TEST BANK for Cost Accounting: With Integrated Data Analytics 1st Edition Karen Congo Farmer, Amy Fr by StudyGuide

Cost Accounting, 1e (Farmer) Chapter 1 Cost Accounting Has Purpose 1) A ________ helps an organization, whether for profit or nonprofit, turn its purpose into action by establishing the direction of the entity. A) mission statement B) strategic plan C) SWOT analysis D) vision Answer: B Explanation: A strategic plan helps an organization, whether for profit or nonprofit, turn its purpose into action by establishing the direction of the entity. Diff: 2 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 2) An organization's strategic plan includes its why, where and how for its purpose represented by A) opportunities, strengths and weaknesses. B) opportunities, strengths, and mission. C) mission, vision, and strategy. D) mission, strengths, and strategy. Answer: C Explanation: An organization's strategic plan includes its why, where, and how for its purpose represented by mission, vision, and strategy. Diff: 2 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

3) In choosing a strategy, a business begins by undertaking a thorough examination of itself and the industry within which it operates by performing a ________ analysis. A) mission and vision statement B) strategic initiative C) target objective D) SWOT Answer: D Explanation: In choosing a strategy, a business begins by undertaking a thorough examination of itself and the industry within which it operates by performing a SWOT analysis. Diff: 2 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 4) An organization's ________ is its purpose; its reason for existing. A) mission B) strategy C) initiative D) strategic plan Answer: A Explanation: An organization's mission is its purpose, its reason for existing. Diff: 2 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 5) A SWOT analysis allows an organization to assess its A) strategies, wealth, outlets, and targets. B) strengths, warnings, outlets, and threats. C) strengths, weaknesses, opportunities, and threats. D) strategies, wealth, opportunities, and threats. Answer: C Explanation: A SWOT analysis allows an organization to assess its strengths, weaknesses, opportunities, and threats. Diff: 1 LO: 1 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

6) What is a narrative that describes what the organization will look like, or a destination to achieve, by some future date called? A) SWOT analysis B) Strategic plan C) Vision D) Mission Answer: C Explanation: A narrative the describes what the organization will look like, or a destination to achieve, by some future date is called a vision. Diff: 2 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 7) Which of the following statements is correct regarding a SWOT analysis? A) The basis for evaluation using the SWOT analysis focuses on external factors only. B) Factors to assess in a SWOT analysis included elements described in Porter's Five Forces. C) Insignificant in setting a company's strategy is determining the organization's critical success factors. D) A SWOT analysis is typically used in the Mission and Vision stage in creating the strategic plan for an organization. Answer: B Explanation: The correct statement regarding SWOT analysis is, "Factors to assess in a SWOT analysis included elements described in Porter's Five Forces." Diff: 2 LO: 1 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

8) Which balanced scorecard perspective considers how an organization supports its people and infrastructure to drive and maintain new products and service development and growth? A) Financial perspective B) Customer perspective C) Internal business process perspective D) Learning and growth perspective Answer: D Explanation: The learning and growth perspective considers how an organization supports its people and infrastructure to drive and maintain new products and service development and growth. Diff: 2 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 9) Which of the following represent internal factors in the SWOT analysis? A) Opportunities and threats B) Strengths and weaknesses C) Strengths and opportunities D) Weaknesses and threats Answer: B Explanation: Internal factors in the SWOT include strengths and weaknesses. Diff: 1 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

10) The correct flow of the steps in the creation of an organization's strategic plan is A) Mission and Vision→Strategies and Initatives→Goals and Objectives→Measures and Targets→Results. B) Mission and Vision→Goals and Objectives→Strategies and Initiatives→Measures and Targets→Results. C) Strategies and Initatives→Goals and Objectives→Mission and Vision→Measures and Targets→Results. D) Mission and Vision→Measures and Targets→Strategies and Initiatives→Goals and Objectives→Results. Answer: B Explanation: The correct flow of the steps in the creation of an organization's strategic plan is Mission and Vision→Goals and Objectives→Strategies and Initiatives→Measures and Targets→Results Diff: 2 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 11) When performing a SWOT analysis, a business would ask, "What are the organization's need- improvement areas that impede goal achievement" to address its A) strengths. B) weaknesses. C) opportunities. D) threats. Answer: B Explanation: When performing a SWOT analysis, a business would ask, "What are the organization's need-improvement areas that impede goal achievement" to address its weaknesses. Diff: 1 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

12) An organization's mission is the same as its A) purpose. B) vision. C) objectives. D) targets. Answer: A Explanation: An organization's mission is the same as its purpose. Diff: 1 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 13) A wide-reaching set of documents detailing a company's purpose, future destination, and short-term and long-term techniques for getting there is its A) vision. B) strategic plan. C) balanced scorecard. D) SWOT analysis. Answer: B Explanation: A wide-reaching set of documents detailing a company's purpose, future destination, and short-term and long-term techniques for getting there is Its strategic plan. Diff: 1 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 14) Which of the following statements is correct? A) A strategic plan conveys the idea of a coordinated, consolidated, short-term, organizationwide plan. B) Many strategic plans include both short-term and long-term goals to direct the organization toward arriving at its vision. C) Once an organization determines its mission, it does not need to change it. D) Only for-profit entities need purpose and direction normally detailed in a strategic plan. Answer: B Explanation: The correct statement is, "Many strategic plans include both short-term and longterm goals to direct the organization toward arriving at its vision." Diff: 2 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 6

15) In evaluating a nonprofit organization's balanced scorecard, which perspective might be addressed? A) Customer perspective B) Learning and growth perspective C) Financial stewardship perspective D) Internal business process perspective Answer: C Explanation: In evaluating a nonprofit organization's balanced scorecard, the financial stewardship perspective might be addressed. The other perspectives are for a for-profit organization. Diff: 2 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 16) Which of the following would NOT be included in an organization's strategic plan? A) Mission (why) B) Vision (where) C) Timing (when) D) Strategy (how) Answer: C Explanation: An organization's strategic plan includes its why (mission), where (vision) and how (strategy). It does not include when (timing). Diff: 2 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 17) Porter's Five Forces used in the SWOT analysis would NOT include impacts of A) customers. B) the strategic plan. C) existing competitors. D) potential new entrants. Answer: B Explanation: Porter's Five Forces used in the SWOT analysis would not include impacts of the strategic plan, but would include the impacts of customers, existing competitors, and potential new entrants. Diff: 2 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 7

18) The current or future external challenges that are unfavorable for an organization are referred to as A) threats. B) opportunities. C) strengths. D) weaknesses. Answer: A Explanation: The current or future external challenges that are unfavorable for an organization are referred to as threats. Diff: 1 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 19) At a minimum, factors to assess in a SWOT analysis include elements described in A) an organization's critical success factors. B) an organization's key performance indicators (KPI). C) Porter's Five Forces. D) the balanced scorecard. Answer: C Explanation: At a minimum, factors to assess in a SWOT analysis include elements described in Porter's Five Forces. Diff: 2 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 20) What a company does well that is helpful for its goal achievement is identified as A) strengths. B) weaknesses. C) opportunities. D) threats. Answer: A Explanation: What a company does well that helpful for goal achievement is identified as strengths. Diff: 1 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

21) "SMARTER" goals should be all of the following except A) relevant. B) achievable. C) universal. D) meaningful. Answer: C Explanation: Smarter goals should be relevant, achievable and meaningful, but should not be universal. Diff: 2 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 22) ________ goals complete the circle with feedback and adjustment components, which are necessary for any good goal-setting plan. A) "BALANCED" B) "STRONG" C) "SMARTER" D) "FLEXIBLE" Answer: C Explanation: SMARTER goals complete the circle with feedback and adjustment components, which are necessary for any good goal-setting plan. Diff: 1 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 23) A performance measurement tool used to evaluate what actually happened against an organization's stated objectives which integrates an organization's vision, mission, and strategy is a A) balanced scorecard. B) SWOT analysis. C) strategic plan. D) key performance indicator. Answer: A Explanation: A performance measurement tool used to evaluate what actually happened against an organization's stated objectives which integrates an organization's vision, mission, and strategy is a balanced scorecard. Diff: 2 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 9

24) Which of the following represents the correct four perspectives of the balanced scorecard? A) Financial, organizational capacity, customer, and internal business process perspectives B) Financial, customer, internal business process, and learning and growth perspectives C) Financial, customer, business processes, and organization capacity perspectives D) Customer, business processes, financial stewardship, and beneficiary/stakeholder perspectives Answer: B Explanation: The four perspectives of the balanced scorecard are financial, customer, internal business process, and learning and growth perspectives. Diff: 2 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 25) Which of the following statements is true regarding the balanced scorecard? A) The balanced scorecard focuses on financial measures alone to measure the success of an organization. B) Governmental agencies and nonprofit organizations use the same four perspectives as forprofit organizations use in the balanced scorecard approach. C) The balanced scorecard is a framework for measuring organizational performance using both financial and nonfinancial measures. D) The balanced scorecard uses the five elements described in Porter's Five Forces to assess the strategies and initiatives of an organization. Answer: C Explanation: The statement regarding the balanced scorecard which is true is, "The balanced scorecard is a framework for measuring organizational performance using both financial and nonfinancial measures." Diff: 2 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

26) Which of the following is a balanced scorecard perspective for governmental agencies and nonprofit organizations? A) Customer perspective B) Organization capacity perspective C) Internal business process perspective D) Learning and growth perspective Answer: B Explanation: The organizational capacity perspective is the only balanced scorecard perspective for governmental agencies and nonprofit organizations. Diff: 2 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 27) Which of the following statements about cost accounting is correct? A) Cost accounting has an external focus. B) Cost accounting is very narrow in scope. C) Cost accounting helps owners and managers make decisions about their companies. D) Cost accounting cannot be tied to all functional areas of a company. Answer: C Explanation: Cost accounting helps owners and managers make decisions about their companies is a correct statement. All other statements about cost accounting are incorrect. Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting. 28) Who is at the heart of a multi-directional flow of financial information in the decisionmaking process? A) Management B) Accountants C) Board of directors D) Stockholders Answer: B Explanation: Accountants are at the heart of a multi-directional flow of financial information in the decision-making process. Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Financial Recordkeeping.

29) Which of the following statements is true regarding accounting in the management decisionmaking process? A) The format and content of internal financial reports are determined by the framework, principles, and rules of GAAP and/or IFRS. B) The scope of external financial reports and the level of detail within is kept private, as it is broader and more detailed than internal reports. C) External financial reports and records are created from the same database of financial transactions that populate the internal financial reports for decision-making purposes. D) Financial reports and records initiate the entire decision-making process for management. Answer: C Explanation: The statement which is true is, "External financial reports and records are created from the same database of financial transactions that populate the internal financial reports for decision-making purposes." Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 30) Which financial manager is responsible for the financial reporting process, which includes creation and monitoring of the internal controls that support financial processes? A) Chief financial officer B) Treasurer C) Internal auditor D) Controller Answer: D Explanation: A Controller is the financial manager who is responsible for the financial reporting process, which includes creation and monitoring of the internal controls that support the financial process. Diff: 1 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management.

31) The Chief financial officer is responsible for A) managing cash, cash equivalents, short-term investments, issuance of debt and equities, and relationships with lenders only. B) the financial reporting process, which includes creation and monitoring of the internal controls that support financial processes only. C) all processes within the finance and accounting functional areas and an important player in strategic decisions for the company. D) preparing internal and external financial reports and records. Answer: C Explanation: The Chief financial officer is responsible for all processes within the finance and accounting functional areas and an important player in strategic decisions for the company. Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Integrated Reporting. 32) The financial manager who is responsible for managing cash, cash equivalents, short-term investments, issuance of debt and equities, and relationships with lenders is the A) controller. B) treasurer. C) chief financial officer. D) auditor. Answer: B Explanation: The financial manager who is responsible for managing cash, cash equivalents, short-term investments, issuance of debt and equities, and relationships with lenders is the Treasurer. Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Integrated Reporting.

33) The primary difference in reporting between cost accounting and financial accounting is that A) cost accounting reports support internal management decision-making whereas financial accounting reports present financial statement information to external users and decision- makers who do not work for the company. B) cost accounting reports are externally focused whereas financial accounting reports are internally focused. C) cost accounting reports are subject to GAAP and/or IFRS whereas financial accounting reports are not. D) cost accounting reports cannot be arranged or presented in any reasonable way and cannot be modified based on manager's feedback whereas financial accounting reports can. Answer: A Explanation: The primary difference in reporting between cost accounting and financial accounting is that cost accounting reports support internal management decision-making whereas financial accounting reports present financial statement information to external users and decision-makers who do not work for the company. Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Integrated Reporting. 34) The decision-making framework for an organization consists of ________ steps. A) three B) four C) five D) six Answer: C Explanation: The decision-making process for an organization consists of five steps. Diff: 1 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

35) Your company has been provided with the following steps for an organization's decisionmaking framework. What is the appropriate order for the steps? 1. Calculate relevant costs and benefits for each option. 2. Implement your choice. 3. Clearly outline the problem and its related unknowns. 4. Select the option that maximizes the benefit to the organization and meets required qualitative criteria. 5. Identify suitable options and gather relevant qualitative and quantitative information, making informed assumptions as need be. A) 5, 3, 1, 2, 4 B) 3, 5, 1, 4, 2 C) 3, 1, 5, 4, 2 D) 1, 3, 5, 4, 2 Answer: B Explanation: The appropriate order of steps in the decision-making process is (1) Clearly outline the problem and its related unknowns; (2) Identify suitable options and gather relevant qualitative and quantitative information, making informed assumptions as need be. (3) Calculate relevant costs and benefits for each option; (4) Select the option that maximizes the benefit to the organization and meets required qualitative criteria; and (5) Implement your choice. Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 36) In any decision-making scenario, after implementing a chosen option the next step is to A) determine how well the decision worked and to learn from that assessment. B) move on to additional problems that needed to be resolved. C) set new goals and objectives that will require the use of the decision-making framework. D) identify the stakeholders in the decision and determine the financial impact of the chosen option. Answer: A Explanation: In any decision-making scenario, after implementing a chosen option, the next step is to determine how well the decision worked and to learn from that assessment. Diff: 1 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

37) What is the first step in the decision-making framework? A) Identify suitable options. B) Gather relevant quantitative and qualitative information regarding the decision. C) Clearly outline the problem and its related unknowns. D) Calculate relevant costs and benefits of each option. Answer: C Explanation: The first step in the decision-making framework is to clearly outline the problem and its related unknowns. Diff: 1 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 38) Which type of data analytics uses observations and patterns to detected to shape future decisions? A) Descriptive analytics B) Diagnostic analytics C) Predictive analytics D) Prescriptive analytics Answer: C Explanation: The type of data analytics that uses observations and patterns detected to shape future decisions is predictive analytics. Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Technology & Analytics: Data Analytics. 39) Prescriptive analytics A) describes what has already happened or what is currently happening and helps organizations detect patterns in data. B) involves understanding the outputs of observations and patterns and finding different ways to reach those desired outcomes. C) attempts to make sense of the observations and/or patterns detected. D) uses observations and patterns detected to shape future decisions. Answer: B Explanation: Prescriptive analytics involves understanding the outputs of observations and patterns and finding different ways to reach those desired outcomes. Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Technology & Analytics: Data Analytics. 16

40) Diagnostic analytics A) describes what has already happened or what is currently happening and helps organizations detect patterns in data. B) involves understanding the outputs of observations and patterns and finding different ways to reach those desired outcomes. C) attempts to make sense of the observations and/or patterns detected. D) uses observations and patterns detected to shape future decisions. Answer: C Explanation: Diagnostic analytics attempts to make sense of the observations and/or patterns detected. Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Technology & Analytics: Data Analytics. 41) A company's value chain starts with A) marketing. B) supply of inputs. C) product and/or service design. D) research and development. Answer: D Explanation: A company's value chain starts with research and development. Diff: 1 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 42) The last step in the value chain for a company is A) distribution to customers. B) customer service. C) marketing. D) production. Answer: B Explanation: The last step in the value chain for a company is customer service. Diff: 1 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

43) The ________ comprises the required series of processes, and activities within them, that transform a product or service from thought to finish. A) decision-analysis framework B) supply chain C) value chain D) cost accounting system Answer: C Explanation: The value chain comprises the required series of processes, and activities within them, that transform a product or service from thought to finish. Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 44) A company's supply chain A) comprises the required series of processes, and activities within them, that transform a product or service from thought to finish B) contributes to its competitive advantage and success. C) consists of the processes starting with research and development and ending with customer service. D) is the same regardless of the type of industry in which the company operates. Answer: B Explanation: A company's supply chain contributes to its competitive advantage and success. Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

45) When selecting which activities to perform in the value chain, a company A) must consider specific rules on which processes should be handled internally. B) will never consider processes which could be outsourced. C) should use its SWOT analysis as an integral source of information in choosing which activities to insource or outsource. D) should use its decision-making framework as an integral source of information in choosing which activities to insource or outsource. Answer: C Explanation: When selecting which activities to perform in the value chain, a company should use its SWOT analysis as an integral source of information in choosing which activities to insource or outsource. Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 46) Which of the following is NOT one of the data analysis techniques? A) Predictive analytics B) Diagnostic analytics C) Prescriptive analytics D) Definitive analytics Answer: D Explanation: Definitive analytics is not one of the data analysis techniques. Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Technology & Analytics: Data Analytics. 47) Which of the following represents the correct order of activities in the value chain for a company? A) Design→Research and Development→Marketing→Supply B) Design→Research and Development→Supply→Marketing C) Research and Development→Design→Supply→Production D) Research and Development→Supply→Design→Marketing Answer: C Explanation: The correct order of activities in the value chain for a company is Research and Development→Design→Supply→Production Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 19

48) What is the first activity in the value chain for a business? A) Research and Development B) Design C) Production D) Marketing Answer: A Explanation: The first activity in the value chain for a business is research and development. Diff: 1 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 49) Which of the following is NOT an activity in the value chain for a business? A) Production B) Distribution C) Inspection D) Marketing Answer: C Explanation: Inspection is not an activity in the value chain for a business. Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 50) The art and science of ________ leverages raw data into important insights that help companies make decisions. A) regression analysis B) break-even analysis C) variance analysis D) data analytics Answer: D Explanation: The art and science of data analytics leverages raw data into important insights that help companies make decisions. Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

51) The scope of cost accounting A) is restricted to simply methods in costing products for businesses. B) analyzes the activities and transactions of every aspect of an organization's value chain. C) includes the preparation of financial information and reports primarily for external users. D) focuses on the preparation of financial information and reports that follow GAAP rules. Answer: B Explanation: The scope of cost accounting analyzes the activities and transactions of every aspect of an organization's value chain. Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting. 52) Which of the following would NOT be considered a value-added activity for an automobile manufacturer? A) Installing the steering wheel. B) Fixing defective seats after installation C) Assembling motor parts for the engine D) Attaching tires to the wheels of the automobile Answer: B Explanation: The activity which would not be a value-added activity for an automobile manufacturer would be the fixing of defective seats installed because it does not add value or provide measurable benefits to the final consumer. Diff: 2 LO: 2 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 53) Value-added activities include which of the following? A) Product recalls B) Defective product repairs C) Product assembly D) Inventory taking Answer: C Explanation: Value-added activities include product assembly. Diff: 2 LO: 2 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

54) Providing enlightenment to many stakeholders on the details of products and services offered with the goal of making sales reflects what activity in the value chain? A) Design B) Production C) Customer service D) Marketing Answer: D Explanation: Providing enlightenment to many stakeholders on the details of products and services offered with the goal of making sales reflects the marketing activity in the value chain. Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 55) Which of the following activities in the value chain overlap with the supply chain of an organization? A) Supply, production, marketing, and distribution B) Research and development, production and marketing C) Design, production, and distribution D) Supply, marketing, distribution, and customer service. Answer: A Explanation: Supply, production, marketing, and distribution activities in the value chain overlap with the supply chain of an organization. Diff: 2 LO: 2 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

56) Which of the following statements is true with regards to an organization's value chain? A) Value is added in all activities except selecting, curating, purchasing, receiving and displaying a variety of products for a target audience for a merchandiser. B) A major consideration in optimizing the value chain is to include only those activities that are value-added, that is, to provide measurable benefits to the final consumer. C) Manufacturers add value to raw materials by accounting for only direct labor and not manufacturing overhead since labor converts inputs into a final product. D) From a manufacturing perspective, organizations reference their position in the value chain relative to the customers only since they are the end-user of the final product. Answer: B Explanation: The following statement is true with regards to an organization's value chain, "A major consideration in optimizing the value chain is to include only those activities that are value-added, that is, to provide measurable benefits to the final consumer. Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 57) Ethics A) are the same as laws in a professional setting. B) reflect expected behavior left up to the principles, conscience, and decision-making of an individual person. C) represents the required behavior of an individual person based on laws and objectives of a profession. D) are only required if an individual is certified in his/her profession. Answer: B Explanation: Ethics reflect expected behavior left up to the principles, conscience, and decision-making of an individual person. Diff: 2 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Professional Ethics & Values: Recognizing and Resolving Unethical Behavior.

58) Which of the following governing bodies combines standards of ethical conduct into their expectations for members from a financial accounting perspective? A) Financial Accounting Standards Board (FASB) B) Institute of Management Accountants (IMA) C) Institute of Internal Auditors (IIA) D) Chartered Institute of Management Accountants (CGMA) Answer: A Explanation: The governing body which combines standard of ethical conduct into their expectations for members from a financial accounting perspective is the Financial Accounting Standards Board (FASB). Diff: 1 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Professional Ethics & Values: Legal and Regulatory Requirements. 59) The professional organization and governing body which has special expertise in the field of internal auditing is A) Financial Accounting Standards Board (FASB). B) Institute of Management Accountants (IMA). C) Institute of Internal Auditors (IIA). D) Chartered Institute of Management Accountants (CGMA). Answer: C Explanation: The professional organization and governing body which has special expertise in the field of internal auditing is the Institute of Internal Auditors (IIA). Diff: 1 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Industry-Specific Knowledge.

60) In the Sarbanes-Oxley Act of 2002 (SOX), the section which requires public companies to disclose if they have adopted a code of ethics for its senior officers is A) Section 302. B) Section 404. C) Section 406. D) Section 201. Answer: C Explanation: Section 406 of the Sarbanes-Oxley Act of 2002 (SOX) requires that public companies disclose if they have adopted a code of ethics for its senior officers. Diff: 2 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Professional Ethics & Values: Legal and Regulatory Requirements. 61) Section 404 of the Sarbanes-Oxley Act of 2002 (SOX) requires that A) public companies disclose if they have adopted a code of ethics for its senior officers. B) management of public companies recognize their responsibility for establishing internal controls and provide an assessment of the effectiveness of those internal controls. C) CEOs and CFOs of publicly traded companies certify the accuracy of their reported financial information. D) public and private companies disclose if they have adopted a code of ethics company-wide. Answer: B Explanation: Section 404 of the Sarbanes-Oxley Act of 2002 (SOX) requires that management of public companies recognize their responsibility for establishing internal controls and provide an assessment of the effectiveness of those internal controls. Diff: 2 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Internal Control.

62) Which section of the Sarbanes-Oxley Act of 2002 (SOX) requires CFOs and CEOs of public companies to certify the accuracy of their reported financial information? A) Section 201 B) Section 302 C) Section 404 D) Section 406 Answer: B Explanation: Section 302 of the Sarbanes-Oxley Act of 2002 (SOX) requires CFOs and CEOs of public companies to certify the accuracy of their reported financial information. Diff: 2 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Financial Statement Preparation. 63) Section 302 of the Sarbanes-Oxley Act of 2002 (SOX) requires that A) CFOs and CEOs of public companies certify the accuracy of their reported financial information. B) stockholders of public companies certify the accuracy of their reported financial information. C) CFOs and CEOs of both public and private companies certify the accuracy of their reported financial information. D) stockholders of public and private companies certify the accuracy of their reported financial information Answer: A Explanation: Section 302 of the Sarbanes-Oxley Act of 2002 (SOX) requires that CFOs and CEOs of public companies certify the accuracy of their reported financial information. Diff: 2 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Financial Statement Preparation.

64) The largest and most respected association focused exclusively on the advancement of the management accounting profession and provision of the highest ethical and best practices in management accounting and finance is the A) Financial Accounting Standards Board (FASB). B) Institute of Management Accountants (IMA). C) Institute of Internal Auditors (IIA). D) American Institute of Certified Public Accountants (AICPA). Answer: B Explanation: The largest and most respected association focused exclusively on the advancement of the management accounting profession is the Institute of Management Accountants (IMA). Diff: 1 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting. 65) The Institute of Management Accountants (IMA) guides the management accounting and finance professions by A) helping professionals build a professional network. B) advocating for the profession in a challenging regulatory environment. C) serving as a thought-leader in cutting edge research and industry best practice. D) all of these choices are correct. Answer: D Explanation: The Institute of Management Accountants (IMA) guides the management accounting and finance profession by helping professionals build a professional network, advocating for the profession in a challenging regulatory environment, and serving as a though leader in cutting edge research and industry best practice. Diff: 2 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

66) The IMA's Statement of Ethical Professional Practice includes all of the following overarching ethical principles except A) honesty. B) fairness. C) subjectivity. D) objectivity. Answer: C Explanation: The IMA's Statement of Ethical Professional Practice includes honesty, fairness and objectivity as overarching ethical principles, but does not include subjectivity. Diff: 2 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Professional Ethics & Values: Professional Ethical Behavior. 67) In the event a member of the Institute of Management Accountants (IMA) encounters unethical conduct, the member should A) first discuss the issue with the CEO or President of the company. B) immediately contact an attorney to obtain legal representation in the matter. C) contact the IMA's anonymous hotline to determine how elements of the IMA Statement of Ethical Professional Practice could be applied to the ethical issue. D) do nothing, since the job of the management accountant requires confidentiality with regards to company matters. Answer: C Explanation: In the event a member of the Institute of Management Accountants (IMA) encounters unethical conduct, the member should contact the IMA's Anonymous hotline to determine how elements of the IMA Statement of Ethical Professional Practice could be applied to the ethical issue. Diff: 2 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Professional Ethics & Values: Professional Ethical Behavior.

68) The governing body that has a vision to be the world leader in driving vitality, relevance and quality across the accounting profession, furthering its trust and influence is the A) Securities Exchange Commission (SEC). B) Institute of Management Accountants (IMA). C) Institute of Internal Auditors (IIA). D) American Institute of Certified Public Accountants (AICPA). Answer: D Explanation: The governing body that has a vision to be the world leader in driving vitality, relevance, and quality across the accounting profession, furthering its trust and influence is the American Institute of Certified Public Accountants (AICPA). Diff: 2 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Professional Ethics & Values: Professional Ethical Behavior. 69) Which governing body establishes professional standards for the accounting industry? A) Securities Exchange Commission (SEC) B) Institute of Management Accountants (IMA) C) Institute of Internal Auditors (IIA) D) American Institute of Certified Public Accountants (AICPA) Answer: D Explanation: The governing body that establishes professional standards for the accounting industry is the American Institute of Certified Public Accountants. Diff: 1 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Professional Ethics & Values: Legal and Regulatory Requirements. 70) Ethical considerations A) are only important in the financial accounting profession since financial reporting is primarily for external users. B) are a constant in the accounting profession, and serve to keep accounting professionals in check. C) should only be monitored for executive positions since they are in a position of authority. D) are enforced by state laws and vary state by state. Answer: B Explanation: Ethical considerations are a constant in the accounting profession, and serve to keep accounting professionals in check. Diff: 2 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Professional Ethics & Values: Professional Ethical Behavior. 29

71) Which two governing bodies partnered to establish the CGMA designation, which further enhances the recognition of management accounting? A) AICPA and IMA B) AICPA and U.K.'s Chartered Institute of Management Accountants C) IMA and U.K.'s Chartered Institute of Management Accountants D) FASB and U.K.'s Chartered Institute of Management Accountants Answer: B Explanation: The two governing bodies that partnered to establish the CGMA designation, which further enhances the recognition of management accounting are the AICPA and U.K.'s Chartered Institute of Management Accountants. Diff: 1 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting. 72) Which of the following is NOT one of the principles of the AICPA's Code of Professional Conduct? A) Integrity principle B) Due care principle C) Subjectivity principle D) Responsibilities principle Answer: C Explanation: The subjectivity principle is not one of the AICPA's Code of Professional Conduct principles. Diff: 2 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Professional Ethics & Values: Legal and Regulatory Requirements.

73) Which of the statements regarding the AICPA's Code of Professional Conduct is correct? A) The principles of the code call for an unwavering commitment to honorable behavior, even at the sacrifice of personal advantage. B) The principles of the code express the profession's recognition of its responsibilities only to clients of CPAs. C) The AICPA's Code of Professional Conduct enforces the expectations of ethical and professional conduct for all accountants in the industry, whether certified or not. D) The AICPA's Code of Professional Conduct stipulates disciplinary action for ethical violations. Answer: A Explanation: The correct statement regarding the AICPA's Code of Professional Conduct is that, "The principles of the code call for an unwavering commitment to honorable behavior, even at the sacrifice of personal advantage." Diff: 2 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Professional Ethics & Values: Legal and Regulatory Requirements. 74) The importance of providing accurate and reliable information to decision-makers and other users of accounting information is consistent with organizations having A) financially literate executive officers. B) weak internal controls but an effective ethics policy. C) a strong ethical culture. D) required certification of the financial reporting. Answer: C Explanation: The importance of providing accurate and reliable information to decision-makers and other users of accounting information is consistent with organization having a strong ethical culture. Diff: 2 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Professional Ethics & Values: Recognizing and Resolving Unethical Behavior.

75) Recruiters for accounting jobs typically look for students who are A) technically strong. B) competent. C) analytic. D) all of these answers are correct. Answer: D Explanation: Recruiters for accounting jobs typically look for students who are technically strong, competent, and analytic. Diff: 1 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 76) Which of the following mindsets is best adapted to learning accounting? A) Fixed mindset B) Static mindset C) Growth mindset D) Short-term learning mindset Answer: C Explanation: The growth mindset is best adapted to learning accounting. Diff: 2 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 77) The way of thinking in which intelligence can be developed and leads to a desire to learn, with a person willing to embrace challenges is referred to as a A) growth mindset. B) static mindset. C) fixed mindset. D) short-term learning mindset. Answer: A Explanation: The way of thinking in which intelligence can be developed and leads to a desire to learn, with a person willing to embrace challenges is referred to as a growth mindset. Diff: 2 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

78) A person who avoids challenges, ignores constructive feedback, and feels threatened by the success of other is most likely to have a(n) ________ mindset. A) growth B) adaptable C) fixed D) long-term learning Answer: C Explanation: A person who avoids challenges, ignores constructive feedback, and feels threatened by the success of others is most likely to have a fixed mindset. Diff: 2 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 79) In order to reach higher learning, understanding is superior to A) ascending. B) remembering. C) creating. D) developing. Answer: B Explanation: In order to reach higher learning, understanding is superior to remembering. Diff: 1 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 80) Bloom's Taxonomy is a useful reference for every lifelong learner since the hierarchy of learning helps to recognize that A) there is value only in certain types of learning. B) all types of learning are foundational to each other. C) ascending to the highest level implies mastery of the levels that precede it. D) creating means building on already existing ideas. Answer: C Explanation: Bloom's taxonomy is a useful reference for every lifelong learner since the hierarchy of learning helps to recognize that ascending to the highest level implies mastery of the levels that precede it. Diff: 2 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

81) Which of the following is at the top of the Bloom's Taxonomy hierarchy of learning pyramid? A) Remember B) Evaluate C) Understand D) Create Answer: D Explanation: Create is at the top of the Bloom's Taxonomy hierarchy of learning pyramid. Diff: 1 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 82) Which of the following is at the bottom of the Bloom's Taxonomy hierarchy of learning pyramid? A) Remember B) Evaluate C) Understand D) Create Answer: A Explanation: Remember is at the bottom of the Bloom's Taxonomy hierarchy of learning pyramid. Diff: 1 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 83) Justifying a stand or decision defines which objective in the Bloom's Taxonomy hierarchy of learning pyramid? A) Remember B) Evaluate C) Understand D) Create Answer: B Explanation: Justifying a stand or decision defines the objective of "Evaluate" in the Bloom's Taxonomy hierarchy of learning pyramid. Diff: 2 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

84) Producing a new or original work indicates which objective in the Bloom's Taxonomy hierarchy of learning pyramid? A) Remember B) Evaluate C) Understand D) Create Answer: D Explanation: Producing a new or original work indicates the objective of "Create" in the Bloom's Taxonomy hierarchy of learning pyramid. Diff: 2 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 85) Using information in new situations implies which objective in the Bloom's Taxonomy hierarchy of learning pyramid? A) Apply B) Evaluate C) Understand D) Create Answer: A Explanation: Using information in new situation implies the objective of "Apply" in the Bloom's Taxonomy hierarchy of learning pyramid. Diff: 2 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 86) Explaining ideas or concepts relates to which objective in the Bloom's Taxonomy hierarchy of learning pyramid? A) Remember B) Evaluate C) Understand D) Create Answer: C Explanation: Explaining ideas or concepts relates to the objective of "Understand" in the Bloom's Taxonomy hierarchy of learning pyramid. Diff: 2 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 35

87) To analyze in the Bloom's Taxonomy hierarchy of learning pyramid means to A) use information in new situations. B) explain ideas or concepts. C) justify a stand or decision. D) draw connections among ideas. Answer: D Explanation: To analyze in the Bloom's Taxonomy hierarchy of learning pyramid means to draw connections among ideas. Diff: 2 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 88) Explaining ideas or concepts relates to which objective in the Bloom's Taxonomy hierarchy of learning pyramid? A) Remember B) Evaluate C) Understand D) Create Answer: C Explanation: Explaining ideas or concepts relates to the objective of "Understand" in the Bloom's Taxonomy hierarchy of learning pyramid. Diff: 2 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 89) A learning method which includes a process of laying groundwork by providing context and building slowly from simple to complex ideas is called A) storytelling. B) micro lessons. C) scaffolding. D) reflection. Answer: C Explanation: A learning method which includes a process of laying groundwork by providing context and building slowly from simple to complex ideas is called scaffolding. Diff: 1 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

90) Seeing an outline, which primes one to learn or prompts one to create relationships among concepts, like cause-and-effect or a series of events reflects which learning method? A) Concept maps B) Descriptive diagrams C) Micro lessons D) Storytelling Answer: A Explanation: Seeing an outline, which primes one to learn or prompts one to create relationships among concepts, like cause-and-effect or a series of events reflects the learning method, concept maps. Diff: 1 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 91) Which of the following is NOT a learning method? A) Storytelling B) Micro lessons C) Evaluation D) Reflection Answer: C Explanation: Evaluation is not a learning method. Storytelling, micro lessons and reflection are learning methods. Diff: 1 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 92) The use of chapter-opening vignettes implements which of the following learning methods? A) Storytelling B) Micro lessons C) Scaffolding D) Reflection Answer: A Explanation: The use of chapter-opening vignettes implements the storytelling learning method. Diff: 2 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

93) A learning method in which questions are used to help students remember what they learned is called A) storytelling. B) micro lessons. C) scaffolding. D) reflection. Answer: D Explanation: A learning method in which questions are used to help students remember what they learned is called reflection. Diff: 1 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 94) Identify and describe the 5 steps of a strategic plan. Answer: 1. Mission and Vision — Mission is an organization's purpose (what drives the organization) and the mission is vision is a narrative that describes what the organization will look like, or a destination to achieve, by some future date. The strategic plan is formed to move the organization toward that vision. 2. Goals and Objectives — Goals and objectives direct the organization towards its vision. Goals are long-term whereas, objectives are short-term. Companies might use a balanced scorecard to organize goals. 3. Strategies and Initiatives — The selection of strategies and initiative is based on the how in achieving the goals and objectives. This is most effectively done when a business prepares a SWOT analysis, evaluating its strengths, weaknesses, opportunities and threats. 4. Measures and Targets — Performance measures should be set with dollars and dates to be achieved. Key performance indicators (KPIs) in the industry are appropriate means of measurement. 5. Results — These can be financial or nonfinancial and represent the sum of the company's actual performance, measured against the targets which are previously set. Variances are determined based on this comparison, and the process begins again using the feedback from the results. If using a balanced scorecard approach, companies will now update the goals previously created with the actual results. Diff: 3 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Business Acumen & Operations: Operational Knowledge.

95) Explain what a SWOT analysis is and its purpose in developing a company's strategy. Answer: A SWOT analysis involves the identification of an organization's strengths, weaknesses, opportunities and threats. Strengths and weaknesses focus on internal factors whereas, opportunities and threats emphasize external factors. In identifying the elements in the SWOT analysis, a company may ask itself the following questions: Strengths — What does the organization do well that is helpful for goal achievement? Weaknesses — What are the organization's "needs improvement" areas that impede goal achievement? Opportunities — What are the current or future external prospects that are favorable to the organization? Threats — What are the current or future external challenges that are unfavorable to the organization? At a minimum, factors to assess in a SWOT analysis would include elements described in Porter's Five Forces — impacts of customers, suppliers, potential new entrants, existing competitors, and substitute products. Vital to setting a company's strategy is determining the organization's critical success factors — specific competencies the organization uses to its competitive advantage. Diff: 3 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Business Acumen & Operations: Operational Knowledge. 96) Define a balanced scorecard and identify and describe the four perspectives used in the balance scorecard for a for-profit organization. Answer: The balanced scorecard is a framework of measuring organizational performance using both financial and nonfinancial measures. Organizations often use this approach as a management tool as a means of organizing its goals with results by integrating it with an organization's mission, vision, and strategy to evaluate what actually happened against the company's stated goals and objectives. Managers have to balance the success of the four elements within their organization to achieve success using the four perspectives shown below. 1. Financial perspective — considers the shareholder and how metrics like growth, profit, and risk impact shareholder value and translate into financial success. 2. Customer perspective — considers the customer and includes metrics that create value for the customer, while often measuring customer satisfaction and retention. 3. Internal business process perspective — considers processes internal to a company that are responsible for creating value for the customer and shareholder. 4. Learning and growth perspective — considers how an organization supports its people and infrastructure to drive and maintain new products and service development and growth. Diff: 3 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Business Acumen & Operations: Operational Knowledge. 39

97) Identify and describe the 4 perspectives in the balanced scorecard for governmental agencies and nonprofit organizations. Answer: The balanced scorecard for governmental agencies and nonprofit organizations uses different names for their multiple perspectives to better align with their purpose. These four perspectives are as follows: 1. Beneficiary/stakeholder perspective — focuses on the positive outcomes of those served by the nonprofit organization. 2. Financial stewardship perspective — optimizes utilization of available resources to complete the organization's mission. 3. Business process perspective — focuses on improving internal and external processes that will sustain its purpose, like improving service delivery and strengthening partnerships. 4. Organization capacity perspective — focuses on improving the organization's infrastructure to remain a viable entity. Diff: 3 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Business Acumen & Operations: Operational Knowledge. 98) Identify and describe the individual "SMARTER" goals. Answer: "SMARTER" goals help to complete the personal strategy circle giving feedback and adjustment components for any goal-setting plan. The following reflect the SMARTER goals: • Specific — Make it clear. • Meaningful — It has to matter to you, or you won't stick with it, and it also has to be measurable. • Achievable — Make goals tough, but achievable, and you won't psych yourself out early. • Relevant — Does it connect with your purpose and the rest of your life? • Time-bound — Set a firm date and work toward it. • Evaluate — Do regular, honest check-ins on your progress toward your goals. • Readjust — Based on your evaluation, adjust your plan as needed. If you are not meeting your goals, you may simply need to change your path towards it (readjust). Diff: 3 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Business Acumen & Operations: Operational Knowledge.

99) Define cost accounting and its major focuses. Answer: Cost accounting helps owners and managers make decisions about their organizations. It has an internal focus but is not narrow in scope. It is tied to all functional areas of a company and embodies the idea that "accounting is the language of business." Cost accounting focuses on process of decision-making and analysis by gathering and analyzing information for decisionmaking purposes including the use of data analytics. It also addresses management control by evaluating the culture of an organization and how management makes decisions by looking at how goals and objectives are set and evaluation of the performance of the organization against these goals. Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Reporting & Control: Cost Accounting.

100) Differentiate between financial accounting and cost accounting. Answer: Cost Accounting Financial Accounting Area of - Internally focused - Externally focused focus Purpose - Designed to support internal - Presents select financial management decision- making. information to external users and decision-makers who don't typically work for the company. - Such external users might be investors, stock analysts, regulators, lenders, suppliers, competitors, customers, or others. Scope - Far broader than simply costing - The details, format, and products. content required by GAAP or - It analyzes the activities and IFRS. transactions of an organization's value chain from inception of an idea through sales and customer service. Types of - Unlimited — Reports can be arranged - The details, format, and reports and presented in any reasonable way that content required by GAAP or used supports managers' needs. IFRS. - Managers' feedback modifies the types of reports created. - Internal reports can initiate transactions. If internal users notice errors, they will correct them, furthering the two-way nature of the information collection and reporting cycle. Diff: 3 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Reporting & Control: Integrated Reporting.

101) Explain how accountants support the management decision-making process. Answer: Accountants play a supportive role in the management decision-making process. Management decision-making initiates the process with the financial information which is prepared by accountants. Likewise, the day-to-day transactions populate a financial database of information which is available to accountants to analyze for either internal or external reporting purposes. Every detail in the financial information systems is used to generate internal financial reports and records which is then used by management to make decisions for the organization. This detail is kept private within the organization. Accountants are also responsible for using the same information generated by the organization's financial information systems to create external financial reports and records which must adhere to a set framework, principles, and rules of GAAP (or IFRS). Diff: 3 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Reporting & Control: Integrated Reporting. 102) Identify three financial managers and describe their responsibilities within an organization. Answer: 1. Chief financial officer — Responsible for all processes within the finance and accounting functional areas and an important player in strategic decisions for the company. 2. Controller — Responsible for financial reporting process, which includes creation and monitoring of the internal controls that support financial processes. The controller reports directly to the chief financial officer. 3. Treasurer — Manages cash, cash equivalents, short-term investments, issuance of debt and equities, and relationships with lenders. The treasurer reports directly to the chief financial officer. Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Business Acumen & Operations: Operational Knowledge.

103) Identify the 5 steps in the decision-making framework. Answer: Step 1: Clearly outline the problem and its related unknowns. Step 2: Identify suitable options and gather relevant qualitative and quantitative information, making informed assumptions as need be. Step 3: Calculate relevant costs and benefits for each option. Step 4: Select the option that maximizes benefit to the organization and meets required qualitative criteria. Step 5: Implement your decision. Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Strategy, Planning & Performance: Decision Analysis. 104) Define value chain. List and describe the activities in the value chain of an organization in the order of their occurrence. Answer: The value chain for an organization comprises the required series of processes, and activities that transform a product or service from thought to finish, or in essence, from research and development to finished product to post-sale customer service. A product can be traced through a value chain as follows: 1. Research and Development — Inception of an idea and its resulting development 2. Design — Collaboration for best possible solutions for approved product/service ideas 3. Supply — Supply of inputs such as direct materials and direct labor, or merchandise inventory 4. Production — Actually making the product or providing service 5. Marketing — Providing enlightenment to many stakeholders on the details of products or services offered, with the goal of making sales 6. Distribution — Means of delivering product or service to customer 7. Customer Service — After the sale of the product or service to customer, follow-up such as technical support, returns, or troubleshooting offered to customers. Diff: 3 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Business Acumen & Operations: Operational Knowledge.

105) What is the supply chain? Answer: The supply chain of an organization includes the processes and activities that span sourcing of raw materials (supply) through moving the completed product or service to customers (distribution), and the inherent logistics of all steps in between. It reflects the combination of supply, production, marketing, and distribution activities and contributes to the competitive advantage and overall success of the organization. Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Business Acumen & Operations: Operational Knowledge. 106) What is outsourcing vs. insourcing and why are these concepts important in the value chain? Answer: Outsourcing occurs when an organization has entire processes or activities performed by other organizations externally. Insourcing refers to the complete value chain activities being performed within the organization. Regarding the value chain activities, organizations must determine which activities to undertake in-house or to outsource as elements of a company's strategy and decision-making process. The organization's choices to insource or outsource are driven by its mission, vision, and selected strategies. An evaluation of an organization's strengths, weaknesses, opportunities, and threats through the use of a SWOT analysis, will be an integral source of information in determining which activities to insource or outsource. Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Business Acumen & Operations: Operational Knowledge. 107) Explain the importance of ethics in business. Answer: Ethics serve to keep professional and society in check and are necessary parameters by which to live. Ethics should be incorporated into every management decision made. The importance of providing accurate and reliable information to decision-makers and other users of accounting information is consistent with organizations having a strong ethical culture. If an organization has ethical breaches, of if management is allowed to disseminate false information with no accountability, chaos most likely will occur. Diff: 2 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Professional & Ethical Values: Professional Ethical Behavior.

108) What does Sarbanes-Oxley Act of 2002 (SOX) address with regards to weaknesses in the financial reporting process? Answer: Sarbanes Oxley Act of 2002 represents a key regulation related to the accounting profession which was implemented to address many previous weaknesses in the financial reporting process. Within this regulation, the following three sections specifically address these concerns: Section 302 — This section now requires CEOs and CFOs of public companies to certify the accuracy of the organization's reported financial information. As such, company leaders are now held accountable for providing reliable and thorough information. Section 404 — This section now requires management of public companies to recognize their responsibility for establishing internal controls and provide assessment of the effectiveness of these internal controls, which underlie all business processes and the financial statement reporting of the entity. Section 406 — This section now requires public companies to disclose if they have adopted a code of ethics for its senior officers. Diff: 3 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Professional & Ethical Values: Legal and Regulatory Requirements; Reporting & Control: Integrated Reporting.

109) Explain the roles of the Institute of Management Accountants (IMA) and the American Institute of Certified Public Accountants (AICPA) in the field of accounting. Answer: 1. Institute of Management Accountants (IMA) — Focuses on the advancement of the management accounting profession. It provides a forum for research, practice development, education, knowledge sharing, and advocacy of the highest ethical and best business practices in management accounting and finance. It also serves as the leading resource for developing, certifying, connecting, and supporting the world's best accountants and financial professional in business. It has established its own Statement of Ethical Professional Practice. 2. American Institute of Certified Public Accountants (AICPA) — Its mission is to power the success of global business, CPAs, CGMAs, and specialty credentials by providing the most relevant knowledge, resources, and advocacy, and by protecting the evolving public interest. Its vision is to be the world leader in driving vitality, relevance, and quality across the accounting profession, furthering its trust and influence. It has established its own Code of Professional Conduct. Diff: 2 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Business Acumen & Operations: Operational Knowledge. 110) Explain the difference between a fixed mindset and a growth mindset and identify which is best for a lifelong learner or a career in accounting. Answer: The way of thinking where intelligence is static or set is defined as a fixed mindset. Such thinkers tend to plateau early and may not reach their true potential, since they give up easily when faced with failure, avoid challenges, see effort as fruitless, ignore constructive feedback, and feel threatened by the success of others. This type of mindset may limit the potential for a promising career, and thus, is not optimal for a lifelong learner of a career in accounting. The way of thinking where intelligence is developed over time, and leads to a desire to continuously learn is defined as a growth mindset. Such thinkers embrace challenges, persist when faced with difficulties, relate efforts to success, value constructive feedback and criticism, and are inspired by the success of others. This level of thinking helps people to reach the highest level of achievement is optimal for a lifelong learner or a career in accounting. Diff: 3 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Business Acumen & Operations: Operational Knowledge.

111) List at least two different learning methods and include an example of how the method is used. (Students' answers may vary) Answer: 1. Concept maps — outlines, chapter roadmaps, learning objectives 2. Descriptive diagrams — pictures, illustrations, solutions 3. Micro lessons — practice and Now You Do It lessons 4. Scaffolds — comprehensive demonstration exercises and problems 5. Storytelling — chapter opening vignettes, data analytics in action boxes 6. Reflection — end-of-chapter questions Diff: 2 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Business Acumen & Operations: Operational Knowledge. 112) Diagram the Bloom's Taxonomy hierarchy of Learning. Answer:

Diff: 3 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Business Acumen & Operations: Operational Knowledge.

Cost Accounting, 1e (Farmer) Chapter 2 Refresher on Cost Terms Road Map 1) Which of the following is a true statement about the definition of costs? A) An expense is the same as a cost. B) Noncash charges are not costs since no cash is paid. C) A cost can be an asset or an expense. D) Costs that have future benefit are expensed on the income statement. Answer: C Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 2) Which of the following statements regarding expenses and costs is correct? A) Costs and expenses are the same for accounting and reporting purposes. B) Costs are reported on the income statement or the balance sheet, and expenses are reported only on the income statement. C) Costs are reported on the income statement, and expenses are reported on the balance sheet. D) An expense has remaining future benefit while a cost will never have future benefit. Answer: B Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

3) At the beginning of the year, Gizmo Inc. is considering whether to repair and retain an existing machine, or to replace it with a new machine. The following information is available to analyze this decision: Machine overhaul costs (last year) Repair costs (current year) Annual operating costs (existing machine) Annual operating costs (new machine)

$ 6,000 3,000 14,000 10,000

Which of the costs being considered for this decision represents a sunk cost? A) $6,000 of Machine overhaul costs (last year) B) $3,000 of repair costs (current year) C) $14,000 of annual operating costs (existing machine) D) $10,000 of annual operating costs (new machine) Answer: A Diff: 2 LO: 1 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 4) CMG Construction purchased a truck 6 years ago at a cost of $68,000. Because the old truck required an overhaul of $4,000 last year, and repairs of $2,000 are needed in the current year, the company is now planning to purchase a new truck to replace the old one. The old truck has a trade-in value of $5,000. The cost of the new truck is $82,000. What amount of these costs represent sunk costs? A) $68,000 B) $72,000 C) $77,000 D) $79,000 Answer: B Explanation: Old Truck Cost, $68,000 + Overhaul (last year), $4,000 = $72,000 sunk costs Diff: 2 LO: 1 Bloom: C, AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

5) Opportunity costs A) can be found on the income statement as expenses. B) can be found on the balance sheet as prepaid expenses. C) relate to decision-making but are not reported on the financial statements. D) do not impact decision-making because they happened in the past. Answer: C Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 6) A resource sacrificed to bring benefit in the current period, leaving no remaining future benefit is a(n) A) cost. B) expense. C) expenditure. D) revenue. Answer: B Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 7) Which of the following is NOT an expense? A) Salaries and payroll-related B) Depreciation C) Marketing and selling D) Inventory Answer: D Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

8) Costs with future benefits are considered A) expenses. B) assets. C) liabilities. D) net income. Answer: B Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 9) Which of the following costs does not impact decision-making for a business? A) Sunk cost B) Opportunity cost C) Product cost D) Variable cost Answer: A Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 10) If costs do NOT have objective, measurable future benefit, they are A) not reported on the financial statements. B) reported on the balance sheet as an asset. C) reported on the income statement as an expense. D) reported on the income statement as an asset or the balance sheet as an expense. Answer: C Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

11) Inventory for a merchandising business is classified as a(n) A) revenue and an expense. B) cost and an asset. C) cost and an expense. D) expense and an asset. Answer: B Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting. 12) If an asset is consumed, used up, or has no future benefit, it A) remains an asset and continues to be reported on the balance sheet. B) becomes an expense and will be reported on the income statement. C) becomes an expense but continues to be reported on the balance sheet. D) remains an asset but will be reported on the income statement. Answer: B Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 13) Using vertical analysis for the income statement, the base, set at 100%, is A) total operating expenses. B) net income. C) operating income. D) total revenues. Answer: D Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Financial Statement Analysis.

14) Nyco Corp. had the following financial information at the end of its first month of operations: Revenues Payroll and related expenses Rent expense Utilities expense Advertising expense Total Operating Expenses Profit

$90,000 28,000 15,000 3,000 2,000 48,000 $42,000

In performing vertical analysis, the payroll and related expenses would be expressed as A) 31%. B) 58%. C) 67%. D) 100%. Answer: A Explanation: Payroll and related expenses ÷ Revenues = $28,000 ÷ $90,000 = 31% Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Financial Statement Analysis. 15) Using vertical analysis for the balance sheet, the base, set at 100%, is A) total assets. B) net income. C) total stockholders' equity. D) total liabilities. Answer: A Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Financial Statement Analysis.

