The management bonus system will have a built-in increase as the book value will decrease each year. This will provide management bonuses without any relation to performance and will motivate managers to not maintain or replace the asset. Diff: 3 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-1; 21-3
97) R & D Storage is a small, but diversified, moving and storage company. In recent years its corporate income has declined to unacceptable levels. To change the direction of the company, the board of directors hired a new chief executive officer. She is currently considering three alternative ways as to how division managers are rewarded for their performance. They are; ROI, RI, and EVA. Required: Evaluate the CEO's plans by comparing the similarities and differences of the three methods. Answer: ROI and RI consider income and the investment made, although ROI may introduce goal congruence problems. The CEO should consider the possibility of a multi-year time horizon, as the benefits of a manager's actions may not be evident in income until sometime in the future (i.e., the longterm), and it would be unwise to encourage managers to focus solely on the short-term. Economic valueadded would be relevant if the CEO wants to be able to include tax effects in the performance measure. Diff: 2 Type: ES CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-1
98) The economic value added concept has attracted considerable attention in recent years. Explain the attractiveness of this number as a measure of performance. Answer: The attractiveness of economic value added at the divisional level is primarily the fact that it allows managers to incorporate the cost of capital in decisions at the divisional level. The economic value added concept, like residual income, charges managers for the cost of their investments in long-term assets and working capital. Value is created only if after-tax operating income exceeds the cost of investing the capital. To improve economic value added, managers must earn more operating income with the same capital, use less capital, or invest capital in high-return projects. Diff: 2 Type: ES CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-1
99) Companies are increasingly using nonfinancial measures to evaluate performance. Why? Since these numbers do not come from the company's financial records, why are they used? Answer: The correct answer will revolve around the objective of providing quality goods to the corporation's customers. Quality goods bring repeat business and satisfied customers are a business's best advertisement. The idea is that these nonfinancial measures concentrate on areas and questions that indicate the quality of a particular corporation's products. While some of these items do not come from a company's financial records, such as defect rates, they are quantifiable and can be verified. Diff: 2 Type: ES CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-1
100) List and describe the steps involved in making decisions on performance measures. Answer: 1. Identify and align accounting performance measures with financial goals. Does operating income, return on assets, or revenues best measure a subunit's financial goals? 2. Decide on time horizons appropriate for each performance measure. Should the performance measures be calculated for one year or a multi year time horizon? 3. Decide on how to define the components in each performance measure. Should assets be defined as total assets or net assets? 4. Decide on an appropriate measurement method for each performance measure. Should assets be measured at historical cost or current cost? 5. Decide on criteria/targets against which to assess measured performance. Should all subunits have the same targets such as the same required rate of return on assets? 6. Decide on the timing of feedback. How often should manufacturing performance reports be sent to management? 7. Decide on the elements of the compensation package. What percentage should be fixed vs. variable salary? What fringe benefits will be granted? Diff: 2 Type: ES CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
101) The term "investment" used in the calculation of accounting performance measures can vary from company to company. By using financial statement terminology describe four different ways that categories of accounts are used to determine the amount of investment. Answer: Total assets available. Includes all business assets, regardless of their particular purpose. Total assets employed. Defined as total assets available minus idle assets and minus assets purchased for future expansion. For example, if the Hull motel in Exhibit 22-2 has unused land set aside for potential expansion, the total assets employed by the motel would exclude the cost of that land. Working capital (current assets minus current liabilities) plus long-term assets. This definition excludes that portion of current assets financed by short-term creditors (which generally has zero financing cost associated with it). Shareholders' equity. Use of this definition for each individual motel in Exhibit 22-2 requires allocation of the long-term liabilities of Hospitality Inns to the three motels, which would then be deducted from the total assets of each motel. Diff: 2 Type: ES CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-1
23.2 Evaluate current-cost and historical-cost asset measurement methods. 1) Current cost is the cost of purchasing an asset today identical to the one currently held. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-2
2) The timing of feedback depends on the level of management that receives the information and on the complexity of the organization's information technology. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-2
3) Current cost return on investment is a better measure of the current economic returns from an investment than historical cost return on investment. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-2
4) Using gross book value as an investment base will result in a lower ROI than using net book value as an investment base. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-2
5) One way to achieve greater comparability of historical-cost based ROIs is to restate performance in current dollars. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-2
6) Using net book value when calculating return on investment encourages managers whose performance is measured by this metric to replace assets. Answer: FALSE Explanation: Purchasing assets will reduce ROI so the managers will be discouraged from doing so. Diff: 2 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-2
Use the information below to answer the following question(s). The following data are available for a foundry operation started as a new company four years ago when the construction cost index was 125: Current liabilities Operating income NBV long-term assets (end year 3) Current assets Gross book value * Estimated total useful life * Age of assets * Construction cost index end of year 4
$170,000 $176,200 $687,500 $300,000 $1,100,000 8 years 4 years 150
* = "of long-term assets at historical cost" 7) What is the net book value (NBV )of the long-term assets at current cost at the end of year 4? A) $660,000 B) $800,000 C) $960,000 D) $1,180,000 E) $1,760,000 Answer: A Explanation: 1,100,000 × 150/125 = 1,320,000 1,320,000 × 4/8 = 660,000 Diff: 3 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-2
8) What is the current cost annual depreciation in year 4 dollars? A) $165,000 B) $200,000 C) $240,000 D) $295,000 E) $440,000 Answer: A Explanation: 1,320,000 × 1/8 = 165,000 Diff: 3 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-2