16) When comparing the financial reporting for service providers and merchandisers, which of the following statements is correct regarding these two business entities? A) Operating expenses are significantly different between service providers and merchandisers. B) Merchandisers report merchandise inventory and cost of goods sold but service providers usually do not. C) Both business entities report cost of goods sold, but only merchandisers report merchandise inventory. D) Both business entities report merchandise inventory but only merchandisers report cost of goods sold. Answer: B Diff: 1 LO: 2 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting. 17) Which of the following is reported on the balance sheet of a merchandiser? A) Raw materials inventory B) Finished goods inventory C) Merchandise inventory D) Work-in-process inventory Answer: C Diff: 1 LO: 2 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting. 18) For financial statement reporting, Inventories are reported as a(n) A) cost of goods sold on the income statement. B) expenses on the income statement. C) current assets on the income statement. D) current assets on the balance sheet. Answer: D Diff: 1 LO: 2 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

19) A merchandiser shows total current assets of $59,000 and the following additional information: Cash and Cash Equivalents Accounts Receivable Property, Plant and Equipment Other long-term assets

$10,000 5,000 30,000 7,000

How much Merchandise Inventory would be reported for the merchandiser? A) $8,000 B) $23,000 C) $39,000 D) $44,000 Answer: D Explanation: Merchandise Inventory = Total Current Assets - Cash and Cash Equivalents Accounts Receivable = $59,000 - $10,000 - $5,000 = $44,000. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting. 20) Which of the following items would appear on the income statement of a merchandiser but usually not on the income statement of a service provider? A) Revenues B) Cost of goods sold C) Net income D) Operating expenses Answer: B Diff: 1 LO: 2 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

21) The ability of a manufacturer to mark-up its product costs to selling price is reflected in its A) gross margin (profit). B) nonoperating expenses. C) operating expenses. D) inventory. Answer: A Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 22) Which of the following costs reported in the financial statements would uniquely identify the business entity as a manufacturer? A) Rent expense B) Work-in-process inventory C) Merchandise inventory D) Cost of goods sold Answer: B Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting. 23) Which of the following statements related to a Service Provider is incorrect? A) A Service Provider commonly will not carry inventory or cost of goods sold accounts. B) Occasionally, a Service Provider will carry goods for sale that complement the service provided. C) Most costs for a Service Provider are expensed as incurred instead of going through the balance sheet. D) A Service Provider commonly will carry inventory and cost of goods sold accounts similar to a Merchandiser. Answer: D Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

24) Shin Manufacturers reports the following information at the end of the current year: Sales Revenue Cost of Goods Sold Selling Expenses General and Administrative Expenses Raw Materials Inventory Work-In-Process Inventory Finished Goods Inventory Cash

$125,000 33,000 12,000 10,000 42,000 26,000 11,000 23,000

What is the gross margin at year-end for Shin Manufacturers? A) $46,000 B) $70,000 C) $92,000 D) $158,000 Answer: C Explanation: Gross Margin = Sales Revenue - Cost of Goods Sold = $125,000 - $33,000 = $92,000. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

25) Ringold Retailers reports the following information at the end of the current year: Sales Revenue Cost of Goods Sold Selling Expenses General and Administrative Expenses Merchandise Inventory Cash Accounts Receivable Supplies

$452,000 213,000 58,000 46,000 93,000 125,000 21,000 4,000

What is Ringold's net income at year-end? A) $135,000 B) $181,000 C) $146,000 D) $239,000 Answer: A Explanation: Net Income = Sales Revenue - Cost of Goods Sold - Selling Expenses - General and Administrative Expenses = $452,000 - $213,000 - $58,000 - $46,000 = $135,000. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

26) Marcus Manufacturers reports the following information at the end of the current year: Sales Revenue Cost of Goods Sold Selling Expenses General and Administrative Expenses Raw Materials Inventory Work-In-Process Inventory Finished Goods Inventory Cash Accounts Receivable Prepaid Expenses

$250,000 125,000 15,000 23,000 44,000 27,000 35,000 68,000 42,000 9,000

What is the amount of total current assets reported for Marcus Manufacturers at year-end? A) $119,000 B) $216,000 C) $225,000 D) $350,000 Answer: C Explanation: Total Current Assets = Cash + Accounts Receivable + Finished Goods Inventory + Work-In-Process Inventory + Raw Materials Inventory + Prepaid Expenses = $68,000 + $42,000 + $35,000 + $27,000 + $44,000 + 9,000 = $225,000 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

27) Micromart reports the following information at the end of the current year: Sales Revenue Selling Expenses General and Administrative Expenses Gross Margin Net Income Merchandise Inventory Cash Accounts Receivable

$567,000 126,000 78,000 330,000 33,000 149,000 72,000 213,000

What is Micromart's cost of goods sold at year-end? A) $111,000 B) $159,000 C) $237,000 D) $285,000 Answer: C Explanation: Cost of Goods Sold = Sales Revenue - Gross Margin = $567,000 - $330,000 or Net Income + General and Administrative Expenses + Selling Expenses = $33,000 + $78,000 + $126,000 = $237,000. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting. 28) At year-end, Xenon Manufacturers had Sales Revenue of $987,000. Its Cost of Goods Sold was 30% of Sales Revenue. Operating expenses for the year included $205,000 of Selling Expenses and $56,000 of General and Administrative Expenses. The balance in the Prepaid Expenses was $22,000 at the end of the year. What was the net income for Xenon Manufacturers at the end of the year? A) $407,900 B) $429,900 C) $451,900 D) $704,000 Answer: B Explanation: Net Income = Sales Revenue - Cost of Goods Sold - Selling Expenses - General and Administrative Expenses = $987,000 - ($987,000 × 30%) - $205,000 - $56,000 = $429,900. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

29) At year-end, Hercules, Inc. had Sales Revenue was $1,235,000. Its Cost of Goods Sold was 45% of Sales Revenue. Operating expenses for the year included $345,000 of Selling Expense and $142,000 of General and Administrative Expenses. Hercules, Inc. also had balances in Work-In-Process Inventory of $56,000, Finished Goods Inventory of $69,000, and Prepaid Expenses of $13,000 at year-end. What was the gross margin for Hercules, Inc. at year-end? A) $192,250 B) $679,237 C) $679,250 D) $748,000 Answer: C Explanation: Gross Margin = Sales Revenue - Cost of Goods Sold = $1,235,000 - ($1,235,000 × 45%) = $679,250 or $1,235,000 × (100% - 45%) = $679,250. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting. 30) At year-end, KC Consulting had Service Revenue of $365,000. Other pertinent data is as follows: Salaries and benefits expense Rental fees expense Depreciation expense Marketing and selling expense Equipment Prepaid expenses

$72,000 51,000 16,000 9,000 85,000 3,000

What is the net income for KC Consulting at year-end? A) $132,000 B) $214,000 C) $217,000 D) $242,000 Answer: C Explanation: Net Income = Sales Revenue - Salaries and benefits expense - Rental fees expense - Depreciation expense - Marketing and selling expense = $365,000 - $72,000 -$51,000 $16,000 - $9,000 = $217,000. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

31) Product costs consist of A) direct materials and direct labor only. B) direct materials, direct labor, and manufacturing overhead. C) direct materials, direct labor, and selling expenses. D) direct materials, direct labor, and general and administrative expenses. Answer: B Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 32) Which of the following is a period cost? A) Factory rent B) Factory depreciation C) Office depreciation D) Factory insurance Answer: C Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 33) Direct costs include A) direct materials and direct labor. B) direct materials and manufacturing overhead. C) direct labor and manufacturing overhead. D) direct materials, direct labor, and manufacturing overhead. Answer: A Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

34) Which of the following is a non-manufacturing cost? A) Office supplies B) Factory rent C) Materials used to make products D) Wages for production workers Answer: A Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 35) Prime costs are defined as A) direct materials + manufacturing overhead. B) direct labor + manufacturing overhead. C) direct materials + direct labor. D) direct materials + direct labor + manufacturing overhead. Answer: C Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 36) Prime costs are synonymous with A) indirect costs. B) direct costs. C) conversion costs. D) total product costs. Answer: B Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

37) Conversion costs are equal to A) direct materials + direct labor + manufacturing overhead. B) direct materials + direct labor. C) direct materials + manufacturing overhead. D) direct labor + manufacturing overhead. Answer: D Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 38) In computing the cost to manufacture a product, the total prime cost will always be A) greater than the conversion cost. B) less than the conversion cost. C) less than the product cost. D) greater than the product cost. Answer: C Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 39) Ferguson Fasteners, Inc. manufactures hook-and-eye closures. For the month of July, it incurred direct labor of $65,300, direct materials of $32,400, and manufacturing overhead of $44,800. Included in these costs are direct costs of $97,700 and indirect costs of $44,800. Respectively, the conversion costs and prime costs for Ferguson Fasteners, Inc. for July are A) $77,200 and $97,700. B) $77,200 and $110,100. C) $97,700 and $110,100. D) $110,100 and $97,700. Answer: D Explanation: Conversion Costs = Direct Labor + Manufacturing Overhead = $65,300 + $44,800 = $110,100 and Prime Costs = Direct Costs = Direct Materials + Direct Labor = $32,400 + $65,300 = $97,700 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

40) Anwar, Inc. incurred the costs listed below for the month of May in manufacturing shoes. Leather uppers and soles used Advertising Factory labor Factory equipment depreciation Office supplies

$190,000 22,000 115,000 43,000 16,000

Salespersons' salaries Insurance on factory Factory manager salary Factory rent Factory utilities

$ 65,000 38,000 12,000 27,000 21,000

From this list, the total product costs are A) $434,000. B) $446,000. C) $462,000. D) $533,000. Answer: B Explanation: (Leather uppers and soles used + Factory labor + Factory equipment depreciation + Insurance on factory + Factory manager salary + Factory rent + Factory utilities) = ($190,000 + $115,000 + $43,000 + $38,000 + $12,000 + $27,000 + $21,000) = $446,000 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 41) Magnum Manufacturing had sales revenue last year of $100,000, direct manufacturing costs of $60,000, and indirect manufacturing costs of $20,000. If Magnum expects revenues to increase by 10% for the upcoming year, with direct manufacturing costs maintaining the same percentage relationship to sales as in the previous year, and the indirect manufacturing costs remaining unchanged, what will the expected profit margin be for Magnum during the upcoming year? A) $20,000 B) $40,000 C) $44,000 D) $24,000 Answer: D Explanation: Direct manufacturing costs ÷ Sales = $60,000 ÷ $100,000 = 60%; Expected Sales = $100,000 × (1 + 10%) = $110,000, Expected direct manufacturing costs = (Expected sales, $110,000 × 60% = $66,000; Sales - Direct Costs - Indirect Manufacturing Costs = Profit Margin; $110,000 - $66,000 - $20,000 = $24,000 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

42) Colmar, Inc. incurred the following costs for the month of June in manufacturing gardening tools. Wood handles and metal parts used Salespersons' salaries and commissions Labor costs for tool assemblers Factory equipment depreciation Office supplies

$ 156,000 Advertising 22,000 Insurance on factory 85,000 Factory manager salary 27,000 Factory building rent 14,000 Factory utilities

$ 15,000 13,000 9,000 39,000 11,000

From this information, the total manufacturing costs are A) $331,000. B) $340,000. C) $377,000. D) $391,000. Answer: B Explanation: (Wood handles and metal parts used + Factory labor + Factory equipment depreciation + Insurance on factory + Factory manager salary + Factory rent + Factory utilities) = ($156,000 + $85,000 + $27,000 + 13,000 + $9,000 + $39,000 + $11,000) = $340,000 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

43) Deng Distributors incurred the following costs for the month of April in making smartphone covers: Plastic casing components used Salespersons' salaries and commissions Labor costs for case production workers Factory equipment depreciation Office supplies

$ 142,000 33,000 57,000 24,000 12,000

Advertising Insurance on factory Office manager salary Factory building rent Office utilities

$ 19,000 8,000 7,500 31,200 13,500

What are the total period costs for April based on this information? A) $85,000 B) $109,000 C) $124,200 D) $148,200 Answer: A Explanation: Period Costs = Salespersons' salaries and commissions + Office supplies + Advertising + Office manager salary + Office utilities = $33,000 + $12,000 + $19,000 + $7,500 + $13,500 = $85,000 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

44) Metluck Motor-Parts, Inc. incurred the following costs for the current month: Motor-part materials used Office rent Assembly-line worker wages Factory equipment depreciation Office supplies Factory utilities

$250,200 Office salaries and wages 18,700 Office insurance 75,600 Factory manager salary 25,400 Factory rent 7,500 Factory supplies 13,800 Office manager's salary

$ 25,000 8,500 9,200 27,000 6,400 6,300

The total conversion costs for Metluck Motor-Parts, Inc. for the current month is A) $151,000. B) $157,400. C) $171,200. D) $179,700. Answer: B Explanation: Total Conversion Costs = Direct Labor + Manufacturing Overhead = $75,600 + $81,800 = $157,400; Direct Labor = Assembly-line worker wages = $75,600; Manufacturing Overhead = Factory equipment depreciation + Factory utilities + Factory manager salary + Factory rent + Factory supplies = $25,400 + $13,800 + $9,200 + $27,000 + $6,400 = $81,800. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

45) Miracle Marble, Inc. incurred the following costs for the current month to produce high-end marble countertops: Marble used in production Factory equipment rent Assembly-line worker wages Factory insurance Store supplies used Factory utilities

$180,400 Sales salaries and wages exp. 28,700 Store insurance expense 89,500 Factory manager salary 6,300 Factory building depreciation 7,800 Marble-dusting materials used 13,800 Store manager salary expense

$ 32,000 5,800 8,100 27,000 7,200 4,300

Respectively, the total manufacturing and non-manufacturing costs for Miracle Marble are A) $352,900 manufacturing costs and $58,000 non-manufacturing costs. B) $361,000 manufacturing costs and $49,900 non-manufacturing costs. C) $368,800 manufacturing costs and $42,100 non-manufacturing costs. D) $373,100 manufacturing costs and $37,800 non-manufacturing costs. Answer: B Explanation: Total Manufacturing Costs = Direct Materials + Direct Labor + Manufacturing Overhead = (Marble used in production + Marble-dusting materials used) + Assembly-line worker wages + (Factory equipment rent + Factory insurance + Factory Utilities + Factory manager salary + Factory building depreciation) = ($180,400 + $7,200) + $89,500 + ($28,700 + $6,300 + $$13,800 + $8,100 + $27,000) = $361,000; Non-manufacturing costs = Period costs = Store supplies used + Sales salaries and wages exp. + Store insurance expense + Store manager salary expense = $7,800 + $32,000 + $5,800 + $4,300 = $49,900 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 46) A fixed cost A) remains constant per unit at every level of activity. B) remains constant in total at every level of activity. C) varies in total with changes in the level of activity. D) increases per unit as the activity level increases. Answer: B Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

47) Variable costs A) vary in total with a given change in an activity level. B) increase per unit as activity levels increase. C) decrease per unit as activity levels decrease. D) do not change in total with a given change in an activity level. Answer: A Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 48) Information for Hans Gruber, Inc. for the current and prior months is provided below: Cost Item Rent Expense Factory Labor

Current Month Prior Month Current Month Prior Month

Activity in Units 20,000 10,000 20,000 10,000

Cost $50,000 50,000 80,000 40,000

How would the costs for "Rent Expense" and "Factory Labor" be classified? A) Rent Expense is a variable cost and Factory Labor is a fixed cost. B) Rent Expense is a fixed cost and Factory Labor is a variable cost. C) Both Rent Expense and Factory Labor are variable costs. D) Both Rent Expense and Factory Labor are fixed costs. Answer: B Diff: 1 LO: 4 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

49) Which of the statements regarding the relevant range for a business is true? A) No relationship exists between the relevant range for a business and fixed costs and capacity. B) Within the relevant range for a business, the fixed costs and capacity will always change with the change in the activity level. C) Within the relevant range for a business, fixed costs stay fixed or constant when the activity level changes. D) Within the relevant range for a business, variable costs stay fixed or constant when the activity level changes. Answer: C Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 50) Within the relevant range, if a company's level of production decreases, variable costs A) will remain unchanged. B) increase in total, but remain the same per unit. C) decrease in total, but remain the same per unit. D) decrease in total, but the per unit amount may increase or decrease. Answer: C Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 51) Within the relevant range, as a company's level of production increases, fixed costs A) will remain the same in total and the per unit amount will decrease. B) increase in total, but decrease the per unit amount. C) increase in total, but remain the same per unit. D) decrease in total, but the per unit amount may increase or decrease. Answer: A Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

52) Which of the following costs is a variable cost? A) Factory insurance B) Factory production labor costs C) Factory rent D) Factory equipment depreciation Answer: B Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 53) Which of the following statements is correct regarding the management of costs for businesses when activity levels may change rapidly? A) Fixed costs are more manageable than variable costs. B) Both fixed costs and variable costs are easily managed. C) Variable costs are more manageable than fixed costs. D) Both variable costs and fixed costs are difficult to manage. Answer: C Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

54) The following contribution margin income statement represents the operations of Peroux Company, a small manufacturer, at a level of production of 10,000 units (assuming all units produced are sold): Sales Revenue Variable Costs Contribution Margin Fixed Costs Net Income

$53,000 33,000 20,000 15,000 5,000

The relevant rage for Peroux Company is 4,000 to 12,000 units. If production and sales were to decrease to 5,000 units, which of the following would likely occur? A) Unit variable cost would increase but unit fixed cost would not change. B) Unit variable cost would not change, but unit fixed cost would decrease. C) Unit variable cost and unit fixed cost would not change. D) Unit variable cost would not change, but unit fixed cost would increase. Answer: D Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 55) Janus Manufacturing had sales revenue last year of $200,000, variable manufacturing costs of $120,000, and fixed manufacturing costs of $40,000. If Janus expects sales revenue to increase by 10% for the upcoming year, with variable manufacturing costs maintaining the same percentage relationship to sales revenue as in the previous year, and fixed manufacturing costs remaining the same, what will the expected profit be for Janus in the upcoming year? A) $40,000 B) $44,000 C) $48,000 D) $88,000 Answer: C Explanation: Variable costs / Sales Revenue = $120,000 / $200,000 = 60%; Expected Sales Revenue = $200,000 × (1 + 10%) = $220,000, Expected Sales Revenue - ($220,000 × 60%, Expected Variable Costs) - $40,000, Fixed Costs = Expected Profit, $48,000. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

56) Copper Creek Nursery purchases annual and perennial plants from Commercial Landscapers. If the nursery purchases at least 3,000 plants, the cost per annual plant is $1.50 and the cost per perennial plant is $2.00. If 3,001 or more plants are purchased, then a bulk discount of 20% is given for the entire purchase. If Copper Creek purchases 3,000 annual plants and 2,000 perennial plants, what will be the total variable cost of the plants purchased? A) $6,800 B) $7,000 C) $7,600 D) $8,500 Answer: A Explanation: Total Variable costs = (Cost per annual plant × annual plants purchased) + (Cost per perennial plant × perennial plants purchased) = [{$1.50 × (1 - 20%)} × 3,000] + [{$2.00 × (1 - 20%)} × 2,000] = $3,600 + $3,200 = $6,800. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 57) MCG Industries has the following sales and cost data per unit at current production of 10,000 units: Selling Price per Unit Variable Cost per Unit Fixed Cost per Unit

$25.00 9.40 5.10

If MCG Industries was able to increase production to 20,000 units without having to add extra capacity, what will the total costs be for the company? A) $145,000 B) $196,000 C) $239,000 D) $290,000 Answer: C Explanation: Total Costs = Total Variable Costs + Total Fixed Costs = (Variable cost per unit × 20,000 units) + (Fixed Cost per Unit × original units, 10,000) = ($9.40 × 20,000) + (5.10 × 10,000 units) = $188,000 + 51,000 =$239,000. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

58) Retro Rockers makes vintage rocking chairs. It has the following sales and cost data per unit at current production of 100,000 units: Selling Price per Unit Variable Cost per Unit Fixed Cost per Unit

$200.00 123.50 27.30

If Retro Rockers was able to increase production by 20% without having to add extra capacity, what amount of profit will the company recognize? A) $4,920,000 B) $5,904,000 C) $6,450,000 D) $8,374,000 Answer: C Explanation: Sales Revenue - Total Costs = Profit; Sales Revenue = Selling Price per Unit × Expected Sales = [$200.00 × 100,000 units × (1 + 20%)] = $24,000,000; Total Costs = Total Variable Costs + Total Fixed Costs = [{Variable cost per unit × Expected Units, 100,000 units × (1 + 20%)} + (Fixed Cost per Unit × original units, 100,000)] = ($123.50 × 120,000) + (27.30 × 100,000 units) = $14,820,000 + 2,730,000 =$17,550,000; Sales Revenue, $24,000,000 - Total Costs, $17,550,000 = $6,450,000 Profit. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

59) Palm Furniture makes beach-themed furniture. In the prior-year, the unit selling price for a dining set was $1,000 with a unit variable cost of $400 and a unit fixed cost of $200 based on prior production and sales of 5,000 dining sets. For the current year, Palm Furniture is planning to increase the unit selling price to $1,100 since the unit variable cost is increasing 20%. Assuming that at the higher selling price, the company feels that sales may decrease to 4,500 dining sets, what profit will Palm Furniture expect to recognize in the current year? A) $1,790,000 B) $1,890,000 C) $2,790,000 D) $3,160,000 Answer: A Explanation: Sales Revenue - Total Costs = Profit; Sales Revenue = New Selling Price per Unit × Expected Sales = [$1,100 × 4,500 units = $4,950,000; Total Costs = Total Variable Costs + Total Fixed Costs = [{Variable cost per unit × (1 + 20%)} × Expected Units, 4,500 units] + (Fixed Cost per Unit × original units, 5,000)] = ($400 × 1.2 × 4,500) + ($200 × 5,000 units) = $2,160,000 + 1,000,000 =$3,160,000; Sales Revenue, $4,950,000 - Total Costs, $3,160,000 = $1,790,000 Profit Diff: 2 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

60) Franconia Florist makes custom floral arrangements. Sales and cost data is available for the current year below. Arrangements Sales Variable Costs Fixed Costs

3,000 units $195,000 60,000 80,000

If Franconia Florist were able to increase production and sales by 2,000 units while remaining within its relevant range (not adding extra fixed costs), what would the unit variable cost and unit fixed cost be at 5,000 units? A) Unit variable cost, $20.00, and unit fixed cost, $26.67 B) Unit variable cost, $20.00, and unit fixed cost, $16.00 C) Unit variable cost, $16.00, and unit fixed cost, $33.33 D) Unit variable cost, $26.67, and unit fixed cost, $33.33 Answer: B Explanation: Unit Variable Cost at 5,000 units (3,000 units original + 2,000 additional units) = $60,000 ÷ 3,000 units = $20.00 or [($60,000 ÷ 3,000 units) × 5,000 units] ÷ 5,000 units = $20.00; and Unit Fixed Cost at 5,000 units = $80,000 ÷ 5,000 units = $16.00 Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 61) Manufacturing costs incurred during production are A) expensed when incurred. B) inventoriable costs when the units are sold. C) inventoriable costs, and only expensed when the units are sold. D) inventoriable costs throughout the production and sales cycle. Answer: C Diff: 1 LO: 5 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

62) When determining the ending balances in the inventory accounts, the ending balance the Work-In-Process Inventory account represents the manufacturing costs of A) units that are completed. B) units that are sold. C) units not yet started into production. D) units started into production but not finished. Answer: D Diff: 1 LO: 5 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 63) When goods are completed in the production process, they are transferred from A) Work-In-Process Inventory to Finished Goods Inventory. B) Raw Materials Inventory to Work-In-Process Inventory. C) Finished Goods Inventory to Cost of Goods Sold. D) Finished Goods Inventory to Work-In-Process Inventory. Answer: A Diff: 1 LO: 5 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting. 64) Which account will appear on a company's income statement? A) Raw materials inventory B) Cost of goods sold C) Cash D) Accounts payable Answer: B Diff: 1 LO: 5 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

65) When assigning manufacturing costs to production, which account will be debited? A) Finished goods inventory B) Cost of goods sold C) Work-in-process inventory D) Manufacturing overhead Answer: C Diff: 1 LO: 5 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting. 66) Vision-Right Eyewear manufactures discount eyeglasses. The company is trying to determine the amount of plastic material used in production during the current year. The inventory manager has in his records that the beginning inventory for the plastic material was $28,000 and that the ending inventory for the plastic material is $33,000, both based on a physical count. After contacting the purchasing department, it was determined that three separate purchases were made during the year as follows: March 15……………………….... $42,000 July 23…………………………… $37,000 October 7……………………….... $55,000 How much of the plastic material was used to produce glasses during the current year? A) $73,000 B) $129,000 C) $139,000 D) $195,000 Answer: B Explanation: Raw Materials Used = Beginning Direct Materials Inventory + Purchases Ending Direct Materials Inventory; $28,000 + ($42,000 + $37,000 + $55,000) - $33,000 = $129,000. Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

67) Zoom Robotics produces robotic vacuum cleaners. For the current month, Zoom has the following information and business transactions: Beginning Balances: Raw Materials Inventory, $13,500; Work-In-Process Inventory, $16,000; and Finished Goods Inventory, $22,000. Production data for the month: Direct materials, direct labor and manufacturing overhead costs totaling $73,000 were incurred in producing 4,000 robotic vacuums. Ending Balances: Raw Materials Inventory, $15,000; Work-In-Process Inventory, $34,000; and Finished Goods Inventory, $13,000. What is the cost of the goods completed and transferred to the Finished Goods Inventory at the end of the current month? A) $21,000 B) $39,000 C) $55,000 D) $77,000 Answer: C Explanation: (Work-In Process Inventory-Beginning Balance + Total Manufacturing Costs) Work-in-Process Inventory-Ending Balance = Cost of Goods Completed for the Period; WIP Beg. Bal., $16,000 + Total Mfg. Costs, $73,000 (DM + DL + MOH) - WIP End. Bal., $34,000 = $55,000. Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 68) Millville Menagerie has a beginning balance in its Work-in-Process Inventory of $33,000 and an ending balance in its Work-in-Process Inventory of $25,000. If Millville's Cost of Goods Manufactured is $114,000, and it incurred costs for direct materials, $42,000, and direct labor, $38,000, how much manufacturing overhead was assigned (applied) to production? A) $26,000 B) $34,000 C) $42,000 D) $104,000 Answer: A Explanation: (Work-In Process Inventory-Beginning Balance + Total Manufacturing Costs) Work-in-Process Inventory-Ending Balance = Cost of Goods Manufactured; WIP Beg. Bal., $33,000 + Total Mfg. Costs, (DM, $42,000 + DL, $38,000 + MOH) - WIP End. Bal., $25,000 = $114,000. Solving for MOH = ($33,000 + $42,000 + $38,000) + MOH - $25,000 = $114,000; $88,000 + MOH = $114,000; MOH = $114,000 - $88,000 = $26,000. Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 33

69) Lennox Manufacturing had the following production data for the week ended January 31, 20XX, with no beginning balance in the Work-In-Process Inventory account: Monday:Requisitioned $22,000 of direct materials into production and assigned $39,000 of direct labor to production. Wednesday:Added $17,000 of manufacturing overhead to production. Friday:Completed production on 60% of the production and transferred the completed units to finished goods inventory. The balance in the Work-in-Process Inventory at the end of the week would be A) $24,400 B) $31,200 C) $46,800 D) $78,000 Answer: B Explanation: (Direct Materials + Direct Labor + Manufacturing Overhead) × (1 - 60%) = ($22,000 + $39,000 + $17,000) × 40% = $31,200. Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

70) Mannix Manufacturing had the following production data for the month ended April 30, 20XX, with a beginning balances in the Work-In-Process Inventory of $0 and Finished Goods Inventory account of $13,000: April 9: Requisitioned $54,000 of direct materials into production and assigned $58,000 of direct labor to production. April 17: Added $32,000 of manufacturing overhead to production. April 27: Completed production on 80% of the production and transferred the completed units to finished goods inventory. April 30: Sold 40% of the products in finished goods inventory. The balance in the Finished Goods inventory at the end of the month would be A) $56,120. B) $69,120. C) $75,360. D) $76,920. Answer: D Explanation: Ending FG Inventory = Beginning FG Inventory + [{(Direct Materials + Direct Labor + Manufacturing Overhead) × 80%}] × (1 - 40%) = [$13,000 + {($54,000 + $58,000 + $32,000) × 80%}] × 60% = ($13,000 + $115,200) × 60% = $76,920. Diff: 3 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

71) The account balances are shown below for Deshields Industries at the end of the current month: Direct Materials Used WIP, Beginning Depreciation - Factory Equipment Advertising expenses Finished Goods Inventory, End. Factory supervisor salary Sales commissions Factory utility costs

$58,000 Finished Goods Inventory, Beg. 35,000 Factory Insurance 9,100 Office supplies 4,200 Direct Labor 28,000 WIP, Ending 13,000 Office equipment depreciation 7,000 Delivery expenses 3,500 Office rent

$38,000 6,400 3,700 44,000 65,000 1,600 3,900 5,500

The cost of goods manufactured for Deshields Industries at the end of the month is A) $104,000. B) $107,900. C) $117,100. D) $164,000. Answer: A Explanation: Cost of Goods Manufactured = WIP, Beginning + (Direct Materials Used + Direct Labor + Manufacturing Overhead) - WIP, Ending = $35,000 + [$58,000 + $44,000 + ($9,100 + $13,000 + $3,500 + $6,400)] - $65,000 = $104,000 Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

72) If Johnson Manufacturing has the following information, what is the cost of goods sold? Direct Materials Used WIP, Beginning Depreciation - Factory Equipment Advertising expenses Finished Goods Inventory, End. Factory supplies Sales commissions

$38,000 Finished Goods Inventory, Beg. 45,000 Factory Insurance 2,900 Office supplies 5,300 Cost of goods manufactured 38,000 WIP, Ending 3,100 Office equipment depreciation 7,000 Delivery expenses

28,000 2,400 1,600 $44,000 38,000 2,400 4,600

A) $34,000. B) $37,000. C) $51,000. D) $54,000. Answer: A Explanation: Finished Goods Inventory, Beginning + Cost of Goods Manufactured - Finished Goods Inventory, Ending = Cost of Goods Sold = $28,000 + $44,000 - $38,000 = $34,000 Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 73) Which of the following journal entries is correct to account for the cost of goods completed at the end of a period? A) Debit Work-in-Process Inventory and credit Finished Goods Inventory B) Debit Cost of Goods Sold and credit Finished Goods Inventory C) Debit Finished Goods Inventory and credit Work-in-Process Inventory D) Debit Finished Goods Inventory and credit Sales Answer: C Diff: 2 LO: 5 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: FSA.

74) When accounting for the sale of completed goods, which of the following entries would be correct in recording the sale? A) Debit Finished Goods Inventory B) Debit Cost of Goods Sold C) Credit Cost of Goods Sold D) Debit Sales Answer: B Diff: 2 LO: 5 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting. 75) Assuming all units produced are sold for a business, then the operating income computed in a contribution income statement as compared to a gross margin income statement is A) greater. B) lower. C) the same amount. D) undeterminable without action amounts. Answer: C Diff: 1 LO: 6 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting. 76) Contribution margin is A) the same as gross margin. B) the difference between sales and variable costs. C) the difference between sales and total manufacturing costs. D) the difference between sales and cost of goods sold. Answer: B Diff: 1 LO: 6 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

77) Which of the following statements is true regarding the use of different types of income statements? A) Traditional GAAP income statements are used for internal financial reporting purposes only. B) Contribution margin income statements are used for external financial reporting purposed only. C) Traditional GAAP income statements separate variable and fixed costs, which help in internal decision-making. D) Contribution margin income statements separate variable and fixed costs, which help in internal decision-making. Answer: D Diff: 2 LO: 6 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting. 78) Full cost is A) the same as product cost. B) made up of both product costs and period costs. C) made up of variable costs and period costs. D) made up of fixed costs and period costs. Answer: B Diff: 1 LO: 6 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 79) Gross margin equals A) variable costs plus fixed costs. B) sales less variable costs. C) sales less cost of goods sold. D) sales less cost of goods sold and selling and administrative costs. Answer: C Diff: 1 LO: 6 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

80) If all units produced are sold during a period for a business, then the total expenses on a traditional income statement compared to those presented on a contribution margin income statement A) are equal. B) are greater. C) are lower. D) vary with the amount of sales. Answer: A Diff: 2 LO: 6 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 81) A contribution margin income statement is organized by A) function. B) cost behavior. C) product vs. period costs. D) operating vs. nonoperating costs. Answer: B Diff: 1 LO: 6 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting. 82) Which of the following business activities would NOT be considered a value-added activity in the value chain of a business? A) Research & Development B) Distribution C) Inspection and Rework D) Design Answer: C Diff: 1 LO: 6 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

83) At a sales level of $300,000, Ben's Burgers' gross margin is $50,000 less than its contribution margin. If its operating income is $75,000, and total SG&A expenses are $30,000, what is the contribution margin of Ben's Burgers? A) $145,000 B) $155,000 C) $195,000 D) $245,000 Answer: B Explanation: Operating Income + Total SG&A expenses = Gross Margin; $75,000 + $30,000 = $105,000 Gross Margin; Contribution Margin = Gross Margin, $105,000 + $50,000 = $155,000. Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting. 84) At a sales level of $100,000, Bonita's Baskets' gross margin of $55,000 is $20,000 less than its contribution margin. If its operating income is $25,000, and total SG&A expenses are $30,000, what are the variable and fixed costs for Bonita's Baskets? A) Variable, $25,000 and Fixed, $50,000 B) Variable, $50,000 and Fixed, $25,000 C) Variable, $35,000 and Fixed, $40,000 D) Variable, $40,000 and Fixed, $35,000 Answer: A Explanation: Contribution Margin = Gross Margin, $55,000 + $20,000 = $75,000; Variable Costs = Sales - Contribution Margin = $100,000 - $75,000 = $25,000; Fixed Costs = Contribution Margin - Operating Income = $75,000 - $25,000 = $50,000. Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

85) Zenco Machine and Tools currently prices its hammers at $12 per unit. The corresponding unit variable cost is $7 and the unit fixed cost is $2 per when 10,000 hammers are produced and sold. Zenco is considering increasing the price of its hammers to $15 since its suppliers have increased the cost of the materials used in production which has caused the unit variable cost to increase to $8. What is Zenco's projected operating income with the new unit selling price and new unit variable cost if it is only able to produce and sell 8,000 hammers? A) $30,000 B) $36,000 C) $40,000 D) $56,000 Answer: B Explanation: New Unit Selling Price - New Unit Variable Cost = New Unit Contribution margin; $15 - $8 = $7 × 8,000 = $56,000 New Contribution Margin; Operating Income = New Contribution Margin - Fixed Costs = $56,000 - ($2 × 10,000) = $36,000. Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting. 86) Yum Yum Bakery Shop has the following information for the current fiscal year: Total Sales COGS — Variable COGS — Fixed SG&A — Variable SG&A — Fixed

$350,000 150,000 50,000 22,000 13,000

The contribution margin for Yum Yum Bakery Shop is A) $128,000. B) $150,000. C) $178,000. D) $315,000. Answer: C Explanation: Contribution Margin = Sales - COGS—Variable - SG&A—Variable = $350,000 $150,000 - $22,000 = $178,000. Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting.

87) Creative Crafts, Inc. has the following information for the current fiscal year: Total Sales COGS — Variable COGS — Fixed SG&A — Variable SG&A — Fixed

$400,000 133,000 52,000 28,000 16,000

The gross margin for Creative Crafts, Inc. is A) $171,000. B) $187,000. C) $215,000. D) $267,000. Answer: C Explanation: Gross Margin = Sales - COGS—Variable - COGS—Fixed = $400,000 - $133,000 - $52,000 = $215,000. Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting. 88) Nyce Vending has the following information for the current fiscal year: COGS — Variable COGS — Fixed SG&A — Variable SG&A — Fixed

$85,000 43,000 26,000 14,000

The Sales for Nyce Vending are A) $166,000. B) $168,000. C) $209,000. D) $223,000. Answer: D Explanation: Sales = COGS—Variable + COGS—Fixed + SG&A—Variable + SG&A—Fixed + Operating Income = $85,000 + $43,000 - $26,000 + $14,000 + $55,000 = $223,000. Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting, Strategy, Planning & Performance: Strategic Cost Management.

89) Harper's Hunting and Fishing has the following information for the current fiscal year: COGS — Variable COGS — Fixed SG&A — Variable SG&A — Fixed Contribution Margin

$225,000 73,000 38,000 23,000 245,000

The Sales for Harper's Hunting and Fishing are A) $306,000. B) $508,000. C) $543,000. D) $581,000. Answer: B Explanation: Sales = COGS—Variable + SG&A—Variable + Contribution Margin = $225,000 + $38,000 + $245,000 = $508,000. Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting. 90) Bert's Business purchased equipment in 2 years ago at a cost $120,000. Last year, Bert had the equipment repaired at a cost of $5,000. In the current year, Bert is faced with the following alternatives: (1) pay for additional repairs for the equipment at a cost of $8,000; or (2) purchase new equipment at a cost of $144,000. The old equipment will have a trade-in value of approximately $20,000. What amount of the equipment costs represent sunk costs? Answer: Total Sunk Costs = $125,000 Solution: Original Equipment Cost + Equipment Repair Cost (last year) = $120,000 + $5,000 Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

91) The following transactions occurred during the month of April for Nico's Nursery: April 4 Purchased 500 plants for at a total cost of $250 on account. 5 Purchased 700 containers for the plants at a cost of $175 paying cash. 9 Purchased and used fertilizer and plant food for the plants for cash, $68. 16 Purchased an additional 200 plants for cash of $100. Determined the total expenses, total assets and total expenditures for Nico's Nursery for April. Answer: Total Expenses = $68 Total Assets = $525 Total Expenditures = $343 Solution: Total Expenses = Fertilizer and Plant Food = $68 Total Assets = Purchased Plants and Containers (Inventory) = $250 + $175 + $100 = $525 Total Expenditures = Cash Outflows = $175 + $68 + $100 = $343 Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

92) Carnival Cruises breaks down its revenue and cost information for the year ended 2022 as follows: Total Revenue Cost of Revenue Gross Profit Operating Expenses Operating Income

$20,825,000 12,909,000 7,916,000 4,640,000 3,276,000

Perform vertical analysis for the income statement for Carnival Cruises. (Round to nearest whole percentage) Answer: Total Revenue $20,825,000 100% Cost of Revenue 12,909,000 62% Gross Profit 7,916,000 38% Operating Expenses 4,640,000 22% Operating Income 3,276,000 16% Solution: Total Revenue Total Revenue $20,825,000 100% (20,825,000 ÷ 20,825,000) Cost of Revenue Cost of Revenue 12,909,000 62% (12,909,000 ÷ 20,825,000) Gross Profit Gross Profit 7,916,000 38% (7,916,000 ÷ 20,825,000) Operating Operating Expenses Expenses 4,640,000 22% (4,640,000 ÷ 20,825,000) Operating Operating Income Income 3,276,000 16% (3,276,000 ÷ 20,825,000) Using Total Revenue as the base, all items are then divided by the Total Revenue of $20,825,000; Total Revenue, 100% = (20,825,000 ÷ 20,825,000); Cost of Revenue = 62% = (12,909,000 ÷ 20,825,000); Gross Profit = 38%= (7,916,000 ÷ 20,825,000); Operating Expenses = 22% = (4,640,000 ÷ 20,825,000); Operating Income = 16% = (3,276,000 ÷ 20,825,000). Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Financial Statement Analysis.

93) Given the following information for C & J, Inc. identify where the items will be classified (asset or expense, or not reported) and on which financial statement the items will reported (income statement, balance sheet, or N/A). Cost Item Research and Development Prepaid Expenses Cost of Goods Sold Selling, General and Administrative Inventory Opportunity Cost

Classification

Financial Statement

Answer: Cost Item Research and Development Prepaid Expenses Cost of Goods Sold Selling, General and Administrative Inventory Opportunity Cost

Classification Expense Asset Expense Expense Asset Not Reported

Financial Statement Income Statement Balance Sheet Income Statement Income Statement Balance Sheet N/A

Diff: 2 LO: 1 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

94) Match the following definitions to the appropriate term. ______ ______ ______

1. Opportunity Cost a. A cash outflow 2. Sunk Cost b. A resource sacrificed to bring benefit in current period; no remaining future benefit 3. Expenditure c. A measure of a resource being sacrificed; includes assets and expenses. 4. Asset d. Costs already incurred in the past 5. Expense e. Net benefit of paths not taken in decision-making 6. Cost f. Resource with future benefits

______ ______ ______ Answer: ___E__ 1. Opportunity Cost ___D__ 2. Sunk Cost ___A__ 3. Expenditure

A. A cash outflow B. A resource sacrificed to bring benefit in current period; no remaining future benefit C. A measure of a resource being sacrificed; includes assets and expenses. D. Costs already incurred in the past E. Net benefit of paths not taken in decision-making F. Resource with future benefits

___F__ 4. Asset ___B__ 5. Expense ___C__ 6. Cost Diff: 2 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

95) Window Wizards Manufacturing's information is presented below for the current month: Raw Materials Inventory Prepaid Expenses Research and Development Cost of Goods Sold Depreciation Work-In-Process Inventory Cash Selling, General and Administrative Finished Goods Inventory Accounts Receivable

$10,500 8,300 3,520 26,130 1,423 3,450 6,230 12,840 18,190 7,140

Compute the total current assets for Window Wizards Manufacturing. Answer: Total current assets = $53,810 Solution: Cash, $6,230 + Accounts Receivable, $7,140 + Raw Materials Inventory, $10,500 + Work-In- Process Inventory, $3,450 + Finished Goods Inventory, $18,190 + Prepaid Expenses, $8,300 = $53,810 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting. 96) Bestco Products has total inventory balances of $330,000. If 1/6 of the balance reflects goods that are completed and ready for sale, and 3/6 represents materials not yet placed into production, what are the balances in each of the three inventory categories for this manufacturer? Answer: Raw Materials Inventory = $165,000 Work-In-Process Inventory = $110,000 Finished Goods Inventory = $55,000 Solution: Raw Materials Inventory = $330,000 × 3/6 = $165,000 Work-In-Process Inventory = $330,000 × 2/6 = $110,000 Finished Goods Inventory = $330,000 × 1/6 = $55,000 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting.

97) If Midwest Plastics has a Gross Margin of $68,000, Finished Goods Inventory (beginning)of $26,000, Sales Revenues of $193,000, Operating Expenses of $52,000, and Finished Goods Inventory (ending) of $38,000. What is Midwest Plastics' Cost of Goods Sold? Answer: $125,000 Solution: Sales Revenues, $193,000 - Gross Margin, $68,000 = Cost of Goods Sold, $125,000 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting. 98) Given the following items listed below, identify on which type(s) of business financial statements these items would normally appear: A. Service Provider, B. Merchandiser, and/or C. Manufacturer. More than one selection may be included in an answer. _________ 1. Raw Materials Inventory _________ 2. Operating Expenses _________ 3. Cost of Goods Sold _________ 4. Finished Goods Inventory _________ 5. Gross Margin _________ 6. Operating Income _________ 7. Work-In-Process Inventory _________ 8. Merchandise Inventory Answer: 1. C 2. A, B, C 3. B, C 4. C 5. B, C 6. A, B, C 7. C 8. B Diff: 2 LO: 2 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

99) The following information is included below for Golden Gadgets: Raw Materials Inventory Cost of Goods Sold (Product) Depreciation Work-In-Process Inventory Cash Revenues (Product) Selling, General and Administrative Finished Goods Inventory Accounts Receivable

$ 7,500 42,140 11,253 13,489 19,710 105,328 6,840 5,190 16,530

Compute the Gross Margin for Golden Gadgets. Answer: $63,188 Solution: Revenues, $105,328 - Cost of Goods Sold, $42,140 = Gross Margin, $63,188 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting. 100) Yogo Factory reports the following costs and expenses for the month of August: Factory Equipment Rent Direct Materials Used Factory Supervisor's Salary Sales Salaries and Wages Factory Building Depreciation

$ 4,500 Sales Commissions 12,320 Factory Repairs 5,490 Advertising 21,480 Factory Utilities 6,210 Delivery Costs

430 1,290 4,830 5,840 3,570

What is the total "Manufacturing Overhead" for Yogo Factory for August? Answer: $23,330 Solution: Manufacturing Overhead = Factory Equipment Rent + Factory Supervisor's Salary + Factory Building Depreciation + Factory Repairs + Factory Utilities = $4,500 + $5,490 + $6,210 + $1,290 + $5,840 = $23,330 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

101) Winter Widgets reported the following costs and expenses for the month of December: Factory Equipment Depreciation Direct Materials Used Factory Supervisor's Salary Sales Salaries and Wages Factory Building Rent

$4,500 Direct Labor 25,320 Factory Repairs 5,490 Advertising 21,480 Factory Utilities 6,210 Delivery Costs

$34,200 1,290 3,830 5,840 4,570

What is the total "Manufacturing Cost" for Winter Widgets for December? Answer: $82,850 Solution: Total Manufacturing Cost = Direct Materials + Direct Labor + Manufacturing Overhead; Manufacturing Overhead = Factory Equipment Depreciation + Factory Supervisor's Salary + Factory Building Rent + Factory Repairs + Factory Utilities = $4,500 + $5,490 + $6,210 + $1,290 + $5,840 = $23,330 MOH; DM, $25,320 + DL, $34,200 + MOH, $23,330 = $82,850 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 102) Sierra Ski, Inc. reported the following costs and expenses for the month of January: Office Equipment Depreciation Direct Materials Used Sales Salaries

$4,700 Direct Labor 31,250 Manufacturing Overhead 25,940 Advertising

$24,600 32,790 13,420

What are the amounts for "Prime Costs" and "Conversion Costs" for Sierra Ski, Inc. for January? Answer: Prime Costs = $55,850 and Conversion Costs = $57,390 Solution: Total Prime Costs = Direct Materials Used + Direct Labor = $31,250 + $24,600 = $55,850; Total Conversion Costs = Direct Labor + Manufacturing Overhead = $24,600 + $32,790 = $57,390 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

103) Buford is interested in raising money for charity by opening his own custom lemonade shop. Instead of buying the lemonade premixed, he plans to make his lemonade from scratch in the shop. He has questions about the reporting of the following costs and expenses, as to whether they are product costs or period costs so that he can properly identify the costs to make one eight-ounce cup of lemonade and then, properly price the cup of lemonade to make a profit. Identify each of the costs as either a "product" cost or a "period" cost to help Buford. 1. Production Equipment Depreciation 2. Shop Rent (Production Facilities) 3. Production Supervisor's Salary 4. Sales Salaries and Wages 5. Production Equipment Repairs Answer: 1. Production Equipment Depreciation 2. Shop Rent (Production Facilities) 3. Production Supervisor's Salary 4. Sales Salaries and Wages 5. Production Equipment Repairs

6. Direct Labor 7. Direct Materials Used 8. Advertising 9. Shop Utilities (Production) 10. Delivery Costs

Product 6. Direct Labor

Product

Product 7. Direct Materials Used Product 8. Advertising Period 9. Shop Utilities (Production) Product 10. Delivery Costs

Product Period Product Period

Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

104) Skye Corporation reported the following costs and expenses for the month of May, which need to be classified as either a direct cost or an indirect cost: Factory Equipment Depreciation Direct Materials Used Factory Supplies Factory Rent

Factory Repairs Factory Insurance Factory Supervisor's Salary Direct Labor Used

Classify these costs as either "direct" costs or "indirect" costs for Skye Corporation. Answer: 1. Factory Equipment Indirect 5. Factory Repairs Indirect Depreciation 2. Direct Materials Used Direct 6. Factory Insurance Indirect 3. Factory Supplies Indirect 7. Factory Supervisor's Salary Indirect 4. Factory Rent Indirect 8. Direct Labor Used Direct Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

105) Tristate Table Manufacturers incurred the following costs for the current month: 1. Factory equipment rent 2. Depreciation on factory (straight-line) 3. Wages of assembly-line workers 4. Wood used in the table 5. Factory property taxes

6. Salary of factory supervisor 7. Hardware used in assembling tables (screws and washers) 8. Factory insurance 9. Wages of table artisans 10. Paint/varnish for finishing tables

Identify the costs shown above as either variable costs or fixed costs. Answer: 1. Factory equipment rent Fixed 6. Salary of factory supervisor 2. Depreciation on factory 7. Hardware used in assembling (straight-line) Fixed tables (screws and washers) 3. Wages of assembly-line Variable 8. Factory insurance workers 4. Wood used in the table Variable 9. Wages of table artisans 5. Factory property taxes Fixed 10. Paint/varnish for finishing tables Diff: 2 LO: 4 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

Fixed Variable Fixed Variable Variable

106) Determine the missing amounts in the following set of data:

Unit Selling Price Unit Variable Cost Unit Fixed Cost Profit per Unit Total Profit

100 units $20.00 $8.00 $5.00 (a) (b)

400 units $20 (c) (d) (e) (f)

Answer: (a) $7.00 (b) $700.00 (c) $8.00 (d) $1.25 (e) $ 10.75 (f) $4,300.00 Solution: (a) $20.00 - ($8.00 + $5.00) = $7.00; (b) $7.00 [from (a)] × 100 units = $700.00; (c) $8.00; variable cost per unit stays the same; (d) [100 units × $5.00] ÷ 400 units = $1.25; (e) $20.00 - [$8.00 + $1.25 from (d)] = $10.75; (f) $10.75 [from (a)] × 400 units = $4,300 Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 107) The following costs were incurred by Birdie's Bikes for the month of July: 1. Factory equipment rent $7,700 6. Salary of factory supervisor 2. Bike tires 2,430 7. Bike chains 3. Wages of assembly-line workers 10,920 8. Factory insurance 9. Bike hardware (screws, caps, 4. Bike frames 7,850 etc.) 5. Factory property taxes 2,460 10. Handlebar assemblies

4,760 3,780 2,190 2,270 3,140

Determine the total variable costs and total fixed costs for Birdie's Bikes for the month of July. Answer: Total variable costs = $30,390; Total fixed costs = $17,110 Solution: Total variable costs = Bike tires + Wages of assembly-line workers + Bike frames + Bike chains + Bike hardware + Handlebar assemblies = $2,430 + $10,920 + $7,850 + $3,780 + $2,270 + $3,140 = $30,390; Total fixed costs = Factory equipment rent + Factory property taxes + Salary of factory supervisor + Factory insurance = $7,700 + $2,460 + $4,760 + $2,190 = $17,110 Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 56

108) Identify the following statements as correct or incorrect regarding cost behavior. 1. Variable costs change in total and per unit when a given level of activity level changes. 2. Fixed costs remain the same in total but change inversely with a given change in an activity level. 3. The relevant range relates to all levels of activity even if it extends beyond the current capacity of the company. 4. Variable costs and fixed costs will always change on a per unit basis when the activity level changes. Answer: 1. Incorrect — Variable costs change in total but not on a per unit basis. Variable unit costs remain the same when the activity level changes. 2. Correct. 3. Incorrect — The relevant range only relates to levels of activity within the current capacity. 4. Incorrect — Variable unit costs remain the same when the activity level changes whereas, fixed unit costs will change, inversely with the change in the activity level. Diff: 2 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 109) If Meyers Manufacturing currently incurs a variable cost per unit of $19.00 and a fixed cost per unit of $14.00 when it produces 1,000 units, what will the unit variable cost and unit fixed cost be when it produces $10,000 units? Answer: Unit variable cost = $19.00 and Unit fixed cost = $1.40 Solution: Unit variable cost will not change with the change in the level of activity, so it remains at $19.00; however, the unit fixed cost = (1,000 units × $14) = $14,000 initial fixed costs ÷ 10,000 units (new level) = $1.40 Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

110) If Ciaxis Inc. has $0 in its Direct Materials Inventory (beginning), and $9,300 in its Direct Materials Inventory (ending), and purchased $28,400 of direct materials during the period, what amount of direct materials was used in production by Ciaxis during the period? Answer: Direct materials used = $19,100 Solution: Direct Materials Inventory (beginning) + Direct Materials Purchases - Direct Materials Inventory (ending) = Direct Materials Used during the Period; $0 + $28,400 - $9,300 = $19,100 Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting. 111) If Work-In-Process Inventory has a balance of $4,200 at the beginning of the month, direct materials used in production totaled $10,000, direct labor used in production totaled $15,000, and manufacturing overhead applied totaled $3,700, what is the ending balance in the Work-InProcess Inventory at the end of the month, if none of the units are completed and transferred to finished goods inventory? Answer: Work-In-Process Inventory (ending) = $32,900 Solution: Work-In-Process Inventory (ending) = Work-In-Process Inventory (beginning) + Direct Materials Used + Direct Labor + Manufacturing Overhead Applied = $4,200 + $10,000 + $15,000 + $3,700 = $32,900 Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting.

112) Miriad Manufacturers has the following information for the month of September: Work-In-Process Inventory (ending) Finished Goods Inventory (beginning) Total Manufacturing Costs Sales and Advertising Costs Finished Goods Inventory (ending Work-In-Process Inventory (beginning)

$10,000 12,000 89,000 25,000 18,000 13,000

Determine the Cost of Goods Manufactured for Miriad Manufacturers for September. Answer: Cost of Goods Manufactured = $92,000 Solution: Cost of Goods Manufactured = Work-In-Process Inventory (beginning) + Total Manufacturing Costs - Work-In-Process Inventory (ending) = $13,000 + $89,000 - $10,000 = $92,000 Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 113) Crescent Computers, Inc. has the following information for the month of October: Work-In-Process Inventory (ending) Finished Goods Inventory (beginning) Cost of Goods Manufactured Total Manufacturing Costs Sales and Advertising Costs Finished Goods Inventory (ending) Work-In-Process Inventory (beginning)

$20,000 22,000 71,000 68,000 26,000 38,000 23,000

Determine the Cost of Goods Sold for Crescent Computers for October. Answer: Cost of Goods Sold = $55,000 Solution: Cost of Goods Sold = Finished Goods Inventory (beginning) + Cost of Goods Manufactured - Finished Goods Inventory (ending) = $22,000 + $71,000 - $38,000 = $55,000 Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

114) Prepare the journal entry for the following production activity for the current week: • Incurred $5,600 of manufacturing overhead in production of goods for utilities. • Incurred direct labor costs of $37,200 in production of goods. • Direct materials of $13,700 were requisitioned for production. Answer: Debit Credit Work-In-Process Inventory 56,500 Raw Materials Inventory 13,700 Wages Payable 37,200 Utilities Payable 5,600 Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting. 115) Country Cookers has the following information for the current fiscal year: Total Sales COGS — Variable COGS — Fixed SG&A — Variable SG&A — Fixed

$300,000 123,000 67,000 34,000 26,000

Determine the gross margin for County Cookers. Answer: Gross Margin = $110,000 Solution: Total Sales - COGS—Variable - COGS—Fixed = $300,000 - $123,000 - $67,000 = $110,000 Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting.

116) Zebra Zingers has the following information for the current fiscal year: Total Sales COGS — Variable COGS — Fixed SG&A — Variable SG&A — Fixed

$550,000 243,000 122,000 75,000 46,000

Determine the contribution margin for Zebra Zingers. Answer: Contribution Margin = $232,000 Solution: Total Sales - COGS—Variable - SG&A—Variable = $550,000 - $243,000 - $75,000 = $232,000 Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting. 117) Compute the missing amounts in the table below:

(1) (2) (3)

Sales $150,000 (c) $265,000

Variable Costs Contribution Margin Fixed Costs Operating Income (a) $90,000 $40,000 (b) $77,000 $45,000 (d) $20,000 $73,000 (e) $89,000 (f)

Answer: (a) $60,000 (b) $50,000 (c) $122,000 (d) $25,000 (e) $192,000 (f) $103,000 Solution: (a) Sales - Contribution Margin = Variable Costs; $150,000 - $90,000 = $60,000 (b) Contribution Margin - Fixed Costs = Operating Income; $90,000 - $40,000 = $50,000 (c) Variable Costs + Contribution Margin = Sales; $77,000 + $45,000 = $122,000 (d) Contribution Margin - Operating Income = Fixed Costs; $45,000 - $20,000 = $25,000 (e) Sales - Variable Costs = Contribution Margin; $265,000 - $73,000 = $192,000 (f) Contribution Margin - Fixed Costs = Operating Income; $192,000 (e) - $89,000 = $103,000 Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting. 61

118) Compute the missing amounts in the table below:

(1) (2) (3)

Sales $250,000 (c) $198,000

Cost of Goods Sold (a) $97,000 $62,000

Gross Margin $120,000 $58,000 (e)

SG&A Expenses $65,000 (d) $73,000

Operating Income (b) $32,000 (f)

Answer: (a) $130,000 (b) $55,000 (c) $155,000 (d) $26,000 (e) $136,000 (f) $63,000 Solution: (a) Sales - Gross Margin = Cost of Goods Sold; $250,000 - $120,000 = $130,000 (b) Gross Margin - SG&A Expenses = Operating Income; $120,000 - $65,000 = $55,000 (c) Cost of Goods Sold + Gross Margin = Sales; $97,000 + $58,000 = $155,000 (d) Gross Margin - Operating Income = SG&A Expenses; $58,000 - $32,000 = $26,000 (e) Sales - Cost of Goods Sold = Gross Margin; $198,000 - $62,000 = $136,000 (f) Gross Margin - SG&A = Operating Income; $136,000 (e) - $73,000 = $63,000 Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting.

119) Speedy Sneakers, Inc. has the following information for the current fiscal year: Total Sales COGS — Variable COGS — Fixed SG&A — Variable SG&A — Fixed

$620,000 214,000 167,000 48,000 39,000

Determine the gross margin for Speedy Sneakers, Inc. Answer: Gross Margin = $239,000 Solution: Total Sales - COGS—Variable - COGS—Fixed = $620,000 - $214,000 - $167,000 = $239,000 Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting. 120) White Water Springs Rafting Company has the following cost data for its first year of operations: Cost of Goods Sold Salaries and Wages Cost of Equipment (New) Building Rent

$68,000 Advertising 29,000 Cost of Land (for a New Building) 37,000 Research and Development 24,000 Utilities

$5,000 89,000 4,200 6,300

Given these costs, first classify the costs as expenses or assets, and then, total the amounts. Answer: Expenses are Cost of Goods Sold, Salaries and Wages, Building Rent, Advertising, Research and Development, and Utilities. Assets include the Cost of Equipment (New) and the Cost of Land (for a New Building); Total Expenses = $136,500 Total Assets = $126,000 Solution: Total Expenses = $136,500 = Cost of Merchandise Sold, $68,000 + Salaries and Wages, $29,000 + Building Rent, $24,000 + Adverting, $5,000 + Research and Development, $4,200 + Utilities, $6,300; Total Assets = $126,000 = Cost of Equipment (New), $37,000 + Cost of Land (for a New Building), $89,000 Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis IMA: C Strategy, Planning & Performance: Strategic Cost Management.

121) Maya has been invited to attend a free accounting conference in Myrtle Beach, SC next month. She is planning travel arrangements for this trip, which will be reimbursed by the college where she works. She is considering the following options for traveling: Air:

Flight (round-trip): $450 (1.5 hours each way) Parking at airport: (3 days at $15 per day) Rental Car: $200 Drive: (1,200 miles in total at $.56 per mile) - 9.5 hrs. each way Which option proves to be the least costly option for Maya to travel to the conference? Answer: Driving is the least costly option at $672. Solution: Air: $450 + (3 × $45) + $200 = $695 or Drive: 1,200 × $.56/mile = $672 Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis IMA: Strategy, Planning & Performance: Strategic Cost Management.

122) You have been presented with the following financial information for GenX Company: 2024 $2,100,000 829,000 1,271,000 543,200 40,800 687,000

Revenues Cost of Goods and Services Sold Gross Profit Selling, General and Administrative Expenses Other Costs and Expenses - Operating Operating Income

You have been asked to prepare a vertical analysis for the income statement for current year. (Round percentages to one decimal place) Answer: 2024 % Revenues $2,100,000 100.0 Cost of Goods and Services Sold 829,000 39.5 Gross Profit 1,271,000 60.5 Selling, General and Administrative Expenses 543,200 25.9 Other Costs and Expenses - Operating 40,800 1.9 Operating Income 687,000 32.7 Solution: Revenues = $2,100,000/ $2,100,000 = 100%; Cost of Goods and Services Sold = $829,000/$2,100,000 = 39.5%; Gross Profit = $1,271,000/$2,100,000 = 60.5%; Selling, General and Administrative Expenses = $543,200/$2,100,000 = 25.9%; Other Costs and ExpensesOperating = $40,800/$2,100,000 = 1.9%; Operating Income = $687,000/$2,100,000 = 32.7% Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis IMA: Strategy, Planning & Performance: Strategic Cost Management.

123) Xenon Corporation has the following cost and expenditure data available for its first month of operations. Complete the table with the data indicating whether the cost incurred would be an expense or an asset, and also, compute the total expenditures related to the costs. Cost Item Amount Expense Asset Expenditures Monthly rent (paid in full) $2,300 Advertising (50 % paid in cash; balance on credit) 500 Monthly computer costs (paid in full) 900 Equipment purchased (30% paid in cash; balance on credit) 4,000 Salaries and Wages (paid in full) 1,600 Total $9,300 Answer: Total Expenses = $5,300; Total Assets = $4,000; and Total Expenditures = $6,250 Solution: Cost Item Amount Expense Asset Expenditures Monthly rent (paid in full) $2,300 $2,300 $2,300 Advertising (50 % paid in cash; balance on credit) 500 500 250 Monthly computer costs (paid in full) 900 900 900 Equipment purchased (30% paid in cash; balance on credit) 4,000 $4,000 1,200 Salaries and Wages (paid in full) 1,600 1,600 1,600 Total $9,300 $5,300 $4,000 $6,250 Total Expenses = Monthly rent + Advertising + Monthly computer costs + Salaries and Wages = $2,300 + $500 + $900 + $1,600 = $5,300; Total Assets = Equipment purchased = $4,000; Total Expenditures = Monthly rent + 50% of Advertising + Monthly computer costs + 30% of Equipment Purchased + Salaries and Wages + = $2,300 + (50% × $500) + $900 + (30% × $4,000) + $1,600 = $6,250 Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis IMA: Strategy, Planning & Performance: Strategic Cost Management.