9) What is the year 4 operating income using year-4 current cost amortization? A) $(126,300) B) $176,200 C) $73,700 D) $18,700 E) $148,700 Answer: E Explanation: 176,200 + ($1,100,000/8) - $165,000 = $148,700 Diff: 3 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-2
10) What is the ROI using current cost? A) (11.50)% B) 16.00% C) 22.5% D) 12.00% E) 11.25% Answer: C Explanation: 148,700/660,000 = 22.5% Diff: 3 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-2
11) Carriage Incorporated manufactures horse carriages. The company has two divisions, Wheels and Assembly. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 2021:
Wheels Assembly
ASSETS Book Value Current value $485,000 $550,000 $800,000 $1,600,000
INCOME Book value Current value $130,000 $150,000 $170,000 $195,000
The company is currently using a 12% required rate of return. What are Wheels' and Assembly's return on investment based on book values, respectively? A) 27%; 12% B) 27%; 21% C) 12%; 27% D) 21%; 27% Answer: B Explanation: Book value ROI: Wheels: $130,000 / $485,000 = 27% Assembly: $170,000 / $800,000 = 21% Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-2
12) Carriage Incorporated manufactures horse carriages. The company has two divisions, Wheels and
Assembly. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 2021:
Wheels Assembly
ASSETS Book Value Current value $510,000 $570,000 $760,000 $1,200,000
INCOME Book value Current value $120,000 $155,000 $165,000 $172,000
The company is currently using a 14% required rate of return. What are Wheels' and Assembly's return on investment based on current values, respectively? A) 14%; 27% B) 24%; 22% C) 22%; 24% D) 27%; 14% Answer: D Explanation: Book value ROI: Wheels: $155,000 / $570,000 = 27% Assembly: $172,000 / $1,200,000 = 14% Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-2
Use the information below to answer the following question(s). The following data are available for a heating, ventilating, and air conditioning (HVAC) vent manufacturer started as a new company four years ago when the construction cost index was 120: Current liabilities Operating income NBV long-term assets (end year 3) Current assets Gross book value * Estimated total useful life * Age of assets * Construction cost index end of year 4
$150,000 $295,000 $840,000 $180,000 $1,200,000 10 years 4 years 135
* = "of long-term assets at historical cost" 13) What is the net book value (NBV )of the long-term assets at current cost at the end of year 4? A) $640,000 B) $426,667 C) $720,000 D) $810,000 E) $540,000 Answer: D Explanation: $1,200,000 × 135/120 = $1,350,000 $1,350,000 - ($1,350,000 × 4/10) = $1,350,000 - $540,000 = $810,000 Diff: 3 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-2
14) What is the current cost annual depreciation in year 4 dollars? A) $165,000 B) $135,000 C) $120,000 D) $84,000 E) $106,667 Answer: B Explanation: $1,350,000 × 1/10 = $135,000 Diff: 3 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-2
15) What is the year 4 operating income using year-4 current cost amortization? A) $280,000 B) $310,000 C) $550,000 D) $295,000 E) $305,000 Answer: A Explanation: $295,000 + ($1,200,000/10) - $135,000 = $280,000 Diff: 3 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-2
16) What is the ROI using current cost? A) 28% B) 32% C) 38% D) 35% E) 23% Answer: D Explanation: $280,000/$810,000 = 35% Diff: 3 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-2
Use the information below to answer the following question(s). Richardson Cleaning Products manufactures home cleaning products. The company has two divisions, Bleach and Bleach-2. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for the year that just ended:
Bleach Bleach-2
Assets Assets Book value Current value $225,000 $300,000 450,000 250,000
Income Income Book value Current value $150,000 $155,000 100,000 105,000
The company is currently using a required rate of return of 15 percent. 17) What are Bleach's and Bleach-2's return on investment based on current values? A) 0.22; 0.67 B) 0.42; 0.52 C) 0.52; 0.42 D) 0.67; 0.22 E) 0.50; 0.45 Answer: C Explanation: Bleach: $155,000/$300,000 = 0.52 Bleach-2: $105,000/$250,000 = 0.42 Diff: 1 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-2
18) What are Bleach's and Bleach-2's residual incomes, based on current values, respectively? A) $116,250; $37,500 B) $110,000; $67,500 C) $67,500; $110,000 D) $37,500; $116,250 E) $115,340; $80,000 Answer: B Explanation: Current value ROI: Bleach: $155,000 - ($300,000 × 0.15) = $110,000 Bleach-2: $105,000 - ($250,000 × 0.15) = $67,500 Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-2
Answer the following question(s) using the information below: Safe Carriage Ltd. manufactures baby carriages. The company has two divisions, Wheels and Assembly. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for the year just ended:
Wheels Assembly
ASSETS Book value Current value $485,000 $550,000 $750,000 $1,200,000
INCOME Book value Current value $120,000 $160,000 $160,000 $172,500
The company is currently using a 12% required rate of return. 19) What are Wheels and Assembly Divisions' return on investment based on book values, respectively? A) 0.21; 0.25 B) 0.25; 0.21 C) 0.14; 0.29 D) 0.29; 0.14 E) 0.33; 0.23 Answer: B Explanation: Book value ROI: Wheels: $120,000/$485,000 = 0.25 Assembly: $160,000/$750,000 = 0.21 Diff: 1 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-2
20) What are Wheels' and Assembly's return on investment based on current values, respectively? A) 0.21; 0.25 B) 0.25; 0.21 C) 0.14; 0.29 D) 0.29; 0.14 E) 0.33; 0.23 Answer: D Explanation: Book value ROI: Wheels: $160,000/$550,000 = 0.29 Assembly: $172,500/$1,200,000 = 0.14 Diff: 1 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-2
21) What are Wheels' and Assembly's residual incomes based on book values, respectively? A) $74,000; $28,500 B) $61,800; $70,000 C) $63,500; $59.500 D) $28,500; $74,000 E) $101,800; $70,000 Answer: B Explanation: Book value RI: Wheels: $120,000 - ($485,000 × 0.12) = $61,800 Assembly: $160,000 - ($750,000 × 0.12) = $70,000 Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-2
22) What are Wheels' and Assembly's residual incomes based on current values, respectively? A) $70,000; $28,500 B) $94,000; $28,500 C) $94,000; $70,000 D) $28,500; $94,000 E) $61,800; $70,000 Answer: B Explanation: Current value RI: Wheels: $160,000 - ($550,000 × 0.12) = $160,000 - $66,000 = $94,000 Assembly: $172,500 - ($1,200,000 × 0.12) = $172,500 - $144,000 = $28,500 Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-2
23) The cost today of purchasing an asset identical to the one currently held is called a(n) A) actual cost. B) current cost. C) dual cost. D) fixed cost. E) sunk cost. Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-2
24) National Can Company has three divisions, Eastern, Midwestern, and Western. Because of very different accounting methods and inflation rates in different countries it is considering multiple evaluation measures. Information gathered about the divisions for the year just ended follows:
Eastern Midwestern Western
Assets Book value Current value $600,000 $900,000 700,000 700,000 1,000,000 1,400,000
Income Book value Current value $120,000 $110,000 120,000 120,000 200,000 180,000
The company is currently using a required rate of return of 15 percent. Required: a. Compute the ROI using both book value and current value for all divisions. Round to three decimal places. b. Compute residual income using book value and current value for all divisions. c. Does book value or current value provide the better basis for performance evaluation? Why? Which division is the most successful?
Answer: a. Book value ROI: Eastern = $120,000/$600,000 = 0.200 Midwestern = $120,000/$700,000 = 0.171 Western = $200,000/$1,000,000 = 0.200 Current ROI: Eastern = $110,000/$900,000 = 0.122 Midwestern = $120,000/$700,000 = 0.171 Western = $180,000/$1,400,000 = 0.129 b. Book value RI: Eastern = $120,000 - ($600,000 × 0.15) = $30,000 Midwestern = $120,000 - ($700,000 × 0.15) = $15,000 Western = $200,000 - ($1,000,000 × 0.15) = $50,000 Current RI: Eastern = $110,000 - ($900,000 × 0.15) = ($25,000) Midwestern = $120,000 - ($700,000 × 0.15) = $15,000 Western = $180,000 - ($1,400,000 × 0.15) = ($30,000) c. Because it reflects current costs, current value is generally better than book value. Using this basis, the Midwestern Division is the most successful. It has the highest ROI and RI. Diff: 2 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-2
25) Holmes Electronics Ltd. has three divisions: Resistors, Semiconductors and Transistors, each located in a different geographic region. Data for its most recent year are presented below: Assets Book value Current value Resistors $750,000 $980,000 Semiconductors 900,000 925,000 Transistors 1,600,000 1,800,000
Income Book value Current value $180,000 $130,000 170,000 190,000 260,000 210,000
The company is currently using a required rate of return of 16 percent. Required: a. Compute the ROI using both book value and current value for all divisions. Round to four decimal places. b. Compute residual income using book value and current value for all divisions. c. Does book value or current value provide the better basis for performance evaluation? Why? Which division is the most successful? Answer: a. Book value ROI: Resistors = $180,000/$750,000 = 0.2400 Semiconductors = $170,000/$900,000 = 0.1889 Transistors= $260,000/$1,600,000 = 0.1625 Current ROI: Resistors = $130,000/$980,000 = 0.1326 Semiconductors = $190,000/$925,000 = 0.2054 Transistors = $210,000/$1,800,000 = 0.1167 b. Book value RI: Resistors = $180,000 - ($750,000 × 0.16) = $180,000 - $120,000 = $60,000 Semiconductors = $170,000 - ($900,000 × 0.16) = $170,000 - $144,000 = $26,000 Transistors = $260,000 - ($1,600,000 × 0.16) = $260,000 - $256,000 = $4,000 Current RI: Resistors = $130,000 - ($980,000 × 0.16) = $130,000 - $156,800 = ($26,800) Semiconductors= $190,000 - ($925,000 × 0.16) = $190,000 - $148,000 = $42,000 Transistors= $210,000 - ($1,800,000 × 0.16) = $210,000 - $288,000 = ($78,000) c. Because it reflects current costs, current value is generally better than book value. Using this basis, the Semiconductor Division is the most successful. It has the highest ROI and RI. Diff: 2 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-2
26) The following data are available for a manufacturing business started as a new company five years ago when the construction cost index was 115: Current liabilities Operating income NBV long-term assets (end year 4) Current assets Gross book value * Estimated total useful life * Age of assets * Construction cost index end of year 5
$190,000 $329,000 $1,200,000 $600,000 $2,000,000 10 years 5 years 130
* = "of long-term assets at historical cost" Required: Calculate the return on investment and the residual income for year five based on current cost. The company's required rate of return is 12%. Answer: Current cost BV = $2,000,000 × 130/115 = $2,260,870 Current cost depreciation = $2,260,870/10 years = $226,087 Year five current value operating income = $329,000 + $200,000 - $226,087 = $302,913 Current value BV end of year five = $2,260,870 - ($226,087 × 5) = $1,130,435 ROI = $302,913/$1,130,435 = 27% Residual income = $302,913 - ($2,260,870 × 12%) = $31,609 Diff: 3 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-2
27) The following data are available for a manufacturing business started as a new company four years ago when the construction cost index was 110: Current liabilities Operating income NBV long-term assets (end year 3) Current assets Gross book value * Estimated total useful life * Age of assets * Construction cost index end of year 4
$175,000 $312,000 $1,260,000 $210,000 $1,800,000 10 years 4 years 124
* = "of long-term assets at historical cost" Required: Calculate the return on investment and the residual income for year five based on current cost. The company's required rate of return is 12%. Answer: Current cost BV = $1,800,000 × 124/110 = $2,029,091 Current cost depreciation = $2,029.091/10 years = $202,909 Year 4 current value operating income = $312,000 + $180,000 - $202,909 = $289,091 Current value BV end of year 4 = $2,029,091 - ($202,909 × 4) = $1,217,455 ROI = $289,091/$1,217,455 = 24% Residual income = $289,091 - ($1,217,455 × 12%) = $142,996 Diff: 3 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-2
28) Current cost is defined as the cost of purchasing an asset today identical to the one currently held. Required: Discuss why this is a useful concept and explain some difficulties in its use. Answer: Current costs are useful because they eliminate differences in the investment base caused by differences in prices. This may enhance comparability among divisions, particularly those that are located in different geographic regions. As a result current cost ROIs will result in better representations of economic returns. A major difficulty in using current costs is the valuation of an identical asset. Does the exact asset currently exist? Many assets become technologically obsolete quickly. Even if the asset exists, it is very likely that a company would not choose to replace its existing asset with an identical asset, even if it could. It would opt for a "better" asset. Diff: 2 Type: ES CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-2
23.3 Analyze the technical difficulties that arise when comparing the performance of divisions operating in different countries. 1) Comparing the performance of divisions of a multinational company operating in different countries is difficult because of the differences in economic, legal, political, social and cultural environments. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-3
2) Benchmarks represent 'best practices', and can be derived from either inside or outside the organization. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-3