124) At year-end, a Hannah's Housekeeping Services had Service Revenue of $128,000. Other pertinent information for the period is shown below: Salaries and benefits Cleaning supplies expenses Depreciation - Cleaning Equipment Social media advertising Cleaning Equipment Prepaid expenses Insurance expense

$ 87,000 5,900 4,200 6,500 55,000 1,300 600

Prepare an income statement to show the amount of operating income that Hannah's Housekeeping Services earned for this past year. Answer: Service Revenue $128,000 Less: Salaries and benefits 87,000 Cleaning supplies exp. 5,900 Depreciation - Cleaning Equip. 4,200 Social media advertising 6,500 Insurance expense __600 104,200 Operating Income $ 23,800 Solution: Operating Income = Sales Revenue - Salaries and benefits - Cleaning supplies expenses - Depreciation-Cleaning Equip. - Social media advertising - Insurance expense = $128,000 - $87,000 - $5,900 - $4,200 - $6,500 - $600 = $23,800. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

125) A & M Retailers has compiled the following information from its accounting records for the current year: Sales Revenue Cost of Goods Sold Selling Expenses General and Administrative Expenses Merchandise Inventory Cash Accounts Receivable Supplies

$527,000 289,000 45,000 86,000 73,000 94,000 21,000 4,000

What is the gross margin and operating income for A & Retailers' for the current year? Answer: Gross margin = $238,000 Operating Income = $107,000 Solution: Gross Margin = Sales Revenue - Cost of Goods Sold = $527,000 - $289,000 = $238,000; Operating Income = Gross Margin - Selling Expenses - General and Admin. Expenses; $107,000 = $238,000 - $45,000 - $86,000 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting.

126) Creative-Closets Manufacturers reports the following information at December 31: Sales Revenue Cost of Goods Sold Selling Expenses General and Administrative Expenses Raw Materials Inventory Work-In-Process Inventory Finished Goods Inventory Cash Accounts Receivable Prepaid Expenses

$450,000 263,000 75,000 43,000 47,000 39,000 82,000 168,000 42,000 8,000

Compute the amount of total current assets reported for Creative-Closets Manufacturers at yearend by preparing a partial balance sheet? Answer: Creative-Closets Manufacturers Partial Balance Sheet December 31, XXXX Current Assets Cash 168,000 Accounts Receivable 42,000 Finished Goods Inventory 82,000 Work-In-Process Inventory 39,000 Raw Materials Inventory 47,000 Prepaid Expenses 8,000 Total Current Assets 386,000 Solution: Total Current Assets = Cash + Accounts Receivable + Finished Goods Inventory + Work-In-Process Inventory + Raw Materials Inventory + Prepaid Expenses = $168,000 + $42,000 + $82,000 + $39,000 + $47,000 + 8,000 = $386,000 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

127) A manufacturer shows total assets of $419,000 and the following additional information: Cash and Cash Equivalents Property, Plant and Equipment Prepaid Expenses

$45,000 60,000 5,000

The composition of total Inventory is 30% Raw Materials Inventory, 50% Work-In-Process Inventory, and 20% Finished Goods Inventory. What dollar amount would be reported for each of the inventory accounts? Answer: Raw Materials Inventory = $92,700 Work-In-Process Inventory = $154,500 Finished Goods Inventory = $61,800 Solution: Total Assets - Cash and Cash Equivalents - Property, Plant and Equipment - Prepaid Expenses = Total Inventory; $419,000 - $45,000 - $60,000 - $5,000 = $309,000; Raw Materials Inventory = 30% × $309,000 = $92,700; Work-In-Process Inventory = 50% × $309,000 = $154,500; Finished Goods Inventory = $309,000 × 20% = $61,800. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting.

128) At December 31, Puppy Scrub had Service Revenue of $106,000. Other pertinent data is shown below. Salaries and benefits Rental fees Depreciation Marketing and selling Equipment Prepaid expenses

$53,000 21,000 3,000 2,000 28,000 3,000

Compute the net income for Puppy Scrub by preparing an income statement. Answer: Puppy Scrub Income Statement December 31, XXXX Service Revenue $106,000 Less: Salaries and benefits 53,000 Rental fees 21,000 Depreciation 3,000 Marketing and Selling 2,000 79,000 Net Income $27,000 Solution: Net Income = Sales Revenue - Salaries and benefits - Rental fees - Depreciation Marketing and selling = $106,000 - $53,000 -$21,000 - $3,000 - $2,000 = $27,000. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

129) HomeShop, Inc. incurred the following costs for the current month to produce custom cabinets: Wood and hinges for cabinets Factory equipment rent Carpenters' salaries and wages Factory insurance Office supplies

$178,200 Factory utilities 25,700 Office equipment depreciation 90,800 Factory manager salary 6,300 Factory depreciation 7,800 Office clerks' wags

$11,300 9,200 6,100 23,000 7,200

What are the total (a) manufacturing costs and (b) non-manufacturing costs HomeShop? Answer: Total Manufacturing Costs = $341,400 and Total Non-Manufacturing Costs = $24,200 Solution: Total Manufacturing Costs = Direct Materials + Direct Labor + Manufacturing Overhead = Wood and hinges for cabinets + Carpenters' salaries and wages + (Factory equipment rent + Factory insurance + Factory Utilities + Factory manager salary + Factory depreciation) = $178,200 + $90,800 + ($25,700 + $6,300 + $11,300 + $6,100 +$23,000) = $341,400; Non-manufacturing costs = Period costs = Office supplies + Office equipment depreciation + Office clerks' wages = $7,800 + $9,200 + $7,200 = $24,200 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 130) Castle Cameras incurred the following costs for the month of May in making cameras: Plastic casings and camera components Salespersons' salaries Labor costs for camera assemblers Factory equipment depreciation Office supplies

$ 241,000 Advertising 38,000 Insurance on factory 67,000 Office manager salary 24,000 Factory building rent 16,000 Office utilities

$ 21,000 8,000 5,300 27,100 13,200

What are the total product costs and total period costs for Castle Cameras for May based on this information? Answer: Total Product Costs = $367,100 and Total Period Costs = $93,500 Solution: Total Product Costs = Plastic casings and camera components + Labor costs for camera assemblers + Factory equipment depreciation + Insurance on factory + Factory building rent = $241,000 + $67,000 + $24,000 + $8,000 + $27,100 = $367,100; Total Period Costs = Salespersons' salaries and commissions + Office supplies + Advertising + Office manager salary + Office utilities = $38,000 + $16,000 + $21,000 + $5,300 + $13,200 = $93,500 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

131) CarQuest Automotive Parts incurred the following costs for the last month: Car part materials Office rent Assembly worker wages Factory equipment rent Office insurance Factory building depreciation

$160,800 Office salaries and wages 28,300 Office supplies 77,200 Factory manager salary 15,400 Factory utilities 5,500 Factory supplies 11,800 Office manager salary

$ 21,400 3,500 7,200 13,600 6,100 3,900

Compute total prime costs and the conversion costs for CarQuest Automotive Parts for last month. Answer: Total Prime Costs = $238.000 Total Conversion Costs = $131,300 Solution: Total Prime Costs = Direct Materials + Direct Labor = Car part materials + Assembly worker wages = $160,800 + $77,200 = $238,000; Total Conversion Costs = Direct Labor + Manufacturing Overhead = $77,200 + $54,100 = $131,300; Direct Labor = Assembly worker wages = $77,200; Manufacturing Overhead = Factory equipment rent + Factory building depreciation + Factory manager salary + Factory utilities + Factory supplies = $15,400 + $11,800 + $7,200 + $13,600 + $6,100 = $54,100. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

132) Santaya, Inc. incurred the costs listed below for the month of June in making its products. Production materials

$140,900 Salespersons' salaries

$ 59,400

Factory labor

112,500 Insurance on factory

18,200

Advertising

9,200 Factory manager's salary

7,300

Factory equipment depreciation

35,700 Factory rent

29,000

Office supplies

16,100 Factory utilities

14,800

From this list, compute the total product costs and per unit product cost assuming that 10,000 units are produced and sold. Answer: Total Product Costs = $358,400 Per Unit Product Cost = $35.84 Solution: Total Product Costs = (Production materials + Factory labor + Factory equipment depreciation + Insurance on factory + Factory manager's salary + Factory rent + Factory utilities) = ($140,900 + $112,500 + $35,700 + $18,200 + $7,300 + $29,000 + $14,800) = $358,400; Per Unit Product Cost = Total Product Costs ÷ Units Produced/Sold = $358,400 ÷ 10,000 units = $35.84 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

133) Mystique Manufacturing had sales revenue last year of $450,000, variable manufacturing costs of $135,000, and fixed manufacturing costs of $60,000. a) If Mystique expects sales revenues to increase by 20% for the upcoming year, with variable manufacturing costs maintaining the same percentage relationship to sales revenue as in the previous year, with the same fixed manufacturing costs, what will the expected net income (profit) be for Mystique in the upcoming year? b) If Mystique expects sales revenues to decrease by 20% for the upcoming year, with variable manufacturing costs maintaining the same percentage relationship to sales revenue as in the previous year, with the same fixed manufacturing costs, what will the expected net income (profit) be for Mystique in the upcoming year? Answer: (a) Net Income = $318,000; (b) Net Income = $192,000 Solution: (a) Variable costs ÷ Sales = $135,000 ÷ $450,000 = 30%; Expected Sales = $450,000 × (1 + 20%) = $540,000, Expected Sales - ($540,000 × 30%, Expected Variable Costs) 60,000, Fixed Costs = Expected Net Income, $318,000; (b) Variable costs ÷ Sales = $135,000 ÷ $450,000 = 30%; Expected Sales = $450,000 × (1 20%) = $495,000, Expected Sales - ($495,000 × 30%, Expected Variable Costs) - $60,000, Fixed Costs = Expected Net Income, $192,000. Diff: 3 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting.

134) Regency Records makes vintage vinyl record albums. It has the following sales and cost data per unit at current production of 100,000 units: Unit Selling Price Unit Variable Cost Unit Fixed Cost

$28.00 13.50 5.30

If Regency were able to increase production by 20% without having to add extra capacity, a) What amount of total variable and fixed costs will the company recognize? b) What amount of net income will the company recognize? Answer: (a) Variable Costs = $1,620,000 Fixed Costs = $530,000 (b) Net Income = $1,210,000 Solution: (a) Total Costs = Total Variable Costs + Total Fixed Costs = [{Unit Variable Cost × Expected Units, 100,000 units × (1 + 20%)} + (Unit Fixed Cost × original units, 100,000)] = ($13.50 × 120,000) + (5.30 × 100,000 units) = $1,620,000 + $530,000 = $2,150,000; (b) Sales Revenue - Total Costs = Net Income; Sales Revenue = Unit Selling Price × Expected Sales = [$28.00 × (100,000 units × (1 + 20%)] = $3,360,000; Sales Revenue, $3,360,000 - Total Costs, $2,150,000 [from (a)] = $1,210,000 Net Income (Profit) Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting.

135) Willow Hearth Winery makes local wines. The prior-year, unit selling price for a bottle of its red wine was $30 with a unit variable cost of $14 and a unit fixed cost of $10 based on prior production and sales of 5,000 bottles. For the current year, Willow Hearth Winery is planning to increase the unit selling price to $34 since the unit variable cost increased by 20%. a) Assuming that at the higher unit selling price, the company is still able to sell 5,000 bottles, what profit will Willow Hearth Winery expect to recognize for the current year? b) Assuming that at the unit higher selling price, the company feels that sales may decrease to 4,500 bottles, what profit will Willow Hearth Winery expect to recognize for the current year? Answer: (a) Profit = $36,000 (b) Profit = $27,400 Solution: (a) Sales Revenue - Total Costs = Profit; Sales Revenue = New Unit Selling Price × Expected Sales = [$34 × 5,000 units = $170,000; Total Costs = Total Variable Costs + Total Fixed Costs = [{Unit Variable Cost × (1 + 20%)} × Expected Units] + (Unit Fixed Cost × Expected Units, 5,000)] = ($14 × 1.2 × 5,000) + ($10 × 5,000 units) = $84,000 + $50,000 = $134,000; Sales Revenue, $170,000 - Total Costs, $134,000 = $36,000 Profit; (b) Sales Revenue - Total Costs = Profit; Sales Revenue = New Unit Selling Price × Expected Sales = [$34 × 4,500 units = $153,000; Total Costs = Total Variable Costs + Total Fixed Costs = [{Unit Variable Cost × (1 + 20%)} × Expected Units, 4.500] + (Unit Fixed Cost × Original Units, 5,000)] = ($14 × 1.2 × 4,500) + ($10 × 5,000 units) = $75,600 + $50,000 = $34,000; Sales Revenue, $153,000 - Total Costs, $125,600 = $27,400 Profit Diff: 3 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting.

136) C & G, Inc. has sales and cost data for the current year below. Production Units Sales Variable Costs Fixed Costs

3,000 units $450,000 150,000 110,000

a) If C & G is able to increase production and sales by 2,000 units without adding extra fixed costs, what will be the unit variable cost and unit fixed cost at 5,000 units? b) If C & G is able to increase production and sales by 2,000 units but only by adding extra fixed costs of $20,000, what will be the unit variable cost and unit fixed cost at 5,000 units? Answer: (a) Unit Variable Cost = $50 Unit Fixed Cost = $22 (b) Unit Variable Cost = $50 Unit Fixed Cost = $26 Solution: (a) Unit Variable Cost at 5,000 units (3,000 units original + 2,000 additional units); $150,000 ÷ 3,000 units = $50.00 or [($150,000 ÷ 3,000 units) × 5,000 units] ÷ 5,000 units = $50.00; and Unit Fixed Cost at 5,000 units = $110,000 ÷ 5,000 units = $22.00; (b) Unit Variable Cost at 5,000 units (3,000 units original + 2,000 additional units); $150,000 ÷ 3,000 units = $50.00 or [($150,000 ÷ 3,000 units) × 5,000 units] ÷ 5,000 units = $50.00; and Unit Fixed Cost at 5,000 units = ($110,000 + $20,000) ÷ 5,000 units = $26.00 Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

137) Alpine Athletics is trying to determine the amount of direct materials used in production during the current month. Records indicate that the beginning inventory for the direct materials was $67,000 and that, based on a physical count, the ending inventory for the direct materials is $43,000. After contacting the purchasing department, it was noted that three separate purchases of direct materials were made during the month as follows: Purchase #1……………………….. $27,000 Purchase #2……………………….. $41,000 Purchase #3……………………….. $39,000 a) How much of the direct materials were used in production during the current month? b) If the beginning inventory for materials was $72,000 and the ending inventory for direct materials was $55,000, what amount of materials was used in production during the month? Answer: (a) Materials Used = $131,000 (b) Materials Used = $124,000 Solution: (a) Direct Materials Used = Beginning Direct Materials Inventory + DM Purchases - Ending Direct Materials Inventory; $67,000 + ($27,000 + $41,000 + $39,000) - $43,000 = $131,000. (b) Direct Materials Used = Beginning Direct Materials Inventory + DM Purchases - Ending Direct Materials Inventory; $72,000 + ($27,000 + $41,000 + $39,000) - $55,000 = $124,000. Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

138) Vinyl Sign Suppliers makes signs for businesses. For the previous month, the company had the following information and business transactions: Beginning Balances: Raw Materials Inventory, $28,300; Work-In-Process Inventory, $14,900; and Finished Goods Inventory, $21,400 Production data for the month: Direct materials, direct labor and manufacturing overhead costs totaling $115,000 were incurred in producing 300 vinyl signs. Ending Balances: Raw Materials Inventory, $15,200; Work-In-Process Inventory $34,500; and Finished Goods Inventory, $13,700. What was the cost of the goods manufactured and transferred to the Finished Goods Inventory at the end of last month? Answer: Cost of the Goods Manufactured = $95,400 Solution: (Work-In Process Inventory-Beginning Balance + Total Manufacturing Costs) - Workin-Process Inventory-Ending Balance = Cost of Goods Manufactured for the Period; WIP Beg. Bal., $14,900 + Total Mfg. Costs, $115,000 (DM + DL + MOH) - WIP End. Bal., $34,500 = $95,400. Diff: 3 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 139) Weston Woodworks has a beginning balance in its Work-in-Process Inventory of $83,000 and an ending balance in its Work-In-Process Inventory of $75,000. If Millville's Cost of Goods Manufactured is $227,000, and it incurred direct costs, which include direct materials, $67,000, and direct labor, $58,000, how much manufacturing overhead was used for production? Answer: Manufacturing Overhead used for production = $94,000 Solution: (Work-In Process Inventory-Beginning Balance + Total Manufacturing Costs) - Workin-Process Inventory-Ending Balance = Cost of Goods Manufactured; WIP Beg. Bal., $83,000 + Total Mfg. Costs, (DM, $67,000 + DL, $58,000 + MOH) - WIP End. Bal., $75,000 = $227,000. Solving for MOH = ($83,000 + $67,000 + $58,000 - $75,000) + MOH = $227,000; $133,000 + MOH = $227,000; MOH = $227,000 - $133,000 = $94,000. Diff: 3 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

140) Astro Manufacturing had the following production data for the week ended July 31, 20XX, with zero beginning balances in all of its inventory accounts: Monday: Tuesday:

Purchased $137,000 of raw materials on account. Requisitioned $83,000 of direct materials into production and assigned $39,000 of direct labor to production. Wednesday: Added $24,000 of manufacturing overhead to production related to utilities. Thursday: Completed production on 60% of the production and transferred the completed units to finished goods inventory. Friday: Sold 50% of the goods that were transferred to Finished Goods for $65,000 cash. a) Prepare the necessary journal entries to record the production of units for July. b) Compute the ending balances in the Raw Materials Inventory, Work-In-Process Inventory, and Finished Goods Inventory at the end of July.

Answer: (a) Monday

Tuesday

Wednesday

Thursday

Friday

Debit 137,000

Raw Materials Inventory Accounts Payable

Credit 137,000

Work-In-Process Inventory Raw (Direct) Materials Inventory Wages Payable

122,000

Work-In-Process Inventory Utilities Payable

24,000

Finished Goods Inventory Work-In-Process Inventory [($83,000 + $39,000 + $24,000) × 60%]

87,600

Cash Cost of Goods Sold (COGS) Sales Finished Goods Inventory ($87,600 × 50%)

65,000 43,800

83,000 39,000

24,000

87,600

65,000 43,800

(b) Raw Materials Inventory = $54,000; Work-In-Process Inventory = $58,400; Finished Goods Inventory = $43,800 Solution: (b) RM Inventory = Purchases - Materials Requisitioned = $137,000 - $83,000 = $54,000; WIP Inventory = (DM + DL + MOH) - Goods Completed = ($122,000 + $24,000) - $87,600 = $58,400; FG Inventory = Goods Completed - Goods Sold = $87,600 - $43,800 = $43,800 Diff: 3 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting.

141) The account balances are shown below for Indigo Industries at the end of the current month: Direct Materials Used WIP, Beginning Depreciation - Factory Equipment Advertising expenses Finished Goods Inventory, End. Factory supervisor salary Sales commissions Factory utility costs

$67,000 Finished Goods Inventory, Beg. 25,000 Factory Insurance 1,900 Office supplies 2,200 Direct Labor 31,000 WIP, Ending 9,800 Office equipment depreciation 6,700 Delivery expenses 3,700 Office rent

$26,000 4,600 3,200 52,000 45,000 2,600 1,900 4,700

Compute the cost of goods manufactured and cost of goods sold for Indigo Industries at the end of the month. Answer: Cost of Goods Manufactured = $119,000 Cost of Goods Sold = $114,000 Solution: Cost of Goods Manufactured = WIP, Beginning + (Direct Materials Used + Direct Labor + Manufacturing Overhead) - WIP, Ending = $25,000 + [$67,000 + $52,000 + ($1,900 + $9,800 + $3,700 + $4,600)] - $45,000 = $119,000: Cost of Goods Sold = (Cost of Goods Manufactured + Finished Goods Inventory, Beginning) - Finished Goods Inventory, Ending = $119,000 + $26,000 - $31,000 = $114,000 Diff: 3 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

142) Dogs-Are-Us, Inc. has the following information available at the end of last year: Sales Less: Variable Costs Contribution Margin Less: Fixed Costs Operating Income

$964,000 413,000 551,000 210,000 $341,000

Due to recent events, the company has moved all production from labor-based to automation so that it would not need to shut down the factory. By doing this, the variable costs have decreased by 30%, and the fixed costs have increased by 20%. Based on these changes, with no change in sales for the upcoming year, what is the expected contribution margin and operating income based on these changes? Is the company more profitable by making this change? Why? Answer: Expected contribution margin = $674,900 and Expected operating income = $422,900. The company is more profitable, since it has a higher operating income based on the changes to automation. Solution: Sales Less: Variable Costs [$413,000 × (1 - 30%)] Contribution Margin Less: Fixed Costs [$210,000 × (1 + 20%)] Operating Income

$964,000 289,100 674,900 252,000 $422,900

Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting.

143) Aquafresco manufactures bottled water with all-natural flavoring added. Aquafresco reported the information below for the current year using a contribution margin income statement format: Sales Less: COGS — Variable SG&A — Variable Contribution Margin Less: COGS — Fixed SG&A — Fixed Operating Income

$443,000 103,800 49,200 290,000 74,600 52,400 $163,000

Present Aquafresco's contribution margin income statement in the traditional gross margin income statement format. Answer: Traditional Income Statement Sales $443,000 Less: Cost of Goods Sold ($103,800 + $74,600) 178,400 Gross Margin 264,600 Less: SG&A ($49,200 + $52,400) 101,600 Operating Income $163,000 Solution: Operating Income = Sales Revenue - COGS = Gross Margin - SG&A; $443,000 ($103,800 + $74,600) = $264,600 - ($49,200 + $52,400) = $163,000 Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

144) Cedar Ridge Orthodontics manufactures custom nontraditional orthodontic apparatuses. The following information was reported at the end of the current year: Traditional Income Statement Sales Less: Cost of Goods Sold Gross Margin Less: SG&A Operating Income

$597,000 224,000 373,000 230,000 $143,000

If 70% of the Cost of Goods Sold is variable, and 65% of the SG&A expenses are variable, convert Cedar Ridge's traditional-formatted income statement to a contribution margin income statement format. Answer: Contribution Margin Income Statement Sales $597,000 Less: COGS — Variable (224,000 × 70%) 156,800 SG&A — Variable (230,000 × 65%) 149,500 Contribution Margin 290,700 Less: COGS — Fixed (224,000 × 30%) 67,200 SG&A — Fixed (230,000 × 35%) 80,500 Operating Income $143,000 Solution: Operating Income = Sales Revenue - COGS—Variable - SG&A—Variable = Contribution Margin - COGS—Fixed - SG&A—Fixed; $597,000 - ($156,800 + $149,500) = $290,700 - ($67,200 + $80,500) = $143,000 Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

145) Eastern Electronics has the following per unit amounts for the production of electronic components for automobiles: Unit Selling Price Unit Variable COGS Unit Variable SG&A

$52 $24 $12

At its current production and sales of 10,000 units, it incurs $60,000 of fixed costs for cost of goods sold and SG&A costs. Unfortunately, Eastern Electronics has fallen on hard times, and since sales have been declining, production has also been deceased significantly for the current year. If Eastern Electronics is only able to produce and sell 6,000 units, is it still profitable? Compute the operating income for Eastern Electronics. Answer: Yes, Eastern Electronics is still profitable with an operating income of $36,000. Solution: Total Sales (6,000 units × $52) $312,000 COGS — Variable (6,000 units × $24) 144,000 SG&A — Variable (6,000 units × $12) 72,000 Contribution Margin 96,000 Total Fixed Costs (COGS and SG&A) 60,000 Operating Income $36,000 Diff: 2 LO: 6 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

146) Jambany Juice, Inc. has the following information for the current fiscal year: Total Sales COGS — Variable COGS — Fixed SG&A — Variable SG&A — Fixed

$1,240,000 463,000 149,000 87,000 61,000

What are the gross margin and contribution margin for Jambany Juice, Inc.? Answer: Gross Margin = $628,000 and Contribution Margin = $690,000 Solution: Gross Margin = Total Sales - COGS—Variable - COGS—Fixed; $628,000 = 1,240,000 - $463,000 - $149,000: Contribution Margin = Total Sales - COGS—Variable SG&A—Variable; $690,000 = 1,240,000 - $463,000 - $87,000 Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting. 147) TMZ Transportation purchased a truck 5 years ago at a cost of $98,000. The truck has been depreciated on an annual basis using straight-line depreciation. The truck had new tires installed 2 years ago at a total cost of $1,200 and had an engine overhaul last year, which cost $5,000. It is expected that the truck will need additional repairs of $3,000 in the current year. Because of these repair and upgrade costs, the company is now considering a purchase of a new truck to replace the old one. The old truck has a trade-in/sale value of $13,000. The cost of the new truck is $102,000. What amount of these costs represent sunk costs? Answer: Total sunk costs = $104,200 Solution: Total sunk costs, $104,200 = Old truck cost, $98,000 + Tire-replacement costs, $1,200 + engine overhaul cost, $5,000 Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

148) You have been presented with the following 3-year comparative financial information for The Coca Cola Company:

Revenues Cost of Goods and Services Sold Gross Profit Selling, General and Administrative Expenses Other Costs and Expenses - Operating Operating Income

2022 $33,014 13,433 19,581

2021 $37,266 14,619 22,647

2020 $34,300 13,067 21,233

9,731 853 8,997

12,103 458 10,086

11,002 1,079 9,152

You have been asked to prepare a vertical analysis for the income statement for the 3 years of comparative data. Answer: 2022 % 2021 % 2020 % Revenues $33,014 100.0 $37,266 100.0 $34,300 100.0 COGS 13,433 40.7 14,619 39.2 13,067 38.1 Gross Profit 19,581 59.3 22,647 60.8 21,233 61.9 SG&A Expenses 9,731 29.5 12,103 32.5 11,002 32.1 Other Exp. - Operating 853 2.6 458 1.2 1079 3.1 Operating Income 8,997 27.2 10,086 27.1 9,152 26.7 Solution: Line item amounts by year ÷ Revenues by year = Line Item % Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis IMA: Reporting & Control: Financial Statement Analysis.

149) Benz Corporation has the following cost and expenditure data available for its first month of operations. Complete the table with by indicating whether the cost incurred would be an expense or an asset. Then, compute the total expenditures related to these costs. Cost Item Amount Monthly rent (paid in full) $1,200 Advertising (not yet paid) 400 Monthly insurance (paid in full) 300 Equipment purchased (50% paid in cash; balance on credit) 7,000 Salaries and Wages (paid in full) 5,200 Inventory purchased (60 % paid in cash; balance on credit) 2,500 Prepaid expenses (paid in full) 8,000 Total $24,600

Expense

Asset

Expenditures

Answer: Total Expenses = $7,100; Total Assets = $17,500; and Total Expenditures = $19,700 Solution: Cost Item Amount Expense Monthly rent (paid in full) $1,200 $1,200 Advertising (not yet paid) 400 400 Monthly insurance (paid in full) 300 300 Equipment purchased (50% paid in cash; balance on credit) 7,000 Salaries and Wages (paid in full) 5,200 5,200 Inventory purchased (60% paid in cash; balance on credit) 2,500 Prepaid expenses (paid in full) 8,000 Total $24,600 $7,100

Asset

300 $7,000

3,500 5,200

2,500 8,000 $17,500

1,500 8,000 $19,700

Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis IMA: Strategy, Planning & Performance: Strategic Cost Management.

Expenditures $1,200

150) Lincoln Log Construction produces prefabricated log homes. It has the following comparative financial information available for the past three years. Compute the net income for 2022, 2021, and 2020, and indicate whether the company's profitability has improved or worsened over the 3-year period. Explain what is causing the performance change. (in thousands) Revenues Cost of Goods Sold Salaries and benefits Construction Equipment Depreciation Marketing and Selling Prepaid Expenses (Insurance and Rent) Rental costs

2022 $95,300 25,400 29,800 29,300 3,800 8,900 12,200 14,600

2021 $97,200 24,600 22,400 27,100 4,500 10,600 10,900 15,300

2020 $104,700 23,100 21,300 21,500 3,700 9,200 11,600 13,400

Answer: 2022 Net Income, $12,800; 2021 Net Income, $19,800; 2020 Net Income, $34,000. The company's net income has decreased each year due to a combination of declining revenues and increasing expenses over the 3-year period. Solution: (in thousands) 2022 2021 2020 Revenues $95,300 $97,200 $104,700 Cost of Goods Sold 25,400 24,600 23,100 Gross Margin (Profit) 69,900 72,600 81,600 Salaries and benefits 29,800 22,400 21,300 Depreciation 3,800 4,500 3,700 Marketing and Selling 8,900 10,600 9,200 Rental costs 14,600 15,300 13,400 Net Income 12,800 19,800 34,000 Diff: 3 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting.

151) Fabulous Furs, Inc. reports the following information at the end of the current year: Sales Revenue Selling Expenses General and Administrative Expenses Gross Margin Prepaid Expenses Merchandise Inventory Cash Accounts Receivable

$763,000 165,000 138,000 425,000 33,000 149,000 72,000 213,000

What is Fabulous Furs' cost of goods sold, net income, and total current assets at year-end? Answer: Cost of Goods Sold, $338,000; Net Income, $122,000; Current Assets, $467,000 Solution: Cost of Goods Sold = Sales Revenue - Gross Margin = $763,000 - $425,000 = $338,000; Net Income = Gross Margin - Selling Expenses - General and Administrative Expenses = $122,000 = $425,000 - $165,000 - $138,000; Current Assets = Cash + Accounts Receivable + Merchandise Inventory Prepaid Expenses = $467,000 = $72,000 + $213,000 + $149,000 + $33,000 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting.

152) At year-end, Produce Palace had Sales Revenue of $765,000. Its Cost of Goods Sold was 40% of Sales Revenue. Operating expenses for the year included $135,000 of Selling Expenses, $102,000 of General and Administrative Expenses. Merchandise Inventory was $53,000, and Prepaid Expenses were $23,000. a) What is the gross margin and operating income for this Produce Palace, Inc. at year- end using a traditional income statement approach? b) If the Sales Revenue is estimated to increase by 10% for the upcoming year due to consumers wanting to eat a healthier diet, what would the gross margin and net income be, assuming that the Cost of Goods percentage remains the same at 40% of sales revenue, using a traditional income statement approach? Answer: (a) Gross Margin, $459,000; Operating Income, $222,000 (b) Gross Margin, $504,900; Operating Income, $267,900 Solution: (a) Gross Margin = Sales Revenue - Cost of Goods Sold = $765,000 - ($765,000 × 40%) = $459,000 or $765,000 × (100% - 40%) = $459,000. Operating Income = Gross Margin - Selling Expenses - General and Administrative Expenses = $222,000 = $459,000 - $135,000 - $102,000 (b) Gross Margin = Sales Revenue - Cost of Goods Sold = $765,000 (1 + 10%) - ($765,000 (1 + 10%) × 40%) = $841,500 - $336,600 = $504,900 or $765,000 (1 + 10%) × (100% - 40%) = $504,900. Operating Income = Gross Margin - Selling Expenses - General and Administrative Expenses = $267,900 = $504,900 - $135,000 - $102,000 Diff: 3 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting.

153) Nokitar Company specializes in manufacturing smart phones. The company has enough orders to keep factory production at 1,000 smart phones per month. Nokitar's monthly manufacturing costs and other expense data are shown in the table below. Complete the table, classifying each item as either direct materials (DM), direct labor (DL), manufacturing overhead (MOH), or period cost. Then compute the total manufacturing cost and the per unit manufacturing cost. Cost Item Factory maintenance Factory manager salary Advertising Factory equipment rent Office equipment rent Sales commissions Factory building insurance Factory equipment rent Electrical components - phones Wages-assembly-line workers Office supplies Factory building depreciation Casings - phones Total

Cost $1,500 4,000 9,000 2,300 4,500 6,000 2,000 8,000 35,000 15,000 900 4,900 11,000

MOH

Period

Answer: Direct Materials = $46,000: Direct Labor = $15,000: Manufacturing Overhead = $22,700; Period Costs = $20,400; Total Manufacturing Costs = $83,700; Unit Manufacturing Cost = $83.70. Solution: Cost Item Cost DM DL MOH Period Factory maintenance $ 1,500 $1,500 Factory manager salary 4,000 4,000 Advertising 9,000 $9,000 Factory equipment rent 2,300 2,300 Office equipment rent 4,500 4,500 Sales commissions 6,000 6,000 Factory building insurance 2,000 2,000 Factory equipment rent 8,000 8,000 Electrical components -phones 35,000 $35,000 Wages-assembly-line workers 15,000 $15,000 Office supplies 900 900 Factory building depreciation 4,900 4,900 Casings - phones 11,000 11,000 Total $104,100 $46,000 $15,000 $22,700 $20,400 Total Manufacturing Costs = DL + DM + MOH = $46,000 + $15,000 + $22,700 = $83,700; Unit Manufacturing Cost = $83,700 ÷ 1,000 phones = $83.70 Diff: 3 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

154) Jingle Jewelry makes customized holiday jewelry. It has the following cost data for the current month. Direct labor Factory property taxes Office supplies Factory equipment rent Delivery trucks depreciation Factory depreciation

$52,000 4,100 2,300 5,000 1,800 8,300

Sales commissions Advertising Factory manager's salary Direct materials used Factory utilities Office equipment rent

$9,000 1,400 7,000 89,200 2,600 3,300

From this information, determine the total amount of (a) Manufacturing overhead, (b) Product costs and (c) Period costs. Answer: (a) Manufacturing overhead = $27,000; (b) Product costs = $168,200; (c) Period Costs = $17,800 Solution: (a) Manufacturing Overhead (b) Product Costs (c) Period Costs Factory property Direct materials taxes $4,100 used $89,200 Office supplies $2,300 Factory Delivery trucks equipment rent 5,000 Direct labor 52,000 depreciation 1,800 Factory Sales depreciation 8,300 Total MOH 27,000 commissions 9,000 Factory manager's salary 7,000 Advertising 1,400 Office Factory utilities 2,600 equipment rent 3,300 Total Product Total Period Total MOH $27,000 Costs $168,200 Costs $17,800 Diff: 3 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

155) Sierra Ski, Inc. reported the following costs and expenses for the month of January: Office Equipment Depreciation Direct Materials Used Sales Salaries

$4,700 Direct Labor 31,250 Manufacturing Overhead 25,940 Advertising

$24,600 32,790 13,420

156) Tiny Tots Trikes (TTT), Inc. makes tricycles for toddlers. Sales and cost data is available for the current year below: Tricycles Sales Variable Costs Fixed Costs

4,000 units $280,000 $70 per unit 160,000 $40 per unit 40,000 $10 per unit

Answer the following questions regarding Tiny Tots Trikes assuming that each scenario is independent. a) If Tiny Tots Trikes were able to increase production and sales by 2,000 units without adding extra fixed costs, what would the unit variable cost and unit fixed cost be? b) If Tiny Tots Trikes were able to increase production and sales by 3,000 units without adding extra fixed costs, what would the operating income be and by how much would it differ from the current year's amount? What would the new unit variable cost and unit fixed cost be under this scenario? c) If Tiny Tots Trikes is able to increase production and sales by 3,000 units but have to add additional capacity to meet demand by incurring extra fixed costs of $30,000, what would the operating income be based on these changes? What would the new unit variable cost and unit fixed cost be under this scenario? Answer: (a) Unit variable cost, $40 and Unit fixed cost, $6.67 (b) Operating income (current), $80,000 and Operating income (new), $170,000, Change in Operating income, $90,000, Unit variable cost, $40 and Unit fixed cost, $5.71 (c) Operating income (new), $140,000, Unit variable cost, $40 and Unit fixed cost, $10.00 Solution: (a) Unit variable cost = (6,000 units × ($160,000 ÷ 4,000 units)] ÷ 6,000 units = $40 per unit: Unit fixed cost = $40,000 ÷ 6,000 units = $6.67 per unit; (b) Sales (current) - Variable costs (current) - Fixed costs (current) = Operating income (current) = $280,000 - $160,000 - $40,000 = $80,000 Sales (new) - Variable costs (new) - Fixed costs (current) = Operating income (new) = (7,000 × $70) - (7,000 × $40) - $40,000 = $170,000; Operating income (new) - Operating income (current) = Change in Operating Income = $170,000 - $80,000 = $90,000 increase; Unit variable cost = (7,000 units × ($160,000 ÷ 4,000 units)] ÷ 7,000 units = $40 per unit; Unit fixed cost = $40,000 ÷ 7,000 units = $5.71; (c) Sales (new) - Variable costs (new) - Fixed costs (new) = Operating income (new) = (7,000 × $70) - (7,000 × $40) - ($40,000 + $30,000) = $140,000 Unit variable cost = (7,000 units × ($160,000 ÷ 4,000 units)] ÷ 7,000 units = $40 per unit; Unit fixed cost = ($40,000 + $30,000) ÷ 7,000 units = $10.00 Diff: 3 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting.

157) Samsuni makes wireless earbuds. The prior-year, unit selling price for a set of earbuds was $100 with a unit variable cost of $40 and a unit fixed cost of $10 based on production and sales of 5,000 sets. For the current year, Samsuni is planning to increase the unit selling price to $105 since the unit variable cost increased by 20% and the total fixed cost also increased by 10%. Assume that at the higher selling price, the company feels that unit sales may decrease to 4,500 sets. What operating income will Samsuni expect to recognize for the current year? Answer: $201,500 Operating Income Solution: Sales Revenue - Total Costs = Profit; Sales Revenue = New Unit Selling Price × Expected Sales = [$105.00 × 4,500 units = $472,500; Total Costs = Total Variable Costs + Total Fixed Costs = [{Unit Variable Cost × (1 + 20%)} × Expected Units, 4,500 units] + (Unit Fixed Cost × original units, 5,000) × (1 + 10%)] = ($40.00 × 1.2 × 4,500) + ($10.00 × 5,000 units × 1.1) = $216,000 + 55,000 = $271,000; Sales Revenue, $472,500 - Total Costs, $271,000 = $201,500 Operating Income Diff: 3 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting. 158) Manseco Manufacturing had sales revenue last year of $500,000, variable manufacturing costs of $320,000, and fixed manufacturing costs of $80,000. a) If Manseco expects sales revenue to increase by 20% for the upcoming year, with variable manufacturing costs maintaining the same percentage relationship to sales revenue as in the previous year, with the same fixed manufacturing costs, what will the expected operating income (profit) be for Manseco? b) If Manseco instead expects sales revenue to decline by 10% for the upcoming year, with variable manufacturing costs maintaining the same percentage relationship to sales revenue as in the previous year, with the same fixed manufacturing costs, what will the expected operating income (profit) be for Manseco? Answer: (a) Operating income, $136,000; (b) Operating income, $82,000, Solution: a) Variable costs ÷ Sales = $320,000 ÷ $500,000 = 64%; Expected Sales = $500,000 × (1 + 20%) = $600,000; Expected Sales - ($600,000 × 64%, Expected Variable Costs) - $80,000, Fixed Costs = Expected Operating Income = $600,000 - $384,000 - $80,000 = $136,000 b) Variable costs ÷ Sales = $320,000 ÷ $500,000 = 64%; Expected Sales = $500,000 × (1 10%) = $450,000; Expected Sales - ($450,000 × 64%, Expected Variable Costs) - $80,000, Fixed Costs = Expected Operating Income = $450,000 - $288,000 - $80,000 = $82,000 Diff: 3 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting. 99

159) Presented below is incomplete manufacturing cost data for Cadence Company. Solve for the missing amounts. Work-In- Work-InDirect Total Process Process Cost of Materials Direct Manufacturing Manufacturing Inventory Inventory Goods Used Labor Overhead Costs (beginning) (ending) Manufactured 1. $23,000 $65,000 $14,000 (a) $37,000 $45,000 (b) 2. (c) $44,000 $25,000 $157,000 $69,000 (d) $153,000 3. $52,000 $38,000 (e) $107,000 (f) $58,000 $114,000 Answer: (a) $102,000 (b) $94,000 (c) $88,000 (d) $73,000 (e) $17,000 (f) $65,000 Solution: (a) Total Manufacturing Costs = Direct Materials Used + Direct Labor + Manufacturing Overhead = $23,000 + $65,000 + $14,000 = $102,000 (b) Cost of Goods Manufactured = Work-In-Process Inventory (beginning) + Total Manufacturing Costs - Work-In-Process Inventory (ending) = $37,000 + $102,000 [from (a)] $45,000 = $94,000 (c) Direct Materials Used = Total Manufacturing Costs - Direct Labor - Manufacturing Overhead = $157,000 - $44,000 - $25,000 = $88,000 (d) Work-In-Process (ending) = Total Manufacturing Costs + Work-In-Process (beginning) Cost of Goods Manufactured = $157,000 + $69,000 - $153,000 = $73,000 (e) Manufacturing Costs = Total Manufacturing Costs - Direct Materials Used - Direct Labor = $107,000 - $52,000 - $38,000 = $17,000 (f) Work-In-Process (beginning) = Cost of Goods Manufactured + Work-In-Process (ending) Total Manufacturing Costs = $114,000 + $58,000 - $107,000 = $65,000 Diff: 3 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

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160) DeLino Distribution has the following cost data provided in the table below for the month of March: Materials used in production Factory depreciation Store salaries Production workers' wages Advertising

$78,000 15,200 12,800 44,700 6,100

Delivery costs Factory insurance Factory supplies Store supplies Factory equipment rent

$14,000 7,800 2,300 2,800 9,500

Additional information related to the company's Inventory is provided below:

Raw Materials Inventory Work-In-Process Inventory Finished Goods Inventory

Beginning $20,000 65,000 43,000

Ending $45,000 150,000 38,000

Compute the Cost of Goods Manufactured and Cost of Goods Sold for Delino Distribution for the month of March. Answer: Cost of Goods Manufactured = $72,500; Cost of Goods Sold = $77,500 Solution: Cost of Goods Manufactured = Work-In-Process Inventory (Beginning) + Total Manufacturing Costs - Work-In-Process Inventory (Ending) = $65,000 + (DM, $78,000 + DL, $44,700 + MOH, ($15,200 + $7,800 + 2,300 + $9,500) - $150,000 = $72,500; Cost of Goods Sold = Finished Goods Inventory (Beginning) + Cost of Goods Manufactured - Finished Goods Inventory (Ending) = $43,000 + $72,500 - $38,000 = $77,500 Diff: 3 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

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161) Wonder Wares has the following transactions related to its production for the month of May: May 5 10 15 23 30 31

Purchased direct materials of $28,000, which were delivered the same day. $19,000 of direct materials was requisitioned into production. Incurred $54,000 of direct labor related to production workers. Incurred $9,000 of manufacturing overhead in production. 70% of production was completed in the month. 60% of the completed goods were sold.

There were zero beginning balances in all of the Inventory accounts at May 1. Determine the balances in Raw Materials Inventory, Work-In-Process Inventory, Finished Goods Inventory and Cost of Goods Sold at the end of May. (Hint: Use T-accounts) Answer: Raw Materials Inventory balance = $9,000; Work-In-Process Inventory balance = $24,600; Finished Goods Inventory = $22,960; Cost of Goods Sold = $34,440 Solution:

Diff: 3 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

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162) Shawna's Smoothies has the following cost information for the current month: Total Sales (units) Unit Selling Price Unit Variable COGS COGS - Fixed Unit Variable SG&A SG&A - Fixed

2,000 $6.50 $2.30 $400 $1.20 $ 600

Shawna would like to know how profitable the business was for the current month. She is not sure which income statement format is best for her to given her insight into what is contributing to the profitability of the business. She has asked for a traditional income statement and a contribution margin income statement to be prepared (headings not required). a) Is the operating income different based on the type of income statement prepared? b) Which type of income statement is normally used for internal reporting purposes? Which type of income statement is normally used for external reporting purposes? Answer: Traditional Income Statement Contribution Margin Income Sales (2,000 × $6.50) $13,000 Sales (2,000 × $6.50) $13,000 Less: COGS — Variable Less: COGS — Variable (2,000 × $2.30) 4,600 (2,000 × $2.30) 4,600 SG&A — Variable COGS - Fixed 400 (2,000 × $1.20) 2,400 Gross Margin 8,000 Contribution Margin 6,000 Less: SG&A — Variable (2,000 × $1.20) 2,400 Less: COGS — Fixed 400 SG&A — Fixed 600 SG&A — Fixed 600 Operating Income $5,000 Operating Income $5,000 a) The operating income is not different; it is exactly the same in both statement formats. b) The contribution margin income statement is used for internal reporting purposes, whereas, the traditional income statement is used for external reporting purposes. Diff: 3 LO: 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting.

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163) Estrella Corporation has a unit selling price of $400, unit variable cost of $250, and total fixed costs of $200,000. The company is currently operating at full capacity, producing and selling 5,000 units annually. The company is considering the following alternatives, both of which will allow the company to continue to produce and sell at full capacity. Alternative 1: Decrease the unit selling price by 5% while embarking on a cost reduction plan to also decrease unit variable costs by 10% and the fixed costs by $25,000. Alternative 2: Decrease the unit selling price by 3% while decreasing the unit variable cost by 12%, but incurring an increase in the fixed costs of 3%. Determine the profitability of each alternative using the contribution margin income statement format and identify the alternative that is most profitable to management. Answer:

Alternative #1 should be selected since it produces the higher net income of $650,000 as compared to Alternative #2, which only produces net income of $634,000. Both alternatives, though, will improve the profitability of the company. Solution: Original IS: Sales (5,000 × $400), $2,000,000 - Variable Costs (5,000 × $250), $1,250,000 - Fixed Costs, $200,000 = Operating Income, $550,000; Alternative #1 Inc. Stmnt: Sales (5,000 × $380), $1,900,000 - Variable Costs (5,000 × $225), $1,125,000 - Fixed Costs ($200,000 - $25,000), $175,000 = Operating Income, $650,000; Alternative #2 Inc. Stmnt: Sales (5,000 × $388), $1,940,000 - Variable Costs (5,000 × $220), $1,100,000 - Fixed Costs ($200,000 + {$200,000 × 3%}), $206,000 = Operating Income, $634,000 Diff: 3 LO: 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting.

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164) Marco Manufacturers has a current unit selling price of $120 with a unit variable cost of $70 and total fixed costs of $60,000. At its current production level of 1,000 units, it is experiencing a net loss of $10,000. The company is trying to plan a strategy for the upcoming year that will result in a profit. It is considering the following options while maintaining the same current production of 1,000 units: Option #1: Outsource some of its parts' production. The external unit price (unit cost) will only result in cost-savings of $20 in unit variable cost but $5,000 in fixed costs can be saved ($55,000 of fixed costs will still be incurred). Option #2: Move to automating most of the production, which will result in a significant cut the unit variable cost, reducing it to $40 per unit, but increasing the total fixed costs to $68,000. Using a contribution margin income statement format, determine which option appears to be the best for Marco Manufacturers. (Highest net income) Answer: Option #1 Option #2 Sales (1,000 × $120) $120,000 Sales (1,000 × $120) $120,000 Less: Variable Costs Less: Variable Costs (1,000 × $50) 50,000 (1,000 × $40) 40,000 Contribution Margin 70,000 Contribution Margin 80,000 Less: Fixed Costs 55,000 Less: Fixed Costs 68,000 Operating Income $15,000 Operating Income $12,000 Both options are going to bring the company into a profitable position, and both are going to result in the labor force being reduced. As such, the most profitable option should therefore, be pursued which would be Option #1, producing $15,000. Solution: Sales (1,000 × $125), $120,000 - Variable Costs (1,000 × $120), $120,000 - Fixed Costs ($60,000 - $5,000), $55,000 = Operating Income, $15,000; Option #2 IS: Sales (1,000 × $388), $1,940,000 - Variable Costs (1,000 × $40), $40,000 - Fixed Costs, $68,000 = Operating Income, $12,000 Diff: 3 LO: 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting.

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165) Companies use financial statements and cost information for budgeting, planning, and control purposes. Explain what vertical analysis is and how it is used to interpret the performance of a business. Answer: Vertical analysis is a method used for comparison of financial data reported within the financial statements, such as the balance sheet or the income statement. It relates items on these financial statements as a percentage of a base amount. The base used for the balance sheet is total assets and the base used for the income statement is total revenue. For example, on the balance sheet if Inventory is $2,000 and total assets are $8,000, then the vertical analysis would show the total assets as 100% and the Inventory as 25% ($2,000 ÷ $8,000). Similarly, for the vertical analysis of the income statement, if Cost of Goods Sold is $60,000 and Sales Revenue is $100,000, then the Cost of Goods Sold would be expressed as 60% ($60,000 ÷ $100,000) and the Sales Revenue would be expressed as 100%. Diff: 2 LO: 1 Bloom: K AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Strategic Cost Management. 166) Costs are NOT always easily measured or reported on the financial statements. Identify two types of costs that fit this description, define them, and explain the importance of these costs for decision-making purposes. Answer: The two types of costs that are not easily measured and are not reported on the financial statements but are important for decision-making purposes are opportunity costs and sunk costs. Opportunity costs are combined benefits less costs of the available options that were not chosen and sunk costs are costs that have already been incurred and thus, will not affect the current decision being made. Although both sunk costs and opportunity costs may be included in the costs provided for decision-making purposes, it is important to remember to ignore the sunk costs, but include the opportunity costs for decision-making purposes in selecting alternatives. Diff: 2 LO: 1 Bloom: K AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Strategic Cost Management.

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167) Define the terms expenses, costs, and expenditures and explain their differences. Answer: Costs are a measure of a resource being sacrificed. They include both assets and expenses. A cost reported as an asset continues to have future benefit; expenses have no future benefit. Expenses on the other hand, represents a resource already sacrificed to bring benefit in the current period. If a cost is considered an expense, the amount will be reported on the income statement and if a cost is classified as an asset, it will be reported on the balance sheet. Expenditures are cash outflows and can include expenses and costs. For example, monthly rent paid in cash is an expenditure, cost, and expense, and the purchase of equipment with cash is an expenditure and a cost, but not an expense. Diff: 2 LO: 1 Bloom: K AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Strategic Cost Management. 168) Explain how the financial statements for a service provider, merchandiser and manufacturer differ. Answer: For a service provider, the financial statements will typically not include Inventory or Cost of Goods Sold (unless goods are sold to complement services provided). Merchandisers and manufacturers will include Inventory and Cost of Goods Sold on their financial statements, but merchandisers will only show one Inventory account-type, Merchandise Inventory and manufacturers will show three different Inventory accounts: Raw Materials Inventory, Work-InProcess Inventory and Finished Goods Inventory. Since the merchandisers and manufacturers report Cost of Goods Sold, the income statement for a merchandiser and manufacturer will also show gross margin, Sales Revenue minus Cost of Goods Sold, which a service provider will not usually report. Diff: 2 LO: 2 Bloom: K AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Strategic Cost Management.

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169) What are the three different types of Inventory for a manufacturer, and explain what each of them includes? Answer: The three different types of Inventory for a manufacturer are Raw Materials Inventory, Work-In-Process Inventory and Finished Goods Inventory. The Raw Materials Inventory represents materials purchased (both direct and indirect) but not yet used in production. Work-In-Process Inventory reflects goods started into production, but not yet completed; simply stated they are partially-completed goods (consisting of direct materials, direct labor, and manufacturing overhead.) Finished Goods Inventory includes finished products (goods) that are in a form ready for sale. Diff: 2 LO: 2 Bloom: K AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Strategic Cost Management. 170) Explain the similarities and differences between the income statements for a service provider and a manufacturer. Answer: The similarities in the income statement presentation for a service provider and a manufacturer are that both report revenues and expenses, but the detail for the manufacturer is more significant. The service provider reports revenue as Service Revenue or Fees whereas, the manufacturer reports revenue as Sales or Net Sales. Both entities will report operating expenses, but the manufacturer will include an additional expense for the Cost of Goods Sold, which when deducted from the Sales (Net Sales), will show the Gross Margin for the manufacturer. The income statement for a service provider shows Direct Costs of Services as a deduction from Service Revenue to determine Gross Margin. Diff: 2 LO: 2 Bloom: K AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Strategic Cost Management. 171) Differentiate between product costs and period costs. Answer: Product costs are the same as manufacturing costs and thus, include direct materials, direct labor and manufacturing overhead. Product costs are included in inventory accounts as assets on the balance sheet until sold, at which point they become expenses, reported as the Cost of Goods Sold on the income statement. Period costs are the same as non-manufacturing costs and include selling expenses and general and administrative expenses. Period costs are expensed as incurred and thus, are reported the income statement. Diff: 2 LO: 3 Bloom: K AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Strategic Cost Management.

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172) Define prime costs and conversion costs as they relate to product costs. Answer: Both prime costs and conversion costs are classified as manufacturing costs and product costs. Prime costs are the sum of direct materials and direct labor in production. They are labeled as "prime" because they are the primary costs incurred in the production of finished goods. Conversion costs consist of direct labor and manufacturing overhead and emphasize the "what it took" to convert the direct materials into a finished good. Diff: 2 LO: 3 Bloom: K AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Strategic Cost Management. 173) Explain how direct costs and indirect costs relate to product and manufacturing costs. Answer: Both direct costs and indirect costs are product and manufacturing costs. Direct costs include the costs that are easily traced to the final product, such as direct materials and direct labor (or prime costs). Indirect costs are those product or manufacturing costs that are not easily or directly traceable to a final product, and include manufacturing overhead costs such as factory rent, factory supplies, factory insurance, etc. Diff: 2 LO: 3 Bloom: K AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Strategic Cost Management. 174) Define a variable cost on a total and a per unit basis and give an example of one. Answer: A variable cost is one that changes in total directly and proportionately with a given level of change in activity. If the production level increases by 10%, the total variable cost will increase by 10% as well. On a per unit basis, regardless of the change in the level of activity, a unit variable cost will remain constant over the entire relevant range. Examples of variable costs include direct materials and direct labor costs. Diff: 2 LO: 4 Bloom: K AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Strategic Cost Management.

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175) Explain the cost behavior of a fixed cost in total and per unit when production levels vary and provide an example of one. Answer: Fixed costs are constant in total within the available production capacity (relevant range). If production activity increases or decreases, the total fixed costs will not change. However, the unit fixed cost has an inverse relationship with a change in the level of activity. For example, if the activity level increases, the unit fixed cost will decrease, and if the activity level decreased, the unit fixed cost will increase. Changing fixed costs to accommodate a change in the capacity-level is often very difficult. Examples of fixed costs include building rent, factory insurance, factory property taxes, and depreciation of factory equipment. Diff: 2 LO: 4 Bloom: K AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Strategic Cost Management. 176) Explain how variable costs and fixed costs can be graphed in conjunction with revenues to reflect profit, loss and the breakeven point. Answer: The graph would be constructed with the vertical axis representing the dollars and the horizontal axis reflecting the units produced/sold. A horizontal line representing the fixed costs would be drawn at the dollar amount located on the vertical axis, extending across all levels of activity (relevant range). From the intersection of the vertical axis and the fixed cost line, the total cost line will be drawn as an upward sloping line reflecting increases in total costs as the level of production increases. The distance between the total cost line and the fixed cost line shows the increment of variable cost incurred as production/sales increase. Lastly, a revenue line is drawn starting at $0 and sloping upward and to the right. The point at which the revenue line and the total cost line intersect represents the breakeven point, with any points below the intersection point representing a net loss and any point above the intersection point representing a profit. Diff: 2 LO: 4 Bloom: K AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Strategic Cost Management.

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177) Describe the flow of costs through the production cycle for a manufacturer. Answer: When raw materials are purchased, they are recorded in the Raw Materials Inventory account. Once direct materials, are requisitioned for production, the Raw Materials Inventory account is decreased and the Work-In-Process Inventory account is increased as the direct materials move into production. Direct labor and manufacturing overhead are then assigned directly into production with these costs being recorded as increases to the Work-In-Process Inventory. As goods are completed, they are then transferred out of the Work-In-Process Inventory, thereby, decreasing the account, into Finished Goods Inventory as an increase, where the cost of the completed goods remains until goods are sold. When goods are subsequently sold, the costs related to the finished goods sold are transferred out of Finished Goods Inventory, which will decrease the balance in this account, into Cost of Goods Sold, which will reflect an increase. This is the point at which the inventoriable costs now become an expense. Diff: 2 LO: 5 Bloom: K AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Strategic Cost Management. 178) How would the direct materials used be computed if they were not directly accounted for? Answer: Direct materials used can be computed by taking the difference between the beginning balance in the Raw Materials Inventory and the ending balance in the Raw Materials Inventory and then, add to that purchase the total direct materials purchased during the period, and the sum will represent the direct materials used for the period, assuming that no indirect materials were used in production. Diff: 2 LO: 5 Bloom: K AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Strategic Cost Management. 179) What is the cost of goods manufactured and how is it computed? Answer: The cost of goods manufactured represents the costs of the goods that were completed during a period and transferred from the Work-In-Process Inventory to the Finished Goods Inventory. If the costs of the completed goods are not expressly known, the cost of goods manufactured can be computed by adding total manufacturing costs (direct materials used, direct labor and manufacturing overhead) to the beginning balance of the Work-In-Process Inventory and then, deducting the ending balance of the Work-In-Process Inventory. Diff: 2 LO: 5 Bloom: K AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Strategic Cost Management.