3) Divisions operating in different countries often record performance is different currencies. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-3
4) If the exchange rate at the end of the a foreign subsidiary's first year was 5 Fidgets to 1 Canadian dollar, and if it was 8 Fidgets to 1 Canadian dollar at the end of the second (current) year, what exchange rate should be used to convert total assets if we want to calculate the company's ROI in Canadian dollars? A) the rate in effect when the ROI is calculated B) the rate estimated to be in effect when the ROI is to be reported in the financial statements C) the average rate for the year, assuming that the rate changed approximately evenly throughout the year D) the rate in effect when the assets were acquired (ie. 5 to 1) E) it would be double-counting to convert the assets - leave both assets and income in fidgets and the exchange rate for the numerator cancels out the exchange rate for the denominator Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-3
5) If a company is a multinational company with operations in several different countries, one way to achieve comparability of historical-cost based ROIs for facilities in different countries is to A) restate the results of operations using the cash basis method of accounting. B) use ASPE/IFRS for all reporting and calculations. C) restate the results of all operations in dollars. D) identify the rate of inflation in the most inflationary division and restate the other divisions' results using that rate. E) do nothing, the ROIs are comparable without adjustments. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-3
6) Which of the following statements is TRUE? A) The economic, legal, political, social, and cultural environments are always similar across countries. B) Governments in some countries may impose controls and limit selling prices of a company's products. C) The availability of materials and skilled labour does not normally differ across countries. D) There are no difficulties in comparing performance of divisions across different countries. E) Nonfinancial performance measures should not be used when comparing performance of divisions in different countries. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-3
7) ________ and ________ would be uncontrollable factors that a firm would need to consider when evaluating the return on investment of an international division. A) Manager's experience; currency stability B) Manager's compensation; political climate C) Required rate of return; legal requirements D) Custom duties; cultural environment E) Cultural requirements; required rate of return Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-3
8) Windsor Corporation manufactures iPod covers in Canada and China. The operations are organized as decentralized divisions. The following information is available for the year just ended:
Operating income Total assets
Canada Division $2,400,000 $16,000,000
China Division 11,400,000 yuan 75,000,000 yuan
The exchange rate at the time of Windsor's investment (the end of the previous year) in China was 7.5 Chinese yuan = $1 Canadian. During the year, the yuan declined steadily in value and the exchange rate at the end of the current year was 8.5 yuan = $1 Canadian. The average exchange rate during the year was 8 yuan = $1 Canadian. Required: a. Calculate the Canadian Division's ROI for last year based on dollars. b. Calculate the Chinese Division's ROI for last year based on yuan. c. Which of Windsor's two divisions earned the better ROI? Explain your answer, complete with supporting calculations showing the China Division ROI in Canadian dollars.
Answer: a. Canadian Division's ROI for the year = $2,400,000/$16,000,000 = 15% b.
Chinese Division's ROI for the year = 11,400,000 yuan/75,000,000 yuan = 15.2%
c. Three steps are used to determine the answer. First, convert total assets in the Chinese Division into dollars at the exchange rate prevailing when these assets were acquired (7.5 yuan = $1): Total assets = 75,000,000 yuan/7.5 yuan per dollar = $10,000,000 Second, convert operating income in the Chinese Division into dollars at the average exchange rate prevailing during the year when the operating income was earned: 11,400,000 yuan/8 yuan per dollar = $1,425,000 Third, calculate the Chinese Division's comparable ROI for the year = $1,425,000/$10,000,000 = 14.25% The Chinese Division's ROI measured in yuan is helped by the inflation that occurred in China during the year because inflation boosted the Chinese Division's operating income. Given that the assets were acquired the previous year, the asset values should not be increased to reflect the inflation that occurred during the current year. The net effect of inflation on ROI calculated in yuan is to use an inflated value in the numerator relative to the denominator. Adjusting for inflation using currency differences that represent differential inflation negates the effects of any differences in inflation rates between the two countries on the calculation of ROI. After these adjustments, the Canadian Division shows a higher ROI (15% from part (a) above) than the Chinese Division (14.25%). Diff: 3 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-3
9) The Shamrock Corporation manufactures flower pots in Canada and Ireland. The operations are organized as decentralized divisions. The following information is available for the year just ended:
Operating income Total assets
Canada Division $900,000 $3,500,000
Irish Division 1,250,000 € 2,100,000 €
The exchange rate at the time of Shamrock's investment (the end of the previous year) in Ireland was $1.35 Canadian to 1.00 Euro. During the year, the Euro weakened steadily in value and the exchange rate at the end of the current year was 1.24 Canadian = $1.00 Euro. The average exchange rate during the year was 1.28 Canadian = $1.00 Euro. Required: a. Calculate the Canadian Division's ROI for last year based on dollars. b. Calculate the Irish Division's ROI for last year based on Euros. c. Which of Shamrock's two divisions earned the better ROI? Explain your answer, complete with supporting calculations showing the Irish Division ROI in Canadian dollars. Answer: a. Canadian Division's ROI for the year = $900,000/$3,500,000 = 26% b.
Irish Division's ROI for the year = 1,250,000 €/ 2,100,000 € = 60%
c. Three steps are used to determine the answer. First, convert total assets in the Euro Division into dollars at the exchange rate prevailing when these assets were acquired: Total assets = 2,100,000 €/ 0.741 € per dollar = $2,834,008 Second, convert operating income in the Euro Division into dollars at the average exchange rate prevailing during the year when the operating income was earned: 1,250,000 €/0.781 € per dollar = $1,600,512 Third, calculate the Irish Division's comparable ROI for the year = $1,600,512/$2,834,008 = 56.5% The Irish Division's ROI measured in euros is helped by the weakening of that currency. The effect of a strengthening Canadian dollar is to reduce the converted operating income in relation to the converted investment cost thereby reducing the Irish Division ROI in Canadian dollars. The Irish Division is still a much better performer based on ROI even when the effect of the currency is taken into account. Diff: 3 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-3
10) A multinational corporation established a division in a South American country as a subsidiary
corporation, with an initial investment in total assets of 13 million CU's (the local currency is CU's), which cost the company $3,250,000 Canadian at the time. The company sent an experienced manager to run the division, and gave her a target of 13% required rate of return, promising a bonus if this was met and/or exceeded. After one year, the subsidiary manager was pleased to report a 20% ROI. You have been able to determine the following data pertaining to the subsidiary: ∙ ∙ ∙
Exchange rate at end of year was 8 CU's to 1 Cdn dollar Operating income was earned evenly throughout the year The exchange rate changed approximately evenly throughout the year
Required: a. Calculate the subsidiary's income in CU's. b. Calculate the subsidiary's return on investment in Canadian dollars. c. Calculate the subsidiary's residual income in Canadian dollars. Answer: a. income ÷ 13,000,000 CU's = .20 income = 2,600,000 CU's b.
Old exchange rate = 4 CU's to 1 Cdn dollar ($13,000,000 CU/$3,250,000 Cdn) Average exchange rate = (4 + 8) ÷ 2 = 6 CU's to 1 Cdn dollar 2,600,000 CU's ÷ 6 = $433,333 $433,333 ÷ $3,250,000 = 13.33%
c.
$433,333 - (0.13 × 3,250,000) = $10,833
Diff: 3 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 23-3
11) A multinational corporation established a division in Ireland as a subsidiary corporation, with an initial investment in total assets of 13 million €'s, which cost the company $19,240,000 Canadian at the time. The company sent an experienced manager to run the division, and gave her a target of 12% required rate of return, promising a bonus if this was met and/or exceeded. After one year, the subsidiary manager was pleased to report a 15% ROI. You have been able to determine the following data pertaining to the subsidiary: ∙ ∙ ∙
Exchange rate at end of year was $1.42 Canadian to the Euro Operating income was earned evenly throughout the year The exchange rate changed approximately evenly throughout the year
Required: a. Calculate the subsidiary's income in €'s. b. Calculate the subsidiary's return on investment in Canadian dollars. c. Calculate the subsidiary's residual income in Canadian dollars. Answer: a. income ÷ 13,000,000 €'s = .15 income = 1,950,000 €'s b.
Old exchange rate = $19,240,000/ € 13,000,000 = $1.48 Cdn. to one Euro Average exchange rate = (1.48 + 1.42) ÷ 2 = $1.45 Cdn. to one Euro 1,950,000 €'s × 1.45 = $2,827,500 $2,827,500 ÷ $19,240,000 = 14.70%
c.