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180) Explain the difference in the organization of costs in a traditional income statement versus a contribution margin income statement. Answer: The traditional income statement organizes costs based on function, product versus period costs, and reports gross margin. The contribution margin income statement organizes costs based on behavior, variable versus fixed costs, and reports a contribution margin. Both income statement formats will report the same operating income regardless of the organization of the costs. Diff: 2 LO: 6 Bloom: K AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Strategic Cost Management. 181) Discuss the purposes of a traditional income statement versus a contribution margin income statement. Answer: The traditional income statement is used primarily for external reporting purposes, whereas, the contribution margin income statement is strictly used for internal reporting purposes. The contribution margin income statement format supports internal decision-making since it reports variable and fixed costs separately. The contribution margin income statement is never used for external reporting purposes because the information that it discloses is proprietary. Diff: 2 LO: 6 Bloom: K AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Strategic Cost Management. 182) Define the term contribution margin and explain how it is computed. Answer: Contribution margin is the amount of revenue that remains after deducting total variable costs. That difference contributes to covering total fixed costs and the generation of net income. It is computed with the following equation: Sales less Variable Costs equal Contribution Margin. Contribution margin can be expressed in total or on a per unit basis by deducting the unit variable cost from the unit selling price. Diff: 2 LO: 6 Bloom: K AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Strategic Cost Management.

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Cost Accounting, 1e (Farmer) Chapter 3 Cost Behavior and Estimation 1) Which of the following is NOT a way to manage costs? A) Predict costs under different future conditions. B) Institute measures to control costs. C) Plan and budget costs. D) Compare actual costs to expected future costs. Answer: B Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 2) In a professional services firm such as a medical doctor's practice, which of the following overhead costs most likely represents a mixed cost function? A) Medical assistant salaries B) Double-declining balance depreciation on office computers C) Copy machine costs D) Disposable patient gowns Answer: C Diff: 1 LO: 1 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 3) Which of the following is NOT a method of determining a cost driver? A) Time-and-motion studies B) Regression analysis C) Classifying costs D) Intuition Answer: C Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

4) A cost driver is a(n) A) system that tracks prior costs. B) activity that causes a particular cost. C) group of accumulated costs. D) rate used to assign costs. Answer: B Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 5) Why is identification of a relevant range important? A) Product costs are higher outside of the relevant range B) Cost behavior outside of the relevant range is linear, which distorts CVP analysis. C) It directly impacts the number of units of product a company must sell to be profitable. D) It allows a company to rely on cost behavior for planning purposes. Answer: D Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 6) A mixed cost A) can be fixed one period and then, change to variable in a subsequent period. B) changes inversely with changes in volume. C) includes both a variable cost and a fixed cost component. D) is omitted from CVP analysis since it does not fit either a fixed or variable category. Answer: C Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

7) Which of the following would most likely be considered a mixed cost for an attorney's office? A) Electricity costs for the attorney's office complex B) Cost of the copy machine C) Cost of wages of paralegal clerks D) Cost of auto expenses for office vehicles driven to and from the courthouse Answer: B Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 8) The relevant range is A) a band of activity with a specific relationship between activity levels and the cost of being measured. B) the slope of the cost line based on a cost equation. C) the y-intercept of a cost line based on a cost equation. D) the range in which a company earns a profit. Answer: A Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 9) A linear cost equation A) is derived from two elements — the relevant range and the level of activity. B) is used to estimate future costs. C) includes three components — fixed costs, variable costs and mixed costs. D) is fixed when the volume is zero and increases at a constant rate per activity level after that. Answer: B Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

10) If a company expands capacity by 40% or 40,000 units by increasing its fixed costs, and its unit selling price and unit variable cost remain the same, its total profit will A) stay the same if no additional units are sold because the revenue remains the same. B) increase if 2,000 additional units are sold. C) decrease by the amount of the additional fixed costs if no additional units are sold. D) increase by the selling price per unit if 2,000 additional units are sold. Answer: C Diff: 1 LO: 1 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting. 11) You are planning a retirement party and have rented space at a capacity of 80 people at a total cost of $800 for the evening. Food is expected to cost $34 per person. Drinks will be provided to attendees at a rate of $8 per drink and each attendee is expected to have on average, two drinks. By how much will the variable cost line rise on a graph for each additional attendee? A) $42 B) $50 C) $52 D) $60 Answer: B Explanation: Food cost + Drink cost = Total Variable cost per attendee; $34 + (2 × $8) = $50 Diff: 1 LO: 1 Bloom: AP AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

12) You are planning a retirement party and have rented space at a capacity of 80 people at a total cost of $800 for the evening. Food is expected to cost $34 per person. Drinks will be provided to attendees at a rate of $8 per drink and each attendee is expected to have on average, two drinks. At capacity, how much total cost will you generate if you charge each attendee $62? A) $3,360 B) $4,160 C) $4,000 D) $4,800 Answer: D Explanation: Food cost + Drink cost = Total Variable cost per attendee; $34 + (2 × $8) = $50; Total cost = Total fixed cost + Total variable cost = $800 + (80 × $50) = $4,800 Diff: 2 LO: 1 Bloom: AP AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 13) Given the mixed cost graph below, what is the amount of the slope?

A) $1.00 B) $0.50 C) $2.00 D) $0.40 Answer: C Explanation: Slope is the difference in the x-axis amounts divided into the difference in the yaxis amounts. Choose any point on the total cost line: ($700 - $600) ÷ (250 - 200) = $2.00 Diff: 1 LO: 1 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 5

14) At 400 units, what is the total variable costs using the mixed cost graph shown below:

A) $50 B) $100 C) $700 D) $1,000 Answer: C Explanation: Locate 400 units on the vertical axis. At this point, the variable cost is the difference between the total cost of $1,000 and the fixed cost of $300, or $700. Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 15) Bentley Baskets is equipped to produce up to 240 basket per month. During June, the company produced as few as 180 baskets at a total cost of $5,400, and in May produced a high for the year of 225 baskets at a total cost of $7,200. What is the monthly relevant range for Bentley Baskets for the past two months? A) 180 to 240 B) 225 to 240 C) 180 to 225 D) 540 to 575 Answer: C Diff: 1 LO: 1 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 6

16) Delivery costs for Fast Delivery appears below for two months of operation. How should the delivery costs be classified? Month May June

Packages Delivered 960 1,140

Total Delivery Cost $4,608 $5,130

A) Variable cost B) Fixed cost C) Mixed cost D) More information is needed to determine answer. Answer: C Explanation: May cost per unit = $4,608 ÷ 960 = $4.80 and June cost per unit = $5,130 ÷ 1,140 = $4.50. If the cost was to be a variable cost, the unit cost amount would have to be the same at both levels, which it is not. Also, for the cost to be a fixed cost, the total delivery cost would have to be the same at both levels, which it is not. The cost does increase with the increase in the number of packages delivered, and the unit cost changes with the activity level, thus, the cost is a mixed cost, since both the per unit cost changes and the total cost changes. Diff: 2 LO: 1 Bloom: AN AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 17) Which of the following is NOT correct concerning the account analysis method? A) It uses estimated costs to predict future costs. B) It requires insight of the nature of the costs. C) It requires that mixed costs be separated into their variable and fixed components. D) It is scalable. Answer: A Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

18) For which of the following can the account analysis method be used? I. To identify the relevant range II. To determine the cost equation for multiple periods of data. III. To estimate costs at different levels of activity A) I and II B) II and III C) I and III D) II only Answer: B Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 19) Wally World provided the following data concerning its costs of operating and the number of riders of its Scream ride and the related linear regression for selected operation months:

Riders Operating costs

January February March April 3,800 3,700 3,200 3,100 $11,320 $11,150 $9,820 $9,745

May 3,400 $10,360

June 3,600 $11,240

Using the high-low method, what is the unit variable cost for the Scream ride? A) $2.25 B) $2.42 C) $2.47 D) $2.60 Answer: A Explanation: Using January as the high activity point, and April as the low activity point, we can compute the unit variable cost as (High cost - Low cost) / (High activity - Low activity) = ($11,320 - $9,745) / (3,800 - 3,100) = $1,575 / 700 = $2.25. Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

20) Wally World provided the following data concerning its costs of operating and the number of riders of its Scream ride and the related linear regression for selected operation months:

Riders Operating costs

January February March April 3,800 3,700 3,200 3,100 $11,320 $11,150 $9,820 $9,745

May 3,400 $10,360

June 3,600 $11,240

Using the high-low method, what is the amount of total fixed costs for the Scream ride? A) $1,560 B) $1,575 C) $2,086 D) $2,770 Answer: D Explanation: Using January as the high activity point, and April as the low activity point, we can compute the unit variable cost as (High cost - Low cost) / (High activity - Low activity) = ($11,320 - $9,745) / (3,800 - 3,100) = $1,575 / 700 = $2.25. Total fixed costs (at high) = $11,320 - (3,800 × $2.25) = $2,770. Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 21) Lee Hardware produces bins. Each bin sells for $16. Information for June appears below. Sales revenue Variable costs Fixed costs Operating income

$67,200 18,480 28,728 $19,992

Which of the following represents Lee's cost equation? A) Y = $16.00X + $28,728 B) Y = $4.40X + $28,728 C) Y = $6.84X + $18,480 D) Y = $4.40X + $18,480 Answer: B Explanation: Units Sold = Sales Revenue ÷ Unit Selling Price = $67,200 ÷ $16 = 4,200 units; Unit variable cost = Total variable costs ÷ Units sold = $18,480 ÷ 4,200 = $4.40. The cost equation is the total costs = (Unit Variable cost * X) + Total Fixed Costs = $4.40X + $28,728. Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

22) Mow Power produces and sells custom lawn mowers. Each lawn mower sells for $220 and has a contribution margin of $132 per unit. Monthly fixed costs are $35,200 The cost equation for Mow Power's lawn mowers is A) Y = $132X + $35,200. B) Y = $88X + $35,200. C) Y = $220X - $35,200. D) Y = $88X - $35,200. Answer: B Explanation: Unit variable cost = Unit selling price - Unit contribution margin = $220 - $132 = $88; The cost equation is the total costs = (Unit Variable cost * X) + Total Fixed Costs = $88X + $35,200. Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 23) A line with a positive slope indicates that the A) independent variable increases due to an increase in the dependent variable. B) independent variable increases due to a decrease in the dependent variable. C) dependent variable increases due to an increase in the independent variable. D) dependent variable decreases due to a decrease in the independent variable. Answer: C Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 24) Which of the following is considered to be a risk of the high-low method? A) The relevant range B) Outliers C) Requires judgment D) Requires software to handle all the data points Answer: B Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

25) Use of a scatter-plot A) mitigates the risk of using outliers as a basis for the cost equation. B) depicts a line using the two high and low data points. C) obscures extreme data points. D) can help identify the most important data point. Answer: A Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 26) Visualizing data on a scatter-plot A) requires the selection of the highest and lowest data points. B) results in a single cost equation line. C) allows the user to see actual data points. D) presents a plot of the expected data points. Answer: C Diff: 1 LO: 2 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 27) In creating a scatter plot using Excel, which of the following is true? A) Upon selecting the data then scatter chart icon, the scatter chart is displayed with the data. B) After the scatter chart icon is selected, the date selected. C) The cost driver is graphed on the horizontal axis. D) The chart title is selected at the same time the data is selected to ensure the chart contains the proper title once created. Answer: C Diff: 1 LO: 2 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

28) A leak in the roof ruined part of the data needed to complete the high-low method calculation. The high point related to 50 units indicates a total cost of $1,840. Total fixed costs are estimated at $1,200. The plans are to produce 60 units in the current month. How much is the variable cost per unit? A) $11.20 B) $12.80 C) $20.00 D) $64.00 Answer: B Explanation: Total Cost (at high) - fixed costs = Total Variable cost (high); $1,840 - $1,200 = $640; Unit variable cost = Total variable cost (high) ÷ units (high) = $640 ÷ 50 = $12.80 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 29) DMX anticipates producing 500 license plates during his stay in a Miami jail during July. The budgeted costs for July are $5,600 with $4,200 being related to variable costs. How much will the total cost be if DMX produces 600 license plates? A) $3,500 B) $4,200 C) $5,600 D) $6,440 Answer: D Explanation: Unit variable cost = Total variable costs ÷ units produced; $4,200 ÷ 500 plates = $8.40; Total fixed costs = Total costs - Total variable costs = $5,600 - $4,200 = $1,400; Total cost (600 plates) = (Unit variable cost × plates produced) + Total fixed costs = ($8.40 × 600) + $1,400 = $6,440. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

30) Given the graph shown below, what is the variable cost per unit to be used in the cost equation for the line at 400 units?

A) $1.00 B) $1.25 C) $2.00 D) $2.25 Answer: B Explanation: Total cost - Fixed cost = Total variable cost; TC (400 units) of $1,000 - Fixed cost (400 units) of $500 = Total variable cost (400 units) of $500; $500 ÷ 400 units = $1.25 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

31) Anwar Industries has the following activity and cost data for the past year: Machine Hours 397 443 660 360 479 600 463 618 641 430 470 630 590

R&M Costs $12,250 13,072 16,250 12,050 17,798 15,687 13,776 15,993 16,847 12,911 13,271 16,067 15,914

What will the total cost be when 615 units are produced? A) $7,010 B) $10,455 C) $15,620 D) $16,385 Answer: C Explanation: High point is at 660 machine hours and low point is at 360 hours; Variable cost per unit = (Total cost at 660 hours, $16,250 - Total cost at 360 hours $12,050) ÷ Total hours at high point 660 - Total hours at low point 360) = $14.00; Total cost at high point $16,250 (Variable cost per unit $14.00 × Number of units at high point 660) = $7,010; Total cost at 615 units = Total fixed cost $7,010 = (Variable cost per unit $14.00 × Units at desired level 615) = $15,620. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

32) The regression method A) uses only two actual data points to estimate a cost line. B) can estimate a cost line but cannot separate total costs into variable and fixed costs. C) uses every point in a data set to create a straight-line equation to estimate future costs. D) uses the same methodology as the high-low method. Answer: C Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 33) The "line of best fit" created in the regression method to generate a straight-line equation A) is used to estimate future costs. B) determines variability in estimated and actual costs for a given period. C) helps to analyze the cause-and-effect relationship of actual costs. D) allows the estimate of costs to be exactly the same as those costs actually incurred. Answer: A Diff: 1 LO: 3 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 34) In graphing the "line of best fit" in the regression method A) one would expect to not see any residuals scattered around the cost line. B) none of the data points have to touch the cost line. C) some of the data points must touch the cost line. D) a straight line will not exist within the relevant range. Answer: B Diff: 2 LO: 3 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

35) What is the common goal of the high-low method and the regression method? A) To accurately predict future costs with no variation. B) To compare and analyze future and past costs for predictive purposes. C) To separate total costs into their fixed and variable cost components to help in predicting future costs with a derived equation. D) To determine a cause-and-effect relationship between various costs. Answer: C Diff: 2 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 36) When using cost prediction methods, output A) always establishes a cause-and-effect relationship if positively correlated. B) reliability depends on thoughtful, rational relationships between cost drivers and their costs. C) is dependable regardless of the input as long as a regression method is use. D) is less reliable if a regression method is used instead of a high-low or account analysis method. Answer: B Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 37) In the regression method, residual refers to the A) data points that are not used in creating the line of best fit. B) number of data points that do not fall directly on the line of best fit. C) vertical distance between each known data point and the line of best fit. D) slope of the cost-line. Answer: B Diff: 2 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

38) If the (X,Y) relationship is purely variable, A) regression analysis must be used. B) the equation of a line becomes Y = m(X). C) the equation of a line that must be used is Y = m(X) + b. D) account analysis must be used. Answer: B Diff: 2 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 39) If costs are purely fixed in determining the cost line equation, A) regression analysis must be used. B) the equation of the line becomes Y = m(X). C) the equation of the line becomes Y = b. D) the equation of the line remains Y= m(X) + b. Answer: C Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 40) Which of the following metrics would NOT be used to evaluate the validity of the regression model? A) Economic plausibility B) Statistical significance of the slope C) Cause-and-effect negative relationships D) Goodness of fit Answer: C Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

41) In evaluating the economic plausibility of a regression model, the analyst is determining A) the statistical significance of the relationship of the independent variable, X with the dependent variable, Y. B) whether the chosen independent variable, X, is a viable, sensible predictor of the dependent variable, Y, using judgment and understanding of cause-and-effect relationships. C) the degree to which the regression line fits the actual observations. D) the correlation of variable costs to fixed costs in the total cost line determination. Answer: B Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 42) In using a regression method, and determining the statistical significance of the slope of the cost line, the larger the t-statistic, A) the stronger or more significant the relationship between the independent variable, X and the dependent variable, Y. B) the weaker or less significant the relationship between the independent variable, X and the dependent variable, Y. C) the more relevant the intercept is in the cost equation. D) the less relevant the intercept is in the cost equation. Answer: A Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 43) The fixed portion of the cost equation is called the A) p value. B) intercept coefficient. C) t statistic. D) standard deviation. Answer: B Diff: 2 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

44) Which of the following is NOT an assumption of the regression method? A) Abnormality of the residuals B) Independence of the residuals C) Constant variance of the residuals D) Linearity Answer: A Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 45) What is meant by a multiple regression? A) The same variables (both independent and dependent) are simply run multiple times in the same regression to ensure statistical significance. B) The same regression is run as was previously run, but with multiple independent variables (X) to estimate one cost function. C) The same regression is run with the same variables, but with supporting analyses such as account analysis and high-low method. D) The use of the same regression run multiple times to eliminate the need for the evaluation criteria for the validity of the input and output. Answer: B Diff: 2 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 46) When evaluating the output of a multiple regression model, one needs to check A) the validity of the entire model using the criteria of economic plausibility, goodness of fit, and significance of slope. B) the validity of the entire model using the criteria of economic plausibility only since the goodness of fit and significance of slope validity have been addressed in the multiple regression runs of data. C) the validity of the last data set run using the criteria of economic plausibility, goodness of fit, and significance of slope. D) the validity of the model using the first and last set of data run using the criteria of economic plausibility, goodness of fit, and significance of slope. Answer: A Diff: 2 LO: 3 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 19

47) The essence of the learning curve is that A) as the number of units of output increases, the labor hours per unit increase in a corresponding, observable, linear relationship. B) as the number of units of output decreases, the labor hours per unit decline in a corresponding, observable, linear relationship. C) as the number of units of output increases, the labor hours per unit decline in a corresponding, observable, nonlinear relationship. D) as the number of units of output decreases, the labor hours per unit increase in a corresponding, observable, nonlinear relationship. Answer: C Diff: 2 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 48) Greta's Gadgets has a learning curve of 90%. The time observed to complete the first gadget was 1 hour (60 minutes). What is the expected time to complete the 5th unit assuming the learning curve of 90%? A) 36.3 minutes B) 47.98 minutes C) 48.6 minutes D) 54 minutes Answer: B Explanation: Unit #2: 60 min. × (2-.152) = 54 min.; Unit #3: 60 min. × (3-.152) = 50.8 min.; Unit #4: 60 min. × (4-.152) = 48.6 min.; Unit #5: 60 min. × (5-.152) = 47.98 min. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 49) If one were to apply a linear cost function to labor, the implication would be that A) the time to make an additional unit increases over time. B) the time to make each additional unit decreased over time. C) each unit requires the same amount of time to produce. D) there is an inverse relationship between cost and the cost driver. Answer: C Diff: 2 LO: 4 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

50) The learning curve approach assumes A) a linear cost function. B) a nonlinear cost function. C) that each unit will take the same amount of time to produce. D) regardless of training, production time per unit cannot be reduced. Answer: B Diff: 2 LO: 4 Bloom: K AACSB: Ethics AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 51) In applying a linear cost approach as compared to a nonlinear approach results in A) labor costs being higher. B) labor costs being lower. C) labor costs being the same. D) operating income being higher. Answer: A Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 52) Chandra Corporation has an observed and documented a learning curve of 90%, and production of units has increased from 10 to 20 units per week. If it is known that it takes 60 minutes to produce the 10th unit, what amount of time will it take to product the 20th unit? A) 45 minutes B) 50 minutes C) 54 minutes D) 60 minutes Answer: C Explanation: Since the number of units produced doubled, then the 90% is applied to the original 60 minutes (.90 × 60) = 54 minutes to complete the 20th unit. Diff: 1 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

53) Which of the following statements is true regarding the concept of a learning curve? A) As additional units are produced, it will require the same amount of time, but cost per unit will decrease. B) As additional units are produced, each additional unit will require less time, and thus, will result in cost savings. C) As additional units are produced, the amount of time required may increase or decrease depending on the training of the production worker. D) As additional units are produced, each additional unit will require less time, but the cost will increase per unit due to increased training costs for the production worker. Answer: B Diff: 2 LO: 4 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 54) Which of the following is the ultimate limitation of the concept of a learning curve? A) It typically requires additional training and education of production workers. B) Innovation such as when a company creates a new product or production process, the learning curve requires a new learning curve to be started. C) It cuts operating costs by saving time. D) It improves skill improvement and learning for production employees. Answer: B Diff: 2 LO: 4 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

55) You and another company are currently bidding on a construction project. Your competitor is an experienced construction company with an observed learning curve of 90%. You are a new company with no observed learning curve. Assuming the company with the lowest bid will be granted the contract and both companies determined their bid based on a 40% markup on cost, who will most likely get the construction contract? A) You will get the contract since you are new and most likely offered a low bid. B) Your competitor will most likely get the bid since its costs are probably lower than those of a new company because of the learning curve of 90%. C) Each company is equally likely to receive the contract since a learning curve does not affect costs or the related contract pricing. D) Not enough information is given to make this determination. Answer: B Diff: 1 LO: 4 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 56) The method(s) which can be used to separate mixed costs into their fixed and variable cost components to predict future costs is (are) A) high-low method. B) account analysis method. C) regression method. D) all of these methods can be used. Answer: C Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 57) If a company was to plot its learning curve on a graph with the time per unit and number of units on each axis, one would expect the curve to be A) downward sloping. B) upward sloping. C) a horizontal straight line. D) a vertical straight line. Answer: A Diff: 2 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

58) When computing the time required for the production of each additional unit with a learning curve, one would A) multiply the time to produce the immediately preceding unit by the learning curve percentage. B) divide the time of the immediately preceding unit by the learning curve percentage. C) multiply the time to produce one unit by the cumulative number of units at this point by the learning rate [ln learning rate %/ ln 2]. D) divide the time of the immediately preceding unit by the one minus the learning curve percentage. Answer: A Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 59) Which of the following methods would be the most comprehensive and reliable predictor of future costs for linear cost functions? A) Account analysis method B) High-low method C) Regression method D) Learning curve method Answer: C Diff: 2 LO: 2, 3, 4 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

60) Alpine Corporation has been manufacturing the same model of snowboards for several years. The original time to produce one snowboard was 2 hours (120 minutes). Over the last year, the production line has steam-lined the production process with a learning curve of 80%. Recently, the company has introduced a new model of snowboard which now requires 3 hours of production time, but with a 90% learning curve. How much time will it take to produce the third unit of the new snowboard? A) 146 minutes B) 152 minutes C) 162 minutes D) 180 minutes Answer: B Explanation: Unit #1: 180 min. × 1 = 180 min.; Unit #2: 180 min × (2-.152) = 162 min.; Unit #3: 180 min. × (3-.152) = 152 min. The old learning curve is no longer used given the newer model. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 61) Futuristic Fashions reports the following cost information for the period: Direct Materials Direct Labor Indirect Materials Factory Rent Factory Utilities Factory Insurance

$12 per outfit $8 per outfit $1.50 per outfit $1,200 per month $230 per month $110 per month

Determine the linear cost function equation of a line using the data provide for Futuristic Fashions. Answer: Total Cost at a Given Activity Level = Unit Variable Cost × Activity Level) + Fixed Costs = ($21.50 × Activity Level) + $1,540 Solution: Total Unit Variable Cost = Direct Materials + Direct Labor + Indirect Materials = $12 + $8 + 1.50 = $21.50; Total Fixed Costs = Factory Rent + Factory Utilities + Factory Insurance = $1,200 + $230 + $110 = $1,540; Equation: Total Cost at a Given Activity Level = Unit Variable Cost × Activity Level) + Fixed Costs = ($21.50 × Activity Level) + $1,540 Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

62) Sustainable Solutions, Inc. incurred the following costs during the previous month:

Management Salaries Production Workers' Wages Factory Maintenance

10,000 Machine Hours $2,800 $5,000 2,300

20,000 Machine Hours $2,800 $10,000 3,800

Determine which of the costs in the table are variable, fixed or mixed and give an explanation for your classification for each cost. Answer: Classification Explanation Management Salaries Fixed Cost did not change in total as more machine hours were incurred. Production Workers' Variable Costs did change in total as more machine hours Wages were incurred and the cost per MH remained constant at $2.00 per MH. Factory Maintenance Mixed Changed in total but cost per machine hour did not remain constant. This cost cannot be fixed or variable, thus, it has to be a mixed cost. Diff: 1 LO: 1 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

63) Makito Manufacturers incurs the following costs in manufacturing computers. Match the cost driver with the related cost which would most likely cause the cost to change. ________ 1. Production workers Wages A. Labor hours ________ 2. Power Costs B. Machine hours ________ 3. Computer chips, Memory boards, C. Units produced Keyboard assemblies ________ 4. Indirect production materials ________ 5. Indirect production labor wages Answer: __A__ 1. Production workers Wages __B__ 2. Power Costs __C__ 3. Computer chips, Memory boards, Keyboard assemblies __C__ 4. Indirect production materials __A__ 5. Indirect production labor wages Diff: 2 LO: 1 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

64) You have recently decided to open a miniature golf course on a tract of land that you inherited. You have estimated that your monthly fixed costs will be $150 and your variable cost per customer will be $4. Prepare a graph showing your fixed cost line, total variable costs, and total cost line for 10 customers.

Answer: Number of Customers 1 2 3 4 5 6 7 8 9 10

Fixed costs 150 150 150 150 150 150 150 150 150 150

Total Costs 154 158 162 166 170 174 178 182 186 190

Variable Costs 4 8 (2 × 4) 12 (3 × 4) 16 (4 × 4) 20 (5 × 4) 24 (6 × 4) 28 (7 × 4) 32 (8 × 4) 36 (9 × 4) 40 (10 × 4)

Diff: 3 LO: 1 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting.

65) The finance manager has provided you with the following overhead cost function in a Y = m(X) + b format: Total monthly overhead costs = $2.50 (machine hours used) + $4,300. Given this cost function, identify the (a) variable cost; (b) the cost driver; (c) the fixed costs; and whether these monthly overhead costs are considered variable, fixed, or mixed in total. Answer: a) Variable cost = $2.50 per machine hour used b) Cost driver is machine hours used c) Fixed costs = $4,300 d) These monthly overhead costs are considered mixed in total since it has both a variable and fixed cost component. Diff: 2 LO: 1 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 66) Ahmed Company had a high level of activity in June of 7,000 machine hours and related electrical costs of $20,000. In February had a month of low activity of 2,000 machine hours with electrical costs of $10,000. Using the high-low method, what are the variable cost per unit and the estimated fixed cost element of electrical costs? Answer: Fixed cost element = $6,000 Solution: (High Activity Cost - Low Activity Cost) ÷ (High Activity - Low Activity) = Unit variable cost; ($20,000 - $10,000) / (7,000 - 2,000) = $10,000 / 5,000 = $2.00 High Activity: Total Cost - (Unit Variable Cost) × High Activity) = Fixed Cost Element [$20,000 - ($2.00 × 7,000)] = $6,000 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

67) Sanchez Manufacturing Company collected the following production data for the past year: Units Produced 1,600 1,300 1,500 1,100

Total Cost $66,000 57,000 67,500 49,500

If the high-low method is used, what is cost equation for the year? Answer: Total cost = $33/unit + $13,200 Solution: (High Activity Cost - Low Activity Cost) ÷ (High Activity - Low Activity) = Unit variable cost; ($66,000 - $49,500) / (1,600 - 1,100) = $16,500 / 500 = $33.00 High Activity: Total Cost - (Unit Variable Cost) × High Activity) = Fixed Cost Element [$66,000 - ($33.00 × 1,600)] = $13,200 Diff: 3 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 68) Nina and Marco having been working their accounting internship at Pino's Pizzeria. The owner of Pino's has provided them with the following information for the month of July, and has asked them to compute a cost equation for the pizzeria. Cost Type Pizza ingredients Manufacturing Overhead (MOH) Total

Number of Units 5,000 5,000

Total Cost $14,000 $ 5,500 $19,500

Answer: $2.80 per unit + $5,500 Solution: Total Costs = Total Variable Costs + Total Fixed Costs; $19,500 = (*$2.80 × 5,000 units) + $5,500; ($14,000 ÷ 5,000 units = $2.80 per unit) Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

69) Brianna Wellington is the new accountant at Advanced Auto Corporation. She has been assigned the task of determining the next month's costs for her department. She only has partial information available from the previous month as follows: high activity level of 350 units at a total cost of $3,280. She also knows from the accounting records, that the total fixed costs are estimated at $970. Determine the amount of the variable cost per unit and the estimated total costs for next month assuming that 330 units are going to be produced. Answer: Variable cost per unit = $6.60 Total costs at 330 units = $3,148 Solution: High Activity Total Cost - Fixed Cost = Variable Cost; $3,280 - $970 = $2,310 Unit Variable cost = Variable Cost ÷ Units = $2,310 ÷ 350 = $6.60 per unit Total cost at 330 units = ($6.60 × 330 units) + $970 = $3,148 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 70) The controller of MGX Industries is trying to estimate the upcoming quarter's cell phone costs for the company. The phone cost has been determined to be a mixed cost, of which $100 is the monthly base fee, and the total bill for the last quarter for employee cell phone usage was $780. Assume that 2 additional employees were given company cell phones to use for the upcoming quarter which should increase usage-related charges to increase by 20%. Using an account analysis approach, what do you expect the total cost to be for the company cell phones for the upcoming quarter? Answer: $916 Solution: Total Costs = Fixed Cost + Total Variable Costs = $100 + [($780 - 100) × 1.20]) = $100 + $816 = $916 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

71) Carl's Canine Cuts has just recently opened for business offering grooming services for all breeds of dogs. Carl has just finished his first day of service and has noted a remarkable improvement in the amount of time that it takes him to complete a grooming service for each dog. Currently, he managed to groom the 4th dog by the end of the day in 2 hours (120 minutes) time. If Carl has an 80% learning curve, how much time should it take him to groom the 8th dog? The 16th dog? Answer: 8th Dog Grooming Time = 96 minutes: 16th Dog Grooming Time = 76.8 minutes Solution: 8th Dog Grooming Time = 120 minutes × 80% = 96 minutes or 1 hour 36 minutes 16th Dog Grooming Time = 96 minutes × 80% = 76.8 minutes or 1 hour and 16.8 minutes Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 72) If Baxter's Barber Shop is able to cut the 1st customer's hair in 30 minutes, the 2nd customer's hair in 28.5 minutes, the 4th customer's hair in 27.08 minutes, and the 8th customer's hair in 25.72 minutes, what is Baxter's learning curve? Answer: Learning Curve = 95% Solution: 30 × (X%) = 28.5; 28.5 ÷ 30 = 95%; or 28.5 × (X%) = 27.08; 27.08 ÷ 28.5 = 95%; or 27.08 × (X%) = 25.72; 25.72 ÷ 27.08 = 95% Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

73) Jaimin reported the following amount of time to production of the MCG products: 1st Unit = 120 minutes 2nd Unit = 84 minutes 3rd Unit = 68.18 minutes 4th Unit = ? Based on this data, what is Jaimin's learning curve? How much time should it take him to complete his 4th unit? Answer: Learning Curve = 70%; 4th Unit = 58.8 minutes Solution: Learning Curve = 84 ÷ 120 = 70%; 4th Unit = 84 × 70% Learning Curve = 58.8 Minutes Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 74) Mario Finzelli has just learned how to make his grandfather's famous pizza recipe. To make his first pizza, it took him 15 minutes. It should take him only 10 minutes to make a pizza. What learning curve percentage will he need to experience in order to get to the 10 minute mark by the time he makes his 4 pizzas? Answer: 80% Learning Curve since the 10 minute mark is reached between the 3rd and 4th pizza Solution: 1st Unit = 15 minutes 2nd Unit = 15 minutes × 80% = 12.0 minutes 3rd Unit = 15 minutes × (3-0.32) = 15 × .8462 = 10.55 minutes 4th Unit = 12 minutes × 80% = 9.6 minutes Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

75) Imani is studying for her first accounting exam. She is unsure of what the teacher will ask on the exam or the material covered, so she plans to study for 4 hours. On the second exam, Imani feels more comfortable with the exam format and material, and given that she believes she has an 85% learning curve, how long should she have to study in order to achieve the same results as she received on the first exam? Answer: 3.4 hours Solution: 1st Exam Study Time = 4.0 hours 2nd Exam Study Time = 4 hours × 85% = 3.4 hours Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

76) Ventner Manufacturing manufactures a single product. Monthly costs incurred in the production process of 1,000 units are shown below. Costs Incurred Production in Units 1,000 3,000 Production Costs 1. Direct Materials $ 8,000 ? 2. Indirect Labor 3,000 ? 3. Utilities (fixed portion is $600) 1,400 ? 4. Equipment Depreciation 3,000 ? 5. Direct Labor 11,000 ? 6. Manager Salaries 2,800 ? 7. Maintenance (fixed portion is $300) 1,000 ? 8. Factory Rent 3,500 ? Compute the expected costs to be incurred when production is 3,000 units using your understanding of cost classifications to determine which of the costs are fixed or variable. Answer: Costs Incurred Production in Units 1,000 3,000 (3 times original production) Production Costs 1. Direct Materials $ 8,000 $24,000 (3 × $8,000) Variable 2. Indirect Labor 3,000 9,000 (3 × $3,000) Variable 3. Utilities (fixed portion is $600) 1,400 3,000 (3 × $800) + $600 Mixed 4. Equipment Depreciation 3,000 3,000 Fixed — No Change 5. Direct Labor 11,000 33,000 (3 × $11,000) Variable 6. Manager Salaries 2,800 2,800 Fixed — No Change 7. Maintenance (fixed portion is $300) 1,000 2,400 (3 × $700) + $300 Mixed 8. Factory Rent 3,500 3,500 Fixed — No Change Total $33,700 $80,700 Diff: 3 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

77) ZZZZ Best Accounting and Tax Services pays $300 per month for a tax software license. In addition, for each tax return prepared, the business incurs variable costs of $65 per return. The relevant range for ZZZZ Best Accounting and Tax Services is 100 - 400 tax returns per month. What is the total monthly cost and per unit cost if the business prepares a. 150 returns? b. 200 returns? c. 300 returns? Answer: a. Total Monthly Cost = $10,050; Per Unit Cost = $67.00 b. Total Monthly Cost = $13,300; Per Unit Cost = $66.50 c. Total Monthly Cost = $19,800; Per unit Cost = $66.00 Solution: a. Total Monthly Cost = (150 × $65) + $300 = $10,050; Per Unit Cost = $10,050 ÷ 150 = $67.00 b. Total Monthly Cost = (200 × $65) + $300 = $13,300; Per Unit Cost = $13,300 ÷ 200 = $66.50 c. Total Monthly Cost = (300 × $65) + $300 = $19,800; Per Unit Cost = $19,800 ÷ 300 = $66.00 Diff: 3 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

78) You have been provided with the following cost information for your factory at various levels of production activity. You job is to review the provided data, and based on your knowledge of cost behavior analysis, to classify the costs as either variable, fixed or mixed. Cost Factory Equipment Rent Factory Utilities Costs Factory Insurance Production Worker Wages Factory Building Depreciation Materials used in production Factory Foreman Salary Factory Maintenance Costs

0 Units $1,500 1,200 300 0 2,300 0 1,500 200

3,000 Units $1,500 1,600 300 4,100 2,300 3,200 1,500 300

6,000 Units $1,500 1,800 300 8,200 2,300 6,400 1,500 450

3,000 Units $1,500 1,600 300 4,100 2,300 3,200 1,500 300

6,000 Units $1,500 1,800 300 8,200 2,300 6,400 1,500 450

Cost Type Fixed Mixed Fixed Variable Fixed Variable Fixed

Answer: Cost 0 Units Factory Equipment Rent $1,500 Factory Utilities Costs 1,200 Factory Insurance 300 Production Worker Wages 0 Factory Building Depreciation 2,300 Materials used in production 0 Factory Foreman Salary 1,500 Factory Maintenance Costs 200

Diff: 3 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

79) You have just started your new job as a staff accountant for a local business. The President and owner of the company has asked you to help him to create a budget for utility costs for next year. He is specifically interested in estimating the cost for the electric for the upcoming fiscal year. He has provided you with the utility bills for the last 6 months, along with the login for the online account with the utility company to access additional information. Required: The company President is asking you to budget for the total annual electric costs using the account analysis method using the following information with the expectation that the total kWH usage for the next fiscal year will be based on the average usage over the last six months for a monthly usage to be annualized, with an increase in the kWH rate of 10% (the monthly base fee will not change for next year): Monthly Base Fee……………………………………………………$280 Monthly Usage kWH:

January February March April May June

Total Usage 1,010 980 1,080 1,120 1,050 1,220

Charges $373.93 371.14 380.44 384.16 377.65 393.46

Answer: $4,681.72 Solution: The monthly kWH rate is computed by taking any of the charges given in the data, then deducting the monthly base feel of $280, and dividing the remaining charges by the total usage. For example, for the month of January, $373.93 - $280.00 = $93.93 ÷ 1,010 kWH = $.093 per kWH. This rate will then increase by 10% next fiscal year, so the new variable rate per kWH will be $.093 × 1.10 = $.1023 per kWH. Next, the annual usage should be based on an average of the six months usage given, as (1,010 + 980 + 1,080 + 1,120 + 1,050 + 1,220) = 6,460 ÷ 6 = 1,076.67; Then project this by 12 months, 12 × 1,076.67 kWH = 12,920.04 kWH; Then, the new rate will be multiplied by the projected annual usage as 12,920.04 kWH × $.1093 = $1,321.72 of total variable charges per kWH. Then the fixed charges should be computed, ($280 per month × 12 months) = $3,360 per year, and then added to the annual variable charges to arrive at the total estimated electric costs for the upcoming year, $1,321.72 (Variable Cost) + $3,360 (Fixed Cost) = $4,681.72. Diff: 3 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

80) The following information is available for Crescent Computer Company for its monthly maintenance costs: Month February March April May June July August

Units Produced 60 120 150 180 240 210 90

Maintenance Cost $3,600 5,100 6,000 6,950 8,100 6,900 5,450

Using the high-low method: a. Estimate the variable cost component of the maintenance cost for Crescent. b. Estimate the fixed cost component of the maintenance cost for Crescent. c. Determine the estimated cost function for Crescent Computer's maintenance cost. d. If Crescent expects to produce 230 units in September, what are the expected total maintenance costs to be incurred? Answer: a. Variable cost component = $25 per unit b. Total fixed cost component = $2,100 c. Estimated cost function: Y = ($25 per unit × Units Produced) + $2,100 d. Estimated September Maintenance Costs = $7,850 Solution: a. To determine the variable cost component of the maintenance cost for Crescent, it is first necessary to identify the high level of activity, which occurs in the month of June, and the low level of activity, which occurs in the month of February. Using the following equation: (High Level Cost - Low Level Cost) / (High Activity Level - Low Activity Level) = ($8,100 - $3,600) / (240 - 60) = $4,500/180 = $25 per unit variable cost component. b. The fixed cost component of the maintenance cost for Crescent is then computed by computing the total variable cost at either the high and or low level of activity and deducting it from the total cost at the level of activity. At the high level of activity, the total variable cost = (240 units × $25 per unit) = $6,000; Total Cost - Total Variable Cost = Total Fixed Cost; $8,100 - $6,000 = $2,100 Total Fixed Cost. Or, at the low level of activity, the total variable cost = (60 units × $25 per unit) = $1,500; Total Cost - Total Variable Cost = Total Fixed Cost; $3,600 $1,500 = $2,100 Total Fixed Cost. c. The estimated cost function for Crescent Computer's maintenance cost is thus, Y (Total Maintenance Cost) = mX + b = ($25 per unit × Units Produced) + $2,100. d. If Crescent produces 230 units in September, the expected total maintenance costs will be ($25 per unit × 230 units) + $2,100 = $5,750 + $2,100 = $7,850. Diff: 3 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

81) You have been provided with the following data regarding shipments and costs for Brighton Boutiques: Number of Shipments Received 120 105 70 80 87 115 100

Cost per Receiving Report $202 185 142 154 162 200 175

Required: Plot the data points on a scatter graph, and then using the high-low method, determine the cost function of the line that will connect the high and low points on the graph. Does the cost function appear to be linear in nature?

Answer:

Equation of the line is determined as: First: (High Level Cost - Low Level Cost)/ (High Activity - Low Activity Level) = ($202 - $142)/(120 - 70) = $60/50 = $1.20 per unit of variable costs; Fixed Costs = Total Costs - Fixed Costs; At high level, FC = $202 - (120 × $1.20) = $202 - $144 = $58; or at the low, FC = $142 - (70 × $1.20) = $142 - $84 = $58; Therefore, the cost function of the line is Y = ($1.20 × Shipments Received) + $58. Yes, the line connecting the graphed points is linear in nature. Diff: 3 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

82) Mama Leone is canning her fresh tomatoes so that she can make spaghetti sauce later in the year. It took her 30 minutes from start to finish for her first canning jar, and she has 4 hours (240 minutes) to complete the canning process. If she has a learning curve of 90%, how many jars of tomatoes will she be able can? Answer: 10 jars Solution: 1st Unit = 30.0 minutes 2nd Unit = 30.0 minutes × 90% = 27.0 minutes 3rd Unit = 30.0 minutes × (3-0.152) = 30 × .8462 = 25.4 minutes 4th Unit = 27.0 minutes × 90% = 24.3 minutes 5th Unit = 30.0 minutes × ((5-0.152) = 30 × .783 = 23.5 minutes 6th Unit = 25.4 minutes × 90% = 22.9 minutes 7th Unit = 30 minutes × (7-0.152) = 30 × .744 = 22.3 minutes 8th Unit = 24.3 minutes × 90% = 21.9 minutes 9th Unit = 30.0 minutes × (9-0.152) = 30 × .716 = 21.5 minutes 10th Unit = 23.5 minutes × 90% = 21.2 minutes 240.0 minutes Diff: 3 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

83) Lennox Custom Home Designs has just hired Janesh to pack all orders for shipping to customers. It took Janesh 3 minutes to pack her first box of goods, with an estimated learning curve of 85%. Compute the time predicted per unit when packaging the following quantities for customer shipment and total time to package.

Total Packages 1 2 4 8 16

Predicted Time per Package Total Package Time 4 mins. 4 mins. ? ? ? ? ? ? ? ?

Answer:

Total Packages 1 2 4 8 16

Predicted Time per Package 4.00 mins. 3.40 mins. 2.89 mins. 2.457 mins. 2.088 mins.

Total Package Time (Predicted Time per Package × Total Packages) 4.00 mins. 6.80 mins. 11.56 mins. 19.656 mins. 18.088 mins.

Diff: 3 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

84) Cyril's Cycling Enthusiasts sells specialty bikes. Cyril has just hired a new assistant to assemble the bikes purchased by customers. Since Cyril is new to bike assembly, he was shocked to find that it took his new assistant 5 hours to assemble his first bike. Cyril has done some research on the internet and found that a learning curve of 90% is normal for bike assembly. Cyril would therefore, like to predict what the average time would be for his assistant to assemble 32 bikes, considering he is expecting a large customer order and wants to give the customer an accurate timeframe for the completion of the assembly. Total Bike Assembly 1 2 4 8 16 32 Answer: Total Bike Assembly 1 2 4 8 16 32

Predicted Time per Bike 5 hrs. ? ? ? ? ?

Predicted Time per Bike 5 hrs. 4.5 hrs. 4.05 hrs. 3.645 hrs. 3.2805 hrs. 2.9525 hrs.

Total Time to Assemble Bikes 5 hrs. ? ? ? ? ?

Total Time to Assemble Bikes 5 hrs. 9 hrs. 16.2 hrs. 29.16 hrs. 52.488 hrs. 94.54 hrs.

Diff: 3 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

85) Tracy has started her own business producing custom candles. For now, she is starting slowly, and offering only certain designs in the custom candles. Her favorite design, which was her first candle produced, had the following production time and costs: Candle Materials (Wax and Wicks) .5 lbs at $6 per pound Labor to produce one candle 1 hour at $12 per hour Manufacturing Overhead 1 hour at $4 per hour Tracy expects to experience a learning curve of 90% in making subsequent candles for her customers. Required: a. Computer the total cost of for the first candle that Tracy produced. b. Compute the cost of four candles if Tracy does not account for a learning curve. c. Compute the total cost of four candles and the cost per unit if Tracy does account for a learning curve. Answer: a. Cost for first candle = (.5 lbs. × $6) + (1 hr. × $12) + (1 hr. × $4) = $19 per candle b. Cost for four candles (without learning curve) = 4 × $19 (per a) = $76 c. Cost for four candles (with learning curve): Number of candles 1 2 4

Time to produce 1 hour (60 minutes) .9 hrs. (54 minutes) .81 hrs. (48.6 minutes)

Total time to produce 1.8 hrs. (108 minutes) 3.24 hrs. (194.4 minutes)

4 × [(.5 lbs. × $6) + (.81 hrs. × $12) + (.81 × $4)] = 4 × ($3 + $9.72 + $3.24) = $63.84; Per candle = $63.84 ÷ 4 = $15.96 or [(.5 lbs. × $6) + (.81 hrs. × $12) + (.81 × $4)] = ($3 + $9.72 + $3.24) Diff: 3 LO: 1, 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

86) The town of Jim Thorpe, Pennsylvania operates a scenic railway business for tourists. The town is trying to create a cost function for labor costs, which has been identified as a mixed cost, associated with operating the railway. The following data has been gathered related to the labor costs and two possible cost drivers, the number of trips and gross ticket revenues by month.

January February March April May June July August

Labor Costs $18,400 37,000 16,000 24,000 28,400 56,000 60,000 68,000

Number of Trips 14 40 10 22 28 62 90 100

Ticket Revenues $18,000 $60,000 12,000 26,000 36,000 82,000 100,000 120,000

Required: a. Using the high-low method, determine the cost function for labor costs using (1) Number of Trips as a cost driver, and (2) Ticket Revenues as a cost driver. b. Prepare a scatter plot for labor costs using (1) Number of Trips as a cost driver, and (2) Ticket Revenues as a cost driver using the templates below. Based on the scatter plot, which appears to be a more relevant cost driver?

(1)

(2)

Answer: a. (1) (High Level Cost - Low Level Cost) / (High Activity Level - Low Activity Level) = ($68,000 - $16,000) / (100 - 10) = $52,000/90 = $577.78 per trip variable cost component. Fixed Cost = Total Cost - Total Variable Cost; At high level, Fixed Cost = $68,000 - (100 × $578) = $68,000 - $57,800 = $10,200 or at low level, Fixed Cost = $16,000 - (10 × $578) = $16,000 $5,780 = $10,220 (off by $20 due to rounding). (2) (High Level Cost - Low Level Cost) / (High Activity Level - Low Activity Level) = ($68,000 - $16,000) / (120,000 - 12,000) = $52,000/$108,000 = $0.48 per dollar of ticket revenue variable cost component. Fixed Cost = Total Cost - Total Variable Cost; At high level, Fixed Cost = $68,000 - ($120,000 × $0.48) = $68,000 - $57,600 = $10,400 or at low level, Fixed Cost = $16,000 - ($12,000 × $0.48) = $16,000 - $5,760 = $10,240 (off due to rounding).

b. (1)

(2)

Based on the results of the scatter plot, if a straight-line were to be drawn between the high and low points, the most linear relationship will be with ticket revenues as a cost driver for labor costs. Diff: 3 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

87) Septa Bus Company accumulates the following data concerning a mixed cost, using miles as the activity level. Miles Driven Total Cost March 10,000 $17,000 April 9,500 15,200 May 8,000 13,500 June 7,500 13,000 July 7,000 12,700 August 9,000 14,400 Required: a. Using the high-low method, determine the cost function for total costs using miles driven as a cost driver, separating the cost into its respective variable cost component and fixed cost component. b. Prepare a scatter plot for total costs using miles driven as a cost driver using the graph template below.

c. Septa expects that it buses will be driven 12,000 miles in September due to a new route being added. What are the predicted total costs for September?

Answer: a. To determine the variable cost component of the maintenance cost for Septa, it is first necessary to identify the high level of activity, which occurs in the month of March, and the low level of activity, which occurs in the month of July. Using the following equation: (High Level Cost - Low Level Cost) / (High Activity Level - Low Activity Level) = ($17,200 - $12,700) / (10,000 - 7,000) = $4,500/3,000 = $1.50 per mile variable cost component. The fixed cost component of the maintenance cost for Septa is then computed by computing the total variable cost at either the high and or low level of activity and deducting it from the total cost at the level of activity. At the high level of activity, the total variable cost = (10,000 miles × $1.50 per mile) = $15,000; Total Cost - Total Variable Cost = Total Fixed Cost; $17,200 $15,000 = $2,200 Total Fixed Cost. Or, at the low level of activity, the total variable cost = (7,000 miles × $1.50 per mile) = $10,500; Total Cost - Total Variable Cost = Total Fixed Cost; $12,700 - $10,500 = $2,200 Total Fixed Cost. The estimated cost function for Septa Bus Company cost is thus, Y (Total Cost) = mX + b = ($1.50 per mile × Miles Driven) + $2,200. b.

c. If Septa Bus Company has 12,000 miles driven in September, the expected total costs will be ($1.50 per mile × 12,000 units) + $2,200 = $18,000 + $2,200 = $20,200. Diff: 3 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost and Decision Analysis.

88) Describe the fundamentals of cost behavior. Answer: Costs must be monitored and managed in order to optimize business results. Before costs can be analyzed, cost drivers, the activities which cause certain costs, must be identified. Costs are then categorized based on their behavior as either fixed costs, variable costs, or mixed costs. Mixed costs are further separated into their respective fixed cost and variable cost components. These cost classifications are then used to develop a cost function equation set as Y = m(X) + b which is linear in nature, to help predict future costs within a relevant range. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost Management. 89) Define variable costs, fixed costs and mixed costs and explain their relevance in predicting future costs. Answer: Variable costs are costs that change in total based on a change in the level of activity, or usage of their cost driver, but are constant on a per unit basis. Fixed costs are costs that remain the same in total within a relevant range, but change inversely with a change in a given level of activity or use of their cost driver. Mixed Costs include both a variable and a fixed cost component. For cost prediction purposes, mixed costs must be separated into their respective variable and fixed components. The relevance of these cost classifications in predicting future costs is seen in the linear cost function equation set as Y = m(X) + b, where Y = Total Cost, m = Unit Variable Cost, x = Activity Level, and b = Total Fixed Cost. This equation is used to predict future costs. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation, Business Acumen & Operations: Operational Knowledge IMA: Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost Management.

90) What is the relevant range and how is it important in predicting future costs? Answer: The relevant ranged is a band of activity with a specific relationship between activity levels and that cost being measured. Within the relevant range, fixed costs remain fixed, unit variable costs are constant, and a linear relationship exists between fixed costs, variable costs, and total costs. Given the predictably linear function, one can use actual costs to estimate future costs with the linear cost function formula, Y = m(X) + b, but for it to work as accurately as possible, the relevant range must be defined. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation, Business Acumen & Operations: Operational Knowledge IMA: Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost Management. 91) Identify the two, straightforward methods for predicting costs and explain the how each method is used to predict future costs. Answer: The two straightforward methods for predicting costs are the account analysis method and the high-low method. The account analysis uses actual costs usually at an invoice level and requires a good understanding of how the cost behaves. The high-low method uses several data points with the highest and lowest activity levels being used to create a possible equation of a line to use for predicting future costs. It is quick to use, but a bit more difficult to estimate. Diff: 2 LO: 2 Bloom: C AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost Management. 92) What are two limitations of the high-low method for predicting future costs? Answer: Two limitations of the high-low method for predicting future costs are: 1. The highest and the lowest points of activity in the range may not be representative of the remaining coordinates in the sample. 2. One or more of the data points might be outliers, making the resulting equation when connecting the highest activity level point with the lowest activity level point a poor predictor of future costs. Or, the outlier points might be indicative of seasonality and necessary to estimating future costs, but are not factored into the resulting equation. Diff: 2 LO: 2 Bloom: C AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation, Business Acumen & Operations: Operational Knowledge IMA: Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost Management. 53

93) How is a scatter plot used to predict future costs? Answer: A scatter plot is a data-visualization method depicting all (X, Y) coordinates in a sample on a graph. Using this method, a user can identify any outliers, and make other relevant observations about the data set. The scatter plot provides analysis to supplement the other cost estimation methods by mitigating the risk of selecting the highest and lowest X values when either or both of them appears to be an outlier in the data set. Diff: 2 LO: 2 Bloom: C AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Application, Cost Management. 94) Describe the regression method and explain why it is a better method for estimating future costs. Answer: The regression method is a more comprehensive method of estimating costs that is usually done with statistical tools such as Excel (computer) instead of manually. This analysis uses every point in the data set in a mathematical determination to minimize the vertical distance among the data points (residual) to generate a straight-line equation, referred to as a line of best fit. Using the regression method allows one to analyze multiple (X, Y) relationships to see which ones are the best potential cost drivers. Diff: 2 LO: 3 Bloom: C AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost Management. 95) What are the metrics that can be used to evaluate the validity of a regression model? Answer: The metrics that can be used to evaluate the validity of a regression model are as follows: 1. Economic plausibility — Is the chosen variable, X, a viable predictor for the variable, Y 2. Goodness of fit — degree to which the regression line fits the actual observations, measured by the coefficient of determination. 3. Statistical significance of the slope — slope of the regression line is statistically significant in that the independent variable or the cost driver, X, is said to have a statistically significant relationship with Y, if the slope of the line is different from zero. Diff: 2 LO: 3 Bloom: C AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Application, Cost Management.