$2,827,500 - (0.12 × $19,240,000) = $518,700
Diff: 3 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 23-3
23.4 Evaluate the behavioural effects of salaries and incentives in compensation arrangements. 1) An important consideration in designing compensation arrangements is the tradeoff between creating incentives, and reducing risk. Answer: FALSE Explanation: ... and imposing risk. Diff: 2 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-4
2) Moral hazard describes contexts in which, once risk is shared, the individual fails to make as much effort to avoid harm as when risk was not shared. Answer: TRUE Diff: 1 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-4
3) Good performance measures do not change significantly with the manager's performance but change with factors that are beyond the manager's control. Answer: FALSE Explanation: Good performance measures correlate closely with manager's performance. Diff: 2 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-4
4) Well-designed compensation plans for executives focus on risk and long-term incentives. Answer: FALSE Explanation: Well-designed plans use a compensation mix that carefully balances risk and short and long-term incentives. Diff: 2 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-4
5) The only criticism of team-based compensation is that the incentives for individual employees to excel are diminished, harming overall performance. Answer: FALSE Explanation: An additional criticism is that there can be problems managing team members who are not productive contributors to the team's success but who, nevertheless, share in the team's rewards. Diff: 2 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-4
6) It is more cost-efficient for owners to bear risk than managers, because managers demand a premium (extra compensation) for bearing risk. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-4
7) ________ describes contexts in which, once risk is shared, the individual fails to make as much effort to avoid harm as when risk was not shared. A) Goal congruence B) Moral hazard C) Management compensation D) Incentive compensation E) Executive compensation Answer: B Diff: 1 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-4
8) The absence of good performance measures restricts the owner's ability to motivate managers through A) rewards for products. B) performance-based incentives. C) monetary rewards. D) compensation. E) non-financial rewards. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-4
9) Which of the following statements is TRUE relative to performance evaluations? A) Managers should be evaluated for the whole organization's performance. B) Managers should be evaluated on things they can affect. C) Sales people cannot completely control the level of sales. D) Managers should not be evaluated on the things they can affect if the factors are not completely controllable. E) Managers should be evaluated on all items they affect regardless of the control they exert over them. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-4
10) The benefits of tying performance measures more closely to a manager's efforts encourage the use of A) financial measures. B) nonfinancial measures. C) nonfinancial and financial measures. D) performance input measures. E) moral measures. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-4
11) Measurement of one group's performance against the best possible level of performance exhibited by another group, either inside or outside the organization, is known as A) teamwork analysis. B) performance-variation analysis. C) comparative analysis. D) benchmarking. E) competition analysis. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-4
12) Team incentives encourage cooperation by A) forcing people to work together on difficult tasks. B) changing management style. C) letting individuals help one another as they strive toward a common goal. D) rewarding based on team performance. E) rewarding team members individually. Answer: D Diff: 1 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-4
13) Which type of compensation is most prevalent when a satisfactory performance measure cannot be designed? A) dividends B) stock options C) salary D) bonus based on ROI E) bonus based on ROI and/or RI Answer: C Diff: 1 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-4
14) Signal Cellular Phone uses ROI to measure divisional performance. Annual ROI calculations for each division have traditionally employed the ending amount of invested capital along with the annual operating income and net revenue. The DuPont method is generally used. The company's Phone Accessories Division had the following results: Previous Year ROI = ($2,000,000/$20,000,000) × ($20,000,000/$10,000,000) = 0.20 Current Year ROI = ($2,400,000/$25,000,000) × ($25,000,000/$15,000,000) = 0.16 Corporate management was disappointed in the performance of the division for the current year since it had made an additional investment in the division that was budgeted for a 23 percent ROI. Required: a. Discuss some factors that may have contributed to the decrease in ROI for the current year. b. Assume total assets employed are 10% less than total assets. What is the effect of using total assets employed when calculating ROI? Answer: a. While sales increased by 25 percent, net income only increased by 20 percent. This may indicate that expenses increased more than they should have. Apparently, the expected marginal net income from the new investment was $1,150,000 ($5,000,000 × 0.23), and either sales were too low or expenses too high for the new products. Start-up costs may have also contributed to the increased expenses of the first year's operations. b.
Total assets employed = $10,000,000 × 90% = $9,000,000 ROI = $2,400,000/$9,000,000 = 0.267
Using this formulation of ROI, management would be pleased with their results, since actual results exceed the budget results. Diff: 3 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-4
15) Hummer Construction Supplies Ltd. is preparing the budget for the upcoming year and planning the size of the executive bonus pool. The following table presents budget amounts and their respective probabilities:
Sales Variable costs Fixed costs
Worst Case 25% 20% 5%
Amount $10,000,000 6,000,000 2,000,000
Likely Case 50% 60% 90%
Amount $12,000,000 7,200,000 2,500,000
Best Case 25% 20% 5%
Amount $15,000,000 9,000,000 2,900,000
The VP Finance is interested in determining the size of the bonus pool for the executive team. The base bonus pool is 10% of operating income, if the company reaches the budget. In addition, the VP Finance would like to recommend an additional 20% incentive bonus based on operating income in excess of the budget. Required: 1. Prepare a budget income statement, in contribution margin format, based on the expected values for sales, variable costs, and fixed costs. 2. What is the maximum amount that should be budgeted for the executive bonus pool?
Answer: 1. Hummer Construction Supplies Income Statement Based on Expected Values Sales Variable costs Contribution margin Fixed costs Operating income
$ 12,250,000 7,320,000 $4,930,000 2,495,000 $2,435,000
2. Hummer Construction Supplies Budgeted Income Statement Based on Best Case Sales Variable costs Contribution margin Fixed costs Operating income
$ 15,000,000 9,000,000 $6,000,000 2,900,000 $3,100,000
(10% × $2,435,000) + (20% × ( $3,100,000 - $2,435,000)) = $376,500 Diff: 3 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-4
16) Rocky Construction Supplies Ltd. is preparing the budget for the upcoming year and planning the size of the executive bonus pool. The following table presents budget amounts and their respective probabilities:
Sales Variable costs Fixed costs
Worst Case 15% 30% 10%
Amount $10,000,000 6,000,000 2,000,000
Likely Case 55% 50% 80%
Amount $12,000,000 7,200,000 2,500,000
Best Case 30% 20% 10%
Amount $15,000,000 9,000,000 2,900,000
The VP Finance is interested in determining the size of the bonus pool for the executive team. The base bonus pool is 10% of operating income if the company reaches the budget. In addition, the VP Finance would like to recommend an additional 20% incentive bonus based on operating income in excess of the budget. Required: 1. Prepare a budget income statement, in contribution margin format, based on the expected values for sales, variable costs, and fixed costs. 2. What is the maximum amount that should be budgeted for the executive bonus pool?
Answer: 1. Rocky Construction Supplies Income Statement Based on Expected Values Sales Variable costs Contribution margin Fixed costs Operating income
$ 12,600,000 7,200,000 $5,400,000 2,490,000 $2,910,000
2. Rocky Construction Supplies Budgeted Income Statement Based on Best Case Sales Variable costs Contribution margin Fixed costs Operating income
$ 15,000,000 9,000,000 $6,000,000 2,900,000 $3,100,000
(10% × $2,910,000) + (20% × ( $3,100,000 - $2,910,000)) = $329,000 Diff: 3 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Applying Objective: LO 23-4
17) Broughton Industries Ltd. is a publicly traded company and is organized into divisions. The company currently has a stock option plan for its head office executives only and it now is considering establishing an incentive program for its divisional managers. The proposal is to create a bonus pool based on a predetermined percentage of corporate net income after taxes. Divisional managers will be eligible for money from the bonus pool based on achievement of divisional return on investment (ROI). The calculation of the divisional ROI will be based on divisional net income (including an allocation of head office charges) and investment is defined as total assets. Required: Evaluate the proposed incentive plan. What changes would you recommend, if any, to the proposal? Answer: The proposed bonus plan is cash based. In addition to the company achieving income and establishing the bonus pool maximum, it must ensure it has sufficient cash on hand to pay out the bonuses. Pros of the proposal: The company has clearly defined the basis of the bonus calculation. The measure selected is objective and verifiable. The measure is relatively straightforward to calculate and is based on data captured by the accounting system. Divisional managers will be motivated to increase corporate income as this will increase the amount of funds available for bonus distribution. Cons of the proposal: ROI is a short term performance measure. Future performance may be neglected as managers seek to maximize short term results. ROI can also be manipulated by managers through the timing of expenditures. Managers may defer asset replacement and/or discretionary fixed costs. Although the measure is clearly defined, not all costs (head office) are under the control of the divisional managers. The allocation of corporate costs may be subject to dispute. The plan needs to be defined a bit more precisely. What percentage of corporate income will be available? How will the pool be shared among existing managers? The plan is based on a single performance measure. Recommendations may include: Establishing multiple performance measures including non-financial performance measures. Using Residual Income in lieu of return on investment. Including non-cash based incentives. Defining ROI as controllable divisional income instead of divisional net income. Diff: 3 Type: ES CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: LO 23-4
18) Endicott Inc. has four divisions. Each division produces and sells a variety of industrial products. The
company is developing a compensation plan for division managers. Three options are being considered: (a) salary, (b) performance based incentive using RI, (c) mix of salary and a performance based incentive using RI. What factors should be considered in designing this plan? Answer: The basic trade-off to consider in designing the compensation plan for division managers is between creating incentives to get managers to work hard and imposing risk on them. Compensation based on RI creates incentives for the managers to work hard, but they also bear risk because RI is affected by some factors outside their control. For example, a division manager may work hard but uncontrollable factors (such as economic conditions) may cause RI to be reduced, thereby reducing the manager's compensation. A salary, independent of RI performance, does not impose any risk on managers but it also creates no incentives for them. For this reason, many companies use a mix of salary and a performance based incentive—the salary component reduces risk while the performance based component creates incentives. Diff: 2 Type: ES CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-4
23.5 Apply strategic concepts to analyze the four levers of control, and evaluate their usefulness. 1) Ethical behaviour on the part of managers, while important for its own sake, is not paramount in importance. Answer: FALSE Explanation: Ethical behaviour is important for creating long-term shareholder value. Diff: 2 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-5
2) An interactive control system is a formal information system that managers use to focus organization attention and learning on key strategic issues. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-5
3) Boundary systems describe standards of behaviour and codes of conduct expected of all employees, especially actions that are off-limits. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-5
4) The "four levers" of control are operating profit before taxes, return on investment, residual income, and economic value added. Answer: FALSE Explanation: The "four levers" of control are diagnostic control systems, boundary systems, belief systems, and interactive control systems. Diff: 2 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-5
5) Measures which monitor critical performance variables that help managers track progress toward achieving a company's strategic goals are collectively called diagnostic control systems. Answer: TRUE Diff: 2 Type: TF CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-5
6) How should environmental and ethical issues affect managers' performance evaluations? A) Socially responsible companies set aggressive targets for income and ROI, which must be met before environmental and ethical issues become relevant. B) Environmental responsibilities are met by adhering to the law of the land (e.g., pollution laws). C) Issues that may be ethical concerns in Canada (e.g., bribery) may not be illegal in other countries, and multi-national companies must adhere to local custom. D) Socially responsible companies include environmental and ethical targets in managers' performance evaluations. E) Illegal behaviour is not part of management's concern, unless it affects the bottom line. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-5
7) Which of the following is a difference between a diagnostic control system and an interactive control system? A) A diagnostic control system focuses on meeting expectations, while an interactive control system focuses on standards of ethical behaviour. B) A diagnostic control system focuses on standards of ethical behaviour while an interactive control system focus on meeting expectations. C) Both systems focus on standards of ethical behaviour and meeting expectations. D) A diagnostic control system focuses on organizational attention and learning on key strategic issues, while an interactive control system focuses on meeting expectations. E) A diagnostic control system focuses on meeting expectations, while an interactive control system focuses on organizational attention and learning on key strategic issues. Answer: E Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-5
8) A control system that focuses on meeting expectations is known as a(n) A) diagnostic control system. B) boundary system. C) belief system. D) interactive control system. E) isolated system. Answer: A Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-5
9) A control system that describes standards of behaviour and codes of conduct expected of all employees, especially actions that are off-limits, is known as a(n) A) diagnostic control system. B) boundary system. C) belief system. D) interactive control system. E) isolated system. Answer: B Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-5