96) Identify and describe on what four assumptions the nature of the regression method relies. Answer: 1. Linearity — observations when plotted on an (X, Y) scatter plot should exhibit a linear relationship 2. Constant of variance of the residuals — variability of residuals is constant across all (X) values 3. Independence of the residuals — one observation does not differ predictably based on a previous observation 4. Normality of the residuals — residuals are normally distributed Diff: 2 LO: 3 Bloom: C AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost Management. 97) What are the two major reasons to use the account analysis method, the high-low method, and the regression method? Answer: 1. To separate mixed costs into their respective fixed and variable cost components 2. To predict future costs. Diff: 2 LO: 2, 3, 4 Bloom: C AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation, Business Acumen & Operations: Operational Knowledge IMA: Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost Management. 98) Which method is the most comprehensive method for estimating costs? Explain. Answer: Regression analysis is the most comprehensive method for estimating costs because it allows for the use of multiple (X,Y) relationships. This method is typically done with statistical analysis tools such as Excel rather than computed manually. Diff: 2 LO: 3 Bloom: C AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

99) When evaluating a regression analysis output, what should one check for? Answer: When evaluating a regression output, one should check for economic plausibility, goodness of fit, and the statistical significance of the slope. Diff: 2 LO: 3 Bloom: C AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 100) Identify the four assumptions that cause a regression model to be most likely considered reliable. Answer: The four assumptions that cause a regression model to most likely be considered reliable are as follows: 1. Linearity; 2. Constant variance of the residuals; 3. Independence of the residuals; and 4. Normality of the residuals. Diff: 2 LO: 3 Bloom: C AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 101) A manager of an insurance agency was working on the portion of a time budget for one of his new insurance agent hires. He knows that based on past experience with new hires, that there is a learning curve, but that due to the complexity of the work assignments, that the new hire will not be able to significantly reduce time spent on any of the new tasks, as he will still be learning. If the manager wishes then to use a very small learning curve for the work of the new hire, should the learning curve be set at 95% or 5%? Explain your answer. Answer: The learning curve should be set at 95%. First, it is important to understand how a learning curve works. If we suppose that a learning curve of 95% has been observed and documented, then as the number of units doubles, the time it takes to produce the doubled amount should take 95% of the time it took to make the original amount. This represents a minimal amount of time being saved based on 95% learning curve. If the learning curve was set at 5%, as the number of units doubles, the time it takes to produce the doubled amount would take 5% of the time it took to make the original amount, which represents a significant amount of time saved performing the same task, which does not match the facts given for the new hire. Diff: 2 LO: 4 Bloom: C AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

102) If there is a learning curve in effect, what would be expected as more units of output are produced with regards to production time and costs? Answer: If there is a learning curve in effect, then the production hours per unit will decrease as the number of units of output increases, in a corresponding, observable, but nonlinear relationship. Likewise, the production costs in total will decrease over time, due to the decrease in overall production time. Diff: 2 LO: 4 Bloom: C AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

Cost Accounting, 1e (Farmer) Chapter 4 Cost-Volume-Profit Analysis 1) Contribution margin is defined as revenue less A) all costs. B) variable costs. C) fixed costs. D) cost of goods sold. Answer: B Explanation: Contribution margin is defined as revenue less variable costs. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting. 2) Total fixed costs are $24,000. The selling price per unit is $10, while variable costs per unit are $6. Break even in units is A) 1,500. B) 4,000. C) 6,000. D) 8,000. Answer: C Explanation: Break-even is equal to fixed costs ($24,000) divided by contribution margin per unit ($10 - $6 = $4) = 6,000 units. Diff: 2 LO: 1 Bloom: AP AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 3) To break even is to generate enough in sales revenue to cover A) fixed costs only. B) variable costs only. C) fixed and variable costs with no profit. D) fixed and variable costs with a small profit left over. Answer: C Explanation: At break-even, sales less all costs equals zero. Diff: 1 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

4) Atoll Fish Market has fixed costs of $60,000. Variable cost per fish sold is $5, while the selling price per fish is $15. What is operating income (loss) if 7,100 fish are sold? A) ($49,000) B) ($41,000) C) $11,000 D) $46,500 Answer: C Explanation: First calculate breakeven, which is 6,000 units (fixed costs of $60,000 ÷ unit contribution margin of $10 ($15 - $5). Actual unit sales are 7,100 units, which is 1,100 units above break-even; 1,100 units × unit contribution margin of $10 = $11,000. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 5) In calculating the contribution margin, variable selling and administrative costs are A) ignored in the calculation, as they are period costs. B) included in the variable costs. C) included in the fixed costs. D) included in the variable costs, but only if they are directly related to the product. Answer: B Explanation: Contribution margin is sales less variable costs, including both variable costs and all selling and administrative variable costs. Diff: 1 LO: 1 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management.

6) Natalia is excited, as she has just reached her break-even point. The selling price per unit of the rubber exercise ball she developed is $28. At this sales volume, her variable cost is $7, while her fixed cost is $12 per unit. When Natalia sells one more unit, she will generate additional income of A) $7. B) $16. C) $21. D) $28. Answer: C Explanation: The contribution margin per unit is $21 (sales price of $28 less variable cost of $7). The $12 fixed cost per unit is irrelevant in this problem. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 7) Fred's break-even point for his "Fred's Fantastic" (FF) sport drink is 19,000 bottles per year. Fred thinks the market for his FF drink is closer to 15,000 bottles per year. Therefore, Fred would like to reduce his break-even point. Fred should A) decrease his variable costs. B) increase his fixed costs. C) decrease his selling price. D) increase his variable costs. Answer: A Explanation: Breakeven is calculated as fixed costs divided by contribution margin per unit (sales less variable costs). Fred should reduce his variable costs, thereby increasing his contribution margin for each bottle of FF sold. Increasing fixed costs or decreasing his selling price will generate a higher break-even point, which is not the objective. Diff: 2 LO: 1 Bloom: AP AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management.

8) Terabyte Visions charges $7,500 for each new website that it develops. Its total fixed costs per year are $324,000, while its variable costs are $1,500 per website. What is Terabyte Visions' break-even point? A) 43 websites B) 54 websites C) 100 websites D) 216 websites Answer: B Explanation: Breakeven is calculated as fixed costs ($324,000) divided by contribution margin per unit (sales less variable costs, or $7,500 - $1,500 = $6,000). $324,000 ÷ $6,000 = 54 websites as the annual break-even point. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 9) Which of the following is an example of a variable cost? A) Insurance expense B) Property taxes C) Depreciation expense D) Material used to make the product Answer: D Explanation: If you do not make the product, you will not incur material costs. All of the other costs will be incurred, even if no product is made. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management.

10) Delfynn Dynamics Inc. reports the following financial information for the month: Revenues of $2.5 million, total variable costs of $1.25 million, total fixed costs of $1.0 million, 5,000 units sold, and a variable cost per unit of $250. Which of the following is correct? A) Gross margin equals $250,000. B) Break-even point equals 4,000 units. C) Contribution margin equals $1.5 million. D) Contribution margin equals $1.75 million. Answer: B Explanation: Since revenues equal $2.5 million and units sold equal 5,000, each item is sold at a price of $500. Variable costs per unit are $250, so the contribution margin per unit sold equals $250. The break-even point is the point at which sufficient units are sold to equal fixed costs. Fixed costs are $1.0 million. Therefore, the break-even point is $1,000,000 ÷ $250 = 4,000 units. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 11) Discount Electronics, a new company in the area, has reported break-even sales for its first month of operation. This means which of the following? A) Revenues were equal to fixed costs. B) Revenues were equal to variable costs. C) Variable costs were equal to fixed costs. D) Contribution margin was equal to fixed costs. Answer: D Explanation: Break-even is achieved when contribution margin (revenues less variable costs) equals fixed costs. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

12) When a company has a contribution margin equaling total fixed costs, it is operating at A) zero gross margin. B) break-even point. C) zero contribution margin. D) positive pretax income. Answer: B Explanation: Break-even represents the point at which contribution margin is equal to, or covers, total fixed costs. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting. 13) Riker Video Ltd. sold 450 Blu-ray units last month at a selling price of $600 each. Riker incurred unit variable costs of $250, and the company has total monthly fixed costs of $157,500. Which of the following statements is correct? A) Riker operated at a loss for the month. B) Riker was at break-even for the month. C) Riker operated at a profit for the month. D) Riker had a gross margin for the month of $112,500. Answer: B Explanation: Break-even represents the point at which contribution margin is equal to, or covers, total fixed costs. Contribution margin per unit equals the unit selling price of $600 less unit variable costs of $250, or $350 per unit. Total contribution margin in terms of dollars is equal to $350 per unit × 450 units sold = $157,500. Since this total contribution margin of $157,500 is equal to fixed costs of $157,500, Riker Video Ltd. is operating at break-even. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis, Reporting & Control: Cost Accounting.

14) Licard Wineries Inc. sold 700 bottles of vintage burgundy in April at a price of $120 each. Licard incurs $45 in variable costs for each bottle of vintage burgundy and has total monthly fixed costs of $50,000. Which of the following statements is correct? A) Licard operated at a loss of $2,500 for the month. B) Licard operated at a profit of $2,500 for the month. C) Licard operated at its break-even point for the month. D) Licard operated at a level at which contribution margin was less than fixed costs. Answer: B Explanation: Profit represents contribution margin exceeding fixed costs. Contribution margin is equal to the selling price per unit of $120 less variable costs per unit of $45, equaling $75 per bottle. Since 700 bottles were sold in April, total contribution margin in dollars equals $75 × 700 = $52,500. Fixed costs for the month are $50,000. Total contribution margin in dollars of $52,500 less monthly fixed costs of $50,000 results in profit for the month of $2,500. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis, Reporting & Control: Cost Accounting. 15) Which of the following statements regarding break-even analysis is accurate? A) Break-even analysis will help a company to determine profit at various levels of sales and costs. B) Break-even analysis will help determine the sales volume point after which a company will begin to earn a profit. C) Break-even analysis is often used in identifying areas where costs can be reduced or eliminated to help increase profit. D) Once break-even in units is determined, the break-even dollars can be calculated by multiplying the break-even in units by the variable costs per unit. Answer: B Explanation: Determining the break-even point is important because it identifies how much product must be sold before a company will begin earning profit. This information can be used along with other data, such as estimated sales volume, to help the company make decisions on product pricing and cost structure to promote profitability. Diff: 2 LO: 1 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

16) Wow Wireless produces and distributes two mobile devices. One is of extremely high quality, and the other is mid-range and more affordable. Information on these two items follows: High-quality: Total fixed costs are $90,000, variable costs are $500 per unit, and unit selling price is $800. Mid-range: Total fixed costs are $88,000, variable costs are $130 per unit, and unit selling price is $350. What is the break-even point in units for each device? A) Break-even is 450 units for both items. B) Break-even is 800 units for both items. C) Break-even is 400 units for the high-quality device and 300 units for the mid-range device. D) Break-even is 300 units for the high-quality device and 400 units for the mid-range device. Answer: D Explanation: High quality: Contribution margin per unit is equal to sales price per unit minus variable costs per unit, or $800 - $500 = $300 per unit. Fixed costs of $90,000 ÷ contribution margin per unit of $300 = break-even in units of 300. Mid-range: Contribution margin per unit is equal to sales price per unit minus variable costs per unit, or $350 - $130 = $220 per unit. Fixed costs of $88,000 ÷ Contribution margin per unit of $220 = Break-even in units of 400. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 17) Which of the following statements regarding break-even analysis is correct? A) Break-even analysis is required for all businesses and is used to forecast profitability. B) Break-even analysis is simply a starting point in identifying the feasibility of any one business idea. C) Break-even analysis is used to determine the point at which contribution margin equals variable costs. D) Break-even analysis is used to determine the point at which contribution margin equals targeted income. Answer: B Explanation: The break-even calculation is simply a starting point in identifying the feasibility of any one business idea. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

18) Which statement regarding break-even analysis is true? A) Break-even in sales dollars is reached when sales revenues equal fixed expenses. B) Break-even in sales dollars is the point at which sales dollars equal total variable costs. C) Once break-even in units is determined, the degree of operating leverage is established. D) Once break-even in units is determined, the break-even dollars can be determined by simply multiplying the break-even in units by the unit selling price. Answer: D Explanation: Break-even in sales revenue dollars is equal to the break-even point in units times the unit selling price. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 19) The calculation of break-even in units is determined by dividing A) fixed costs by contribution margin per unit. B) variable costs by contribution margin per unit. C) total costs and expenses by sales price per unit. D) sales revenues by total operating income per unit. Answer: A Explanation: Break-even in units is calculated by dividing total fixed costs by the contribution margin per unit. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 20) Gerry's Gyros had the following results last month: Sales revenues equal $4,000, direct costs of labor and food ingredients were $2,100, other cost of goods sold were $200, and fixed period expenses equal $700 per month. Which of the following statements is correct? A) Gerry's gross margin is equal to $1,900. B) Gerry's gross margin is equal to $1,700. C) Gerry's operating income is equal to $1,700. D) Gerry's degree of operating leverage is 4.25. Answer: B Explanation: The gross margin is equal to sales revenues minus all costs of goods sold. Therefore, total gross margin = $4,000 - $2,100 - $200 = $1,700. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting, Strategy, Planning & Performance: Cost Management. 9

21) Bethany's Bakery sells freshly baked pies at a price of $12 each, has variable costs of $6 per pie produced, and has total fixed costs for the year of $14,400. The monthly break-even point for Bethany's Bakery is which of the following? A) 300 pies B) 200 pies C) 500 pies D) 420 pies Answer: B Explanation: Break-even is equal to the following formula: First, find the contribution margin by unit by taking price per unit minus variable cost per unit, or $12 - $6 = $6. Next, find monthly break-even point by taking total fixed costs (14,400 ÷ 12 months = $1,200 per month) divided by contribution margin per unit: $1,200 ÷ $6 = 200 pies. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 22) When a company experiences an increase in its variable per unit product costs, and no other changes occur, which of the following will happen? A) Fixed costs will decrease by an amount proportional to the increase in variable costs. B) Contribution margin will decline, profit will decline, and the break-even point will rise. C) Contribution margin will remain the same despite changes in the variable cost structure D) Contribution margin will increase, profit will decline, and the break-even point will drop. Answer: B Explanation: When variable costs increase, the contribution margin falls. This results in a higher break-even point. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

23) Which of the following is an important difference between a gross margin income statement and a contribution margin income statement? A) The gross margin income statement shows details of fixed and variable costs, while a contribution margin income statement does not. B) The contribution margin shows direct production costs, while a gross margin income statement does not. C) A contribution margin income statement is more likely to be presented in a set of a company's external financial statements than a gross margin income statement. D) The contribution margin income statement shows details of fixed and variable costs, while a gross margin income statement does not. Answer: D Explanation: The contribution margin income statement shows details of variable costs and contribution margin to overall profit. It is not intended to be an all-encompassing measure of a company's profitability. However, the contribution margin can be used to examine variable production costs, to evaluate the profitability of an item, and to calculate how to improve its profitability. A gross margin income statement shows the deduction of total product costs, or cost of goods sold, from revenue and does not necessarily show the details of variable costs or the contribution to profit of each additional dollar of sales revenue as does as contribution margin income statement. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting. 24) Which of the following statements regarding gross margin and contribution margin is correct? A) If there are no variable period operating expenses to consider, the contribution margin is always greater or equal to the gross margin. B) The contribution margin includes all costs of goods sold, both fixed and variable, while the gross margin does not. C) The gross margin includes all variable product costs, while the contribution margin does not. D) The gross margin is never represented as a line item on the income statement, while the contribution margin is. Answer: A Explanation: The essential difference between the contribution margin and gross margin is that fixed overhead costs are not included in the contribution margin. This means that the contribution margin is always higher than the gross margin, if there are no variable period operating expenses. The classic measure of the profitability of goods and services sold as represented on the income statement is gross margin, which is revenues minus the cost of goods sold. Contribution margin is not shown as a line item on the income statement. Diff: 2 LO: 1 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting. 11

25) Which of the following statements regarding gross margin and contribution margin is true? A) The contribution margin is always less than the gross margin. B) The contribution margin includes all fixed costs, while the gross margin does not. C) The gross margin includes all cost of goods sold, while the contribution margin does not. D) The contribution margin is often represented as a line item on the income statement, while the gross margin is not. Answer: C Explanation: The essential difference between the contribution margin and the gross margin is that the gross margin includes all cost of goods sold items, while the contribution margin does not. The classic measure of the profitability of goods and services sold as represented on the income statement is gross margin, which is equal to revenues minus the cost of goods sold. Diff: 2 LO: 1 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting. 26) Corner Cupcakes Co. is selling cupcakes for $10 for a box of one dozen. Corner has fixed costs equaling $108,000 per year, and its accountant has calculated the contribution margin ratio on each box of donuts to be 60% of the selling price. Based on this information, which of the following statements is correct? A) The monthly break-even point is 1,800 boxes sold. B) The monthly break-even point is 1,600 boxes sold. C) The monthly break-even point is 1,500 boxes sold. D) The monthly break-even point is 1,400 boxes sold. Answer: C Explanation: Break-even is equal to the point at which sales in units multiplied by contribution margin is equal to total fixed costs. If fixed costs equal $108,000 per year, then they equal $9,000 per month (108,000 per year ÷ 12 months). The break-even point is therefore equal to the point at which contribution margin is $9,000 per month. If each box sells for $10 and the contribution margin is 60%, then the contribution margin per box of donuts sold is $6.00 ($10 × 60%). If fixed costs are $9,000 per month and the contribution margin per box is $6.00, then $9,000 ÷ $6.00 = a break-even point of 1,500 boxes per month. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

27) Uptown Upholstering Inc. has the following results for the month: Revenues equal $3,500, variable manufacturing costs equal $800, and fixed manufacturing overhead costs equal $900. Which of the following statements is correct? A) Monthly gross margin is equal to $900. B) Monthly gross margin is equal to $1,800. C) Monthly contribution margin is equal to $1,800. D) Operating income for the month is equal to $2,700. Answer: B Explanation: The gross margin equals sales revenues minus variable manufacturing costs less all fixed manufacturing overhead costs. Therefore, gross margin equals $3,500 - $800 - $900 = $1,800 Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting, Strategy, Planning & Performance: Cost Management and Decision Analysis. 28) As a result of cost increases imposed by its primary supplier, Fast-Fly Fishing Supplies Inc. has experienced an increase in its direct or variable costs per unit that will result in a decrease of 2% in the contribution margin ratio. Operating income last month, before the cost increase, was $2,500 based on sales revenues of $32,000 and fixed costs of $15,500. If sales revenues increase next month by 5%, and the new variable costs come into effect, what can Fast-Fly anticipate in terms of operating profit? A) $3,288 B) $2,728 C) $4,108 D) $3,109 Answer: B Explanation: Last month, before the variable cost increase, total variable costs were equal to sales revenues of $32,000 minus total fixed costs of $15,500 minus operating profit of $2,500, amounting to $14,000. This means that the contribution margin ratio last month was equal to $18,000 ($32,000 - $14,000) ÷ $32,000, for a total contribution margin ratio of 56.25%. The increase in variable costs will reduce the contribution margin ratio by 2%; therefore, it will drop to 54.25%. If sales revenues increase next month by 5%, this will result in total sales revenues of $32,000 × 1.05 = $33,600. If the contribution margin on this sales revenue is 54.25%, the contribution margin in dollars will be 0.5425 × $33,600 = $18,228. Subtracting fixed costs of $15,500 from this amount will result in operating income of $2,728. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting, Strategy, Planning & Performance: Cost Management and Decision Analysis.

29) Which of the following is an accurate statement regarding gross margin and contribution margin? A) All variable costs are subtracted from sales to arrive at both the contribution margin and the gross margin. B) All fixed and variable costs are subtracted from sales to arrive at both the gross margin and the contribution margin. C) Contribution margin and gross margin represent the same concept and therefore the terms may be used interchangeably. D) Gross margin is reached by subtracting both variable and fixed manufacturing costs from sales, while contribution margin is reached by subtracting all variable costs from sales. Answer: D Explanation: Cost of goods sold includes both variable and fixed manufacturing costs. Gross margin is calculated by subtracting cost of goods sold from sales. Therefore, gross margin is equal to sales less variable and fixed manufacturing costs. Diff: 1 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting, Strategy, Planning & Performance: Cost Management and Decision Analysis. 30) Corner Cupcakes Co. is selling cupcakes for $8 for a box of one dozen. Corner has fixed costs equaling $60,000 per year, and its accountant has calculated the monthly break-even at 1,000 boxes sold. Which of the following statements is correct based on this information? A) Variable costs equal $3 per box, and contribution margin is $5 per box. B) Variable costs equal $5 per box, and contribution margin is $3 per box. C) Variable costs equal $4 per box, and contribution margin is $4 per box. D) Variable costs equal $4.50 per box, and contribution margin is $3.50 per box. Answer: A Explanation: Break-even is equal to the point at which sales in units multiplied by contribution margin equals total fixed costs. If fixed costs equal $60,000 per year, then they equal $5,000 per month ($60,000 ÷ 12 months). If the break-even point is equal to 1,000 boxes per month, then contribution margin is equal to $5,000 ÷ 1,000 = $5 per box. This means that variable costs are equal to the selling price per box of $8 minus the contribution margin of $5, or $3 per box. Therefore, variable costs equal $3 per box, and contribution margin is $5 per unit. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting, Strategy, Planning & Performance: Cost Management and Decision Analysis.

31) The contribution margin income statement will show which of the following calculations? A) Sales revenues minus operating income B) Sales revenues minus manufacturing costs C) Sales revenues minus fixed costs D) Sales revenues minus variable costs Answer: D Explanation: The contribution margin income statement shows contribution margin, not gross margin. Therefore, this statement shows sales revenues minus variable costs. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting. 32) What is the contribution margin (CM) ratio? A) The difference between a company's sales revenues and variable costs, expressed as a percentage of sales revenues B) The measurement of a company's direct operating leverage, expressed as a percentage of sales revenues C) The difference between a company's sales revenues and production costs or cost of goods sold, expressed as a percentage of sales revenues D) The difference between a company's sales revenues and net income after taxes, expressed as a percentage of sales revenues Answer: A Explanation: The contribution margin (CM) ratio is the difference between a company's sales revenues and variable costs, expressed as a percentage of sales revenues. Diff: 1 LO: 1 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

33) Corner Cupcakes Co. is selling cupcakes for $8 for a box of four. Corner has fixed costs equaling $105,600 per year, and its accountant has calculated the contribution margin ratio on each box of donuts to be 55%. Based on this information, which of the following statements is correct? A) The monthly break-even point is 2,100 boxes sold. B) The monthly break-even point is 1,900 boxes sold. C) Operating profit will be $880 if 2,200 boxes are sold next month. D) Operating profit will be $1,280 if 2,200 boxes are sold next month. Answer: C Explanation: Break-even is equal to the point at which sales in units multiplied by contribution margin is equal to total fixed costs. If fixed costs equal $105,600 per year, then they equal $8,800 per month ($105,600 ÷ 12 months). The break-even point is therefore the point at which contribution margin is $8,800 per month. If each box sells for $8 and the contribution margin ratio per box is 55%, then the contribution margin per box of donuts sold is $4.40 ($8 × 55%). If fixed costs are $8,800 per month, then $8,800 ÷ $4.40 = a break-even point of 2,000 boxes per month. If 2,200 boxes of donuts are sold in a given month, this will result in a contribution margin of $4.40 × 2,200 boxes = $9,680. This amount minus the monthly fixed costs of $8,800 equals $880 of operating profit for the month. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting, Strategy, Planning & Performance: Cost Management and Decision Analysis.

34) Corner Cupcakes Co. is selling cupcakes for $8 for a box of four. Corner has fixed costs equaling $8,800 per month, and its accountant has calculated the contribution margin ratio on each box of donuts to be 55%. Based on this information, which of the following statements is correct? A) If fixed costs increase by $1,760 per month, the break-even sales point will increase by 400 boxes. B) If fixed costs increase by $2,500 per month, the break-even sales point will increase by 150 boxes. C) If fixed costs increase by $1,760 per month, the break-even sales point will increase by 200 boxes. D) If fixed costs increase by $1,500 per month, the break-even sales point will increase by 500 boxes. Answer: A Explanation: Break-even is equal to the point at which sales in units multiplied by contribution margin is equal to total fixed costs. If fixed costs are $8,800 per month, and each box sells for $8 with a contribution margin ratio of 55%, then the contribution margin per box of donuts sold is $4.40 ($8 × 55%), and the break-even point is 2,000 boxes per month ($8,800 ÷ $4.40). If fixed costs increase by $1,760 per month, then fixed costs become $10,560 ($8,800 + $1,760), and the break-even point becomes 2,400 boxes ($10,560 ÷ $4.40), representing an increase of 400 boxes of donuts sold. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting, Strategy, Planning & Performance: Cost Management and Decision Analysis.

35) Corner Cupcakes Co. is selling cupcakes for $8 for a box of four. Corner has fixed costs equaling $8,800 per month, and its accounting firm has determined the contribution margin ratio on each box of donuts to be 55%. Corner is currently averaging monthly sales of 2,600 boxes of donuts and the company has a tax rate of 40%. Based on this information, Corner Cupcakes has been averaging monthly net income after taxes of A) $1,404. B) $1,584. C) $1,464. D) $1,554. Answer: B Explanation: 2,600 boxes times $8 per box is equal to $20,800 of sales revenues. If the contribution margin ratio is 55%, the contribution margin in dollars is equal to $20,800 × 55% = $11,440. Subtracting fixed costs of $8,800 gives operating income of $2,640. If the company has a 40% tax rate, then taxes will equal $2,640 × 40% = $1,056. Subtracting the tax amount from operating income will result in net income of $2,640 - $1,056 = $1,584. Diff: 2 LO: 1, 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting, Strategy, Planning & Performance: Cost Management and Decision Analysis.

36) Hopalong Hot Dog Stand has had the following average results for the past several months: Its selling price per hot dog is $3. Total monthly sales revenues have been $6,000, direct costs of labor and food ingredients have been $2,500 per month, variable indirect costs have been $500 per month, and fixed costs have been $1,500 per month. If Hopalong experiences a $150 per month increase in insurance costs, what will this increase do to its break-even point? A) Break-even point will increase by 150 hot dogs per month. B) Break-even point will increase by 200 hot dogs per month. C) Break-even point will increase by 100 hot dogs per month. D) Break-even point will increase by 225 hot dogs per month. Answer: C Explanation: Hopalong currently has a contribution margin ratio of 50%. The per-month calculations follow: Contribution margin = $6,000 in sales revenues - $2,500 in direct labor and ingredients costs - $500 in variable indirect costs = $3,000. Contribution margin ratio = $3,000, contribution margin ÷ $6,000, sales revenues = 50% CM ratio. The break-even point before insurance cost increases equals the total fixed costs of $1,500 per month divided by the contribution margin for each hot dog sold, or $3 × 50% = $1.50. Therefore, monthly break-even is $1,500 divided by $1.50, or 1,000 hot dogs. If insurance costs (a fixed cost) increase by $150 per month, this will require the sale of 1,100 hot dogs: $1,650 fixed costs ($1,500 fixed cost + $150 insurance) ÷ $1.50 contribution margin per hot dog, an increase of 100 hot dogs. This can also be calculated by dividing the increased fixed insurance costs of $150 by the $1.50 contribution margin per hot dog. Diff: 2 LO: 1 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting, Strategy, Planning & Performance: Cost Management and Decision Analysis.

37) Sammy's Snow Cone Stand has been selling an average of 850 snow cones per week over the first five months of this year. Sammy's sells each cone for $2. Each snow cone incurs variable costs of $0.75, and Sammy's weekly fixed costs are $900. What is the stand's weekly margin of safety in units? A) 95 cones B) 80 cones C) 130 cones D) There is no margin of safety since Sammy's is not breaking even. Answer: C Explanation: Margin of safety is equal to current or forecasted sales level minus break-even point in units sold. Break-even point is calculated by first solving for contribution margin per unit, which is calculated as price per unit minus various cost per unit, then by dividing fixed costs by contribution margin per unit. Thus, contribution margin per snow cone is calculated as $2.00 - $0.75 = $1.25. The weekly break-even point is calculated as $900 per week ÷ $1.25 per cone = 720 snow cones. Since Sammy's has been selling an average of 850 snow cones a week, the margin of safety can be calculated as 850 - 720 = 130 snow cones. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 38) Which of the following statements regarding margin of safety is correct? A) If fixed expenses increase, a company's margin of safety will increase. B) If the break-even point for sales drops, then a company's margin of safety will increase. C) The margin of safety represents the point at which contribution margin exceeds variable costs. D) The margin of safety can be measured only in sales dollars and is the point at which a company begins to earn a profit. Answer: B Explanation: The margin of safety can be measured in sales dollars or in units and is the difference between actual, targeted, or projected sales and break-even sales. As break-even declines, margin of safety will increase. Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

39) The margin of safety is equal to the amount that current or budgeted sales levels exceed which one of the following? A) Operating profit B) Break-even sales C) Fixed costs D) Net income Answer: B Explanation: The margin of safety is calculated by subtracting break-even sales revenue from current or budgeted sales levels. This calculation shows the amount of sales revenues above the breakeven point, or the total number of sales dollars that can be lost before the company begins to lose money. Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting. 40) Iggy's Ice Cream Shop has been selling an average of 500 banana splits per week for the past several months. If Iggy's price per banana split is $4, each split's variable costs are $1, and weekly fixed costs are $1,200, what is Iggy's current margin of safety on banana splits? A) 200 banana splits B) 100 banana splits C) 400 banana splits D) There is no margin of safety since Iggy's is not breaking even. Answer: B Explanation: Margin of safety is current or forecasted unit sales levels minus the break-even point in units sold. Break-even point is equal to total fixed costs divided by contribution margin. Contribution margin is equal to selling price per unit less variable cost per unit, or $4 - $1 = $3. Fixed costs of $1,200 per week divided by the contribution margin of $3 per split is equal to a weekly break-even point of 400 banana splits. Since Iggy's has been selling an average of 500 banana splits a week, the margin of safety can be calculated as 500 - 400 = 100. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

41) Which of the following statements regarding margin of safety is correct? A) The margin of safety can be measured in sales dollars or in units and is the difference between actual or projected sales and break-even sales. B) The margin of safety can be measured in sales dollars or in units and represents the point at which a company begins to earn income from operations. C) The margin of safety can be measured in sales dollars or in units and represents the point at which contribution margin exceeds variable costs and expenses. D) The margin of safety can only be measured in sales dollars and represents the point at which the gross profit margin exceeds targeted levels of fixed costs and expenses. Answer: A Explanation: The margin of safety can be measured in sales dollars or in units and is the difference between actual, targeted, or projected sales and break-even sales. Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting, Strategy, Planning & Performance: Decision Analysis. 42) Which of the following statements regarding margin of safety is NOT correct? A) If break-even point for sales increases, then a company's margin of safety will increase. B) If the break-even point for sales drops, then a company's margin of safety will increase. C) The margin of safety in sales dollars represents the difference between total sales dollars and break-even point in sales dollars D) The margin of safety can be measured in both sales dollars and units. Answer: A Explanation: The margin of safety can be measured in sales dollars or in units and is the difference between actual, targeted, or projected sales and break-even sales. As break-even declines, margin of safety will increase. Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting, Strategy, Planning & Performance: Decision Analysis.

43) The margin of safety is important information because it can help a company's management determine which of the following? A) Where to cut fixed costs in order to ensure profitability B) How much the company is exceeding break-even sales revenue levels C) How much the company needs in sales revenues to meet company's profit targets and objectives D) How to forecast profit and expenses and what operating income can be expected based on different sales levels Answer: B Explanation: The margin of safety can be measured in sales dollars or in units and is the difference between actual, targeted, or projected sales and break-even sales. The margin of safety is the level of current or forecasted sales revenue that exceeds the break-even point. Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting, Strategy, Planning & Performance: Decision Analysis. 44) Corner Cupcakes Co. is selling cupcakes for $8 for a box of four. Corner has fixed costs equaling $8,800 per month, and its accounting firm has determined the contribution margin ratio on each box of donuts to be 55%. Corner is currently averaging monthly sales of 2,600 boxes of donuts, and the company has a tax rate of 40%. Based on this information, which of the following statements is correct? A) Corner Cupcakes currently has a margin of safety of 450 boxes of donuts. B) Corner Cupcakes currently has a margin of safety of $3,000 in monthly sales revenues. C) Corner Cupcakes currently has a margin of safety of 400 boxes of donuts. D) Corner Cupcakes currently has a margin of safety of $4,800 in monthly sales revenues. Answer: D Explanation: The margin of safety is the amount, either in dollars or in units, that current sales levels exceed the break-even point. Break-even is equal to the point at which sales in units multiplied by contribution margin is equal to total fixed costs. If fixed costs are $8,800 per month, and each box sells for $8 with a contribution margin of 55%, then the contribution margin per box of donuts sold is $4.40 ($8 × 55%), and the break-even point is 2,000 boxes per month ($8,800 ÷ $4.40). If current sales are 2,600 boxes per month, then the margin of safety is 600 boxes, or $4,800 per month (600 × $8) in sales revenues. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting, Strategy, Planning & Performance: Decision Analysis.

45) The relationship between a company's revenues, costs, volume of sales, and consequently profit, is called A) sensitivity analysis. B) cost-volume-profit (CVP) analysis. C) data analysis. D) margin of safety analysis. Answer: B Explanation: The relationship between a company's revenues, costs, volume of sales, and consequently profit, is referred to as cost-volume-profit (CVP) analysis. Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting. 46) A company's relevant range A) is unlimited with regards to production capacity. B) has a lower limit depending on how much capacity the company has and how much the market demands the product. C) is a band of activity with a specific relationship between activity levels and the cost being measured, where fixed cost remain fixed and variable costs per unit are constant. D) is a band of activity with a specific relationship between activity levels and the cost being measured, where fixed cost can vary and variable costs are fixed. Answer: C Explanation: A company's relevant range is a band of activity with a specific relationship between activity levels and the cost being measured, where fixed cost remain fixed and variable costs are constant. Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

47) Which of the following items would not appear on a CVP graph? A) Fixed cost line B) Variable cost line C) Total revenue line D) Total cost line Answer: B Explanation: The CVP graph includes lines for fixed cost, total revenue and total cost, but does not show a separate line for variable cost. The variable cost is Included in the total cost line, which begins from the fixed cost line. The area between the total cost line and the fixed cost line represents the variable costs at different activity levels. Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting. 48) Given the following CVP Graph, what does the point labeled A indicate for this company?

A) Net income B) Net loss C) Break-even point D) Total Revenues = Total variable costs Answer: C Explanation: The point at which the total cost line intersects the total revenue line, point A, is called the break-even point. Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

49) Given the following CVP Graph, what does the Line labeled F represent for this company?

A) Total sales revenue B) Total costs C) Total fixed costs D) Total variable costs Answer: A Explanation: The line labeled Line F in the CVP graph represents the total sales revenue given that it starts at 0 and is upward sloping, increasing with the sales units. Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

50) Given the following CVP Graph, where would a company experience a profit?

A) Between points A and B B) At point B C) At point A D) Any point above point A Answer: D Explanation: The point at which the total cost line intersects the total revenue line, point A, is the break-even point. Above this point, the company will experience profit. Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

51) Armand has opted to sell his famous funnel cakes at the local farmer's market instead of opening his own store. After his first month, he summarized the following financial data: unit variable cost per funnel cake was $2 and the monthly rental fee for the space at the market which includes electricity is $700. Armand initially decided to set the selling price per unit for each funnel cake at $4. If the sales for the first month were 500 funnel cakes, what was Armand's margin of safety in units? A) 150 units B) 350 units C) 500 units D) 650 units Answer: A Explanation: Margin of safety is current or forecasted unit sales levels minus the break-even point in units sold. Break-even point is equal to total fixed costs divided by contribution margin. Contribution margin is equal to selling price per unit less variable cost per unit, or $4 - $2 = $2. Fixed costs of $700 per month divided by the contribution margin of $2 per funnel cake is equal to a monthly break-even point of 350 funnel cakes. Since Armand sold 500 funnel cakes in the first month, the margin of safety can be calculated as 500 - 350 = 150. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 52) Hopalong Hot Dog Stand had the following results last month: Sales revenues were $6,000, variable costs were $3,000, and fixed costs were $1,500 per month. If Hopalong wants to achieve a targeted operating income goal of $3,000 next month, how much in total sales revenue will be required? A) $5,000 B) $5,500 C) $9,000 D) $7,500 Answer: C Explanation: The contribution margin is equal to sales revenues minus all variable costs. For Hopalong, last month's contribution margin is calculated as $6,000 - $3,000 = $3,000, and the contribution margin ratio as $6,000 ÷ $3,000 = 50%. With fixed costs of $1,500, operating profit was $1,500 last month. To reach a targeted operating income level of $3,000, Hopalong will have to generate sufficient sales revenues that carry a 50% contribution margin ratio to offset the $1,500 of fixed costs, and still generate the $3,000 in targeted operating profit. Therefore, $3,000 of target profit plus $1,500 of fixed costs is equal to $4,500. This amount divided by the contribution margin ratio of 50% is equal to $9,000. Thus, sales revenues must be $9,000 to achieve a target operating income of $3,000. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 28

53) Petros's Greek Food Stand had the following results last month: Sales revenues were $4,000, variable costs of were $2,000, and the fixed costs for Petros's stand were $1,000 per month. If Petros's cost structure remains the same and Petros wishes to achieve his targeted operating income goal of $2,000 next month, how much in total sales revenue will Petros require? A) $5,000 B) $5,500 C) $6,000 D) $7,500 Answer: C Explanation: Contribution margin is equal to sales revenues minus the variable costs, thus $4,000 - $2,000 = $2,000. Contribution margin ratio = $2,000 variable costs ÷ $4,000 sales revenues = 50%. With fixed costs of $1,000, operating profit was $1,000 last month. To reach a targeted operating income level of $2,000, Petros will have to generate sufficient sales revenues that carry a 50% contribution margin ratio to offset his $1,000 of fixed costs, and still generate the $2,000 in targeted operating profit. Therefore, $2,000 of target profit plus $1,000 of fixed costs is equal to $3,000. This amount divided by the contribution margin ratio of 50% is equal to $6,000. Sales revenues must be $6,000 to achieve a target operating income of $2,000. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

54) Carrot Jewelry is considering two mutually exclusive product lines, either an emerald ring or a ruby bracelet, which will be introduced next year. The board of directors of the company has established a target net income of $30,000 for the new product line but wishes to maximize profit in any case. For the emerald ring line, Carrot expects to sell 200 rings during the year at a selling price per ring of $1,500. Estimated variable costs are $800 per ring, and fixed costs will amount to $90,000 for the year. For the ruby bracelet line, the company anticipates sales of 500 units at a selling price of $1,100 per bracelet. Fixed costs will amount to $110,000 for the year, and the variable costs will also be $800 each. Carrot Jewelry will have a tax rate of 30% next year. Which one of the following statements is correct? A) Carrot should produce and sell rings even though this will result in a $5,000 shortfall in targeted net income. B) Carrot should produce and sell bracelets, since the income from bracelets will exceed the income from rings and exceed the targeted net income by $20,000. C) Carrot should produce and sell bracelets, since the bracelets will generate more net income than the rings and exceed targeted net income by $5,000. D) Carrot should produce and sell rings, since rings will generate more net income than bracelets and will exceed targeted net income by $5,000. Answer: D Explanation: If Carrot produces and sells rings, the contribution margin per ring sold will be $1,500 - $800 = $700. With 200 rings sold, this will produce a contribution margin of $700 × 200 = $140,000. If fixed costs are $90,000, then total pretax income will be $140,000 - $90,000 = $50,000. At a 30% tax rate, tax will be 30% × $50,000 = $15,000, resulting in net income of $50,000 - $15,000 = $35,000. This exceeds targeted net income by $5,000. If Carrot produces and sells bracelets, the contribution margin per bracelet sold will be $1,100 - $800 = $300. With 500 bracelets sold, this will produce a contribution margin of $300 × 500 = $150,000. If fixed costs are $110,000, then total pretax income will be $150,000 - $110,000 = $40,000. At a 30% tax rate, tax will be 30% × $40,000 = $12,000, resulting in net income of $40,000 - $12,000 = $28,000. This is less than net income targeted by the board of directors. Therefore, Carrot should sell the emerald rings. Diff: 3 LO: 3 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

55) Carrot Jewelry is considering two mutually exclusive product lines, based on either an emerald ring or a ruby bracelet, to introduce next year. The board of directors of the company has established a target net income of $30,000 for the new product line but wishes to maximize profit in any case. For the emerald ring line, Carrot expects to sell 200 rings during the year at a selling price per ring of $1,500. Estimated variable costs are $800 per ring, and fixed costs will amount to $90,000 for the year. For the ruby bracelet line, the company anticipates sales of 500 units at a selling price of $1,100 per bracelet. Fixed costs will come to $110,000 for the year, and the variable costs will also be $800 each. Carrot Jewelry will have a tax rate of 30% next year. How much more or less will Carrot have to spend in fixed costs on the proposed bracelet line in order for it to have the same net income as the ring product line? A) Carrot will need to reduce fixed costs on the bracelet line by $10,000. B) Carrot will need to reduce fixed costs on the bracelet line by $12,000. C) Carrot will need to spend $12,000 more in fixed costs on the bracelet line. D) Carrot will need to spend $15,000 more in fixed costs on the bracelet line. Answer: A Explanation: If Carrot produces and sells rings, the contribution margin per ring sold will be $1,500 - $800 = $700. With 200 rings sold, this will produce a contribution margin of $700 × 200 = $140,000. If fixed costs are $90,000, then total pretax income will be $140,000 - $90,000 = $50,000. At a 30% tax rate, tax will be 30% × $50,000 = $15,000, resulting in net income of $50,000 - $15,000 = $35,000. If Carrot produces and sells bracelets, the contribution margin per bracelet sold will be $1,100 - $800 = $300. With 500 bracelets sold, this will produce a contribution margin of $300 × 500 = $150,000. In order to match the income generated by the ring product line, fixed costs will have to be reduced to $100,000 so that total pretax income will be $150,000 - $100,000 = $50,000. Then, as with the ring line, tax will be 30% × $50,000 = $15,000, resulting in net income of $50,000 - $15,000 = $35,000. Therefore, fixed costs must be reduced on the bracelet line from $110,000 to $100,000, or by $10,000, in order for the bracelet line to generate the same net income as the ring product line. Diff: 3 LO: 3 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

56) In order to determine the sales revenue level needed to reach a specific target income goal, it is necessary to add the targeted income amount to what other element before dividing the sum by contribution margin? A) Variable costs B) Overhead costs C) Fixed costs D) Contribution margin Answer: C Explanation: In order to determine required sales revenue levels, the targeted income should be added to fixed costs and the sum of these divided by contribution margin. Diff: 1 LO: 3 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 57) Target profit is added to what other financial statement line item, or element, to determine the numerator in the overall target contribution margin (CM) calculation in break-even analysis? A) Fixed costs B) Variable costs C) Operating profit D) Net income after taxes Answer: A Explanation: Adjusting the break-even calculation to allow for a target profit simply means adding it to the numerator along with fixed costs. The addition of the target profit in the numerator represents a new, higher hurdle to surmount with the existing CM per unit or CM ratio. Diff: 1 LO: 3 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

58) Corner Cupcakes Co. is selling cupcakes for $10 for a box of one dozen. Corner has fixed costs equaling $120,000 per year, and its accounting firm has determined the contribution margin ratio on each box of donuts to be 50%. Corner is currently averaging monthly sales of 2,500 boxes of donuts, and the company has a tax rate of 25%. Based on this information, Corner Cupcakes has been averaging monthly net income of A) $1,975. B) $1,875. C) $1,625. D) $1,825. Answer: B Explanation: 2,500 boxes times $10 per box is equal to $25,000 of sales revenues. If the contribution margin is 50%, then contribution margin in dollars is equal to $25,000 × 50% = $12,500. Subtracting fixed costs of $10,000 per month ($120,000 per year ÷ 12 months) results in operating income of $2,500. If the company has at a 25% tax rate, then taxes will equal $2,500 × 25% = $625. Subtracting the tax amount from operating income results in net income of $2,500 - $625 = $1,875. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 59) Jinx Company wishes to sell enough products to earn a profit of $200,000. If the unit selling price is $20, unit variable cost is $11, and total fixed costs are $700,000, how many units must be sold to earn target net income of $200,000? A) 45,000 units B) 85,909 units C) 100,000 units D) 900,000 units Answer: C Explanation: (Total Fixed Costs + Net Income) / unit contribution margin = Number of units that must be sold to earn net income) = ($700,000 + $200,000)/($20 - $11) = 100,000 units. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FN: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

60) Indigo Industries has fixed costs of $180,000 and contribution margin is 40% of sales. How much will Indigo report as sales when its net income equals $60,000? A) $150,000 B) $300,000 C) $450,000 D) $600,000 Answer: D Explanation: (Fixed costs + Target Net Income / Contribution Margin Ratio = Sales to for target net income = ($180,000 + $60,000) / 40% = $600,000 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FN: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 61) Retro Records wants to sell enough records to earn a profit of $150,000. If the unit selling price is $20, unit variable cost is $8, and total fixed costs are $180,000, how many records must Retro Records sell to earn the desired net income of $150,000? A) 16,500 units B) 27,500 units C) 41,250 units D) 50,200 units Answer: B Explanation: (Fixed Costs + Target Net Income) / Contribution margin per unit = Units to be sold to earn net income) = ($180,000 + $150,000) / ($20 - $8) = 27,500 units. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FN: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

62) Ginseng Corporation reported the following results from the sale of 10,000 units in July: sales $600,000, variable costs $360,000, fixed costs $80,000, and net income $41,500. Assume that Ginseng expects to increase the selling price by 5% on August 1. How many units will have to be sold by Ginseng in July to maintain the same level of net income? A) 4,200 B) 4,500 C) 4,750 D) 5,000 Answer: B Explanation: (Fixed costs + Target Net income) / (Adj. Selling price per unit - variable cost per unit) = Units to be sold for desired net income = ($80,000 + 41,500) / (($600,000 /10,000) × 1.05) - ($360,000 /10,000)) = 4,500 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FN: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 63) Aspire Appliances desires to earn a target net income of $500,000 for next year. If it has fixed costs of $2,000,000 and variable costs are 60% of sales, what are the required sales? A) $3,750,000 B) $4,166,667 C) $5,000,000 D) $6,250,000 Answer: D Explanation: (Fixed Costs + Net Income) / Contribution Margin Ratio = Required sales for desired net income = ($2,000,000 + $500,000)/(1 - .60) = $6,250,000 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FN: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

64) Vespa, Inc. requires sales of $4,000,000 to cover its fixed costs of $520,000 and to earn net income of $1,000,000. What is Vespa's contribution margin ratio? A) 25% B) 32% C) 38% D) 62% Answer: C Explanation: (Required Sales = (Fixed Costs + Target Net Income) / Contribution Margin Ratio; $4,000,000 = ($520,000 + $1,000,000) / CM%; CM% = Contribution Margin Ratio = .38 or 38%. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FN: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 65) When working with multiple products and a sales mix, information required to determine overall break-even point includes which of the following? A) Target net income B) Target operating profit C) Selling and administrative expenses D) Weighted average contribution margin Answer: D Explanation: When working with multiple products and a sales mix of these products, an average contribution margin, called the weighted average contribution margin (WACM), is needed in the denominator for the break-even calculation. Diff: 1 LO: 4 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

66) Crusher Machinery Inc. sells three heavy-duty construction machines. Information on these machines is as follows: Bulldozer Crane Dump truck

30% of total sales 50% of total sales 20% of total sales

Unit contribution margin of $40 Unit contribution margin of $45 Unit contribution margin of $50

Based on this information, what is the weighted-average contribution margin per unit (WACM)? A) $43.00 B) $44.50 C) $46.50 D) $47.50 Answer: B Explanation: The weighted average contribution margin (WACM) is calculated as: (CM × Sales mix for bulldozer) + (CM × Sales mix for crane) + (CM × Sales mix for dump truck), or ($40 × .30) + ($45 × .50) + ($50 × .20) = $12.00 + $22.50 + $10.00 = 0.445, or $44.50. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting, Strategy, Planning & Performance: Decision Analysis.

67) Crusher Machinery Inc. sells three heavy-duty construction machines. Information on these machines is as follows: Bulldozer Crane Dump truck

30% of total sales 50% of total sales 20% of total sales

Unit contribution margin of $40 Unit contribution margin of $45 Unit contribution margin of $50

Total fixed costs for the year are $890,000. Based on this information, what would be the expected break-even point for Crusher for the year? A) 19,000 units B) 19,778 units C) 20,000 units D) 21,000 units Answer: C Explanation: The weighted average contribution margin (WACM) for these three machines is calculated as: (CM × Sales mix for bulldozer) + (CM × Sales mix for crane) + (CM × Sales mix for dump truck), or ($40 × .30) + ($45 × .50) + ($50 × .20) = $12.00 + $22.50 + $10.00 = $44.50. This WACM is then divided into the annual fixed costs to determine the annual break-even point; $890,000 ÷ $44.50 = 20,000 units. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 68) The weighted average contribution margin (WACM) is most useful when working with which of the following? A) Products with low variable costs B) Products with high contribution margins C) Multiple products or product lines with a known sales mix D) Multiple products that are profitable even with high break-even points Answer: C Explanation: When working with multiple products and a sales mix of these products, an average contribution margin, called the weighted average contribution margin (WACM), is needed for the break-even calculation. Diff: 1 LO: 4 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

69) Which of the following statements regarding sales mix is accurate? A) Sales mix is a necessary piece of information when calculating fixed costs. B) Sales mix is an important concept for a company that specializes in only one product. C) In order to use sales mix in a break-even analysis, the percentages of sales of the individual products, when added together, must total 100%. D) When calculating break-even for a company with multiple products, the sales mix and the weighted average contribution margin (WACM) do not need to be known. Answer: C Explanation: Sales mix is expressed as a ratio or percentage and shows how much each product or product line contributes to overall sales. Overall sales are represented at 100%, and each individual product's sales is a portion, or percentage, of this total. When added together, the individual products' sales percentages will total 100% of the firm's sales. Diff: 1 LO: 4 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 70) Calloway Computers sells three types of computers. Information on these is as follows: Laptop Tablet Desktop

25% of total sales 55% of total sales 20% of total sales

Unit contribution margin of $30 Unit contribution margin of $25 Unit contribution margin of $20

If the sales mix information and individual contribution margins given above remain the same, and fixed costs over the final three months of the year are $50,500, what is the expected breakeven point for Calloway for this period? A) 1,800 units B) 1,980 units C) 2,000 units D) 2,020 units Answer: C Explanation: The weighted average contribution margin (WACM) is calculated as: (CM × Sales mix for laptop) + (CM × Sales mix for tablet) + (CM × Sales mix for desktop) = ($30 × .25) + ($25 × .55) + ($20 × .20) = $7.50 + $13.75 + $4.00 = $25.25. The $50,500 of fixed costs divided by the weighted-average contribution margin (WACM) results in a break-even point for Calloway of $50,500 ÷ $25.25 = 2,000 units. Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

71) The concept of sales mix is best used when a company A) is selling multiple products. B) has a high degree of operating leverage. C) has experienced a large increase in fixed costs. D) has experienced a large increase in variable costs. Answer: A Explanation: The sales mix is a concept that is particularly useful when a company is selling a number of different products that have different sales prices, variable costs, and resulting contribution margins. Diff: 1 LO: 4 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 72) A weighted average contribution margin is a very useful statistic for a company that has which of the following? A) A dwindling contribution margin B) An increasing proportion of fixed costs in its cost structure. C) Insufficient sales to reach break-even D) Multiple product lines with a sales mix Answer: D Explanation: In working with multiple products and a sales mix of these products, an average contribution margin is very useful and is needed for the break-even calculation. This average contribution margin is called the weighted average contribution margin (WACM). Diff: 1 LO: 4 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

73) Crest Computing. Inc. sells three types of computing devices. Information on these is as follows: Laptop Tablet Desktop

25% of total sales 60% of total sales 15% of total sales

Unit contribution margin of $40 Unit contribution margin of $45 Unit contribution margin of $35

Based on this information, what is the weighted average contribution margin (WACM)? A) $43.50 B) $44.50 C) $42.25 D) $43.75 Answer: C Explanation: The weighted average contribution margin (WACM) is calculated as: (UCM × Sales mix for laptop) + (UCM × Sales mix for tablet) + (UCM × Sales mix for desktop), thus ($40 × .25) + ($45 × .60) + ($35 × .15) = $10.00 + $27.00 + $5.25 = $42.25. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 74) Crest Computing Inc. sells three types of computing devices. Information on these is as follows: Laptop Tablet Desktop

25% of total sales 60% of total sales 15% of total sales

Unit contribution margin of $40 Unit contribution margin of $45 Unit contribution margin of $35

If the fixed costs over the last three months of the year are $219,700, what is the expected breakeven point for this same period? A) 4,200 units B) 4,882 units C) 5,200 units D) 5,493 units Answer: C Explanation: The weighted average contribution margin (WACM) is calculated as: (CM × Sales mix for laptop) + (CM × Sales mix for tablet) + (CM × Sales mix for desktop), thus ($40 × .25) + ($45 × .60) + ($35 × .15) or ($10.00 + $27.00 + $5.25) = $42.25. The fixed costs divided by the WACM will result in the break-even point for the period; $219,700 ÷ $42.25 = 5,200 units to break even for the last three months of the year. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 41

75) In order to calculate the weighted-average contribution margin (WACM) for a group of different products, which of the following pieces of information is needed? A) Fixed costs per unit of product sold B) The degree of operating leverage C) Overhead costs for each different product D) The sales mix for the different products Answer: D Explanation: When working with multiple products and a sales mix of these products, an average contribution margin, called the weighted average contribution margin (WACM), is needed for the break-even calculation. The WACM cannot be calculated without sales mix information. Diff: 1 LO: 4 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 76) What is the weighted average contribution margin (WACM) per unit? A) The difference between a company's fixed costs and variable costs, expressed as a per unit amount based on units sole. B) The measurement of a company's direct operating leverage, expressed as a per unit amount based on units sold. C) The sum of the unit contribution margin for each product multiplied by its respective sales mix percentage. D) The difference between a company's net sales revenues and net income, divided by total sales units. Answer: C Explanation: The weighted average contribution margin per unit is the sum of the unit contribution margin for each product multiplied by its respective sales mix percentage of each of the company's products. Diff: 1 LO: 4 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

77) Last month, Everest Environmental Services had revenues amounting to $50,000, while direct labor and other variable costs were $25,000 and fixed costs were $20,000. Everest has an income tax rate of 42%. Based on this information, which statement is correct about last month's results? A) Everest had a gross margin of $30,000 and operating income of $25,000. B) Everest had a contribution margin of $5,000 and net income after tax of $3,360. C) Everest operated last month with a margin of safety of $10,000 in sales revenues. D) Everest operated last month with a margin of safety of $15,000 in sales revenues. Answer: C Explanation: Everest had sales revenues of $50,000 with direct costs of $25,000. This means it had a contribution margin of $50,000 - $25,000 = $25,000, resulting in a 50% contribution margin ratio ($25,000 ÷ $50,000). Break-even is equal to the amount of sales revenues needed to offset fixed costs of $20,000 while carrying a 50% contribution margin ratio. Therefore, $20,000 ÷ 50% = $40,000 of revenues are needed to break-even. If sales revenues are $50,000, Everest margin of safety in sales revenues is calculated as 50,000 - $40,000 = $10,000. Diff: 2 LO: 1, 2, 4, 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 78) Genesis Corporation sells three types of snowboards with the following information:

Beginner Novice Expert

Unit Selling Price $40 $50 $80

Unit Variable Cost $10 $15 $20

Sales Mix 50% 20% 40%

What is the weighted-average contribution margin for Genesis Corporation? A) $42 B) $46 C) $56 D) $62 Answer: B Explanation: Before computing the weighted-average contribution margin, the unit contribution margin for each snowboard must be computed. Beginner, ($40 - $10) is $30, Novice ($50 - $15) is $35, and Expert ($$80 - $20) is $60. The weighted-average contribution margin (WACM) is then calculated as: (CM × Sales mix for Beginner) + (CM × Sales mix for Novice) + (CM × Sales mix for Expert), thus ($30 × .50) + ($35 × .20) + ($60 × .40) or ($15.00 + $7.00 + $24.00) = $46.00. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 43

79) Genesis Corporation sells three types of snowboards with the following information:

Beginner Novice Expert

Unit Selling Price $40 $50 $80

Unit Variable Cost $10 $15 $20

Sales Mix 50% 20% 40%

What is the break-even point for Genesis Corporation if total fixed costs are $883,200? A) 14,245 units B) 15,771 units C) 19,200 units D) 21,029 units Answer: C Explanation: Before computing the weighted-average contribution margin, the unit contribution margin for each snowboard must be computed. Beginner, ($40 - $10) is $30, Novice ($50 - $15) is $35, and Expert ($$80 - $20) is $60. The weighted-average contribution margin (WACM) is then calculated as: (CM × Sales mix for Beginner) + (CM × Sales mix for Novice) + (CM × Sales mix for Expert), thus ($30 × .50) + ($35 × .20) + ($60 × .40) or ($15.00 + $7.00 + $24.00) = $46.00. The fixed costs divided by the WACM will result in the break-even point for the period; $883,200 ÷ $46.00 = 19,200 units. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 80) Which statement regarding degree of operating leverage (DOL) is correct? A) DOL is calculated as contribution margin divided by operating income. B) DOL is calculated as gross margin divided by net income after taxes. C) DOL is calculated as pretax income before interest and tax divided by sales revenues. D) DOL is calculated as net income divided by total fixed manufacturing costs. Answer: A Explanation: The degree of operating leverage (DOL) is calculated as contribution margin divided by operating income. Diff: 1 LO: 5 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting & Control: Cost Accounting.