10) A part of a control system that articulates the mission, purpose, and core values of a company is known as a(n) A) diagnostic control system. B) boundary system. C) belief system. D) interactive control system. E) isolated system. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-5
11) A control system that attempts to focus an organization's attention and learning on key strategic issues is known as a(n) A) diagnostic control system. B) boundary system. C) belief system. D) interactive control system. E) isolated system. Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-5
12) Managers use ________ to create an ongoing dialog around the organization's key strategic issues to personally involve themselves in subordinates' decision-making activities. A) diagnostic control systems B) boundary systems C) belief systems D) interactive control systems E) isolated systems Answer: D Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-5
13) "Levers of control," in addition to a diagnostic control system, are needed in an organization because A) diagnostic controls have been found to lead to poor financial performance. B) diagnostic controls have no place in a Balanced Scorecard system. C) pressure to perform on diagnostic controls may lead to unethical behaviour. D) they are mandated by the external accounting agencies. E) they are mandated by taxation agencies. Answer: C Diff: 2 Type: MC CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Remembering Objective: LO 23-5
14) Alberta Ltd. has two divisions. Division A manufactures components that can be sold in the external market place or transferred to Division B for further processing. The following data relate to Division A's component product. Variable manufacturing costs/unit $925 Fixed costs/unit at capacity $275 Selling price/unit $1,800 The capacity of the plant is 2,500 units per year. Division B has offered to purchase 350 units from Division A at a price of $1,600/unit, which is the market price of the component. The manager of Division A has refused this offer, stating that it would only return a rate of 25.00%, when the divisional target return on sales is 28.00%. The Division A manager also states that additional fixed costs of $195,000 would be required to produce the 350 units. The corporate required rate of return is 18% of assets and the existing asset base in Division A is $2,500,000. Required: a. How many units must Division A sell in order to achieve its required ROR? What profit margin would be earned at this level of sales? b. Assume Division A currently sells 2,000 units to the external market and can accept Division B's offer without affecting its external sales. Evaluate the refusal of Division B's offer from the standpoint of the corporation as a whole and from the Division A manager's perspective. c. Assume Division A currently sells 2,000 units to the external market and can accept Division B's offer without affecting its external sales. Calculate Division A's residual income with and without the sale to Division B. d. What recommendations would you give to the President of Alberta Ltd. with respect to the performance evaluation of the divisions? Answer: a. Target ROI = 18% × $2,500,000 = $450,000 Fixed costs at capacity = $275 × 2,500 = $687,500 Division must cover fixed costs of $687,500 + target ROI of $450,000 or $1,137,500 CM on current sales = $1,800 - $925 = $875 [Fixed Costs + Target OI]/Unit CM = Required sales in units $1,137,500/$875 = 1,300 units Sales at 1,300 units = 1,300 × $1,800 = $2,340,000 Profit margin = $450,000/$2,340,000 = 19.2% b. Division B's offer is profitable, Division A will make CM of $1,600 - $925 = $675/unit Total CM = $675 × $350 = $236,250 The additional CM exceeds the incremental fixed costs of $195,000 by $41,250. Division A would report a return on sales of 29.51% without the internal sale calculated as follows:
Sales CM Fixed Costs OI ROS
2,000 × $1,800 2,000 × $875 2,500 × $275 $1,062.5/3,600
$3,600,000 $1,750,000 $687,500 $1,062,500 29.51%
With the internal transfer, Division A would report a return on sales of 26.53% calculated as follows:
Sales CM on external CM on internal Fixed costs Fixed costs Profit ROS
$3,600,000 + [350 × $1,600] 2,000 × $875 350 × $675 2,500 × $275 special order $1,103.75/4,160
$4,160,000 $1,750,000 $236,250 $687,500 $195,000 $1,103,750 26.53%
This comparison highlights the Division A manager's point that the target return on sales will not be met if the internal transfer is accepted. Note that the ROIs would be: Without the transfer: $1,062,500/$2,500,000 = 42.5% With the transfer: $1,103,750/$2,500,000 = 44.15% We see that the ROI would be improved with the internal transfer. From the company's perspective, the transfer SHOULD occur. Division B would have to purchase the component in the market at $1,600, yet Division A's outlay cost to produce is only $925 (variable cost) + $557.14 ($195,000/350) or $1,482.14. Therefore, the costs to make are less than the costs to buy, so the company should manufacture the component. c. Residual income (without the transfer) = $1,062,500 - (.18 × $2,500,000) = $1,062,500 - $450,000 = $612,500 Residual income (with the transfer) $1,103,750 - (.18 × $2,500,000) = $1,103,750 - $450,000 = $653,750. In this case, the Division A manager is motivated to accept the internal transfer because it increases the residual income of the division. d. Note that in this case, the ROI does improve. This may not always be the case. Residual income will encourage goal congruent behaviour as any returns over the corporate minimum will be viewed as favourable. However, RI, (like ROI) remains a short-term measure. Consideration should be given to including both non-financial performance measures and measures that are more long-term in nature. Diff: 3 Type: SA CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Analyzing Objective: Cumulative
15) Briefly explain each of the four levers of control. Why does a company need to implement more than a diagnostic control system? Answer: The four levers of control are diagnostic control systems, boundary systems, belief systems, and interactive control systems. Companies must strive for performance, behave ethically, inspire employees, and respond to strategic threats and opportunities in the environment. Diagnostic control systems involve measures that help a company to diagnose whether or not a company is performing according to expectations. Boundary systems describe standards of behaviour and codes of conduct expected of all employees, especially actions that are off-limits. Belief systems articulate the mission, purpose, and core values of a company. Interactive control systems are formal information systems that managers use to focus organization attention and learning on key strategic issues. The "levers of control," in addition to diagnostic control systems, are needed since the pressure to perform on diagnostic goals can be so strong that management might take steps to cut corners and make their performance look better than it really is. In addition, diagnostic systems might focus management too much on meeting short term goals that organization learning and attention to key strategic issues might be inadequate for the future. Diff: 2 Type: ES CPA Competencies: Chapter 23 3.5.1 Performs sensitivity analysis, 3.5.2 Evaluates sustainable profit maximization and capacity management performance, 3.6.1 Evaluates performance using accepted frameworks, 3.6.2 Evaluates performance of responsibility centres, 3.6.3 Evaluates root causes of performance issues, 3.4.1 Evaluates sources and drivers of revenue growth Skill: Understanding Objective: LO 23-5