81) Emanuel's Electronics Co. has the following results for the month: Revenues equal $6,500, contribution margin equals $3,900, and operating income equals $600. Revenues are expected to grow by 10% next month. Using the principle of degree of operating leverage (DOL) and based on the projected revenue increase, what can Emanuel's Electronics expect in operating income next month? A) $900 B) $990 C) $1,500 D) $2,200 Answer: B Explanation: The DOL is calculated as contribution margin divided by operating income, or $3,900 ÷ $600 = 6.5. The sales increase of 10% must be multiplied by the DOL of 6.5 to get the multiplier to apply to operating income expected under 10% sales growth. That means operating income must be multiplied by 1.65 to arrive at expected operating income under the new revenue assumption. New operating income = $600 × $1.65 = $990. Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 82) The accounting staff of LaForge Enterprises has computed a degree of operating leverage (DOL) of 3.5 for last month's results based on revenues of $5,500 and variable costs of $2,000. What were total fixed costs? A) $950 B) $1,000 C) $2,300 D) $2,500 Answer: D Explanation: The DOL is calculated as contribution margin (revenues minus variable costs) divided by operating income. Therefore, a DOL of 3.5 = (5,500 - 2,000) ÷ operating income, which can be calculated as 3500 ÷ 3.5 = 1,000. For Operating income to be $1,000 based on a Contribution Margin of $3,500, Fixed Costs would have to be $3,500 - $1,000 = $2,500. Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

83) Degree of operating leverage (DOL) is most often used in what form of business analysis? A) Income analysis B) Sensitivity analysis C) Competitive analysis D) Liquidity and working capital analysis Answer: B Explanation: The degree of operating leverage (DOL) is most frequently used in sensitivity analysis to help analysts plan their operations and answer "what-if" questions. Diff: 1 LO: 5 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 84) Which of the following statements regarding a relatively high degree of operating leverage is correct? A) Firms with higher operating leverage will see a slower decline in profits as sales volume decreases. B) Firms with higher operating leverage will see a steeper increase in variable costs as sales volume increases. C) Firms with higher operating leverage will see a steeper increase in operating profit as sales volume increases. D) Firms with higher operating leverage will see a steeper increase in fixed costs and expenses as sales volume increases. Answer: C Explanation: The degree of operating leverage acts as a multiplier of sales revenues changes. As the degree of operating leverage increases, so does the multiplier effect. Therefore, firms with higher operating leverage will see a steeper increase in operating profit as sales volume increases. Diff: 1 LO: 5 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

85) If all other variables remain the same and a company experiences a change in fixed expense levels which of the following statements regarding the degree of operating leverage (DOL) is correct? A) An increase in fixed expenses will result in a decrease in the degree of operating leverage. B) An increase in fixed expenses will result in no change to the degree of operating leverage. C) A decrease in fixed costs and expenses will result in a higher degree of operating leverage. D) A decrease in fixed costs and expenses will result in a lower degree of operating leverage. Answer: D Explanation: The degree of operating leverage (DOL) is calculated as contribution margin divided by operating income. When fixed costs decrease, this will result in higher operating income with no change to contribution margin. Dividing a contribution margin that is unchanged by an operating income that has increased will result in a lower degree of operating leverage. Diff: 2 LO: 5 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 86) Increasing fixed costs will have what impact on a company's degree of operating leverage (DOL)? A) DOL will increase. B) DOL will decrease. C) DOL will be unchanged. D) DOL is impacted only by changes in variable costs. Answer: A Explanation: The degree of operating leverage (DOL) is calculated as contribution margin divided by operating income. When fixed costs increase, this will result in lower operating income. Therefore, dividing a contribution margin that is unchanged by an operating income that has decreased will result in a higher degree of operating leverage, and DOL will increase. Diff: 1 LO: 5 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

87) Donatello's Donut Shop sells boxes of a dozen donuts for $9, has variable costs of $5 per box and has fixed costs of $8,000 per month. Last month, Donatello's had an operating profit of $2,000. Which of the following statements is correct? A) If Donatello's had sold 2,500 boxes last month, it would have hit the break-even point. B) If Donatello's sold 3,000 boxes last month, its operating profit would have been $3,000. C) If Donatello's has an increase in sales of 10%, it can expect operating profit of $2,500. D) If Donatello's has an increase in sales of 5%, it can expect operating profit of $2,500. Answer: D Explanation: The degree of operating leverage (DOL) is calculated as contribution margin divided by operating income. If operating profit was $2,000 and fixed costs were $8,000, then contribution margin was equal to $10,000 last month. This means that the degree of operating leverage (DOL) for Donatello was its contribution margin of $10,000 ÷ operating income of $2,000 = 5.0. Operating income can be predicted based on a given sales revenue increase. In this case, 5% times the degree of operating leverage of 5.0 equals a 25% increase in expected operating profit, or $2,000 × 1.25 = $2,500. Diff: 3 LO: 5 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 88) Which of the following statements regarding sensitivity analysis is accurate? A) Sensitivity analysis will help a company to determine profit at various levels of sales and costs. B) Sensitivity analysis will help determine the sales volume point at which a company will begin to earn a profit. C) Sensitivity analysis is often used in identifying areas where costs can be reduced or eliminated to help increase profit. D) Sensitivity analysis is used to help identify areas where a company can improve its operations and its ability to manage debt. Answer: A Explanation: Sensitivity analysis helps management plan company business by answering "what-if" questions involving projected profitability at various levels of sales revenues, costs, and expenses. Diff: 1 LO: 5 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

89) Which of the following statements regarding degree of operating leverage (DOL) is correct? A) DOL is considered to be a percentage of sales revenues. B) DOL is considered to be a multiplier. C) DOL is calculated as net income divided by sales revenues. D) DOL is calculated as operating income divided by variable costs. Answer: B Explanation: The degree of operating leverage (DOL) is a multiplier that acts on changes in sales and is determined by dividing contribution margin by operating income. Diff: 1 LO: 5 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Applications. 90) Mike's Maintenance Co. had the following results last month: Revenues were $9,500, contribution margin totaled $4,500, and operating income was $500. Revenues are expected to grow by 5% next month. Using the principle of degree of operating leverage (DOL) and based on the projected revenue increase, what can Mike's expect in operating income next month? A) $650 B) $700 C) $725 D) $850 Answer: C Explanation: DOL is equal to contribution margin divided by operating income, or $4,500 ÷ $500 = 9.0. The projected revenues increase of 5% must be multiplied by the DOL of 9.0 to get the multiplier to apply to the operating income expected under a scenario of 5% sales revenue growth. Thus, operating income must be multiplied by 9.0 × 5%, or 1.45, to arrive at expected operating income under the new revenue assumption. Last month's operating income of $500 × 1.45 = $725 in projected operating income. Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Quantitative Methods.

91) Brandy's Books is operating with a degree of operating leverage (DOL) of 5.0 for last month's results based on revenues of $7,000 and variable costs of $3,500. What were total fixed costs last month? A) $2,750 B) $2,800 C) $2,900 D) $2,500 Answer: B Explanation: The DOL is calculated as contribution margin divided by operating income. Contribution margin = Revenues - Variable costs, thus $7,000 - $3,500 = $3,500. A contribution margin of $3,500 divided by a DOL of 5 equals an operating income of $700. Fixed costs would thus be $3,500 - $700 = $2,800. Diff: 2 LO: 5 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 92) Which of the following statements regarding fixed costs and degree of operating leverage (DOL) is correct? A) A decrease in fixed costs of 50% will cause the DOL to increase by 50%. B) An increase in fixed costs of 30% will cause the DOL to decrease by 60%. C) An increase in fixed costs typically represents an investment in infrastructure by a company and results in a higher DOL. D) An increase in fixed costs typically represents an investment in infrastructure by a company and results in a lower DOL. Answer: C Explanation: The degree of operating leverage (DOL) is calculated as contribution margin divided by operating income. As fixed expenses increase, operating income falls. When operating income falls, contribution margin is divided by a lower operating income figure, and the result is a higher DOL. Thus, when a company makes an investment in infrastructure and its fixed costs increase, the DOL will increase. Diff: 1 LO: 5 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

93) Which of the following statements regarding a relatively high degree of operating leverage is correct? A) Firms with a relatively low fixed cost structure will have a higher degree of operating leverage. B) Firms with a higher degree of operating leverage will see a steeper increase in fixed costs as sales volume increases. C) Firms with higher degrees of operating leverage are less risky and more likely to earn a profit than those with lower degrees of operating leverage. D) Firms with a higher degree of operating leverage will see a steeper increase in operating profit as sales volume increases. Answer: D Explanation: The degree of operating leverage acts as a multiplier of sales revenues changes. As the degree of operating leverage increases, so does the multiplier effect. Therefore, firms with a higher degree operating leverage will see a steeper increase in operating profit as sales volume increases. Firms with higher degrees of operating leverage are riskier than firms with lower degrees of operating leverage, since greater levels of fixed costs must be offset by higher sales levels for firms with higher degrees of operating leverage. Diff: 1 LO: 5 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 94) If a company experiences a change in operating income levels due to a change in period expenses, which of the following statements regarding the degree of operating leverage (DOL) is correct? A) An increase in operating income due to decreased fixed period expenses will result in an increase in the degree of operating leverage. B) An increase in operating income due to a decrease in fixed period expenses will result in no change to the degree of operating leverage. C) A decrease in operating income due to an increase in fixed period expenses will result in an increase in the degree of operating leverage. D) A decrease in operating income due to an increase in fixed period expenses will result in a lower degree of operating leverage. Answer: C Explanation: The degree of operating leverage (DOL) is calculated as contribution margin divided by operating income. When operating income drops due to an increase in fixed period expenses, the denominator of the equation drops, and the result is a larger number for DOL. Therefore, when operating income drops, DOL increases. Diff: 1 LO: 5 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

95) Which of the following statements regarding the degree of operating leverage (DOL) is correct? A) Assuming no other changes occur, an increase in fixed costs will result in a lower DOL. B) Fixed costs are unrelated to operating leverage. C) Assuming no other changes occur, a decrease in fixed costs will result in a lower DOL. D) DOL is entirely dependent on the levels of variable costs. Answer: C Explanation: The degree of operating leverage (DOL) is calculated as contribution margin divided by operating income. As fixed expenses decrease, operating income increases. Dividing contribution margin by a higher operating income level will result in a lower degree of operating leverage. Thus, when a company reduces its fixed costs, the DOL will decrease. Diff: 1 LO: 5 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 96) Which of the following statements regarding a relatively high degree of operating leverage (DOL) is correct? A) Firms with a relatively low proportion of variable costs will have a higher degree of operating leverage. B) Firms with higher degrees of operating leverage will see a lower increase in operating income as sales volume increases. C) Firms with higher degrees of operating leverage are less risky and more likely to earn a profit than those with lower degrees of operating leverage. D) Firms with higher degrees of operating leverage are riskier than those with lower degrees of operating leverage, since there are more fixed costs to overcome. Answer: D Explanation: The degree of operating leverage acts as a multiplier of sales revenues changes. As the degree of operating leverage increases, so does the Multiplier effect. Therefore, firms with higher operating leverage will see a steeper increase in operating profit as sales volume increases. Firms with Higher degrees of operating leverage are riskier than firms with lower DOLs because higher levels of fixed costs must be offset by higher sales and Contribution margins. Diff: 1 LO: 5 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

97) Which of the following statements regarding the degree of operating leverage (DOL) is correct? A) An increase in fixed costs, with no other changes, will result in a decrease in the degree of operating leverage. B) An increase in operating income will have no impact on the degree of operating leverage. C) A decrease in operating income will result in a decrease in the degree of operating leverage. D) An increase in fixed costs, with no other changes, will result in an increase in the degree of operating leverage. Answer: D Explanation: The degree of operating leverage (DOL) is calculated as contribution margin divided by operating income. When fixed costs increase, operating income drops, and the denominator of the equation drops. Therefore, when fixed costs increase and operating income drops, degree of operating leverage increases. Diff: 1 LO: 5 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 98) Which of the following is a characteristic of a business whose operating income level is relatively high compared to its contribution margin? A) The business has relatively high fixed costs. B) The business has a relatively high degree of operating leverage (DOL). C) The business has relatively low variable costs. D) The business has relatively low fixed costs. Answer: D Explanation: If a company has operating income that is relatively high compared to its contribution margin, its fixed costs are relatively low, since operating profit is equal to contribution margin minus fixed costs. The degree of operating leverage (DOL) in such cases is relatively low, since DOL is equal to contribution margin divided by operating income, and dividing by a higher denominator will result in a lower DOL. Diff: 1 LO: 5 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

99) Increasing fixed costs and assuming no other changes will have what impact on a company's degree of operating leverage (DOL)? A) DOL will rise. B) DOL will drop. C) DOL will be unchanged. D) DOL is impacted only by changes in variable costs. Answer: A Explanation: The degree of operating leverage (DOL) is calculated as contribution margin divided by operating income. An increase in fixed costs will result in lower operating income. Dividing a contribution margin that is unchanged by an operating income that has decreased will result in a higher degree of operating leverage. In other words, DOL will increase. Diff: 1 LO: 5 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 100) Assuming no other variables change, decreasing fixed costs will have what impact on a company's degree of operating leverage (DOL)? A) DOL will increase. B) DOL will decrease. C) DOL will be unchanged. D) DOL is impacted only by changes in variable costs. Answer: B Explanation: The degree of operating leverage (DOL) is calculated as contribution margin divided by operating income. When fixed costs decrease, operating income will increase. Dividing a contribution margin that is unchanged by an operating income that has increased will result in a lower degree of operating leverage. Diff: 1 LO: 5 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Applications.

101) Artem CPA Accounting LLP provides standard financial statement review services for clients at a price of $25,000. Artem has variable costs of $13,000 per review and fixed costs of $120,000 per month. Last month, Artem had an operating profit of $36,000. Which of the following statements is correct? A) Artems conducted 15 reviews last month. B) Artems conducted 10 reviews last month. C) Artems has a degree of operating leverage of 4.33. D) If Artems conducts 20 reviews next month, it can expect operating profit of $38,000. Answer: C Explanation: We can start by adding operating profit of $36,000 to fixed costs of $120,000 to arrive at operating income of $156,000 for the month. Dividing this amount by the contribution margin of $12,000 ($25,000 sales - $13,000 variable expenses) yields the number of audits performed: $156,000 ÷ $12,000 = 13. The degree of operating leverage (DOL) is calculated as contribution margin divided by operating income. Therefore, DOL is equal to contribution margin of $156,000 ÷ $36,000 = 4.33. Diff: 2 LO: 5, 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 102) Artem CPA Accounting LLP provides standard financial statement review services for clients at a price of $25,000. Artem has variable costs of $13,000 per review and fixed costs of $120,000 per month. Last month, Artem had an operating profit of $36,000. Artem has an effective tax rate of 30%. If Artem would like to attain its net income after-tax goal of $84,000 next month, how many audits will the firm need to conduct? A) 30 B) 15 C) 25 D) 20 Answer: D Explanation: If Artem wishes to achieve its net income after-tax goal of $84,000 and the firm's tax rate is 30%, then its pretax operating income level will need to be $84,000 ÷ (1 - the tax rate of 30%) = $84,000 ÷ 70% = $120,000. Target income of $120,000 + fixed costs of $120,000 = $240,000. Dividing this amount by the contribution margin of $12,000 ($25,000 sales - $13,000 variable expenses) yields the number of audits: $240,000 ÷ $12,000 = 20 audits. Artem will need to conduct 20 audits next month to achieve its net income goal. Diff: 2 LO: 3, 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

103) Eugene's Environmental Consulting Service LLP had the following operating results last month: Service revenues amounted to $25,000, variable costs were $12,000, and fixed costs were $10,000 for the month. Based on this information which of the following statements about last month is correct? A) Contribution margin was $12,000, and operating profit was $2,000 B) Contribution margin was $13,000, and operating profit was $3,000. C) Eugene's operated at break-even. D) Eugene's had a degree of operating leverage of 4.0. Answer: B Explanation: Service revenues of $25,000 less variable costs of $12,000 results in a contribution margin of $13,000. Contribution margin of $13,000 minus $10,000 of fixed costs is equal to operating profit of $3,000 last month. Diff: 2 LO: 1, 5, 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Quantitative Methods. 104) Eugene's Environmental Consulting Service LLP had the following operating results last month: Service revenues amounted to $25,000, variable costs were $12,000, and fixed costs were $10,000 for the month. Based on this information which of the following statements about last month is correct? A) Contribution margin was $15,000, and operating profit was $5,000. B) Contribution margin was $14,000, and operating profit was $4,000. C) Eugene's operated at break-even. D) Eugene's had a degree of operating leverage of 4.33. Answer: D Explanation: Service revenues of $25,000 less variable costs of $12,000 results in a contribution margin of $13,000. A contribution margin of $13,000 - $10,000 of fixed costs = operating profit of $3,000 last month. Degree of operating leverage (DOL) is equal to a contribution margin of $13,000 ÷ operating income of $3,000 = 4.33. Diff: 2 LO: 1, 5, 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

105) Eugene's Environmental Consulting Service LLP had the following operating results last month: Service revenues amounted to $25,000, variable costs were $12,000, and fixed costs were $10,000 for the month. Eugene's anticipates a 5% increase in service revenues next month and expects its cost structure to remain constant. Based on this information, which of the following statements is correct? A) Contribution margin last month was $10,000. B) Total operating profit next month will be $3,650. C) Operating profit last month amounted to a total of $4,500. D) Eugene's had a degree of operating leverage of 4.0 last month. Answer: B Explanation: Service revenues of $25,000 less variable costs of $12,000 results in a contribution margin of $13,000. A contribution margin of $13,000 minus $10,000 of fixed costs is equal to operating profit of $3,000 last month. Degree of operating leverage (DOL) is equal to a contribution margin of $13,000 divided by operating income of $3,000, or 4.33. The DOL of 4.33 then needs to be multiplied by the 5% sales increase, which comes to 0.2165. Adding 1 to this factor gives an amount of 1.2165, and multiplying this by last month's operating income of $3,000 yields an amount of $3,649.50, or $3,650 rounded, as the anticipated operating income next month. Diff: 3 LO: 1, 5, 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 106) Eugene's Environmental Consulting Service LLP had the following operating results last month: Service revenues amounted to $25,000, variable costs were $12,000, and fixed costs were $10,000 for the month. Eugene has a 40% tax rate. Based on this information, which of the following statements is correct? A) Contribution margin last month was $15,000. B) Total operating profit last month amounted to $5,000. C) Net income last month amounted to $1,800. D) Eugene's experienced a net loss for the month. Answer: C Explanation: Service revenues of $25,000 - variable costs of $12,000 = contribution margin of $13,000. Contribution margin of $13,000 - $10,000 of fixed costs = operating profit of $3,000 last month. At a tax rate of 40%, this would result in taxes of 0.4 × $3,000 = $1,200, leaving a total of net income after taxes of $1,800. Diff: 2 LO: 1, 5, 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

107) Casey Business Consulting provides management consulting evaluations for clients at a price of $15,000 upon completion. Casey has variable costs of $8,000 per evaluation and fixed costs of $70,000 per month. Last month, Casey had an operating profit of $21,000. Which of the following statements is correct? A) Casey completed 15 evaluations last month. B) Casey completed 13 evaluations last month. C) Casey has a degree of operating leverage of 0.50. D) Casey will need to complete 20 evaluations next month to break-even. Answer: B Explanation: Casey completed 13 evaluations last month. This is calculated by adding operating profit of $21,000 to fixed costs of $70,000 for a total of $91,000. Next, we solve for the contribution margin, by subtracting variable costs from revenue, or $15,000 - $8,000 = $7,000. Thus, the number of evaluations is solved as $91,000 ÷ 7,000 = 13. The degree of operating leverage (DOL) is calculated as contribution margin divided by operating income. Therefore, DOL is equal to $7,000 ÷ $21,000 = 0.33. Diff: 3 LO: 5, 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 108) Casey Business Consulting provides management consulting evaluations for clients at a price of $15,000 upon completion. Casey has variable costs of $8,000 per evaluation and fixed costs of $70,000 per month. Last month, Casey had an operating profit of $21,000. Casey has an effective tax rate of 40%. If Casey would like to attain its net income goal of $42,000 next month, how many consulting evaluations will the firm need to complete? A) 20 evaluations B) 15 evaluations C) 25 evaluations D) 18 evaluations Answer: A Explanation: If Casey wishes to achieve a net income goal of $42,000 and the firm's tax rate is 40%, then its pretax operating income level will need to be $42,000 ÷ (1 minus the tax rate of 40%) = $42,000 ÷ 60% = $70,000. Target pretax income of $70,000 + fixed costs of $70,000 = $140,000. Dividing this amount by the contribution margin of $7,000 per audit ($15,000 sales $8,000 variable costs) yields the number of evaluations: $140,000 ÷ $7,000 = 20 evaluations. Diff: 3 LO: 3, 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

109) If an environmental consulting firm is on track to reach its targeted operating profit for the month, and billable hours on a project end up exceeding the original estimate, what will be the result? A) The operating plan will need revision. B) Operating income will likely exceed the plan. C) Operating income will likely fall short of the plan. D) Net income will fall short of the plan. Answer: B Explanation: For a consulting firm, billable hours are the equivalent of sales; they are what will generate revenues and income for the firm. Therefore, if billable hours exceed estimates, the result is likely to be more revenues, along with operating income that is higher than planned. Diff: 1 LO: 3, 6 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Applications. 110) Eugene's Environmental Consulting Service LLP had the following operating results last month. Service revenues amounted to $50,000, variable costs were $24,000, and fixed costs were $10,000 for the month. Based on this information, which of the following statements is correct about last month's results? A) Contribution margin was $26,000, and operating profit was $16,000. B) Contribution margin was $40,000, and operating profit was $30,000. C) Eugene's operated at a loss last month. D) Eugene's had a degree of operating leverage (DOL) of 5.625. Answer: A Explanation: Eugene's had 160 hours of direct labor at $150 per hour, equal to total variable costs of $24,000. Service revenues of $50,000 minus variable costs of $24,000 result in a contribution margin of $26,000. A contribution margin of $26,000 minus $10,000 of fixed costs is equal to operating profit of $16,000 last month. Degree of operating leverage is equal to contribution margin divided by operating margin, so DOL = $26,000 ÷ $16,000 = 1.625. Diff: 2 LO: 1, 5, 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

111) Counters and Green, CPAs, LLP had revenues last month of $46,000 with the only variable costs consisting of 100 hours of staff labor at $130 per hour and 50 hours of partner-level labor at $200 per hour. Fixed costs are $120,000 for the year. Based on this information, which of the following statements about last month's results is correct? A) Contribution margin was $20,000, and operating profit was $10,000. B) Contribution margin was $18,000, and operating profit was $8,000. C) Margin of safety was $26,000. D) Degree of operating leverage was 2.769. Answer: C Explanation: The company had labor costs of $23,000 last month: (100 hours of staff labor × $130 per hour) + (50 hours of partner-level labor × $200 per hour) = $13,000 + $10,000 = $23,000. Total variable costs thus amounted to $23,000. Service revenues of $46,000 less variable costs of $23,000 resulted in a contribution margin of $23,000. Contribution margin of $23,000 less $10,000 of fixed costs per month ($120,000 per year ÷ 12 months) equaled operating profit of $13,000 for the month. The degree of operating leverage (DOL) is equal to contribution margin of $23,000 ÷ operating income of $13,000 = 1.769, which is not a given answer. Margin of safety is equal to the amount of current sales revenues that exceeds the breakeven point in revenues. Break-even in revenues for the month is equal to fixed costs for the month of $10,000 ÷ contribution margin ratio of 50% ($23,000/$46,000) = $20,000. Therefore, the margin of safety is equal to current revenues of $46,000 less the break-even sales revenue amount of $20,000, or $26,000. Diff: 2 LO: 1, 2, 5, 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

112) Counters and Green, CPAs, LLP had service revenues last month of $46,000, with the only variable costs consisting of 100 hours of staff labor at $130 per hour and 50 hours of partnerlevel labor at $200 per hour. Fixed costs are $120,000 for the year. The company anticipates a 10% increase in service revenues next month and expects its cost structure to remain consistent with last month's levels. Based on this information, which of the following statements is correct? A) Total operating profit next month will be $13,000. B) Total operating profit next month will be $12,300. C) Total operating profit next month will be $15,300. D) The degree of operating leverage was 1.5 last month. Answer: C Explanation: The company had labor costs of $23,000 last month: (100 hours of staff labor × $130 per hour) + (50 hours of partner-level labor × $200 per hour) = $13,000 + $10,000 = $23,000. Total variable costs thus amounted to $23,000. Service revenues of $46,000 less variable costs of $23,000 resulted in a contribution margin of $23,000. Contribution margin of $23,000 less $10,000 of fixed costs per month ($120,000 per year ÷ 12 months) equaled operating profit of $13,000 last month. The degree of operating leverage (DOL) is equal to contribution margin of $23,000 ÷ operating income of $13,000 = 1.769. If sales increase by 10%, the DOL 1.769 needs to be multiplied by the 10% growth amount (1.769 × .1 = 0.1769). The next step is to add 1 to this amount (1 + 0.1769 = 1.1769). This intermediate value of 1.1769 is often referred to as the multiplier. The final step is to multiply the 1.1769 by last month's operating income of $13,000: 1.1769 × $13,000 = $15,299.70, which rounds to $15,300. Therefore, $15,300, as rounded, will be the anticipated operating income next month. Diff: 3 LO: 1, 5, 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

113) Counters and Green, CPAs, LLP had revenues last month of $46,000 with the only variable costs consisting of 100 hours of staff labor at $130 per hour and 50 hours of partner-level labor at $200 per hour. Fixed costs are $120,000 for the year. The firm has a 30% tax rate. Based on this information, the firm's net income last month was A) $9,000. B) $8,100. C) $9,100. D) $8,700. Answer: C Explanation: The company had labor costs of $23,000 last month: (100 hours of staff labor × $130 per hour) + (50 hours of partner-level labor × $200 per hour) = $13,000 + $10,000 = $23,000. Total variable costs thus amounted to $23,000. Service revenues of $46,000 - variable costs of $23,000 = a contribution margin of $23,000. Contribution margin of $23,000 - $10,000 of fixed costs per month ($120,000 per year ÷ 12 months) = operating profit of $13,000 last month. At a tax rate of 30%, this would result in taxes of 0.3 × $13,000 = $3,900, leaving a total net income after taxes of $9,100. Diff: 2 LO: 1, 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 114) Environmental Plus Consulting provides environmental safety consulting evaluations for clients at a price of $10,000 upon completion. Environmental Plus has variable costs of $5,000 per evaluation and fixed costs of $1,800,000 per year. Environmental Plus has an effective tax rate of 30%. If company management wants to reach a net income goal of $50,000 next month, approximately how many safety evaluations will the firm need to complete? A) 40 B) 44 C) 50 D) 55 Answer: B Explanation: If Environmental Plus wishes to achieve a net income goal of $50,000 and the firm's tax rate is 30%, then its pretax operating income level will need to be $50,000 ÷ (1 minus the tax rate of 30%) = $50,000 ÷ 70% = $71,429. Target pretax income of $71,429 + fixed costs of ($1,800,000 per year divided by 12 or) $150,000 = $221,529. $221,529 ÷ the contribution margin of ($10,000 - $5,000), or $5,000 per evaluation = 44.3. Diff: 2 LO: 3, 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

115) If an accounting firm experiences a substantial increase in the costs of staffing various audit engagements, what is a possible result? A) The firm will see a reduction in the break-even sales point. B) The firm will see a reduction in the margin of safety. C) The firm will see a reduction in total fixed and total variable costs. D) The firm will see a reduction in monthly sales revenues. Answer: B Explanation: For a consulting firm, labor costs are variable costs, and any increase in these costs will result in a lower contribution margin. This means that the break-even point will rise as the contribution margin declines and the current margin of safety will drop, since it requires more sales revenues to reach the break-even point. Diff: 1 LO: 3, 6 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 116) Counters and Black, CPAs, LLP had revenues last month of $70,000. Their variable labor costs consisted of 100 hours of partner-level labor at $150 per hour and 400 hours of staff labor at $50 per hour. Other variable costs were $2,000 for the month, and fixed costs are $336,000 on an annual basis. Based on this information, which of the following statements about last month's results is correct? A) Operating profit was $2,000. B) Margin of safety was $12,802. C) Margin of safety was $10,602. D) Degree of operating leverage was 6.2. Answer: C Explanation: The company had labor costs of $35,000 last month: (100 hours of partner-level labor × $150 per hour) + (400 hours of staff labor × $50 per hour) = $15,000 + $20,000 = $35,000. There was an additional variable cost component of $2,000. Therefore, total variable costs were $37,000 for the month. Service revenues of $70,000 - variable costs of $37,000 = contribution margin of $33,000. Contribution margin of $33,000 - $28,000 of fixed costs per month ($336,000 per year ÷ 12 months) = operating profit of $5,000 last month. The degree of operating leverage (DOL) = contribution margin of $33,000 ÷ operating income of $5,000, or 6.6. Margin of safety is equal to the amount of current sales revenues that exceeds the break-even point in revenue dollars. Break-even in revenues for the month is equal to fixed costs for the month of $28,000 ÷ the contribution margin ratio of ($33,000 ÷ $70,000) or 47.14% = $59,398 as rounded to the nearest whole dollar. Therefore, the margin of safety is equal to current revenues of $70,000 last month minus the break-even sales revenue amount of $59,398, or $10,602. Diff: 2 LO: 1, 5, 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 63

117) Counters and Black, CPAs, LLP had service revenues last month of $70,000. Their variable labor costs consisted of 100 hours of partner-level labor at $150 per hour and 400 hours of staff labor at $50 per hour. Other variable costs were $2,000 for the month, and fixed costs are $336,000 on an annual basis. The firm anticipates a 10% increase in service revenues next month and expects that its cost structure will remain consistent with last month's levels. Based on this information, which of the following statements is correct? A) Total operating profit next month will be $8,200. B) Total operating profit next month will be $8,300. C) The degree of operating leverage was 6.0 last month. D) The degree of operating leverage was 6.5 last month. Answer: B Explanation: The company had labor costs of $35,000 last month: (100 hours of partner-level labor × $150 per hour) + (400 hours of staff labor × $50 per hour) = $15,000 + $20,000 = $35,000. There was an additional variable cost component of $2,000. Therefore, total variable costs were $37,000 for the month. Service revenues of $70,000 less variable costs of $37,000 results in a contribution margin of $33,000. Contribution margin of $33,000 - $28,000 of fixed costs per month ($336,000 per year ÷ 12 months) is equal to operating profit of $5,000 last month. The degree of operating leverage (DOL) is equal to contribution margin of $33,000 ÷ operating income of $5,000 = 6.6. If service revenues increase by 10% next month, this results in a multiplier of 6.6 × 0.1 = 0.66. Adding 1 to this factor and multiplying 1.66 by the $5,000 of operating profit last month will result in anticipated operating profit of $8,300 next month. Diff: 2 LO: 1, 5, 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 118) Counters and Brown, CPAs, LLP had revenues last month of $100,000 with variable labor costs of $50,000 and an additional variable cost of $4,000 for materials and supplies. Fixed costs are $144,000 for the year. The firm has a 25% tax rate. Based on this information, the firm's net income last month was A) $34,000. B) $25,500. C) $28,500. D) $32,100. Answer: B Explanation: The company had total variable costs amounting to $50,000 + $4,000 = $54,000. Service revenues of $100,000 - variable costs of $54,000 = contribution margin of $46,000. Contribution margin of $46,000 - $12,000 of fixed costs per month ($144,000 per year ÷ 12 months) is equal to operating profit of $34,000 last month. At a tax rate of 25%, this would result in taxes of 0.25 × $34,000 = $8,500, leaving total net income of $25,500. Diff: 2 LO: 1, 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 64

119) Landis Landscaping is offering lawn-cuts for $40 per lawn. Landis has fixed costs equaling $108,000 per year, and its accountant has calculated the contribution margin ratio on each lawn mowed to be 60%. Based on this information, which of the following statements is correct? A) If fixed costs increase by $1,200 per month, the break-even sales point will increase by 50 lawns cut. B) If fixed costs increase by $1,200 per month, the break-even sales point will increase by 100 lawns cut. C) If fixed costs increase by $600 per month, the break-even sales point will increase by 50 lawns cut. D) If fixed costs increase by $1,800 per month, the break-even sales point will increase by 50 lawns cut. Answer: A Explanation: Break-even is equal to the point at which sales in units multiplied by contribution margin is equal to total fixed costs. If fixed costs are equal to $108,000 per year, or $9,000 per month, and each lawn cut sells for $40 with a contribution margin of 60%, then the contribution margin per lawn cut sold is $40 × 60% = $24.00, and the break-even point is $9,000 ÷ $24.00 = 375 lawn cuts per month. If fixed costs increase by $1,200 per month, then the break-even point becomes $9,000 + $1,200 = $10,200 ÷ $24.00 = 425 lawn cuts, an increase of 50 lawns cut over the original break-even point of 375 lawns cut. Diff: 2 LO: 1, 6 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 120) If a consulting firm experiences a substantial increase in fixed period expenses, and no other changes occur, what is the probable result? A) The firm will see a reduction in the break-even sales point. B) The firm will see an increase in the margin of safety. C) The firm will see an increase in the degree of operating leverage. D) The firm will see an increase in monthly service revenues. Answer: C Explanation: An increase in fixed period expenses will lower operating income if all other variables remain the same. This applies to both service firms and manufacturing companies. A decrease in operating income results in a lower denominator in the degree of operating leverage (DOL) formula. This will lead to a higher DOL. Diff: 1 LO: 5, 6 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Applications.

121) Which of the following is the most appropriate measure of the outputs of Zach's Accounting LLP to use when conducting cost-volume-profit (CVP) analysis? A) Number of engagements completed B) Number of employees utilized on a given engagement C) Billable employee hours directly related to an engagement D) Calculated operating income following a reduction in revenues Answer: C Explanation: CVP analysis, for consulting firms and other professional service providers such as accounting firms and legal services, is oriented around the output of billable hours. Diff: 1 LO: 6 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Applications. 122) Ready Set Go Inc. reports the following financial information for the month: Variable costs of $2,500,000; fixed costs of $1,000,000; 2,000 units sold; selling price per unit of $2,000; and variable cost per unit of $1,250. What is the total contribution margin for Ready Set Go Inc.? Answer: Contribution margin equals $1,500,000. Solution: With a selling price per unit of $2,000, and 2,000 units sold, total revenues = $2,000 × 2,000 units = $4,000,000. Contribution margin is equal to total revenues less total variable costs: $4,000,000 - $2,500,000 = $1,500,000. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 123) Pepe's Pizza Parlor sells deep-dish pizzas at a unit selling price of $25, has unit variable costs of $5 per pizza, and has total fixed costs per month of $12,000. What will the monthly break-even point be for Pepe's? Answer: 600 pizzas Solution: Break-even point in units is equal to total fixed costs divided by the unit contribution margin. Fixed costs are $12,000 per month. Unit contribution margin is equal to unit selling price per unit less unit variable cost, or $25 - $5 = $20. Monthly break-even point is thus, calculated as $12,000 ÷ $20 = 600 pizzas. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

124) Ellis Electrical Products serves both residential and commercial clients. Annual financial information for Ellis is as follows:

Sales Revenues Variable Costs Contribution Margin Fixed Costs Operating Profit

Commercial $800,000 200,000 600,000

Residential $500,000 125,000 375,000

Total $1,300,000 325,000 975,000 300,000 $675,000

Calculate the break-even point in sales revenue dollars for Ellis Electrical Products. Answer: Break-even point is sales revenue dollars = $400,000 Solution: The break-even point in sales dollars is calculated by dividing fixed costs by the contribution margin ratio. The contribution margin ratio is calculated by dividing the contribution margin (sales revenues minus variable costs) by sales revenues.

Sales Revenues Variable Costs Contribution Margin Contribution Margin Ratio

Commercial Residential $800,000 $500,000 200,000 125,000 600,000 375,000

Total $1,300,000 325,000 975,000 $975,000 ÷ $1,300,000 = 75%

The break-even point in sales revenues is equal to fixed costs of $300,000 ÷ 0.75 (the 75% contribution margin ratio) = $400,000. Diff: 2 LO: 1, 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

125) Ellis Electrical Products serves both residential and commercial clients. Annual financial information for Ellis is as follows:

Sales Revenues Variable Costs Contribution Margin Fixed Costs Operating Profit

Commercial $800,000 200,000

Residential $500,000 125,000

Total $1,300,000 325,000 300,000

All variable costs are product costs, and the total fixed costs of $300,000 are made up of fixed product costs of $100,000 and selling and general expenses of $200,000. What is Ellis Electrical's contribution margin in dollars and as a percentage? What is Ellis Electrical's gross profit margin in dollars and as a percentage? Answer: Contribution margin in dollars and as a percentage = $975,000 and 75%; Gross margin in dollars and as a percentage = $875,000 and 67.31% Solution: Contribution margin is equal to total sales revenues minus total variable costs. For Ellis, this is equal to $1,300,000 - $325,000 = $975,000. The contribution margin ratio, or percentage, is equal to $975,000 ÷ sales revenues of $1,300,000 = 75%. Gross profit margin is equal to sales revenues minus all product costs. Therefore, gross profit margin for Ellis is equal to sales revenues of $1,300,000 minus variable product costs of $325,000 minus fixed product costs of $100,000 = $875,000. The gross profit margin percentage is equal to $875,000 ÷ $1,300,000 = 67.31%. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 126) Barton Beverages Inc. sells cases of bottled water at $25 each and has variable costs of $10 for each case of water. If fixed costs per month are $30,000, what is Barton's break-even point in terms of cases of water sold? Answer: Break-even point = 2,000 cases of water per month Solution: Break-even is equal to fixed costs divided by contribution margin per unit sold. For Barton, this is $30,000 ÷ ($25 - $10), or $15 per case. Therefore, $30,000 ÷ $15 = break-even point of 2,000 cases of water per month. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

127) Evermore Electrical Products serves both residential and commercial clients. Annual financial information for Evermore is as follows:

Sales Revenues Variable Costs Contribution Margin Fixed Costs Operating Profit

Commercial $800,000 200,000 600,000

Residential $500,000 125,000 375,000

Total $1,300,000 325,000 975,000 300,000 $ 675,000

Calculate the break-even point in sales revenue and the margin of safety in sales revenue dollars for Evermore Electrical Products. Answer: Break-even point in sales revenue = $400,000 and Margin of Safety = $900,000 Solution: The margin of safety is calculated by subtracting the break-even point in sales dollars from total sales revenues. To determine the break-even in sales dollars, it is necessary to first calculate the contribution margin ratio.

Sales Revenues Variable Costs Contribution Margin Contribution Margin Ratio

Commercial Residential $800,000 $500,000 200,000 125,000 600,000 375,000

Total $1,300,000 325,000 975,000 $975,000 ÷ $1,300,000 = 75%

The break-even point in sales revenues is equal to fixed costs of $300,000 ÷ 0.75 (the 75% contribution margin ratio) = $400,000. The margin of safety in sales revenue dollars thus equals total sales revenues of $1,300,000 minus the break-even sales dollar amount of $400,000, or $900,000. Diff: 2 LO: 2, 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

128) Barton Beverages Inc. sells cases of bottled water at $25 each and has variable costs of $10 for each case of water. Fixed costs per month are $30,000, and the accountants at Barton have reported to management that operating profit last month was $3,375. What is Barton's current margin of safety in terms of sales revenue dollars? Answer: Margin of Safety = $5,625 Solution: Margin of safety is equal to the amount by which current sales revenue level exceed the break-even point. Break-even is equal to fixed costs divided by contribution margin per unit sold. For Barton, the contribution margin per case is $15 ($25 sales price minus $10 variable costs). Therefore, $30,000 divided by $15 is equal to a break-even point of 2,000 cases of water per month. In terms of sales revenue, break-even is 2,000 cases multiplied by $25 per case, equaling $50,000 per month. If operating profit was $3,375 for the month, then contribution margin was equal to $30,000 of fixed costs plus the operating profit of $3,375 $33,375. If the contribution margin is equal to $15 per case, and each case sells for $25, this amounts to a CM ratio of $15 divided by $25, equaling 60%. Therefore, in order to generate a total contribution margin of $33,375, sales revenues of $33.375 divided by 60% or 0.6 $55,625 would be necessary. The margin of safety is then calculated as $55,625 minus $50,000 $5,625 in sales revenue dollars. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Quantitative Methods. 129) For Ginger Company, sales are $2,400,000 (8,000 units), fixed expenses are $480,000, and the unit contribution margin is $120. What is the margin of safety in dollars for Ginger Company? Answer: Margin of Safety in dollars = $1,200,000 Solution: First, Break-even sales units must be computed: (Fixed Expenses/Contribution margin per unit = Break even sales in units; Then, the unit selling price must be computed: Budgeted (Expected) Sales / units = Selling price; Last, the break-even sales are computed, and deducted from the actual or expected sales to determine the Margin of Safety: Break even sales in units × Unit selling price = Break-Even Sales in Dollars; Budgeted (Expected) Sales - Break-Even Sales in Dollars = Margin of Safety); $480,000/$120 = 4,000; $2,400,000/8,000= $300; 4,000 × $300 = $1,200,000; $2,400,000 - $1,200,000 = $1,200,000 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

130) Benny's Bakery Shop has been selling an average of 600 cakes per month for the past six months. If Benny's price per cake is $12, each cake has variable costs of $8, and monthly fixed costs are $1,200, what is Benny's expected margin of safety on cakes for the current month? Answer: 300 cakes Solution: Margin of safety is current or forecasted unit sales levels minus the break-even point in units sold. Break-even point is equal to total fixed costs divided by contribution margin. Unit contribution margin is equal to unit selling price less unit variable cost, or $12 - $8 = $4. Fixed costs of $1,200 per month divided by the unit contribution margin of $4 per cake is equal to a monthly break-even point of 300 cakes. Since Benny's has been selling an average of 600 cakes per month, the margin of safety can be calculated as 600 - 300 = 300 cakes. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 131) Petunia's Plantery has been selling an average of 750 plants per week over the past two months of this year. Petunia's sells each plant for $3. Each plant has a unit variable cost of $0.75, and Petunia's weekly fixed costs are $900. What is the Petunia's weekly margin of safety in sales units and sales dollars? Answer: Margin of Safety (Units) = 350 units Margin of Safety (dollars) = $1,050 Solution: Margin of safety is equal to current or forecasted sales level minus break-even point in units sold. Break-even point is calculated by first solving for unit contribution margin, which is calculated as unit selling price minus unit variable cost, then by dividing fixed costs by unit contribution margin. Thus, contribution margin per plant is calculated as $3.00 - $0.75 = $2.25. The weekly break-even point is calculated as $900 per week ÷ $2.25 per plant = 400 plants per week. Since Petunia's has been selling an average of 750 plants per week, the margin of safety in sales units can be calculated as 750 - 400 = 350 units. The Margin of Safety in dollars can be computed by converting the unit contribution margin to a contribution margin ratio, unit CM $2.25/$3.00, Unit SP = 75% with break-even sales dollars computed as Fixed Costs/ CM ratio = $900/.75 = $1,200; Margin of Safety in dollars = Actual sales, $2,250 (750 plants × Unit SP, $3) - Break-even sales dollars, $1,200 = $1,050 or 350 Margin of Safety Units × Unit SP, $3 = $1,050. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

132) Elverly Electrical Products serves both residential and commercial clients. Annual financial information for Elverly is as follows:

Sales Revenues Variable Costs Contribution Margin Fixed Costs Operating Profit

Commercial $800,000 200,000 600,000

Residential $500,000 125,000 375,000

Total $1,300,000 325,000 975,000 300,000 $ 675,000

If Elverly company management decides on a target operating profit of $900,000, what amount of sales revenues will be required? Answer: Required Sales Revenue for Target Profit of $900,000 = $1,600,000 Solution: In order to reach a targeted income goal, the targeted income amount must be added to total fixed costs, and that sum must be divided by the contribution margin ratio. Contribution margin equals sales revenues minus variable costs.

Sales Revenues Variable Costs Contribution Margin Contribution Margin Ratio

Commercial Residential $800,000 $500,000 200,000 125,000 600,000 375,000

Total $1,300,000 325,000 975,000 $975,000 ÷ $1,300,000 = 75%

The targeted income of $900,000 is added to total fixed costs of $300,000 to give a total of $1,200,000. This amount is then divided by 0.75 (the 75% contribution margin ratio), resulting in a sales revenue amount of $1,600,000. That is the amount required to generate a targeted operating income of $900,000. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

133) Jingle Company wishes to sell enough ornaments to earn a profit of $100,000. If the unit selling price is $10, unit variable cost is $4, and total fixed costs are $80,000, how many units must be sold to earn pre-tax target profit of $100,000? If the current tax rate is 20%, how many ornaments must be sold by Jingle to earn an after-tax profit of $100,000? Answer: 30,000 units (pretax) 34,167 units (after-tax) Solution: (Total Fixed Costs + Net Income)/unit contribution margin = Number of units that must be sold to earn pre-tax profit) = ($80,000 + $100,000)/($10 - $4) = 30,000 units. (Total Fixed Costs + Net Income (1- tax rate)/unit contribution margin = Number of units that must be sold to earn after-tax profit) = [$80,000 + {$100,000/(1 - .20)}]/($10 - $4) = 34,167 units. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FN: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 134) Aramingo Corporation has fixed costs of $260,000 and the contribution margin ratio is 40% of sales. How much will Aramingo report as required sales to earn a target operating income of $90,000? Answer: $875,000 Solution: (Fixed costs + Target Operating Income) ÷ Contribution Margin Ratio = Required Sales for target operating income = ($260,000 + $90,000) ÷ 40% = $875,000 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FN: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 135) Memorable Moments wants to sell enough custom gifts to earn a profit of $250,000. If the unit selling price per gift is $40, unit variable cost is $27, and total fixed costs are $101,000, how many custom gifts must be sold to earn the desired operating income of $250,000? Answer: 27,000 units Solution: (Fixed Costs + Target Operating Income) / Contribution margin per unit = Units to be sold to earn income) = ($101,000 + $250,000) / ($40 - $27) = 27,000 units. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FN: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

136) Alpha Corporation reported the following results from the sale of 10,000 units in May: sales $500,000, variable costs $270,000, fixed costs $110,000, and operating income $120,000. Assume that Alpha expects to increase the selling price by 6% on June 1. How many units will have to be sold by Alpha in June to maintain the same level of operating income? Answer: 8,847 Solution: (Fixed costs + Target Operating Income) / (Adj Selling price per unit - variable cost per unit) = Units to be sold for desired operating income = ($110,000 + 120,000) / [($500,000 /10,000) × 1.06) - ($270,000 /10,000)] = 8,847 (rounded) Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FN: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

137) Ellis Electrical Products serves both residential and commercial clients. Annual financial information for Ellis is as follows:

Sales Revenues Variable Costs Contribution Margin Fixed Costs Operating Profit

Commercial $800,000 200,000 600,000

Residential $500,000 125,000 375,000

Total $1,300,000 325,000 975,000 300,000 $ 675,000

If variable costs for the residential business increase by 20%, what is the new contribution margin ratio percentage for Ellis Electrical Products? Answer: The new contribution margin ratio becomes 73.08%. Solution: The new contribution margin ratio percentage is equal to the total contribution margin of the commercial and residential businesses or the company contribution margin, divided by the total sales revenues from both divisions. If variable costs for the residential business increase by 20%, then total variable costs will be $125,000 × 1.2 = $150,000. The financial information for Ellis will then become the following:

Sales Revenues Variable Costs Contribution Margin Contribution Margin Ratio

Commercial Residential $800,000 $500,000 200,000 150,000 600,000 350,000

Total $1,300,000 350,000 950,000 $950,000 ÷ $1,300,000 = 73.08%

The new contribution margin ratio for Ellis Electrical Products becomes 73.08%. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

138) Barton Beverages Inc. sells cases of bottled water at $25 each and has variable costs of $10 for each case of water. Fixed costs per month are $30,000. Barton management is considering adding a new bottled water product line that will be sold at $30 a case and have variable costs of $15 per case. Fixed costs would increase by $5,000 per month, and the new line would comprise 60% of Barton's sales revenues going forward. What would be Barton's weighted average contribution margin after the new bottled water line is introduced? Answer: $15 Solution: The weighted average contribution margin is equal to the sales mix percentage of each product multiplied by its contribution margin percentage, with all results added together. The original bottled water line has a unit contribution margin of $15 (Unit SP, $25 - Unit VC, $10). This line will drop to only 40% of total sales, so $15 × 40% = $6. The new product line will have a unit contribution margin of $15 (Unit SP, $30 - Unit VC, $15) and will make up a total of 60% of the total sales mix, so $15 × 60% = $9. Therefore, the total weighted average contribution margin is equal to $6 + $9 = $15. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 139) Tensa Corporation manufactures cameras. It has fixed costs of $2,120,000. Tensa's sales mix and unit contribution margins are shown below:

Tourist Model Amateur Model Professional Model

Sales Mix 35% 40% 25%

Unit Contribution Margin $ 40 $ 70 $ 140

Compute the weighted-average contribution margin for this product mix. Answer: $77 Solution: Weighted-Average Sales Mix × Contribution Margin Contribution Margin Tourist Model 35% × $ 40 $14 Amateur Model 40% × $ 70 $28 Professional Model 25% × $ 140 $35 $77 Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

140) Minke Medical Machines sells three types of hospital equipment. Information on these machines is as follows: Xray MRI CT Scan

50% of total sales 30% of total sales 20% of total sales

Unit contribution margin of $600 Unit contribution margin of $400 Unit contribution margin of $700

Total fixed costs for the year are $2,240,000. Based on this information, what would the expected break-even point for Minke Medical Machines be for the year? Answer: 4,000 units Solution: The weighted average contribution margin (WACM) for these three machines is calculated as: (Unit CM × Sales mix for Xray) + (Unit CM × Sales mix for MRI) + (Unit CM × Sales mix for CT Scan), or ($600 × .50) + ($400 × .30) + ($700 × .20) = $300 + $120 + $140 = $560 WACM. This WACM is then divided into the annual fixed costs to determine the annual break-even point; $2,240,000 ÷ $560 = 4,000 units. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 141) Big Mountain Sporting Goods has two divisions: Sporting Goods and Camping and Hunting Gear. The sales mix is 60% for Sporting Goods and 40% for Camping and Hunting Gear. Big Mountain incurs $2,660,000 in fixed costs. The unit contribution margin for Sporting Goods is $300, while for Camping and Hunting Gear it is $500. What is the weighted-average contribution margin per unit and break-even point in units for Big Mountain Sporting Goods? Answer: Weighted-average contribution margin per unit = $380; Breakeven units = 7,000 units Solution: The weighted average contribution margin (WACM) for these two divisions is calculated as: (Unit CM × Sales mix for Sporting Goods) + (Unit CM × Sales mix for Camping and Hunting Gear) or ($300 × .60) + ($500 × .40) = $180 + $200 = $380 WACM. This WACM is then divided into the annual fixed costs to determine the annual break-even point; $2,660,000 ÷ $380 = 7,000 units. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

142) Elvis Electrical Products serves both residential and commercial clients. Annual financial information for Elvis is as follows:

Sales Revenues Variable Costs Contribution Margin Fixed Costs Operating Profit

Commercial $800,000 200,000 600,000

Residential $500,000 125,000 375,000

Total $1,300,000 325,000 975,000 300,000 $ 675,000

What is Elvis's current degree of operating leverage? Answer: DOL = 1.4444 Solution: Degree of operating leverage (DOL) is calculated by dividing contribution margin by operating profit. Therefore, DOL = $975,000 ÷ $675,000 = 1.4444. Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

143) Ellis Electrical Products serves both residential and commercial clients. Annual financial information for Ellis is as follows:

Sales Revenues Variable Costs Contribution Margin Fixed Costs Operating Profit

Commercial $800,000 200,000 600,000

Residential $500,000 125,000 375,000

Total $1,300,000 325,000 975,000 300,000 $675,000

If total sales revenues increase by 10%, what operating profit can Ellis expect to generate? Answer: Operating profit of $772,500 (or $772,497 depending on method used) Solution: To calculate an expected operating profit based on a sales revenue percentage change, the percentage change must be multiplied by the degree of operating leverage (DOL) to generate a factor to apply to the current level of operating income. In this case, the DOL is calculated by dividing contribution margin of $975,000 by operating profit of $675,000 = 1.4444. Multiplying the expected sales revenue percentage increase of 10% by 1.4444 gives a factor of 14.444%, which means that operating profit will increase by 14.444% if sales revenues increase by 10%. Current operating profit of $675,000 increased by 14.444% (or multiplied by 1.14444) is equal to an expected operating profit of $772,497. A way to check this calculation is to increase the original sales revenues of $1,300,000 by 10% (multiply by 1.1), which equals $1,430,000. This level of sales revenues will still carry a contribution margin of 75%; therefore, contribution margin = $1,430,000 × 75% (or .75) = $1,072,500. Subtracting the fixed costs of $300,000 from this amount gives total operating profit of $772,500, which is essentially the same amount with a minor $3 difference due to the rounding of the DOL factor. Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

144) Ajax Company has operating income of $4,000 and a degree of operating leverage (DOL) of 3.0 anticipates an increase of 10% in sales revenues next month. The company can expect to generate what amount of operating income next month? Answer: $5,200 Solution: A degree of operating leverage (DOL) of 3.0 multiplied by a 10% increase in sales revenues results in a lever, or multiplier, of 30%. A 30% increase in the base operating income of $4,000 results in operating income of $4,000 × 1.3 = $5,200. Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 145) Catherine Consulting Inc. had service revenues last month of $30,000, variable costs of $15,000 and fixed selling and administrative expenses of $5,000. What is the firm's degree of operating leverage (DOL)? Answer: DOL = 1.5 Solution: DOL is equal to contribution margin divided by operating income. Thus, DOL = ($30,000 - $15,000) ÷ ($15,000 - $5,000) = $15,000 ÷ $10,000 = 1.5. Diff: 2 LO: 5, 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 146) Catherine Consulting Inc. had service revenues last month of $30,000, variable costs of $15,000 and fixed costs of $5,000. If the firm anticipated service revenue growth per service of 10% next month, what would be its anticipated operating profit? Answer: New operating income amount of $11,500 if service revenues increase by 10%. Solution: Operating profit based on revenue growth is equal to the revenue growth percentage multiplied by the degree of operating leverage (DOL). This factor is then multiplied by the current operating income to arrive at an anticipated operating income. DOL is equal to contribution margin divided by operating income. Thus, DOL = ($30,000 - $15,000) ÷ ($15,000 - $5,000) = $15,000 ÷ $10,000 = 1.5. If revenue growth is 10%, then 10% multiplied by 1.5 results in a growth factor, or lever, of 15%. Therefore, operating income will increase by 15% if service revenues grow by 10%. Operating profit last month was $30,000 - $15,000 - $5,000 = $10,000. Applying a 15% increase to $10,000, or $10,000 × 1.15, will equal a new operating income amount of $11,500 if service revenues increase by 10%. Diff: 2 LO: 5, 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Quantitative Methods.

147) Philabundance provides charitable meals to the families in need in the Delaware Valley. Weekly, the nonprofit entity provides 90,000 meals to families. The variable cost per meal is $3.00 and the weekly total fixed costs for the organization are $5,000. How much funding is needed by the Philabundance organization on a weekly basis to support its operations? (Hint: Compute Break-even Sales at net income = $0) Answer: $275,000 of funding required on a weekly basis to support operations Solution: Net Income = Service Revenue - Variable Costs - Fixed Costs = $0; Service Revenue (Funding) = Variable Costs, (90,000 Meals × $3 per meal) + $5,000 = $275,000 of funding required on a weekly basis to support operations. Diff: 2 LO: 5, 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 148) ZZZ Best CPAs provides the following accounting services to its customers: tax preparation and audits. The sales mix for the services is 70% tax preparation and 30% audits. If the contribution margins per unit for tax preparation is $100 and for audits, is $300, what is the break-even point for ZZZ Best CPA's if its annual fixed costs are $900,000? Answer: Weighted-average contribution margin per unit = $160; Breakeven units = 5,625 services Solution: The weighted average contribution margin (WACM) for these two services is calculated as: (Unit CM × Sales mix for tax preparation) + (Unit CM × Sales mix for audits) or ($100 × .70) + ($300 × .30) = $70 + $90 = $160 WACM. This WACM is then divided into the annual fixed costs to determine the annual break-even point; $900,000 ÷ $160 = 5,625 services. Diff: 2 LO: 4, 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

149) Joey plans to start his own snow-shoveling business to help save for his college fund. He plans to charge customers $30 per driveway. To begin his business, he has purchased the necessary equipment which will result in monthly fixed costs of $100. His variable costs include fuel and oil for the equipment, which translates to a unit variable cost of $5 per customer. If Joey projects that he can provide services to his neighborhood, with weekly snowfalls, of 20 customers per week, or 80 customers per month, what amount of operating income will Joey recognize in his first month of operations? Answer: $1,900 Solution: Sales Revenue - Variable Costs - Fixed Costs = Operating Income; (80 × $30) - (80 × $5) - $100 = $2,400 - $400 - $100 = $1,900. Diff: 2 LO: 1, 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 150) Emerald City Jewelers has two products it is currently producing and selling. One is a necklace, and one is a bracelet. Information on these two items follows: Necklace: Total fixed costs are $70,000, variable costs are $50 per unit, and the unit selling price is $120. Bracelet: Total fixed costs are $60,000, variable costs are $40 per unit, and the unit selling price is $100. What is the break-even point in units for each of these jewelry items? Answer: Break-even is 1,000 units for each of the two items, necklace and bracelet. Solution: Necklace: Contribution margin per unit is equal to sales price per unit minus variable costs per unit, or $120 - $50 = $70. Fixed costs of $70,000 divided by contribution margin per unit of $70 is equal to break-even in units of 1,000. Bracelet: Contribution margin per unit is equal to sales price per unit minus variable costs per unit, or $100 - $40 = $60. Fixed costs of $60,000 divided by contribution margin per unit of $60 is equal to break-even in units of 1,000. Each item has a break-even point of 1,000 units. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

151) As a result of cost increases imposed by its primary supplier, Fly Fishing Fanatics Supplies Inc. has experienced an increase in its variable direct per unit costs that will result in a contribution margin ratio that is 3 percentage points lower than previous levels. Operating income last month, before the cost increase, was $5,500 based on sales revenues of $50,000 and fixed costs of $20,000. If sales revenues increase next month by 5%, and the new variable costs come into effect, what can Fly Fishing Fanatics anticipate in terms of operating profit? Answer: $5,200 Solution: Last month, before the variable cost increase, total variable costs were $24,500 (sales revenues of $50,000 less total fixed costs of $20,000 less operating profit of $5,500). This means that the contribution margin last month was equal to $50,000 - $24,500 = $25,500, resulting in a contribution margin ratio of 51.0% ($25,500 ÷ $50,000). The increase in variable costs will reduce the contribution margin ratio by 3%; therefore, it will drop to 48.0%. If sales revenues increase next month by 5%, total sales revenues will increase by $52,500 ($50,000 × 1.05). If the contribution margin on this sales revenue is 48.0%, the contribution margin in dollars will be $25,200 (0.48 × $52,500). Subtracting fixed costs of $20,000 from this amount will result in operating income of $5,200. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 152) Zapple, Ltd. is producing and distributing a new computer-based game that it sells for $75 a unit. Zapple's fixed costs are $43,750 per month, and the company's accountants have determined that the monthly break-even in units is 1,250. What is the monthly unit variable cost and unit contribution margin for Zapple, Ltd.? Answer: Variable costs equal $40 per unit, and contribution margin is $35 per unit. Solution: At the break-even point, sales in units multiplied by contribution margin equal total fixed costs. If fixed costs are $43,750 per month, and the break-even point is 1,250 units, contribution margin is equal to $43,750 ÷ 1,250 = $35 per unit. This means that variable costs are equal to the unit sales price of $75 minus the contribution margin of $35, or $40 per unit. Therefore, variable costs equal $40 per unit, and contribution margin is $35 per unit. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

153) Crest Canoe Co. produces and distributes three types of oars to accompany its various canoe product lines. Financial information for the past year on these three products is as follows:

Price per Unit Units Sold Variable Costs per Unit Fixed Product Costs Total Fixed Selling & Admin Costs Income Tax Rate

Paddler Stroker Ace Super Driver $50 $120 $400 4,000 3,000 2,000 $20 $50 $90 $40,000 $60,000 $110,000

Total

$304,000 25%

Assuming that Crest's overall sales mix for its oars remains the same, calculate and provide the following additional information: a. What is the current weighted average contribution margin per unit? (Round to 2 decimal places) b. What is the break-even point in sales units? c. What is the current overall gross profit margin? Answer: a. To determine the current weighted average contribution margin, it is first necessary to compute the sales mix for the products. Total units sold is 9,000 (4,000 + 3,000 + 2,000), so the sales mix for Paddler would be 45% (4,000/9,000), for the Stroker Ace, 33% (3,000/9,000) and for the Super Driver, 22% (2,000/9,000). The current weighted average contribution margin (WACM) is equal to the sum of the weighted average contribution margins of all three products. Therefore, the WACM = [.45 × ($50 - $20)] + [.33 × ($120 - $50)] + [.22 × ($400 - $90)] = $105.80. b. The break-even point is sales revenue units is equal to total fixed costs divided by the weighted average (total) contribution margin. Total fixed costs are equal to selling and administrative costs of $304,000 + total fixed product costs of $210,000 ($40,000 + $60,000 + $110,000) = $514,000. The total weighted average contribution margin is equal to the total weighted average contribution margin (WACM) of $105.80. Total fixed costs of $514,000 divided by the WACM of $105.80 comes to a break-even sales in units of 4,858 as rounded to the nearest whole unit. c. The current overall gross margin is equal to contribution margin minus any additional product costs. Therefore, the contribution margin of $950,000 {[($50 - $20) × 4,000] + [($120 $50) × 3,000] + [($400 - $90) × 2,000]} minus additional fixed product costs of ($40,000 + $60,000 + $110,000) = total gross profit margin of $740,000. Diff: 3 LO: 1, 4, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

154) Crest Canoe Co. produces and distributes three types of oars to accompany its various canoe product lines. Financial information for the past year on these three products is as follows:

Price per Unit Units Sold Variable Costs per Unit Fixed Product Costs Selling & Admin Costs Income Tax Rate

Paddler Stroker Ace Super Driver $50 $120 $400 4,000 3,000 2,000 $20 $50 $90 $40,000 $60,000 $110,000

Total

$304,000 25%

Assuming that Crest's overall sales mix for its oars remains the same, calculate and provide the following additional information: a. What is Crest Canoe's degree of operating leverage (DOL)? (Round to 4 decimal places) b. What is Crest's operating income after taxes? c. What is the margin of safety in terms of sales revenue dollars? (Hint: Compute the contribution margin ratio for the company (total).) Answer: a. DOL is equal to the total contribution margin divided by operating income. The total contribution margin is equal to the sum of the contribution margins of all three products. Therefore, the total contribution margin is equal to [4,000 × ($50 - $20)] + [3,000 × ($120 $50)] + [2,000 × ($400 - $90)] = $950,000. Operating income is equal to the total contribution margin minus any additional fixed product costs minus any fixed selling and administrative costs. This amounts to $950,000 - ($40,000 + $60,000 + $110,000) - $304,000 = $436,000. DOL is equal to $950,000 ÷ $436,000 = 2.1789. b. Operating income after taxes is equal to operating income (pretax income) minus income taxes. Taxes are calculated by multiplying pretax operating income by the effective tax rate. Therefore, if operating income is $436,000 and the tax rate is 25%, then income taxes are $436,000 × 25% = $109,000. This tax amount subtracted from the $436,000 pretax operating income amounts to total operating income of $327,000. c. Crest's margin of safety is equal to the excess of current total sales revenue dollars above the break-even sales amount. The break-even point in sales revenue dollars is equal to total fixed costs divided by the weighted average (total) contribution margin percentage. Total fixed costs are equal to $304,000 of selling and administrative costs plus total fixed product costs of $210,000 ($40,000 + $60,000 + $110,000) = $514,000. The total contribution margin ratio for Crest Canoe Co. is equal to the total contribution margin of $950,000 divided by the total sales revenues for the three products. Total sales revenues equal (4,000 × $50) + (3,000 × $120) + (2,000 × $400) = $1,360,000. So, the company contribution margin ratio is $950,000 divided by total sales revenues of $1,360,000 = 69.85%. Total fixed costs of $514,000 divided by the company contribution margin ratio of 69.85% comes to a break-even sales revenue amount of $735,863, rounded to the nearest whole dollar. Therefore, the margin of safety is equal to current sales revenues of $1,360,000 - break-even sales revenues of $735,863 = $624,137. Diff: 3 LO: 1, 2, 3, 4, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 85

155) Crest Canoe Co. produces and distributes three types of oars to accompany its various canoe product lines. Financial information for the past year on these three oars is as follows:

Price per Unit Units Sold Variable Costs per Unit Fixed Product Costs Selling & Admin Costs Income Tax Rate

Paddler Stroker Ace Super Driver $50 $120 $400 4,000 3,000 2,000 $20 $50 $90 $40,000 $60,000 $110,000

Total

$304,000 25%

Assuming that Crest's overall sales mix for its oars remains the same and fixed costs increase by $100,000 per year, calculate and provide the following additional information: a. What is Crest Canoe's degree of operating leverage (DOL)? (Round to 4 decimal places) b. What is Crest's operating income after taxes? c. What is the current margin of safety in terms of sales revenue dollars? (Hint: Compute the contribution margin ratio for the company (total). Round to nearest whole dollar)

Answer: a. DOL is equal to the contribution margin divided by operating income. The current contribution margin is equal to the sum of the contribution margins of all three products. Therefore, the contribution margin is equal to [4,000 × ($50 - $20)] + [3,000 × ($120 - $50)] + [2,000 × ($400 - $90)] = $950,000. Operating income is equal to the contribution margin minus any additional fixed product costs minus any fixed selling and administrative costs. This amounts to $950,000 - ($40,000 + $60,000 + $110,000) - $304,000 minus an additional $100,000 for the expected increase to fixed costs = $336,000. DOL is equal to total contribution margin of $950,000 ÷ $336,000 = 2.8274. b. Net income after taxes is equal to operating income (pretax income) minus income taxes. Taxes are calculated by multiplying pretax operating income by the effective tax rate. If operating income is $336,000 and the tax rate is 25%, then income taxes are $336,000 × 25% = $84,000. This tax amount subtracted from the $336,000 pretax operating income amounts to total net income of $252,000. c. Crest's margin of safety is equal to the excess of current total sales revenue dollars above the break-even sales amount. The break-even point in sales revenue dollars is equal to total fixed costs divided by the company (total) contribution margin percentage. Total fixed costs are equal to $304,000 of selling and administrative costs plus total fixed product costs of $40,000 + $60,000 + $110,000 + an additional $100,000 for the expected increase to fixed costs = $614,000. The total weighted average contribution margin percentage is equal to the total contribution margin of $950,000 divided by the total sales revenues for the three products. Total sales revenues are equal to (4,000 × $50) + (3,000 × $120) + (2,000 × $400) = $1,360,000. So, the contribution margin ratio for the company is $950,000 divided by total sales revenues of $1,360,000 = 69.85%. Total fixed costs of $614,000 ÷ company contribution margin ratio of 69.85% comes to a break-even sales revenue amount of $879,026, as rounded to the nearest whole dollar. Therefore, the margin of safety is equal to current sales revenues of $1,360,000 minus break-even sales revenues of $879,026 = $480,974. Diff: 3 LO: 1, 2, 3, 4, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

156) Crest Canoe Co. produces and distributes three types of oars to accompany its various canoe product lines. Financial information for the past year on these three oars is as follows:

Price per Unit Units Sold Variable Costs per Unit Fixed Product Costs Selling & Admin Costs Income Tax Rate

Paddler Stroker Ace $50 $120 4,000 3,000 $20 $50 $40,000 $60,000

Super Driver $400 2,000 $90 $110,000

Total

$304,000 25%

Assuming that Crest's overall sales mix for its oars remains the same and fixed costs increase by $120,000 per year, calculate and provide the following additional information: a. What is Crest Canoe's break-even point in terms of sales dollars? (Hint: Compute the contribution margin ratio for the company (total). Round to nearest whole dollar.) b. What is Crest's operating income? c. What is Crest's degree of operating leverage (DOL)? (Round to 4 decimal places.)

Answer: a. The break-even point in sales units is equal to total fixed costs divided by the weighted average contribution margin per unit. Total fixed costs are equal to $304,000 of selling and administrative costs plus total fixed product costs of $40,000 + $60,000 + $110,000 + an additional $120,000 for the expected increase to fixed costs = $634,000. The current weighted average contribution margin (WACM) is equal to the sum of the contribution margins of all three products. First, the total contribution margin for Crest Canoe Co. is computed as, [4,000 × ($50 $20)] + [3,000 × ($120 - $50)] + [2,000 × ($400 - $90)] = $950,000; the company (total) contribution margin ratio is equal to the total contribution margin of $950,000 divided by the total sales revenues for the company. Total sales revenue is thus, equal to (4,000 × $50) + (3,000 × $120) + (2,000 × $400) = $1,360,000. So, the company (total) contribution margin ratio is $950,000 total contribution margin divided by total sales revenues of $1,360,000 = 69.85%. Total fixed costs of $634,000 divided by the company (total) contribution margin ratio of 69.85% results in a break-even sales revenue amount of $907,659, rounded to the nearest whole dollar. b. Operating income is equal to contribution margin minus all fixed costs and expenses. Therefore, contribution margin of $950,000 - fixed costs of ($40,000 + $60,000 + $110,000) $304,000 minus an additional $120,000 for the expected increase to fixed costs = a total operating income amount of $316,000. c. DOL is equal to the contribution margin divided by operating income. The current contribution margin is equal to the sum of the contribution margins of all three products. Therefore, the contribution margin = [4,000 × ($50 - $20)] + [3,000 × ($120 - $50)] + [2,000 × ($400 - $90)] = $950,000. Operating income is equal to the contribution margin minus any additional fixed product costs minus any fixed selling and administrative costs. This amounts to $950,000 - ($40,000 + $60,000 + $110,000) - $304,000 minus an additional $120,000 for the expected increase to fixed costs = $316,000. DOL is equal to $950,000 ÷ $316,000 = 3.0063 Diff: 3 LO: 1, 2, 4, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

157) Crest Canoe Co. produces and distributes three types of oars to accompany its various canoe product lines. Financial information for the past year on these three oars is as follows:

Price per Unit Units Sold Variable Costs per Unit Fixed Product Costs Selling & Admin Costs Income Tax Rate

Paddler Stroker Ace Super Driver $50 $120 $400 4,000 3,000 2,000 $20 $50 $90 $40,000 $60,000 $110,000

Total

$304,000 25%

Assume that Crest's overall sales mix for its oars remains the same. What are the required sales revenue levels if management sets the following operating income target levels? a. Target operating income of $300,000. b. Target operating income of $400,000. c. Target operating income of $500,000. Answer: a. The total sales revenues necessary to reach specified targeted operating income levels are calculated by adding the targeted operating income value to total fixed costs and dividing the amount by the overall contribution margin percentage. Crest's total fixed costs equal $40,000 + $60,000 + $110,000 + 304,000 = $514,000. This amount added to the first targeted operating income amount of $300,000 = $814,000. The current weighted average contribution margin (WACM) is equal to the sum of the contribution margins of all three products. The WACM is equal to [4,000 × ($50 - $20)] + [3,000 × ($120 - $50)] + [2,000 × ($400 - $90)] = $950,000. The total or weighted average contribution margin percentage is equal to the total weighted average contribution margin (WACM) of $950,000 divided by the total sales revenues for the three products. Total sales revenues are equal to (4,000 × $50) + (3,000 × $120) + (2,000 × $400) = $1,360,000. So, the total or WACM percentage is $950,000 ÷ total sales revenues of $1,360,000 = 69.85%. Therefore, $814,000 ($514,000 + 3300,000) ÷ 69.85% = total required sales revenues of $1,165,354, as rounded to the nearest whole dollar. b. Using the process laid out in part a but targeting operating income of $400,000 requires the following calculations: Total fixed costs of $514,000 plus targeted operating income of $400,000 amounts to a total of $914,000. Dividing this amount by the WACM ratio of 69.85% results in a required sales revenue amount of $1,308,518 to generate targeted operating income of $400,000. c. Using the process laid out under part a but targeting operating income of $500,000 requires the following calculations: Total fixed costs of $514,000 plus targeted operating income of $500,000 amounts to a total of $1,014,000. Dividing this amount by the total or WACM ratio of 69.85% results in a required sales revenue amount of $1,451,682 to generate targeted operating income of $500,000. Diff: 3 LO: 3, 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

158) Dynamic Designs has fixed costs of $380,000 and produces one graphic arts product with a selling price of $80 and variable costs of $42 per unit. The firm's maximum production capacity is 20,000 units, and it anticipates selling 15,000 units. a. What will be Dynamic's expected operating income based on 15,000 units sold? b. If sales increase to the firm's maximum production capacity, what will be its operating income? c. What will sales revenue levels have to be to reach management's operating income goal of $342,000? d. How much will this be in required unit sales? Answer: a. Operating income is equal to total sales revenues minus total variable costs minus total fixed costs. If each unit sold is priced at $80, and variable costs equal $42 per unit, then the contribution margin is equals $38. If 15,000 units are sold, then the total contribution margin is 15,000 × $38 = $570,000. Subtracting fixed costs of $380,000 results in total operating profit of $190,000. b. If sales in units reach capacity of 20,000 units, total contribution margin increases to 20,000 × $38 = $760,000. Subtracting total fixed costs of $380,000 from this amount results in operating income of $380,000. c. If management targets operating income of $342,000, this target income amount must be added to total fixed costs and divided by the contribution margin percentage: $342,000 + $380,000 = $722,000. Contribution margin ratio is calculated as contribution margin per unit of $38 ÷ sales price per unit of $80 = 47.5%. Therefore, 722,000 ÷ 47.5% = required sales revenue amount of $1,520,000. d. The required total sales revenue amount of $1,520,000 divided by the per unit sales price of $80 is equal to the required amount of 19,000 units sold. Diff: 2 LO: 1, 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

159) Dynamic Designs has fixed costs of $380,000 and produces one graphic arts product with a selling price of $80 and variable costs of $42 per unit. Dynamic is currently selling 18,000 units. a. What is Dynamic's break-even point in units sold? b. What is Dynamic's margin of safety in terms of sales revenue dollars? c. If Dynamic has an effective tax rate of 20%, what is its current net income? Answer: a. Break-even is equal to fixed costs divided by contribution margin. Dynamic's contribution margin is $80 - $42 = $38 per unit sold. With fixed costs of $380,000, this means that $380,000 ÷ $38 per unit = 10,000 units is the break-even point. b. The margin of safety is equal to the excess of current sales revenues above the break-even point. With break-even at 10,000 units and a current sales level of 18,000 units, this results in a margin of safety of 8,000 units. With a sale price of $80 each, the margin of safety in sales revenue dollars is equal to $80 × 8,000 units = $640,000. c. Operating income is equal to the current contribution margin of $38 per unit × 18,000 units = $684,000. Subtracting total fixed costs of $380,000 from this amount results in operating income of $304,000. If the tax rate is 20%, then taxes equal $304,000 × 20% = $60,800. Taxes of $60,800 subtracted from operating income of $304,000 results in net income after taxes of $243,200. Diff: 2 LO: 1, 2, 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

160) Dynamic Designs has fixed costs of $380,000 and produces one graphic arts product with a selling price of $80 and variable costs of $42 per unit. Dynamic is currently selling 18,000 units. a. What is Dynamic Design's degree of operating leverage (DOL)? (Round to 2 decimal places) b. If sales revenues are expected to increase by 10%, what will be the expected operating profit? c. Based on the (b) above, what would be Dynamic's expected net income if its effective tax rate is 30%? Answer: a. Degree of operating leverage is calculated as contribution margin divided by operating income. Dynamic's contribution margin is $80 - $42 = $38 per unit sold, and the company is selling 18,000 units. Therefore, the contribution margin is equal to $684,000. Subtracting total fixed costs of $380,000 results in total operating income of $304,000. Contribution margin of $684,000 divided by operating income of $304,000 results in a DOL of 2.25. b. If the DOL is 2.25, a 10% increase in sales revenue will result in a factor, or lever, of 2.25 × 10% = 22.5%. This means that operating income would increase by 22.5% on a sales revenue increase of 10%. Current operating income is equal to $304,000, so an increase of 22.5% (multiplying by 1.225) results in operating income of $372,400 on a 10% sales revenue increase. c. If sales increase by 10%, the new operating income level will be $372,400. If Dynamic has an effective tax rate of 30%, then taxes will be 30% × $372,400 = $111,720. Subtracting these tax dollars from the $372,400 of operating income results in net income after taxes of $260,680. Diff: 2 LO: 1, 3, 4, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

161) Laminex Ltd. manufactures a coffee table that sells for $250 per unit. The company has variable costs of $150 per unit and total fixed costs of $100,000 per period. a. What is the break-even point in terms of units sold? b. If current sales levels are 1,200 units, what is the margin of safety in sales revenue dollars? c. If current sales levels are 1,200 units, what is Laminex's degree of operating leverage? Answer: a. The break-even point in units sold is equal to total fixed costs divided by the contribution margin per unit. Total fixed costs are equal to $100,000. The contribution margin per unit is equal to $250 - $150 = $100 per unit. Dividing total fixed costs of $100,000 by $100 of contribution margin per table sold results in a break-even point in unit sales of 1,000. b. With a current unit sales level of 1,200 and a break-even point of 1,000, the margin of safety is 200 units, resulting in 200 × $250 = $50,000 of sales revenues as a safety margin. c. DOL is equal to the contribution margin divided by operating income. The current contribution margin is equal to $250 - $150 per unit = $100 per unit. If current sales levels are 1,200 units, then total contribution margin is equal to 1,200 × $100 = $120,000. Subtracting total fixed costs of $100,000 from this amount results in operating income of $20,000. Contribution margin of $120,000 divided by operating income of $20,000 yields a DOL of 6.0. Diff: 2 LO: 1, 2, 3, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

162) Laminex Ltd. manufactures a coffee table that sells for $250 per unit. The company has variable costs of $150 per unit and total fixed costs of $100,000 per period. Laminex is currently selling 1,200 units per period. a. What is the current net income after taxes for Laminex if its effective tax rate is 25%? b. Management anticipates that fixed costs will increase $10,000 per period due to general salary increases to office staff. How does this change the break-even point? Answer: a. If current sales levels are at 1,200 units and contribution margin per unit sold is equal to $250 - $150 = $100, then 1,200 × $100 = total contribution margin of $120,000. Subtracting total fixed costs of $100,000 from this amount results in operating income of $20,000. If Laminex has a tax rate of 25%, then income taxes are equal to $20,000 × 25% = $5,000. Subtracting this tax amount from operating income results in net income after taxes of $15,000. b. The break-even point in units sold is equal to total fixed costs divided by the contribution margin per unit. Total fixed costs are equal to $100,000, and contribution margin per unit is equal to $250 - $150 = $100 per unit. Dividing $100,000 by $100 results in a break-even point in unit sales of 1,000. If fixed costs increase by $10,000, the break-even calculation becomes $110,000 of total fixed costs ÷ $100 of contribution margin per table, resulting in a new breakeven point of 1,100 units. With a selling price of $250 per table, this equates to total sales revenues of $275,000. Thus, the break-even point has increased by a total of 100 units or $25,000. Diff: 2 LO: 1, 3, 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

163) Premium Plumbing Products serves both residential and commercial clients. Annual financial information for Premium is as follows:

Sales Revenues Variable Costs Contribution Margin Fixed Costs Operating Profit

Commercial $2,000,000 1,000,000 1,000,000

Residential $1,500,000 700,000 800,000

Total $3,500,000 1,700,000 1,800,000 900,000 $ 900,000

a. If variable costs for the residential business increase by 10%, what is the new total contribution margin ratio for the company? (Hint: Compute the contribution margin ratio for the company (total). Round to 2 decimal places) b. What is the new total operating income amount? Answer: a. The total or company contribution margin ratio is equal to the total contribution margin of both of the commercial and residential businesses divided by the total sales revenues from both divisions. If variable costs for the residential business increase by 10%, total variable costs would equal $700,000 × 1.1 = $770,000. The financial information for Premium then becomes the following:

Sales Revenues Variable Costs Contribution Margin Contribution Margin Ratio

Commercial Residential $2,000,000 $1,500,000 1,000,000 770,000 1,000,000

Total $3,500,000 1,770,000

730,000

1,730,000 $1,730,000 ÷ $3,500,000 = 49.43%

The company (total) contribution margin ratio becomes 49.43%. b. With no changes other than the $70,000 increase in residential variable costs, operating profit decreases by $70,000, from $900,000 to $830,000. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

164) Premium Plumbing Products serves both residential and commercial clients. Annual financial information for Premium is as follows:

Sales Revenues Variable Costs Contribution Margin Fixed Costs Operating Profit

Commercial $2,000,000 1,000,000 1,000,000

Residential $1,500,000 700,000 800,000

Total $3,500,000 1,700,000 1,800,000 900,000 $ 900,000

a. If variable costs for the residential business increase by 10%, what is the new degree of operating leverage (DOL)? (Round to 4 decimal places) b. If Premium has an effective tax rate of 20%, what is the new net income after tax amount? Answer: a. If variable costs for the residential business increase by 10%, total variable costs would increase to $700,000 × 1.1 = $770,000. The financial information for Premium then becomes the following:

Sales Revenues Variable Costs Contribution Margin Fixed Costs Operating Profit

Commercial $2,000,000 1,000,000 1,000,000

Residential $1,500,000 770,000 730,000

Total $3,500,000 1,770,000 1,730,000 900,000 $ 830,000

The DOL is calculated as contribution margin ÷ operating profit = $1,730,000 ÷ $830,000 = 2.0843. b. If operating profit is $830,000 and Premium has a tax rate of 20%, taxes amount to $830,000 × 20% = $166,000. This tax amount subtracted from operating profit results in net income after tax of $664,000. Diff: 2 LO: 3, 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

165) Addison Accounting LLP has the following financial information for its two primary business lines:

Service Revenues Variable Costs Contribution Margin Fixed Costs Operating Profit

Audit $1,900,000 900,000 1,000,000

Consulting $2,300,000 1,250,000 1,050,000

Total $4,200,000 2,150,000 2,050,000 950,000 $1,100,000

a. What is Addison's current degree of operating leverage (DOL)? (Round to 4 decimal places. b. What is the contribution margin ratio for Addison Accounting LLP? (Hint: Compute the contribution margin ratio for the company (total). Round to 2 decimal places) c. If the sales mix holds, and Addison management targets operating profit of $2,000,000, what level of total service revenue will be required? Answer: a. Degree of operating leverage (DOL) is calculated by dividing contribution margin by operating profit. Therefore, DOL is equal to $2,050,000 ÷ $1,100,000 = 1.8636. b. The contribution margin ratio for Addison Accounting LLP amounts to $2,050,000 ÷ $4,200,000 = 48.81% c. If target operating profit is set at $2,000,000, this amount needs to be added to total fixed costs of $950,000, amounting to $2,950,000. This amount divided by the contribution margin ratio from (b) of 48.81% results in total required service revenues of $6,043,843, as rounded to the nearest whole dollar. Diff: 2 LO: 4, 5, 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 166) Barton Beverages Inc. sells cases of bottled water at $25 each, has variable costs of $10 for each case of water, and has fixed costs of $30,000 per month. If Barton decides to invest in its infrastructure and fixed costs increase by $15,000 per month, how many more cases of water will Barton need to sell to break-even? Answer: Break-even is equal to fixed costs divided by unit contribution margin. For Barton before the fixed costs increase, the contribution margin is $15 ($25 - $10) per case. The breakeven point is $30,000 ÷ $15 = 2,000 cases of water per month. If fixed costs increase by $15,000 per month, then $15,000 divided by the contribution margin of $15 per case of water equals an additional 1,000 cases of water required to be sold each month to break-even. Diff: 2 LO: 1, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Quantitative Methods.

167) Barton Beverages Inc. sells cases of bottled water at $25 each and has variable costs of $10 for each case of water. Fixed costs per month are $30,000, and the accountants at Barton have reported to management that operating income last month was $3,375. a. What is Barton's current degree of operating leverage (DOL)? (Round to 2 decimal places) b. If Barton is able to reduce its fixed costs by $3,000 per month, what is its new DOL? (Round to 3 decimal places) Answer: a. DOL is equal to contribution margin divided by operating income: $33,375 of contribution margin ($30,000 + $3,375) divided by operating income of $3,375 equals 9.89. b. If Barton trims fixed costs by $3,000 per month, operating income will change to $6,375, provided all other variables remain the same. DOL will then be calculated as contribution margin remaining at $33,375 divided by the new operating income amount of $6,375, yielding a DOL of 5.235. Diff: 2 LO: 1, 2, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 168) Elmira's Environmental Consulting Service LLP had the following operating results last month: Service revenues amounted to $50,000, variable costs were $24,000, and fixed costs were $10,000 for the month. Based on this information, compute the following amounts: a. Contribution margin (total and ratio) b. Operating income c. Degree of operation leverage (Round to 3 decimal places) d. Break-even point in dollars (Round to nearest whole dollar) Answer: a. Service revenues of $50,000 minus variable costs of $24,000 result in a total contribution margin of $26,000, and contribution margin ratio of 52% = Total contribution margin ÷ Service revenue = $26,000 ÷ $50,000. b. A contribution margin of $26,000 (from a) minus $10,000 of fixed costs is equal to operating income of $16,000 last month. c. Degree of operating leverage is equal to contribution margin divided by operating income, so DOL = $26,000 ÷ $16,000 = 1.625. d. Break-even point in sales dollars = Fixed costs ÷ Contribution margin ratio = $10,000 ÷ .52 = $19,231 (rounded) Diff: 2 LO: 1, 5, 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

169) Clemens Business Consulting provides management-consulting evaluations for clients at a price of $15,000 upon completion. Clemens has variable costs of $10,000 per evaluation and fixed costs of $90,000 per month. Last month, Clemens had an operating income of $21,000. Clemens has an effective tax rate of 20%. If Clemens would like to attain its net income goal of $80,000 next month, how many consulting evaluations will the firm need to complete? Answer: If Clemens wishes to achieve a net income goal of $80,000 and the firm's tax rate is 20%, then its pretax operating income level will need to be $80,000 ÷ (1 minus the tax rate of 20%) = $80,000 ÷ 80% = $100,000. Target pretax income of $100,000 + fixed costs of $90,000 = $190,000. Dividing this amount by the contribution margin of $5,000 per audit ($15,000 sales $10,000 variable costs) yields the number of evaluations: $190,000 ÷ $5,000 = 38 evaluations. Diff: 3 LO: 3, 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

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170) SoniCo operates the Annabell Lee, a riverboat that provides a 2-hour cruise down the St. John River and a buffet dinner for up to 90 guests. On average, 80 guests make reservations and pay the $55 charge per cruise. While the company offers a cash bar, it provides soft drinks at no charge. An outside catering service provides the food, setup, and cleanup for the dinners and charges SoniCo a catering fee. The average costs incurred per guest for each cruise include the following: Food and soft drinks Catering fee Supplies (restroom, cleaning, etc.)

$25.85 1.10 1.65

Each dinner cruise takes guests 8 miles down the river, followed by a return trip. The cost of boat fuel is $4 per gallon, and the riverboat uses 2.5 gallons per mile. The average number of dinner cruises per month is 25. Annual fixed costs include the following: Insurance Depreciation Mooring Maintenance Captain and crew's salaries Registration and license fees

$ 9,600 14,400 7,920 9,430 33,302 900

a. Calculate the contribution margin per cruise. b. Calculate the break-even point in revenue dollars for a month. c. What amount will be reported as contribution margin on the company's monthly income statement if there are 84 guests on each cruise? Briefly explain what information the answer provides to managers. d. If the average number of guests on each cruise is 84, as indicated in part c, what effect will this have on the break-even point in revenue dollars per month? Briefly explain. e. Why is a lower break-even point considered to be more favorable than a higher break-even point? Explain.

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Answer: a. Variable cost per guest: Food and soft drinks Catering fee Supplies Cost per guest

$25.85 1.10 1.65 $28.60

Total annual fixed costs: Fuel (8 × $4 × 2.5 × 2 × 25 × 12) Insurance Depreciation Mooring Maintenance Captain and crew's salaries Registration and license fees Total annual fixed costs

$ 48,000 9,600 14,400 7,920 9,430 33,302 900 $123,552

Contribution margin per cruise = = Number of guests × (Revenue fee per guest - Variable cost per guest) = 80 × ($55 - $28.60) = $2,112 b. Total monthly fixed costs = $123,552 ÷ 12 = $10,296 Break-even point in revenue dollars = (Total monthly fixed costs ÷ Contribution margin per guest) × Revenue per guest = [$10,296 ÷ ($55 - $28.60)] × $55 = $21,450 c. Contribution margin = Monthly guests × Contribution margin per guest = 84 × ($55 - $28.60) × 25 = $55,440; During the current month, the company has $55,440 available to cover fixed costs and to contribute to profit. d. The break-even point is the same regardless of the number of guests that take each river cruise. Break-even simply means that total costs equal total revenues. The only factors that can change the break-even point are the amount charged to each guest on the dinner cruise, the variable cost per guest, and the total fixed costs. e. If a break-even point is lower, the company can start making a profit with fewer sales than if the break-even point was higher. The earlier a company begins to make a profit, the more total profit it will generate each month. Diff: 3 LO: 1 Bloom: AP AACSB: Analytic, Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

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171) Waldo's Water World is distributing replacement water coolers in the Montreal area for $150 per cooler. Waldo's fixed costs are equal to $60,000 per month, and the Waldo's accounting staff has calculated the monthly break-even in units to be 750. a. Given this information, compute the variable cost per unit and the contribution margin per unit. b. Using the amounts computed in part (a), prepare a contribution margin income statement proving that breakeven occurs at this level of sales. Answer: a. Variable costs equal $70 per unit, and contribution margin is $80 per unit. Solution: Break-even in units is the point at which sales in units multiplied by contribution margin is equal to total fixed costs. If fixed costs are $60,000 per month, and the break-even point is 750 units, then contribution margin is equal to $60,000 ÷ 750 = $80 per unit. This means that unit variable costs are equal to the unit price per cooler of $150 minus the contribution margin of $80, or $70 per unit. Therefore, variable costs equal $70 per unit, and contribution margin is $80 per unit. b. Solution: Sales Revenue ($150 × 750 units) Less: Variable Costs ($70 × 750 Units) Contribution Margin Less: Fixed Costs Net Income (Loss)

$112,500 52,500 60,000 60,000 $0

Diff: 3 LO: 1 Bloom: AP AACSB: Analytic, Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

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172) Hooper's Hot Dog Stand has had the following average results for the past several months: Its selling price per hot dog is $4. Total monthly sales revenues have been $8,000, variable product costs have been $3,000 per month, variable period costs have been $500 per month, and fixed costs have been at $2,250 per month. Hooper's expects to have a $450 per month increase in fixed period costs beginning next month. a. What was the operating income for the past several months with the given information? b. What is Hooper's current break-even point? c. How will this cost increase affect Hooper's break-even point? Answer: a. Operating Income = $2,250 b. Break-even point currently = 1,000 hot dogs. c. Break-even point will increase by 200 hot dogs per month. Solution: a. Operating Income = Sales Revenue - Variable Costs (Direct + Indirect) - Fixed Costs = $8,000 - ($3,000 + $500) - $2,250 = $2,250 b. Hopalong currently has a contribution margin ratio of 56.25%. This is calculated as follows: Contribution margin = $8,000 in sales revenues - $3,000 in direct labor and ingredients costs $500 in variable indirect costs = $4,500 contribution margin. Contribution margin ratio = $4,500 contribution margin ÷ $8,000 sales revenues per month = 0.5625, or 56.25%. The break-even point before expense increases is the total fixed costs of $2,250 per month divided by the contribution margin for each hot dog sold, which is $4.00 × 56.25% = $2.25. Therefore, monthly break-even is $2,250 ÷ $2.25 = 1,000 hot dogs. c. If period expenses (fixed costs) increase by $450 per month, this will require an additional sales volume of $450 ÷ $2.25 of contribution margin per hot dog = 200 additional hot dogs each month. Diff: 3 LO: 1 Bloom: AP AACSB: Analytic, Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

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173) Clark Craven started his own business, Craven Haven, last summer. He sells ice cream bars on Panama City Beach on the weekend for $4 each. Each bar has a variable cost of $1.80. Total fixed costs include primarily costs related to the rolling freezer cart and total $396 per month. During June, the business had 264 customers. a. Calculate the break-even point in units and the break-even point in sales revenue for a month. b. Prepare a break-even chart for Craven Haven using the template provided. Label the x- and y-axes, the three lines, and the break-even point. c. What causes the total cost line to slope upward in a straight line on a CVP graph within the relevant range? d. By how much can Craven Haven's revenue decline before a loss is incurred during June? e. If total fixed costs increase, what is the effect on the margin of safety? Explain.

Answer: a. Break-even point in units = Total monthly fixed costs ÷ Contribution margin per unit = $396 ÷ ($4.00 - $1.80) = 180 bars Break-even point in sales dollars = Number of bars to be sold × Selling price per unit = 180 bars × $4.00 = $720

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b. Plot the break-even point in units lined up vertically with the x-axis at 180 units, and the break-even point in sales dollar lined up horizontally with the y-axis at $720.

c. Within the relevant range, the activity–or the number of units–increases at a constant rate, at the same variable cost per unit, also called the slope. Total fixed costs do not change, so the upward-sloping nature of the total cost line increases solely due to the change in the activity, the number of units. d. Margin of safety = Current sales level - Break-even sales level = (264 × $4) - (180 × $4) = $336 e. When total fixed costs increase, the break-even point increases. This increases the number of units that must be sold before the company begins generating a profit. In turn, the gap between the break-even point and the number of units the company is currently selling becomes smaller, which reduces the margin of safety. Diff: 3 LO: 1, 2 Bloom: AP AACSB: Analytic, Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

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174) Accent produces reading lamps and sells each for $18 to distributors. Accent's June income statement follows: Sales Variable product costs Fixed product costs Gross margin Variable selling and admin costs Fixed selling and admin costs Operating income

$172,800 $77,760 38,016 12,096 8,640

115,776 57,024 20,736 $ 36,288

Accent's income tax rate is 30%. a. How much sales revenue must Accent generate to achieve a target profit after taxes of $25,000? b. How much contribution margin will Accent generate when the company generates profit after taxes of $25,000? c. What effect does an increase in the income tax rate from 30% to 32% have on the break-even point? Explain. d. Accent's manager is planning to give each of its hourly production employees a 5% raise and plans to offset it with an increase in the selling price of each lamp by 5%. During June, the direct labor cost totaled $34,992. Provide the manager with insight into the effect of this increase on profitability. e. Why do the two 5% changes in part d not offset each other, resulting in no change in the contribution margin?

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Answer: a. Contribution margin ratio = Contribution margin ÷ Sales revenue = ($172,800 - $77,760 - $12,096) ÷ $172,800 = 48% Sales dollars to earn target profit = [Total fixed costs + (Target profit ÷ (1 - tax rate)] ÷ Contribution margin ratio = [$38,016 + $8,640) + ($25,000 ÷ (1 - 30%)] ÷ 48% = $171,604.76 b. Contribution margin = Sales revenue - Variable costs = $171,604.76 - (52% × $171,604.76) = $82,370.28 = $82,370 c. There is no effect on the break-even point when a change in the income tax rate occurs at break-even. Because total costs equal total revenue at the break-even point, operating income is zero, and no tax is incurred. d. Contribution margin with the changes = Sales revenue - Variable costs = ($172,800 × 105%) - [{($77,760 - $34,992) + $12,096} + ($34,992 × 105%)] = $181,440 - $91,606 = $89,834 Increase in profitability = New contribution margin - Original contribution margin = $89,834 - ($172,800 - $77,760 - $12,096) = $6,890 The contribution margin will increase by $6,890 if the changes are made. e. The increase in variable costs does not offset the increase in revenue for two reasons. First, only a portion of the variable costs will increase: those for direct labor. Second, adding 5% to revenue increases revenue more than adding 5% to costs increases costs. Diff: 3 LO: 1, 3, 4, 5 Bloom: AP AACSB: Analytic, Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

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175) Speed Tek produces two models of professional swim goggles–Jet and Spirit–both with fog-free acrylic lenses. Speed Tek has a 30% income tax rate. Information regarding the products is summarized for the month of May in the following table:

Jet Number of units Sales revenue Variable costs Contribution margin Fixed costs Operating income

2,400 $36,000 20,682 $15,318

Spirit 1,600 $31,500 18,270 $13,230

Total 4,000 $67,500 38,952 28,548 19,989 $ 8,559

The company's sales mix is expected to remain stable over the next year. a. Complete the following statement: For every ________ pairs of Jet goggles, Speed Tek sells ________ pairs of Spirit goggles. b. How many total goggles is Speed Tek expected to sell at break-even? (Round to zero decimal places) c. When calculating break-even points with multiple products, why is the weighted average contribution margin necessary? d. The management team of Speed Tek expects sales volume and total fixed costs to increase by 10% during June. Determine the number of total goggles that Speed Tek must now sell to breakeven in June. e. Based on your answer to part d, would you recommend the company make the change? Briefly explain why or why not.

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Answer: a. Units of Jet: Units of Spirit = 2,400 : 1,600 → 3 : 2 For every three pairs of Jet goggles, Speed Tek sells two pairs of Spirit goggles. b. Sales mix percentages: Jet: 2,400 ÷ (2,400 + 1,600) = 60% Spirit: 1,600 ÷ (2,400 + 1,600) = 40% Contribution margin per unit: Jet: Contribution margin ÷ Number of units = $15,318 ÷ 2,400 = $6.383 Spirit: Contribution margin ÷ Number of units = $13,230 ÷ 1,600 = $8.269 WACM per unit:

Product Jet Spirit Total WACM

Contribution Margin Sales Mix 6.383 x 60% = 8.269 x 40% =

WACM $3.830 3.308 $7.138

Break-even point for both products = Total fixed costs ÷ WACM per unit = $19,989 ÷ $7.138 = 2,800.36 = 2,800 goggles (rounded) c. The weighted average contribution margin is needed to factor in the proportion of each product that is sold, along with its selling price. Companies do not sell the same number of each product, and the selling price and variable costs of each product typically differ, resulting in differing contribution margins. d. Sales mix percentages = No change, because number of units of each product increased by the same percentage: Jet: (2,400 × 110%) ÷ [(2,400 + 1,600) × 110%] = 60% Spirit: (1,600 × 110%) ÷ [(2,400 + 1,600) × 110%] = 40% Contribution margins per unit = No change, because the sales price, variable cost per unit, and number of units increased by the same percentage: Jet: Contribution margin ÷ Number of units = = ($15,318 × 110%) ÷ (2,400 × 110%) = $6.383 Spirit: Contribution margin ÷ Number of units = = ($13,230 × 110%) ÷ (1,600 × 110%) = $8.269 WACM per unit = $7.138 (from part b) = No change, because the sales mix and the contribution margins per unit of each product are the same. Break-even point for both products = Total fixed costs ÷ WACM per unit = ($19,989 × 110%) ÷ $7.138 = 3,080.40 = 3,080 goggles (rounded)

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e. Break-even point for both products without changes (part b) = 2,800 goggles Break-even point for both products without changes (part d) = 3,080 goggles The break-even point increased from 2,800 to 3,080, which by itself is not a favorable change. This increase requires that more units be sold before the sale of units begins to generate a positive contribution margin. The increase occurred because there will be no effect on the contribution margin per unit for either product, so no change in total contribution margin per unit will occur, while fixed costs will increase by 10%. However, operating income is expected to increase, because the 10% increase in sales will increase the total contribution margin by $2,855 ($28,548 × 10%), which is greater than the 10% increase in fixed costs of $1,999 ($19,989 × 10%), resulting in a net increase in operating income of $856. Based on the increase in operating income, the company should make the change. Diff: 3 LO: 1, 4 Bloom: AP AACSB: Analytic, Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

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176) The following operating data was reported by Acer Sports for the month of October, during which 1,000 rackets and 4,000 packs of racquetballs were produced and sold:

Sales revenue Variable costs Contribution margin Fixed costs Operating income

Rackets Ball Packs $40,000 $20,000 23,200 11,000 $16,800 $ 9,000

Total $60,000 34,200 25,800 18,400 $ 7,400

Acer Sports has a loan agreement with its bank that enables the company to borrow as needed for working capital purposes. However, the agreement requires that Acer's degree of operating leverage not exceed 4.0. Acer's income tax rate is 30%. Answer the following questions. Use three decimal places for DOL amounts. a. Calculate the degree of operating leverage for Acer Sports for October. Explain the lever effect as it relates to the DOL. b. The management team estimates that it will experience an 8% decline in sales volume for the months of November and December. Using the answer to part a, determine the expected operating income if the sales decline occurs in November. c. Explain to the management team the effects of the sales decline. Will the company be in violation of the loan agreement? d. What actions might management take to improve its DOL?

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Answer: a. Degree of operating leverage = Contribution margin ÷ Operating income = $25,800 ÷ $7,400 = 3.486 The DOL is referred to as a lever because it has a multiplier effect on sales. Once the expected change in sales is multiplied by the DOL, the lever effect causes the change in profit to be a multiple of the change in sales. b. Percentage decrease in operating income = Percentage decrease in sales × DOL = 8% × 3.486 = 27.89% decrease in operating income New operating income = (100% − 27.89%) × $7,400 = $5,336.14 = $5,336 c. The decline in sales is expected to reduce operating income from $7,400 to $5,336, an unfavorable effect. As a result, the company is expected to be in violation of its loan agreement in November. Its DOL is expected to increase from its October level of 3.486 to 4.448 in November, which exceeds the maximum DOL of 4.0 allowed under the loan agreement. New DOL = Contribution margin ÷ Operating income = ($25,800 × (100% - 8%)) ÷ $5,336 = 4.448 The increase in the DOL occurs because a smaller amount of contribution margin is available to cover fixed costs, which results in an increase in the volatility of operating income for each percentage change in sales. Because variable costs declined and fixed costs remained the same, the company now has a larger proportion of fixed costs. The degree of operating leverage measures risk in that the larger the degree of operating leverage, the more swing that will occur in operating income. d. To improve the DOL, management can either decrease fixed costs, perhaps by selling some plant assets, or reduce variable costs. Perhaps an advertising campaign could be undertaken, in hopes that the campaign will cause an increase of sales volume that will offset the expected 8% decline in sales. However, since an advertising campaign is a fixed cost, this action will affect the DOL as well. Diff: 3 LO: 1, 4, 5 Bloom: AP AACSB: Analytic, Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

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177) Mini Baker products mini cupcakes in various flavors. Suzi Wu opened the shop on January 1 of the current year. The average selling price for each cupcake is $2.50, with some flavors and icings selling for more and some for less. For the first quarter of the current year, the cost of ingredients totaled $28,000; labor to mix, pour, bake, and ice was $35,000; and variable indirect costs, such as supplies, totaled $8,000. The cost of using the baking facility and equipment amounts to $18,000 of fixed product costs each quarter. Selling and administrative costs total $26,000, with 60% variable and 40% fixed. During the first quarter, the company produced and sold 52,000 cupcakes. The income tax rate is 30%. Answer the following questions. Use two decimal places for ratios. a. Determine the amount of gross margin for the quarter. b. What is the amount of contribution margin for the quarter? What information does this amount provide to Suzi Wu's bakery? Be specific. c. Determine the amount of contribution margin ratio for the quarter. What information does it provide to managers? How does it differ from gross margin? d. Suzi Wu hopes to generate an after-tax target profit of $23,000 per quarter. How much sales revenue must Suzi generate to meet this target? e. What will happen to the break-even point if the income tax rate increases to 40%?

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Answer: a. Sales (52,000 × $2.50) Variable product costs ($28,000 + $35,000 + $8,000) Fixed product costs Gross margin

$130,000 $71,000 18,000

89,000 $41,000

b. Contribution margin = Sales revenue - Variable costs (Product and Selling & Admin.) = $130,000 - $71,000 (part a) - ($26,000 × 60%) = $43,400 The company has $43,400 to cover fixed costs and to contribute to profit. c. Contribution margin ratio = Contribution margin ÷ Sales revenue = [($130,000 - $71,000 (part a) - ($26,000 × 60%)] ÷ $130,000 = 33.385% The contribution margin ratio is the amount available out of each sales dollar to cover fixed costs and then contribute to profit. The two margins differ in the costs that are subtracted from sales to arrive at the respective "margin." The contribution margin is sales less both product and period variable costs, while gross margin is sales less both variable and fixed product costs. d. Total fixed costs = $18,000 + (40% × $26,000) = $28,400 Sales dollars to earn target profit = = [Total fixed costs + {(Target profit ÷ (1 - Tax rate)}] ÷ Contribution margin ratio = [$28,400 + {($23,000 ÷ (1 - 30%)}] ÷ 33.385% = $183,487 e. There will be no change in the break-even point. Because total costs equal total revenue at the break-even point, operating income is zero, and no tax is incurred. Diff: 3 LO: 1, 3, 5 Bloom: AP AACSB: Analytic, Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis, Reporting & Control: Cost Accounting.

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178) Pate & Murwick, CPAs, employs 22 professional salaried accountants and 3 hourly administrative staff. The amount billed to clients during the current year differs among the different levels of professional staff. The annual billable hours, costs, rates, and professional staff levels are as follows:

Number of employees Billing rate per hour Labor cost per hour Target billable hours per employee

Partners

Managers

2 $280 $220 1,800

6 $180 $140 2,500

Staff 14 $120 $90 2,100

Total 22

The partners estimate the firm will incur variable overhead amounting to 10% of the professional labor cost and fixed overhead amounting to $8 per billable hour of labor. Total selling and administrative are estimated at $114,000 per year, with 60% of this being fixed. The company's proportions of professional accountants, as well as the billing rates, labor costs, overhead, and selling and administrative costs, are expected to remain the same throughout the next year. The firm uses billable hours as its output measure. a. Determine the total hours that the firm must provide to break-even. b. How many total hours must the firm bill for managers to break-even? c. Why do service businesses use different measures of output than retail companies when calculating their break-even point?

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Answer: a. Sales mix–partners: (2 × 1,800) ÷ [(2 × 1,800) + (6 × 2,500) + (14 × 2,100)] = 7.50% Sales mix–managers: (6 × 2,500) ÷ [(2 × 1,800) + (6 × 2,500) + (14 × 2,100)] = 31.25% Sales mix–staff (14 × 2,100) ÷ [(2 × 1,800) + (6 × 2,500) + (14 × 2,100)] = 61.25% Budgeted labor hours = (Number of partners × Number of hours each) + (Number of managers × Number of hours each) + (Number of staff × Number of hours each) 48,000 Budgeted labor hours = (1,800 × 2) + (2,500 × 6) + (2,100 × 14) Weighted average contribution margin = [(Billable rate, partners - Variable cost, partners) × Sales mix, partners] + [(Billable rate, managers - Variable cost, managers) × Sales mix, managers] + [(Billable rate, staff - Variable cost, staff) × Sales mix, staff] = [($280 - $220) × 7.5%] + [($180 - $140) × 31.25%] + [($120 - $90) × 61.25%] = $35.375 per hour of professional services provided plus the variable selling and administrative costs of [$45,600 or (114,000 × 40%)] ÷ 48,000 billable hours = $35.375 + $.95 = $36.325 per hour of professional services provided] Break-even point in billing hours = Total fixed costs ÷ WACM per billable hour = [($8 × 48,000) + ($114,000 × 60%)] ÷ 36.325 = 12,454.23 = 12,454 billable hours (rounded) b. Number of hours for managers = Total billable hours × Sales mix = 12,454 × 31.25% = 3,891.88 hours = 3,892 billable hours (rounded) c. Service firms use different measures when calculating their break-even point because they have no tangible products to use as their output measures. They may use number of persons served, number of billable hours, number of nights housed, or number of meals provided, among other measures. Diff: 3 LO: 3, 4, 6 Bloom: AN AACSB: Analytic, Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

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179) Briefly describe why break-even analysis is important and what it can tell the management of a business. What information is necessary to calculate the break-even point? Answer: A break-even analysis is used to determine how much product a firm needs to sell to cover the costs of doing business. Break-even is the point at which a business's total costs and total revenue are exactly equal. With a break-even analysis, a business can determine at what sales volume the firm will begin to make a profit. The information needed includes sales revenues, or sales price or revenues per unit; variable costs, or variable costs per unit; and total fixed costs. Diff: 2 LO: 1 Bloom: C AACSB: Knowledge, Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 180) Briefly describe the differences between contribution margin and gross margin. Answer: Gross margin, sometimes referred to as gross profit, is equal to sales revenues minus cost of goods sold, which includes both fixed and variable cost of goods sold. Conversely, contribution margin refers to sales revenues minus variable costs, which include both variable cost of goods sold and variable selling and administrative costs. Diff: 2 LO: 1 Bloom: C AACSB: Knowledge, Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 181) Why is the understanding of cost behavior important to break-even analysis? Answer: It is important to be able to categorize costs into variable and fixed cost elements. The variable cost elements will remain constant on a per unit basis but will change directly and proportionately with a given change in the sales level. On the other hand, fixed costs will stay the same in total regardless of changes in an activity level. So, if a business had no activity in sales, no variable costs would be incurred, but the business would still have to cover the fixed costs. It is important for management to plan accordingly for business activities to cover all costs, both variable and fixed, when making decisions. Diff: 2 LO: 1 Bloom: C AACSB: Knowledge, Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

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182) Briefly describe what important information the margin of safety can provide to a company's management team. How is the margin of safety calculated? Answer: The margin of safety is the amount by which current sales (or budgeted sales) can be reduced before the break-even point is reached. This informs management of the risk of potential loss to which a business is subjected by changes in sales or revenue volume. The concept is useful when a significant proportion of sales are at risk of decline or elimination, as may be the case when a sales contract is coming to an end, or the economy weakens. A minimal margin of safety might trigger action to reduce expenses. The opposite situation may also arise, when the margin of safety is so large that a business is well protected from sales variations and management can consider investments in infrastructure through the increase of fixed costs. To calculate the margin of safety, subtract the current break-even point from current (or budgeted) sales. The margin of safety can be expressed in terms of sale revenue dollars or in terms of units. Diff: 2 LO: 2 Bloom: C AACSB: Knowledge, Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 183) Define the relevant range and explain its importance in CVP analysis. Answer: The relevant range is the band of activity with a specific relationship between activity levels and the cost being measured, where fixed costs remain fixed and variable costs are constant. This concept is important because for a given company, there is a limit to what can be made/or sold. This upper limit is defined by either the capacity of the facilities or equipment usage (time) or the market demand for the product. For example, a business cannot sell more than what the customers demand, and even if the demand exists, the business cannot sell more than what it can realistically produce given it resources and capabilities. Diff: 2 LO: 2 Bloom: K AACSB: Knowledge, Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

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184) In your own words, explain how a CVP graph can be used to indicate cost behavior, breakeven point, and profit/loss situations. Answer: In preparing a CVP graph, it is important to understand the components of the graph. Dollars (cost/sales) are shown on the vertical or Y-axis and the units are shown on the horizontal or X axis. Lines are then drawn for fixed costs represented by a horizontal straight line, with the total cost line upward sloping starting at the fixed cost line. The area showing between the fixed cost line and the total cost line will represent the variable costs for the business at different levels of activity. The last line included is the revenue (sales) line, which is also upward sloping, but beginning at 0. The point at which the total cost line and the revenue line intersect will represent the break-even point (total revenues = total costs = $0 profit (loss)). The area then above this intersection will reflect profit for the business, whereas the are below the intersection of these two lines will show the net loss situations for the business. Diff: 2 LO: 2 Bloom: C AACSB: Knowledge, Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 185) Briefly describe what target (desired) profit is and why calculating it can be important to a business. Answer: Target profit is the income that the management of a company expects to attain for a designated accounting period. It is a key concept in a corporate budgeting and control system that is often used to drive corrective management actions. Target income is derived with costvolume-profit analysis through the following calculation: Multiply the expected number of units to be sold by their expected contribution margin (sales revenues less variable costs) to arrive at the total contribution margin for the period. Subtract the total amount of expected fixed cost for the period. The result is the desired/expected operating income level. Diff: 2 LO: 3 Bloom: C AACSB: Knowledge, Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Strategy, Planning & Performance: Cost Management and Decision Analysis.

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186) Can management easily adjust its computations for breakeven analysis to accommodate assumptions for a target profit and taxes? Answer: Yes, management can easily adjust its computations for breakeven analysis to accommodate assumptions for a target profit and taxes. Both adjustments are made directly to the numerator in the breakeven formula. For example, for a target profit, one would simply add the target profit to the fixed costs and then divide by the contribution margin to arrive at the breakeven point. To factor in taxes, this target profit would be adjusted by dividing it by 1 - tax rate to arrive at the after-tax target profit, and then added to the fixed costs before dividing by the contribution margin to arrive at the adjusted level to achieve the after-tax profit. Diff: 2 LO: 3 Bloom: C AACSB: Knowledge, Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Strategy, Planning & Performance: Cost Management and Decision Analysis. 187) Explain the impact of integrating tax implications into a target profit computation for a business? What impact will this assumption have on the required sales in both sales units and sales dollars? Answer: The formula for target profit when considering tax implications requires an adjustment to the target profit from an after-tax amount to a pretax amount. This is adjusted by dividing the target or desired profit amount by 1 - tax rate. This will cause the desired profit adjusted for tax implications to increase, which in turn will cause the required sales in both sales units and sales dollars to also increase. Diff: 2 LO: 3 Bloom: C AACSB: Knowledge, Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Strategy, Planning & Performance: Decision Analysis. 188) How is cost-volume-profit analysis (CVP) used to calculate target operating income and why is it important to companies? Answer: CVP analysis using the breakeven equation can be modified to include the computation of required sales to arrive at a desired profit. Although, the computation of the break-even point is useful to management, most companies do not just want to break even (net income = $0) but instead, prefer to make a profit. To plan for this, the business would add the desired or target profit to the fixed costs in the numerator in the initial break-even equation and then, divide by the unit contribution margin to determine the required units to achieve the target profit. In addition, the required sales dollars to achieve a target profit can be computed by dividing the total of fixed costs plus the target profit by the contribution margin ratio or simply multiply the required units to achieve the target profit by the unit selling price. Diff: 2 LO: 3 Bloom: C AACSB: Knowledge, Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Strategy, Planning & Performance: Cost Management and Decision Analysis. 121

189) Briefly describe the concept of the weighted average contribution margin (WACM). Answer: The weighted average contribution margin is the average amount that a group of products or services contributes to offsetting the fixed costs of a business. The relative sales mix provides the weighting for the contribution margin of each product in the mix. The concept is a key element of break-even analysis, which is used to project profit levels for various levels of sales. Diff: 2 LO: 4 Bloom: K AACSB: Knowledge, Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Strategy, Planning & Performance: Cost Management and Decision Analysis. 190) Explain why a company's sales mix is important to determining weighted average contribution margin (WACM) when multiple products with different cost structures are being sold. What is a weakness of the WACM method? Answer: A company's sales mix is important because it provides the weighting for the contribution margin of each product in the mix, since different products or services likely have different contribution margins. Its main weakness is that projections based on the average contribution margin incorporate the assumption that the same sales mix of product sales and margins will apply in the future, which is not necessarily the case. Diff: 2 LO: 4 Bloom: C AACSB: Knowledge, Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Strategy, Planning & Performance: Cost Management and Decision Analysis. 191) If a company increases the selling price of one of its products or services in its sales mix what impact (if any) will this have on the company's weighted average contribution margin, assuming all else remains the same? If the company adds a new product to the sales mix, or drops a product from its sales mix, will this impact the company's weighted average contribution margin? Explain. Answer: If a company increases the selling price of one of its products or services in its sales mix, the company's weighted average contribution margin will increase given that all else remains the same. If the company adds a new product to the sales mix, or drops a product from its sales mix, this will also impact the company's weighted average contribution margin based on the percentage affect to the sales mix for not only the new or terminated product, but also based on the impact to the sales mix for the other company products along with the respective contribution margins of the products. In these situations, the weighted average contribution margin could either increase or decrease. Diff: 2 LO: 4 Bloom: C AACSB: Knowledge, Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Strategy, Planning & Performance: Decision Analysis. 122

192) Explain changes in assumptions can change the break-even point, and why a lower breakeven point is preferred by a business when using break-even analysis. Answer: Changes in assumptions such as the unit selling price, unit variable cost, and/or total fixed costs will each affect the break-even point computation for a business. For example, if a business desired to lower its break-even point, it could increase its selling price, and/or lower its unit variable cost and/or lower fixed costs. A lower break-even point in units indicates that the business is covering all costs, both variable and fixed, in a given period, and that after that point, all additional units sold will contribute to operating income at a rate of the unit contribution margin. The lower the break-even point, the sooner the business will begin to earn a profit. If given alternatives for changes, the business will typically prefer the option with the lower breakeven point. Diff: 2 LO: 5 Bloom: C AACSB: Knowledge, Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Strategy, Planning & Performance: Cost Management and Decision Analysis. 193) Briefly describe the concept of operating leverage. How can a company's degree of operating leverage (DOL) be used to help company management in conducting sensitivity analyses? How is the DOL calculated? Answer: Operating leverage refers to the relative mix of fixed and variable costs in a firm's cost structure. If a firm has a relatively high amount of fixed costs, it is said to have a high degree of operating leverage (DOL). DOL works like a lever, enabling management to quickly determine the impact of a projected change in sales on operating income by multiplying the DOL by the percent of revenue increase or decrease. To calculate operating leverage, divide a firm's contribution margin (sales revenues minus variable costs) by its net operating income. Diff: 2 LO: 5 Bloom: C AACSB: Knowledge, Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Strategy, Planning & Performance: Cost Management and Decision Analysis.

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194) How might the degree of operating leverage be used by a company to help predict profits and losses based on decisions that affect cost structures? Answer: The degree of operating leverage (DOL) offers insight into the relative mix of fixed costs to variable costs for a company. The DOL serves as a multiplier when evaluating projected changes in sales to determine the effect on operating income. The higher the fixed costs in comparison to the variable costs for a company, the higher the DOL. For example, if the DOL for Company A is 7, with a 10% increase, one can expect a 70% increase in operating income. However, if the change is a 10% decrease, one can expect a 70% decrease in operating income. Now, on the other hand, if Company B has a DOL of 3, with a 10% increase, one can expect a 30% increase in operating income. However, if the change is a 10% decrease, one can expect a 30% decrease in operating income. This facilitates the projection of income impact for changes in sales without having to work each scenario through a CVP income statement to determine the impact of a change in sales on operating income. Diff: 2 LO: 5 Bloom: C AACSB: Knowledge, Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting; Strategy, Planning & Performance: Cost Management and Decision Analysis. 195) Briefly describe the differences between calculating the contribution margin for a service provider and for a manufacturing business. Answer: The contribution margin for both types of business has the same formula–sales revenues minus variable costs. Although essentially the formula remains the same, for a service provider sales revenues are generated from the sales of its services, whereas for a manufacturing business sales revenues are generated by the sales of its products. The big difference between these two types of firms is the nature of variable costs for each business type. Service providers typically have labor expenses as their variable costs. For example, an accounting firm's variable costs on an audit engagement will consist of staffing costs. A manufacturing firm will have variable costs that are product costs, such as the direct materials, overhead, and labor costs that go into fabricating the product. Diff: 2 LO: 6 Bloom: K AACSB: Knowledge, Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

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196) Can CVP analysis be used for service companies and if so, is the methodology the same as that used for manufacturing companies? Answer: Yes, CVP analysis can be used for service companies, and the methodology is the same as for manufacturing companies. Costs need to be separated into fixed and variable cost categories. Then, contribution margin is computed by deducting the variable cost from the sales. This can be done on a per service basis or in total. Then, just as with manufacturing, the total fixed costs are divided by the unit contribution margin to arrive at the break-even point in units of service and by the contribution margin ratio to determine the break-even point in revenue dollars (or by multiplying the break-even point in units of service by the price per unit of service). Diff: 2 LO: 6 Bloom: C AACSB: Knowledge, Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 197) Explain how nonprofit entities might use CVP analysis to determine a break-even point. Answer: Nonprofit entities can use CVP analysis, which is similar to for-profit entities, but typically they will start with identifying the cost structure for the organization, separating fixed costs and variable costs, and then setting net income = $0 (break-even), determine the amount of funding needed on a periodic basis to support operations. Diff: 2 LO: 6 Bloom: C AACSB: Knowledge, Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis.

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Cost Accounting, 1e (Farmer) Chapter 5 Relevant Costs for the Decision Maker 1) The decision-making framework for businesses considers A) only quantitative factors. B) only qualitative factors. C) both quantitative and qualitative factors. D) neither quantitative nor qualitative factors but focuses only on differential factors. Answer: C Explanation: The decision-making framework for businesses considers both quantitative and qualitative factors. Diff: 1 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 2) The decision-making framework for an organization consists of how many steps? A) Three B) Four C) Five D) Six Answer: C Explanation: The decision-making process for an organization consists of five steps. Diff: 1 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

3) You have been provided with the following steps for an organization's decision-making framework. What is the appropriate order for the steps? 1. Calculate relevant costs and benefits for each option. 2. Implement your decision. 3. Clearly outline the problem and its related unknowns. 4. Select the option that maximizes the benefit to the organization and meets required qualitative criteria. 5. Identify suitable options and gather relevant qualitative and quantitative information, making informed assumptions as need be. A) 5, 3, 1, 2, 4 B) 3, 5, 1, 4, 2 C) 3, 1, 5, 4, 2 D) 1, 3, 5, 4, 2 Answer: B Explanation: The appropriate order of steps in the decision-making process is (1) Clearly outline the problem and its related unknowns; (2) Identify suitable options and gather relevant qualitative and quantitative information, making informed assumptions as need be; (3) Calculate relevant costs and benefits for each option; (4) Select the option that maximizes the benefit to the organization and meets required qualitative criteria; and (5) Implement your choice. Diff: 1 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 4) After implementing a chosen option in the decision-making framework, the next natural step is to A) assess how the decision worked and to learn from it. B) move on to additional problems that needed to be resolved. C) set new goals and objectives that will require the use of the decision-making framework. D) identify the stakeholders in the decision and determine the financial impact of the chosen option. Answer: A Explanation: After implementing a chosen option in the decision-making framework, the next natural step is to assess how the decision worked and to learn from it. Diff: 1 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

5) Which of the following statements is true regarding the application of the decision-making framework? A) Since qualitative factors are difficult to measure in financial terms, they should not be considered in the decision-making framework. B) Only quantitative factors should be considered in the decision-making framework since they can be measured accurately. C) All qualitative and quantitative information that a company has should be used to evaluate a decision. D) Relevant qualitative and quantitative information should be gathered and evaluated when applying the decision-making framework. Answer: D Explanation: The only true statement is, "Relevant qualitative and quantitative information should be gathered and evaluated when applying the decision-making framework." Diff: 2 LO: 1 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 6) What is the first step in the decision-making framework? A) Identify suitable options. B) Gather relevant quantitative and qualitative information regarding the decision. C) Clearly outline the problem and its related unknowns. D) Calculate relevant costs and benefits of each option. Answer: C Explanation: The first step in the decision-making framework is to clearly outline the problem and its related unknowns. Diff: 1 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

7) Precision Products is considering automating its manufacturing process. Currently, the manufacturing process is handled by 5 laborers which operate the machines with annual salaries and wages of $176,000. Annually, direct materials used in production total $73,000, manufacturing overhead associated with production totals $52,000, and marketing costs of $29,000, would remain the same under each option. If Precision automates its factory production, it will eliminate $120,000 of its labor costs, but will also incur $95,000 of machine leasing costs annually. Which of the following costs would be considered relevant in the decision-making framework? A) Direct materials cost of $73,000 B) Manufacturing overhead costs of $52,000 C) Machine leasing costs of $95,000 D) Marketing costs of $29,000 Answer: C Explanation: The machine leasing costs of $95,000 would be relevant in the decision-making framework. Other costs given as responses are not relevant. Diff: 2 LO: 1 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost Management. 8) What is the last step in the decision-making framework? A) Identify suitable options. B) Gather relevant quantitative and qualitative information regarding the decision. C) Implement your decision. D) Calculate relevant costs and benefits of each option. Answer: C Explanation: The last step in the decision-making framework is to implement your decision. Diff: 1 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

9) In decision-making, relevant information pertains A) only costs. B) only revenues. C) either revenues and/or costs. D) neither revenues nor costs, but only qualitative data. Answer: C Explanation: In decision-making, relevant information pertains to either revenues and/or costs. Diff: 1 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 10) Which of the following depicts the correct flow of the steps in the decision-making framework? A) Identify suitable options→Gather relevant qualitative and quantitative information →Calculate relevant costs and benefits for each option→Clearly outline the problem→ Select the option that maximizes the benefit to the organization B) Clearly outline the problem→Identify suitable options→Gather relevant qualitative and quantitative information→?Calculate relevant costs and benefits for each option→Select the option that maximizes the benefit to the organization C) Gather relevant qualitative and quantitative information→ Identify suitable options→Clearly outline the problem→Calculate relevant costs and benefits for each option→Select the option that maximizes the benefit to the organization→Identify suitable options D) Calculate relevant costs and benefits for each option → Clearly outline the problem → Identify suitable options→Gather relevant qualitative and quantitative information →Select the option that maximizes the benefit to the organization Answer: B Explanation: The correct flow of the steps in the decision-making framework is, Clearly outline the problem→Identify suitable options→Gather relevant qualitative and quantitative information→Calculate relevant costs and benefits for each option→Select the option that maximizes the benefit to the organization. Diff: 2 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

11) After identifying suitable options and gathering relevant qualitative and quantitative information, a manager would then proceed to which step in the decision-making process? A) Clearly outline the problem and the related unknowns. B) Calculate relevant costs and benefits for each option. C) Implement the choice you feel is the best option. D) Select the option that maximizes the benefit, and meets the qualitative criteria. Answer: B Explanation: After identifying suitable options and gathering relevant qualitative and quantitative information, a manager would then proceed to calculate relevant costs and benefits for each option. Diff: 1 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 12) Which of the following statements is true regarding the decision-making framework? A) Only management will need to make effective decisions to help meet an organization's profit goal without any regard to time or money spent to achieve them. B) Only management will need to make effective decisions to help meet an organization's profit goals while minimizing the time spent to achieve them. C) Whether as an employee, manager or entrepreneur, you will need to make effective decisions to help meet an organization's profit goals while minimizing the time spent to achieve them. D) Whether as an employee, manager or entrepreneur, you will need to make effective decisions to help meet an organization's profit goals without any regard to time or money spent to achieve them. Answer: C Explanation: The statement which is true which relates to the decision-making framework is, "Whether as an employee, manager or entrepreneur, you will need to make effective decisions to help meet an organization's profit goals while minimizing the time spent to achieve them." Diff: 2 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

13) When calculating relevant costs and benefits in the decision-making framework, if an option or alternative is being considered and it is expected that there will be no changes to the existing capacity, which of the following costs would NOT change in the decision to choose one option over the other? A) Total costs B) Variable costs C) Relevant costs D) Fixed costs Answer: D Explanation: When calculating relevant costs and benefits in the decision-making framework, if an option or alternative is being considered and it is expected that there will be no changes to the existing capacity, fixed costs would not change in the decision to choose one option over the other. Diff: 1 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost Management. 14) If managers are presented with challenges, they should figure out a solution by A) applying the decision-making framework. B) using only data analytics. C) considering every possible option regardless of the time and money spent to arrive at a solution. D) hiring an outside management consulting firm with expertise related to the challenge. Answer: A Explanation: If managers are presented with challenges, they should figure out a solution by applying the decision-making framework. Diff: 1 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

15) Cost accounting A) focuses only on identifying relevant costs in decision making. B) supports management decision-making. C) emphasizes on quantitative information in the decision-making framework. D) will always result in the optimal decision when applying the decision-making framework. Answer: B Explanation: Cost accounting supports management decision-making. Diff: 1 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 16) Differential costs are the same as A) unavoidable costs. B) non-relevant costs. C) incremental costs. D) sunk costs. Answer: C Explanation: Differential costs are the same as incremental costs. Diff: 1 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 17) Which of the following costs is NOT relevant in the decision-making process? A) Incremental costs B) Avoidable costs C) Differential costs D) Unavoidable costs Answer: D Explanation: Unavoidable costs are not relevant to the decision-making process. Incremental, avoidable, and differential costs are relevant in the decision-making process. Diff: 1 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

18) Which of the following costs is relevant in the decision-making process? A) Unavoidable costs B) Sunk costs C) Incremental costs D) Past costs Answer: C Explanation: Incremental costs are relevant in the decision-making process. Unavoidable costs, sunk costs, and past costs are not relevant in the decision-making process. Diff: 1 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 19) A cost which differs in amount between one choice and another is called a(n) A) sunk cost. B) differential cost. C) unavoidable cost. D) past cost. Answer: B Explanation: Differential costs differ in amount between one choice and another. Diff: 1 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 20) Relevant costs A) assist in making a decision by helping dismiss other costs. B) do not matter to a particular decision. C) do not change from decision to decision. D) are always the same for each situation/problem. Answer: A Explanation: Relevant costs assist in making a decision by helping dismiss other costs. Diff: 1 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

21) In the decision-making process, relevant costs A) are treated the same as past costs. B) occur in the future. C) are sunk costs. D) are always unavoidable. Answer: B Explanation: In the decision-making process, relevant cost occur in the future. Diff: 1 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 22) Sunk costs are the same as A) relevant costs. B) avoidable costs. C) incremental costs. D) past costs. Answer: D Explanation: Sunk costs are the same as past costs, and are not relevant to the decision-making process. They are not avoidable nor are they incremental. Diff: 1 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 23) Which of the following costs would NOT be included in the evaluation of alternatives in the decision-making process? A) Sunk costs B) Opportunity costs C) Relevant costs D) Avoidable costs Answer: A Explanation: The cost that would not be included in the evaluation of alternatives in the decision-making process is a sunk cost since it is not relevant. An opportunity cost, avoidable cost and relevant cost would all be included in the evaluation of alternatives. Diff: 1 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

24) Fern's Florist is considering the purchase of a new delivery van since its old van has required numerous repairs. Last year, the old van required an engine overhaul with a cost of $5,000. This year, it is anticipated that the old van will require additional repairs with an estimated cost of $2,500. Fern can purchase a new van for $35,000 or the business can lease a new van with a down-payment of $3,900 and monthly lease payments of $320. Which of the cost presented in this decision would be considered a sunk cost? A) Engine overhaul of $5,000 last year B) Anticipated repairs for old van of $2,500 C) New van purchase of $35,000 D) Lease down-payment of $3,900 Answer: A Explanation: The cost that represents a sunk cost is the engine overhaul of $5,000 that was incurred last year, since it happened in the past and can't be undone. Diff: 2 LO: 2 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 25) How would a decision be made in the decision-making framework if two or more options have both relevant revenues and relevant expenses for each option? A) Compare only the relevant expenses of each option. B) Compare only the relevant revenues of each option. C) Determine the net effect of each option (revenue less expenses) and then compare them. D) Priority is given to the larger difference in the comparison (either expenses or revenues) to determine which option is most beneficial. Answer: C Explanation: If two or more options have both relevant revenues and relevant expenses for each option in the decision-making framework, then a decision would be made based on the net effect of each option (revenue less expenses) and then compared to determine which option is most beneficial. Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

26) Corner Cupcakes is considering the purchase of a new machine for its bakery. It can purchase the new machine at a cost of $10,000. For the existing machine, last year, the bakery spent $3,200 on machine repairs, an additional $1,900 on add-ons, and $2,700 for a software upgrade. How much of the given costs is relevant to the decision to purchase the new machine for the bakery? A) $5,100 B) $7,800 C) $10,000 D) $17,800 Answer: C Explanation: The cost(s) that is relevant to the decision to purchase the new machine for the bakery is $10,000 which is the purchase price of the new machine. The other costs, $3,200 for the machine repairs, the $1,900 for the add-one for the machine, and the $2,700 software upgrade for the machine are considered sunk costs since the occurred last year, and sunk costs are not relevant in the decision-making process. Diff: 2 LO: 2 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

27) Community College of Puxton Park (CCPP) is trying to determine if it is more cost effective to reimburse employees for mileage in traveling to educational conferences or should the college purchase a vehicle to be used for employee travel to conferences. The following information has been provided with regards to the decision: Annual miles driven by employees to conferences Travel reimbursement rate per mile Purchase price - new vehicle (5 year useful life) Annual Maintenance - new vehicle Annual vehicle insurance & registration

29,000 $0.56/mi. $28,000 (no salvage value) $ 1,000 $ 2,500

Given the quantitative information for the two options, which option would you select as most beneficial to CCPP and why? A) The option to continue mileage reimbursement should be selected since it will only cost $16,240 whereas, the option for the new vehicle will cost $31,500. B) The option to continue mileage reimbursement should be selected since it will only cost $16,240 whereas, the option for the new vehicle will cost $28,000. C) The option to purchase the new vehicle should be selected with a total annual cost of $9,100 whereas, the option to continue mileage reimbursement will cost $16,240. D) The option to purchase the new vehicle should be selected with a total annual cost of $5,600 whereas, the option to continue mileage reimbursement will cost $16,240. Answer: C Explanation: Annual cost associated with the mileage reimbursement option is 29,000 miles × $56/mile = $16,240 and the total annual cost related to the purchase of a new vehicle = $28,000 / 5 years = $5,600 annual depreciation + $1,000 annual maintenance + $2,500 annual vehicle insurance & registration = $9,100. Since the annual cost of the vehicle purchase/ownership is less at $9,100 vs. $16,240 in mileage reimbursement, the option to purchase the vehicle should be selected. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

28) In problem-solving with the decision-making framework, one A) must only use the total cost approach since it is the most comprehensive approach. B) must only use the relevant cost or the differential approach since it isolates specifically what changes and what does not change. C) can use either the total cost approach or the relevant cost approach, since the end result will be the same using either method. D) should use the total cost approach since it is less tedious and less time consuming to compute, and is also, more accurate with a final result. Answer: C Explanation: In problem-solving with the decision-making framework, one can use either the total cost approach or the relevant cost approach, since the end result will be the same using either method. Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 29) Which of the statements below is correct with regards to relevant costs and relevant information? A) Every relevant cost happens not only in the future, but also includes what happened in the past. B) Every relevant cost happens in the future, but not every future cost will be relevant to the current decision to be made. C) Relevant costs include both avoidable and unavoidable costs in evaluating options. D) The relevant cost approach focuses on what remains the same among the alternative instead of what changes. Answer: B Explanation: With regards to relevant costs and relevant information, the statement which is correct is that, "Every relevant cost happens in the future, but not every future cost will be relevant to the current decision to be made." Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

30) Corner Cupcakes Co. has two new bakery products to consider marketing. The first product, a Mango Munchie, is expected to be sold for $4.00 each with a related product cost of $1.50 per unit. The projected sales in units for the Mango Munchie is 2,000 per month. The second product is a Cosmo Cookie, which will sell for $3.50 each with a related product cost of $1.30 per unit. The projected sales in units for the Cosmo Cookie is 2,500 per month. Assuming that Corner Cupcakes Co. can only select one of these new bakery products to market and sell, which product should it select and why? A) Mango Munchie should be sold since it has the lowest total cost to produce. B) Cosmo Cookie should be sold since it has the highest revenues generated from sales. C) Cosmo Cookie should be sold since it will result in $500 of additional income to the bakery. D) Mango Munchie should be sold since it has the lowest cost per unit to produce. Answer: C Explanation: Mango Munchie Profit = ($4.00 Unit Selling Price - $1.50 Unit Cost) = $2.50 per unit profit × 2,000 units sales = $5,000 profit; Cosmo Cookie Profit = ($3.50 Unit selling Price $1.30 Unit Cost) = $2.20 per unit profit × 2,500 units sales = $5,500 profit; $5,500 - $5,000 = $500 difference in profit, Cosmo Cookie greater than Mango Munchie. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 31) To think strategically about insourcing versus outsourcing, it's useful to divide processes into which of the following three categories? A) Core processes, functional processes, and critical processes B) Core processes, critical processes, and commodity processes C) Critical processes, commodity processes, and functional processes D) Core processes, commodity processes, and functional processes Answer: B Explanation: To think strategically about insourcing versus outsourcing, its useful to divide processes in three categories: (1) Core processes; (2) Critical processes; and (3) Commodity processes. Diff: 1 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Knowledge: Operational Knowledge.

32) Processes that a company must control in-house and not outsource possibly because they are proprietary and confidential, or a source of competitive advantage are referred to as A) functional processes. B) critical processes. C) core processes. D) commodity processes. Answer: C Explanation: Processes that a company must control in-house and not outsource possibly because they are proprietary and confidential, or a source of competitive advantage are referred to as core processes. Diff: 1 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Knowledge: Operational Knowledge. 33) Payroll processes which typically can be outsourced without losing competitive advantage within a company are known as A) core processes. B) commodity processes. C) critical processes. D) functional processes. Answer: B Explanation: Payroll processes which typically can be outsource without losing competitive advantage within a company are known as commodity processes. Diff: 2 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Knowledge: Operational Knowledge. 34) Relevant costs are A) past costs. B) unavoidable costs. C) differential costs. D) sunk costs. Answer: C Explanation: Relevant costs are differential costs. Diff: 2 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

35) Pergola Industries currently produces 1,000 units of a part needed for its product, incurring the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead

$25,000 8,000 16,000 9,000

If Pergola Industries purchases the component externally, $4,000 of the fixed costs can be avoided. Below what external price per unit for the 1,000 units would Galley choose to outsource (buy) instead of insource (make)? A) $25 B) $49 C) $53 D) $58 Answer: C Explanation: (Direct Materials + Direct Labor + Variable Overhead + Fixed Costs Avoided = External Price to Buy instead of Make) = $25,000 + $8,000 + $16,000 + $4,000 = $53,000 ÷ 1,000 = $53 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

36) Tastykakes makes various cookies and cupcakes. The cost of each batch of cupcakes and cookies is as follows: Direct materials Direct labor Variable overhead Fixed overhead

$18 13 11 14

An outside supplier has offered to make the cupcakes and cookies for $30 per batch. If Tastykakes accepts the offer to outsource the production of the cupcakes and cookies, it will not be able to avoid the $14 of fixed overhead. How much will Tastykakes save if it accepts the offer? A) $15 per batch B) $12 per batch C) $26 per batch D) $ 1 per batch Answer: B Explanation: (Direct Materials + Direct Labor + Variable Overhead + Fixed Overhead) = $18 + $13 + $11 + $14 = Current cost to make, $56; Unavoidable Fixed Overhead + Purchase Price (outsource) = Cost to Outsource; $14 + $30 = $44; Current cost to make, $56 - Cost to Outsource, $44 = $12 saved by Accepting offer to purchase (outsource) Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 37) In which category of management decisions would revenues NOT be relevant in the decision-making process? A) Keep versus drop decisions B) Insource versus outsource decisions C) Product mix decisions D) Special orders Answer: B Explanation: Analysis of revenues is not relevant in the decision-making process for insource versus outsource decisions. Only relevant costs are considered in this evaluation of the decision. Other options include the analysis of revenues and costs in the decision-making process. Diff: 2 LO: 3 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

38) A quantitative rule of thumb for a keep-versus-drop decisions is that any fixed costs avoided by dropping a product line or closing a business segment should be larger than A) the contribution margin given up. B) the sales given up. C) the variable costs given up. D) the income given up. Answer: A Explanation: A quantitative rule of thumb for a keep-versus-drop decisions is that any fixed costs avoided by dropping a product line or closing a business segment should be larger than the contribution margin given up. Diff: 2 LO: 3 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 39) Dropping a product line or a business segment that is experiencing a loss will cause the overall profitability of the company A) to always increase. B) to always decrease. C) to either increase or decrease depending on the fixed costs that can be avoided compared to the contribution margin lost. D) to either increase or decrease depending on the sales and variable costs that can be avoided compared to the contribution margin of the remaining products/segments. Answer: C Explanation: Dropping a product line or a business segment that is experiencing a loss will cause the overall profitability of the company to either increase or decrease depending on the fixed costs that can be avoided compared to the contribution margin lost. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

40) Yuwanga company has three business segments, two of which are profitable and the other which has been experiencing recurring losses. For the current year, the following information is available for the unprofitable segment: Sales Variable expenses Contribution margin Fixed expenses Net loss

$240,000 120,000 120,000 140,000 $ (20,000)

If this segment is eliminated, 70% of the fixed expenses can be eliminated and the other 30% will be allocated to the remaining segments. If management decides to eliminate this segment, the company's net income will A) increase by $20,000. B) decrease by $98,000. C) decrease by $22,000. D) increase by $22,000. Answer: C Explanation: (Contribution margin - Fixed expenses eliminated = Net Income decrease); $120,000 - ($140,000 × .70) = $22,000 (decrease) Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 41) Quentin Company is considering whether it should eliminate a product line. Currently, the company has fixed costs which are allocated to all product lines. Should Quentin Company eliminate the product line, the fixed costs currently allocated to the product line will have to be allocated to the other remaining product lines in total. If the product line is eliminated, A) total income for the company will increase by the amount of the product line's fixed costs. B) total income for the company will decrease by the amount of the product line's fixed costs. C) the contribution margin of the product line will reflect the increase or decrease in the company income. D) the company's total fixed costs will decrease. Answer: C Explanation: If the product line is eliminated for Quentin Company, since the remaining product lines must absorb the total fixed costs allocation, then the contribution of the product line eliminated will reflect the increase or decrease in the company income. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

42) Saturn Industries has three product lines. Management is concerned about the Jupiter product line, which experienced an operating loss of $(40,000) last year as result of sales of $240,000, variable expenses of $150,000, and fixed expenses of $130,000. If this product line is eliminated, 60% of the fixed expenses can be eliminated, but the remaining 40% will have to be allocated to other product lines. If management decides to eliminate this product line, the company's net income will A) increase by $40,000. B) decrease by $90,000. C) decrease by $12,000. D) increase by $12,000. Answer: C Explanation: (Sales - Variable Expenses = Contribution margin - Fixed expenses eliminated = Net Income decrease); $240,000 - $150,000 = $90,000; $90,000 - ($130,000 × .60) = $12,000 (decrease) Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 43) In order to maximize income within a company, management should select a sales mix with A) more higher contribution margin per unit products/services. B) less higher contribution margin per unit products/services. C) more lower contribution margin per unit products/services. D) balanced sales mix of higher and lower contribution margin per unit products/services. Answer: A Explanation: In order to maximize income within a company, management should select a sales mix with more higher contribution margin per unit products/services. Diff: 2 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

44) For product-mix decisions with constrained resources, companies should select the products to produce/sell based on A) highest contribution margin per unit. B) lowest per unit cost. C) highest contribution margin per unit of constrained resource. D) highest selling price per unit. Answer: C Explanation: For product-mix decisions with constrained resources, companies should select products to produce/sell based on the highest contribution margin per unit of constrained resource. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 45) Panera can produce and sell only one of the following bakery products:

Multi-Grain Bread Brioche Bread

Unit Contribution Margin Required Bakery Hours $4 .3 hours $3 .2 hours

Panera has oven capacity of 1,500 hours. If Panera bakes only the most profitable product, how much will the total contribution margin be? A) $15,000 B) $20,000 C) $22,500 D) $30,000 Answer: C Explanation: For product-mix decisions with constrained resources, companies should select products to produce/sell based on the highest contribution margin per unit of constrained resource which for Panera is the Brioche Bread, $15 per bakery hour ($3/.2 hours). If this is then multiplied by the 41,500 hours, the contribution margin = $15 × 1,500 hours = $22,500, Contribution Margin Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

46) Craftsman has the following production information available regarding its lawn mowers:

Unit Contribution Margin Production Machine Hours per Mower

Riding Mower $500

Self-Propelled Push Mower $275

10 hours

5 hours

If Craftsman currently has only 900 machine hours available per month for mower production, which of the two lawn mowers, Riding Mower and/or Self-Propelled Push Mower, should Craftsman produce to maximize net income (assuming all mowers produced can be sold)? A) Riding Mower, since it has the highest unit contribution margin at $500. B) Self-Propelled Push Mower, since it has the highest contribution margin per machine hour of $55. C) Equal amounts of each mower will maximize net income for the company. D) Not enough information is provided to compute the maximized net income computation. Answer: B Explanation: Craftsman should produce and sell the Self-Propelled Push Mower in this scenario since it has the highest contribution margin per unit of constrained resource (Machine Hours) $55 per machine hour ($275/5 hrs.) vs. Riding Mower of $50 ($500/10 hrs.) Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

47) Craftsman has the following production information available regarding its lawn mowers:

Unit Contribution Margin Production Machine Hours per Mower

Riding Mower $500

Self-Propelled Push Mower $275

10 hours

5 hours

If Craftsman currently has sufficient production capacity (no constraints) for mower production, but can only manufacture one of the lawn mowers, which of the two lawn mowers, Riding Mower and/or Self-Propelled Push Mower, should Craftsman produce to maximize net income (assuming all mowers produced can be sold)? A) Riding Mower, since it has the highest unit contribution margin at $500. B) Self-Propelled Push Mower, since it has the highest contribution margin per machine hour of $55. C) Equal amounts of each mower will maximize net income for the company. D) Not enough information is provided to compute the maximized net income computation. Answer: A Explanation: Craftsman should produce and sell the Riding Mower in this scenario since it has the highest contribution margin per unit ($500) given there are no production constraints. Diff: 2 LO: 3 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 48) When making special-order decisions, if there is available capacity (no additional fixed costs incurred) to complete the special order, then the criteria for the decision will be based on the comparison of A) the unit selling prices of the existing product sales to the special-order product sales. B) contribution margins of the existing product sales to the special-order product sales. C) operating incomes of the existing product sales to the special-order product sales. D) the unit production costs (variable and fixed) for the existing product sales to the specialorder product sales. Answer: B Explanation: When making special order decisions, if there is sufficient available capacity to complete the special order, then the criterial for the decision will be based on the comparison of contribution margins of the normal product sales to the special-order product sales. Diff: 1 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

49) When making special order decisions, if there is not available capacity to complete the special order, and additional fixed costs need to be incurred to fulfill the special order, then the criteria for the decision will be based on the comparison of A) the unit selling prices of the existing product sales to the special-order product sales. B) contribution margins of the existing product sales to the special-order product sales. C) operating incomes of the existing product sales to the special-order product sales. D) the unit production costs (variable and fixed) for the normal product sales to the special- order product sales. Answer: C Explanation: When making special order decisions, if there is not sufficient available capacity to complete the special order, and additional fixed costs need to be incurred to fulfill the special order, then the criterial for the decision will be based on the comparison of operating incomes of the normal product sales to the special-order product sales. Diff: 1 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 50) If a company is presented with a decision to accept a special order, if it is already operating at full-capacity, and in order to accept the special order, would need to expand its capacity, which of the following will most likely to happen in the decision analysis? A) Unit variable costs will increase. B) Fixed costs will not be affected. C) Both variable and fixed costs will be need to be considered. D) The company should accept the order. Answer: C Explanation: If a company is presented with a decision to accept a special order, if it is already operating at full-capacity, and in order to accept the special order, would need to expand its capacity, then both the variable and fixed costs will need to be considered in the decision analysis. Diff: 1 LO: 3 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

51) In the decision-making process for a special order, which costs are relevant if there is sufficient production capacity (without adding production facilities)? A) Variable costs only B) Fixed costs only C) Variable costs and fixed costs D) Variable costs and avoidable costs Answer: A Explanation: In the decision-making process for a special order, only variable costs are relevant if there is sufficient production capacity. Diff: 1 LO: 3 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management, Strategy, Planning & Performance: Decision Analysis. 52) Kidzlane makes child-size backpacks for a total cost of $8 per unit ($5 per unit variable cost and $3 per unit fixed cost) and a unit selling price of $12. The company has been recently contacted by a local nonprofit to make the 500 child-size backpacks for a unit selling price of $8 per unit. Kidzlane currently has available capacity to make and sell the 500 units without adding additional production capacity. What should Kidzlane do regarding the special order proposal from the local nonprofit and why? A) Reject the special order since the special order price is equal to the total cost to make. B) Reject the special order since the company would lose $4 per unit. C) Accept the special order since it is being performed for a nonprofit cause, and the $4 loss can be written off as a charitable contribution. D) Accept the special order since it will increase operating income by $1,500 or $3 per unit for 500 units. Answer: D Explanation: Kidzlane should accept the special order since it will increase operation income by $1,500 = (Special Order Price, $8 - Per Unit Variable Cost, $5) = $3 per Unit Contribution Margin × 500 special order units. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

53) Kingston Company produces a hover board with a unit variable cost of $100 and a unit selling price of $176. Fixed manufacturing costs were $24,000 when 8,000 units were produced and sold. The company has a one-time opportunity to sell an additional 1,000 units at $150 each. If the company has sufficient capacity to produce these additional units, should Kingston accept the special order? A) No, because operating income will decrease by $26,000. B) Yes, because operating income will increase by $26,000. C) Yes, because operating income would increase by $150,000. D) Yes, operating income will increase by $50,000. Answer: D Explanation: [(Special order price - unit variable cost) × Special order quantity] = Contribution Margin/Operating Income Increase; [($150 - $100) × 1,000] = $50,000 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 54) Khan Manufacturing incurs the following unit manufacturing cost in producing its sport earbuds: Variable Costs $50 Fixed Costs 25 A special order for 2,000 units has been received. The unit price requested is $65. The normal unit price is $90. If the special order is accepted, the amount of contribution margin that will be realized assuming there is sufficient capacity to produce the special order. A) $(50,000) B) ($20,000) C) $30,000 D) $80,000 Answer: C Explanation: [(Special order price - unit variable cost) × Special order quantity] = Contribution Margin/Operating Income Increase; [($65 - $50) × 2,000] = $30,000 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

55) Brentwood Company is able to currently sell all of the units that it can produce of either A132 or B345. If Unit A132 has a unit contribution margin of $90 and it takes three machine hours to produce and Unit B345 has a unit contribution margin of $72 and takes two machine hours to produce. If Brentwood Company has a constraint on machine hours, and currently has only 1,800 machines of production time, which should Brentwood produce to maximize the operating income of the company? A) Make Unit A132 which creates $18 more profit per unit than Unit B345 does. B) Make Unit B345 which creates $6 more profit per machine hour than Unit A132 does. C) Make Unit B345 because more units can be made and sold than Unit A132. D) The same total profits exist regardless of which product is made. Answer: B Explanation: Using the contribution margin per unit of constrained resource (machine hours), compute the contribution margin per machine hour = Unit Contribution Margin/Production Machine Hours = Unit A132: $72 / 2 = $36; Unit B345: $90 / 3 = $30; Difference = $36 - $30 = $6 more in profit for Unit A123 than Unit B345. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 56) What is the determining factor when a company has sales mix with a constrained resource? A) Contribution margin per unit of constrained resource B) Unit contribution margin C) Unit contribution margin times the unit of constrained resource D) Lowest unit variable cost Answer: A Explanation: The determining factor when a company has sales mix with a constrained resource is the contribution margin per unit of constrained resource. Diff: 1 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

57) The costs and the benefits of those options NOT used or taken are called A) sunk costs. B) avoidable costs. C) opportunity costs. D) future costs. Answer: C Explanation: The costs and benefits of those options not used or taken are called opportunity costs. Diff: 1 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 58) Opportunity costs A) are recorded in the company's books only when that option is chosen. B) are recorded in the company's books only when the option is not chosen. C) are always recorded in the company's books. D) are never recorded in the company's books. Answer: D Explanation: Opportunity costs are never recorded in the company's books. Diff: 1 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 59) In making a decision, A) qualitative considerations will always outweigh quantitative considerations. B) quantitative considerations will always outweigh qualitative considerations. C) equal weights will always be given to both qualitative and quantitative considerations. D) the importance of qualitative and quantitative considerations can vary among alternatives and decisions. Answer: D Explanation: In making a decision, the importance of qualitative and quantitative considerations can vary among alternatives and decisions. Diff: 1 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

60) Opportunity costs are A) costs and benefits of those options not used or taken. B) costs that have already occurred and cannot be changed. C) costs that are not avoidable. D) costs that never change from decision to decision. Answer: A Explanation: Opportunity costs are costs and benefits of those options not used or taken. Diff: 1 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 61) In the decision-making framework, qualitative factors are A) never considered when making a decision. B) considered along with the quantitative factors when making a decision. C) only considered when making decision. D) considered along with quantitative factors, but with much less emphasis when making a decision. Answer: B Explanation: In the decision-making framework, qualitative factors are considered along with the quantitative factors that affect the decision when making a decision. Diff: 1 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 62) Quantitative factors are A) always superior to qualitative factors in the decision-making process. B) evaluated using the same methodology in the decision-making process. C) evaluated along with qualitative factors in the decision-making process. D) used exclusively in the decision-making process. Answer: C Explanation: Quantitative factors are evaluated along with qualitative factors in the decisionmaking process. Diff: 2 LO: 4 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

63) You are trying to make a decision regarding your impending holiday travel plans. You have flown into the major airport in Philadelphia in the past, but have always disliked the one-hour drive to your family's home. You have recently realized that you can fly into a local airport in Allentown, but at a somewhat higher price for the trip. You have been given the following three options for traveling home for the holidays (including all costs incurred for each option to arrive at the final total travel cost): Option 1: Nonstop flight to Philadelphia (1 hour drive) Option 2: Nonstop flight to Allentown (20 minute drive) Option 3: Flight to Allentown via Charlotte (2 hour layover)

$700 $800 $740

You have narrowed your final selection down to flying into the Allentown airport, and decide on the nonstop flight to Allentown. What is the opportunity cost associated with this decision? A) $60 B) $100 C) $140 D) $740 Answer: A Explanation: Opportunity Cost = Cost of Nonstop flight to Allentown, $800 - Cost of Flight to Allentown via Charlotte, $740 = $60 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

64) You are trying to make a decision regarding your impending holiday travel plans. You have flown into the major airport in Philadelphia in the past, but have always disliked the one-hour drive to your family's home. You have recently realized that you can fly into a local airport in Allentown, but at a somewhat higher price for the trip. You have been given the following three options for traveling home for the holidays (including all costs incurred for each option to arrive at the final total travel cost): Option 1: Nonstop flight to Philadelphia (1 hour drive) Option 2: Nonstop flight to Allentown (20 minute drive) Option 3: Flight to Allentown via Charlotte (2 hour layover)

$700 $800 $740

You have narrowed your final selection down to flying nonstop, and must decide between the nonstop flight to Allentown or the nonstop flight to Philadelphia. What is the opportunity cost associated with this decision if you select the nonstop flight to Allentown option? A) $40 B) $60 C) $100 D) $740 Answer: C Explanation: Opportunity Cost = Cost of Nonstop flight to Allentown, $800 - Cost of Nonstop Flight to Philadelphia, $700 = $100 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 65) Which of the following is NOT a type of fixed cost? A) Direct B) Common C) Allocated D) Opportunity Answer: D Explanation: Opportunity cost not a type of fixed cost. Diff: 1 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

66) Fixed costs which are attributable to a product line are called A) allocated fixed costs B) direct fixed costs. C) common fixed costs. D) joint fixed costs. Answer: B Explanation: Fixed costs which are attributable to a product line are called direct fixed costs. Diff: 1 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 67) When making the decision to eliminate a business segment or product line, direct fixed costs are A) unavoidable and relevant. B) avoidable and nonrelevant. C) avoidable and relevant. D) unavoidable and nonrelevant. Answer: C Explanation: When making the decision to eliminate a business segment or product line, direct fixed costs are avoidable and relevant. Diff: 1 LO: 3 Bloom: K AACSB: Analytic AICPA: BB: Industry/Sector Perspective; FN: Measurement; PC: Problem Solving IMA: Strategy, Planning & Performance: Strategic Cost Management. 68) Segment margin equals A) sales - variable costs - common fixed costs. B) sales - variable costs - direct fixed costs. C) sales - variable costs - allocated fixed costs. D) sales - variable costs - total fixed costs. Answer: B Explanation: Segment margin equals sales - variable costs - direct fixed costs. Diff: 1 LO: 3 Bloom: K AACSB: Analytic AICPA: BB: Industry/Sector Perspective; FN: Measurement; PC: Problem Solving IMA: Strategy, Planning & Performance: Strategic Cost Management, Business Acumen & Operations: Operational Knowledge.

69) Common fixed costs A) are differential in nature. B) are relevant in a make-versus-buy decision. C) are not relevant in a make-versus-buy decision. D) only become unavoidable in a decision to keep or drop an entire outlet or location. Answer: C Explanation: Common fixed costs are not relevant in a make-versus-buy decision. Diff: 2 LO: 3 Bloom: K AACSB: Analytic AICPA: BB: Industry/Sector Perspective; FN: Measurement; PC: Problem Solving IMA: Strategy, Planning & Performance: Strategic Cost Management. 70) Allocated fixed costs are A) increased by corporate restructuring or layoffs. B) only eliminated when the company goes out of business. C) eliminated when the drops a segment or division. D) controllable by branch or division managers. Answer: B Explanation: Allocated fixed costs are only eliminated when the company goes out of business. Diff: 2 LO: 3 Bloom: K AACSB: Analytic AICPA: BB: Industry/Sector Perspective; FN: Measurement; PC: Problem Solving IMA: Strategy, Planning & Performance: Strategic Cost Management. 71) Which of the following fixed costs will be eliminated if a segment or product line is eliminated within a company? A) Common fixed costs B) Direct fixed costs C) Allocated fixed costs D) Home office fixed costs Answer: B Explanation: Direct fixed costs will be eliminated is a segment or product line is eliminated within a company. Diff: 2 LO: 5 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

72) If a segment is eliminated simply because it is unprofitable, and the fixed costs associated with the eliminated segment are totally allocated fixed costs, the operating income for the company is expected to A) decrease. B) increase. C) not be affected. D) either increase or decrease depending on the contribution margin for the eliminated segment. Answer: A Explanation: If a segment is eliminated simply because it is unprofitable, and the fixed costs associated with the eliminated segment are totally allocated fixed costs, the operation income for the company is expected to decrease because the fixed costs are not avoidable but the company loses the contribution margin related to the eliminated segment. Diff: 1 LO: 5 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 73) Wilson Racquet Manufacturers produces three different types of tennis racquets: Control Racquet, Tweener Racquet, and a Power Racquet. Financial information for the three racquet product lines is shown below: Control Sales $ 450,000 Variable expenses 325,000 Contribution margin 125,000 Fixed expenses 75,000 Oper. income (loss) $ 50,000

Tweener $250,000 140,000 110,000 35,000 $ 75,000

Power $65,000 58,000 7,000 22,000 $(15,000)

Total $765,000 523,000 242,000 132,000 $110,000

If the fixed expenses for the Power Racquet line are not avoidable since they are allocated fixed costs, what will be total operating income be if the Power Racquet line is dropped? A) $125,000 B) $103,000 C) $105,000 D) $140,000 Answer: B Explanation: (Control: Oper. Income + Tweener: Oper. Income - Power: Fixed Expenses = Total Oper. Income if the line is dropped) = $50,000 + $75,000 - 22,000 = $103,000. Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

74) Which fixed costs are NOT avoidable but can be reduced by corporate restructuring or layoffs? A) Direct fixed costs B) Common fixed costs C) Allocated fixed costs D) Joint fixed costs Answer: C Explanation: Allocated fixed costs are not avoidable but can be reduced by corporate restructuring or layoffs. Diff: 1 LO: 5 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 75) Ajax company has four product lines, one of which reported the following financial results for the current year: Sales Variable expenses Contribution margin Fixed expenses Net loss

$260,000 220,000 40,000 90,000 $ (50,000)

If this product line is eliminated, 60% of the fixed expenses can be eliminated because they are direct fixed costs, and the remaining 40% of the fixed costs will be allocated to other product lines because they are allocated fixed costs. If management decides to eliminate this product line, the company's operating income is expected to A) increase by $50,000. B) decrease by $14,000. C) decrease by $104,000. D) increase by $14,000. Answer: D Explanation: (Contribution margin - Fixed expenses eliminated = Net Income increase or net loss decrease); $40,000 - ($90,000 × .60) = $14,000 (increase) Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

76) Grano Cereals, Inc, has four product lines. It is very concerned about one of its product lines, which reported unprofitable for the current year as shown below: Sales Variable expenses Fixed expenses Net loss

$1,500,000 940,000 700,000 $ (140,000)

If this product line was to be dropped, 40% of the fixed expenses can be eliminated. Using the decision-making framework, how much are the relevant costs in the decision to eliminate this product line? Show all computations. Answer: $1,220,000 Solution: (Variable expenses + Fixed Expenses eliminated = Relevant costs in the decision to eliminate this product); $940,000 + ($700,000 × 40%) = $1,220,000 Diff: 2 LO: 1, 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 77) Memorable Moments sells customizable gifts with a unit selling price per gift is $50, a unit variable cost of $27, and unit fixed cost of $13. It has recently been approached by a local high school with a request to make a custom graduation picture frame for each of the 1,200 students in the current graduating class at a price of $30 per frame. Memorable Moments management is very concerned that by accepting this special order, it may impact the profitability of the company but would like to be socially responsible to the local community. Using the decisionmaking framework, what are the total relevant costs and total relevant revenues in this management decision scenario? Show all computations. Answer: The relevant costs in this management decision scenario are the variable cost per unit, $27 × the units to be produced to meet the special order requirements of 1,200 for a total of $32,400 of relevant costs. Total relevant revenues in this management decision scenario are computed as $36,000 (Special order unit selling price, $30 × Special order unit, 1,200). To determine the differential impact, deduct the relevant costs from the relevant revenues ($36,000 $32,400) to arrive at $3,600. The unit selling price for external customers and the unit fixed cost are not relevant to this decision-making scenario. Diff: 2 LO: 1, 2 Bloom: AP AACSB: Analytic AICPA: BB: Industry/Sector Perspective; FN: Measurement; PC: Problem Solving IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

78) Power Industries is considering two alternatives: Solar and Wind. The Solar option will generate relevant revenues of $200,000 and relevant costs of $140,000. The Wind option is expected to generate relevant revenues of $180,000 and relevant costs of $90,000. Applying the decision-making framework, which option should Power Industries select? Show all computations. Answer: Power Industries should select the Wind option since it will produce operating income of $90,000, which is $30,000 than the operating income to be produced by Solar of $60,000. Solution:

Relevant Revenues Relevant Costs Operating Income

Solar $200,000 (140,000) $60,000

Wind $180,000 (90,000) $90,000

Difference ($20,000) 50,000 ($30,000)

Diff: 2 LO: 1, 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 79) Tuffin Trinkets Company can sell any mix of Trinket A and Trinket B at full capacity. The company has 80,000 hours of capacity. The demand for each product exceeds the current operating capacity. The following information isavailable for the trinkets:

Units produced from capacity available Contribution margin per unit Required Production Time (machine hours)

Trinket A 80,000 $20 1

Trinket B 40,000 $30 2

If production capacity is the constrainingfactor, which trinket should beproduced to maximize operating income and why? Answer: 80,000 units of Trinket A and 0 units of Trinket B Solution: Selection of the trinket to produce, since there is a constraint, is to use the contribution margin per unit of constraint, which in this case is the machine hours. As such, dividing the given Contribution margin per unit by the required production time will give the contribution margin per unit of constraint for each trinket as follows: Trinket A: $20/1 = $20 and Trinket B: $30/2 = $15. The trinket with the highest contribution margin per unit of constraint is Trinket A with $20, so all 80,000 units of production should be dedicated exclusively to Trinket A. Diff: 2 LO: 1, 2, 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

80) Ember Industries incurs a unit cost of $20 (unit variable cost of $14 and unit fixed cost of $6) to produce the electronic lighting switch in its outdoor propane fire pits. A supplier has offered to make 10,000 of the parts at a price per unit of $15. If this offer is accepted by Ember Industries, it will save all variable costs but no fixed costs. Should Ember Industries outsource its production for this part or should it continue to insource the production? Show all computations. Answer: Insource production (make parts) to save $10,000. Solution: Current cost to insource = $20 × 10,000 units = $200,000; Cost to outsource = Purchase price + unavoidable fixed costs = [($15 × 10,000) + ($6 × 10,000 units)] = $210,000; costs $10,000 more to outsource production, it should continue to make the parts. Diff: 2 LO: 1, 2, 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 81) Flameco, Inc. incurs a unit cost of $20 (unit variable cost of $16 and unit fixed cost of $4) to produce the electronic lighting switch in its outdoor propane fire pits. A supplier has offered to make 10,000 of the parts at a price per unit of $15. If this offer is accepted by Flameco, Inc., it will save all variable costs but no fixed costs. Should Flameco, Inc. outsource its production for this part or should it continue to insource the production? Show all computations. Answer: Outsource production to save $10,000. Solution: Current cost to insource = $20 × 10,000 units = $200,000; Cost to outsource = Purchase price + unavoidable fixed costs = [($15 × 10,000) + ($4 × 10,000 units)] = $190,000; Since it would cost $10,000 more for Flameco, Inc. to insource production, it should outsource, or buy the parts from the supplier. Diff: 2 LO: 1, 2, 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

82) The steps in the management decision-making framework are shown in random order below. Indicate the correct order in which the steps should be performed (1 - 5). ________ ________ ________ ________ ________ Answer: 3 5 __ 1 4 2

Calculate relevant costs and benefits for each option. Implement your decision. Clearly outline the problem and its related unknowns. Select the option that maximizes the benefit to the organization and meets required qualitative criteria. Identify suitable options and gather relevant qualitative and quantitative information, making informed assumptions as need be.

Diff: 2 LO: 1 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 83) Poppy's Plantery has been selling an average of 750 plants per week over the past two months of this year. Poppy's sells each plant for $3. Each plant is grown in Poppy's own greenhouse, has a unit variable cost of $0.75, and Poppy's weekly fixed costs are $900. Poppy's Plantery is considered buying plants grown by another supplier which have been offered at a price of $1.00 per plant. If Poppy's were to purchase the plants instead of growing them in-house, half of the fixed costs can be avoided. Should Poppy's Plantery continue to grow its own plants or purchase them directly from a supplier. Show all computations. Answer: Outsource production to save $262.50. Solution: Current cost to insource = $.75 × 750 plants = $562.50 + $900 = $1,462.50; Cost to outsource = Purchase price + unavoidable fixed costs = [($1 × 750 plants) + ($900 × 1/2)] = $750 + $450 = $1,200; $1,462.50 - $1,200.00 = $262.50 Diff: 2 LO: 1, 2, 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

84) Philly Pretzel Company produces specialty pretzels. The cost of box of pretzels is given below. Direct materials Direct labor Variable overhead Fixed overhead

$8 12 9 14

An outside supplier has offered to produce the pretzels for $20 per batch. How much will Philly Pretzel Company save if it accepts the offer? Answer: [($8 + $12 + $9) - $20 = $9 per box cost savings to Insource (Make) (Direct materials + Direct Labor + Variable Overhead) - Outsource Offer Price = Savings) Diff: 2 LO: 1, 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 85) Microplex Company must decide whether to insource or outsource some of its components. The total costs of producing 20,000 parts for its computers are as follows: Direct materials Direct labor

$18,000 $10,000

Variable overhead Fixed overhead

$15,000 $7,000

86) Microplex Company must decide whether to insource or outsource some of its components. The total costs of producing 20,000 parts for its computers are as follows: Direct materials Direct labor

$18,000 $10,000

Variable overhead Fixed overhead

$15,000 $7,000

Instead of making the parts at an average cost of $2.50 ($50,000 ÷ 20,000), Microplex has an opportunity to buy the parts at $2.30 per unit. If the company purchases the parts, all the variable costs will be eliminated and three-fourths (75%) of the fixed costs will be eliminated. Should Microplex outsource its components? Answer: Microplex should outsource some of its components because it will cost the company $2,250 less with the cost savings translating to an increase in operating income of $1,250. Solution: Plan A (Insource) Plan B (Outsource) Cost Difference Direct Materials $18,000 $0 Direct Labor 10,000 0 Variable Overhead 15,000 0 Fixed Overhead 7,000 1,750* Purchase Price 46,000** Total Costs $50,000 $47,750 $2,250 *[$7,000 × (1 - 75%)] **($2.30 × 20,000) Diff: 2 LO: 1, 3 Bloom: AP AACSB: Analytic AICPA: FN: Measurement; PC: Problem Solving IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 87) Memorable Moments sells customizable gifts with a unit selling price per gift is $50, a unit variable cost of $27, and unit fixed cost of $13. It has recently been approached by a local high school with a request to make a custom graduation picture frame for each of the 1,200 students in the current graduating class at a price of $30 per frame. Memorable Moments management is very concerned that by accepting this special order, it may impact the profitability of the company but would like to be socially responsible to the local community. Using the decisionmaking framework, determine if Memorable Moments should accept the special order request assuming that they have sufficient operating capacity. Answer: Memorable Moment should accept the special order since operating income will increase by $3,600. Solution: (Unit Selling Price for Special Order - Unit Variable Cost for Special Order) = Unit Contribution Margin; (Unit Contribution Margin × Special Order Units) = Change in Operating Income; ($30 - $27) = $3 × 1,200 units = $3,600 increase in operating income Diff: 2 LO: 1, 3 Bloom: AP AACSB: Analytic AICPA: BB: Industry/Sector Perspective; FN: Measurement; PC: Problem Solving IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 42

88) Memorable Moments sells customizable gifts with a unit selling price per gift is $50, a unit variable cost of $27, and unit fixed cost of $13. It has recently been approached by a local high school with a request to make a custom graduation picture frame for each of the 1,200 students in the current graduating class at a price of $30 per frame. Memorable Moments management is very concerned that by accepting this special order, it may impact the profitability of the company but would like to be socially responsible to the local community. Memorable Moments is currently operating at capacity, and in order to fulfill the special order, will have to add additional factory capacity of $4,000 for this job. Using the decision-making framework, determine if Memorable Moments should accept the special-order request assuming that they do not have sufficient operating capacity using quantitative considerations only. Answer: Memorable Moment should not accept the special order since operating income will decrease $400. Solution: (Unit Selling Price for Special Order - Unit Variable Cost for Special Order) = Unit Contribution Margin; (Unit Contribution Margin × Special Order Units) + Add'l Fixed Costs for Special Order = Change in Operating Income; ($30 - $27) = ($3 × 1,200 units) - $4,000 = $3,600 - $4,000 = $400 decrease in operating income Diff: 2 LO: 1, 3 Bloom: AP AACSB: Analytic AICPA: BB: Industry/Sector Perspective; FN: Measurement; PC: Problem Solving IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 89) Azure Company has 10,000 hours of capacity and manufactures two products. Product EZT takes 2 hours per unit. Product GLA takes 3 hours per unit. The contribution margin per unit for Product EZT is$5. The contribution margin per unit for Product GLA is$6. The demand for either product exceeds the factory capacity. Which product or products should be manufactured? Answer: 5,000 units of Product EZT and 0 units of Product GLA Solution: Selection of the product to produce, since there is a constraint, is to use the contribution margin per unit of constraint, which in this case is the manufacturing hours. As such, dividing the given contribution margin per unit by the required production time will give the contribution margin per unit of constraint for each product as follows: Product EZT: $5/2 = $2.50 and Product GLA: $6/3 = $2. The product with the highest contribution margin per unit of constraint is Product EZT with $2.50, so all 10,000 hours of manufacturing time should be used to produce Product EZT resulting in (10,000 hours/ 2 hours per unit) 5,000 units of Product EZT exclusively manufactured. Diff: 2 LO: 1, 3 Bloom: AP AACSB: Analytic AICPA: BB: Industry/Sector Perspective; FN: Measurement; PC: Problem Solving IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

90) Mejor Medical Machines sells three types of hospital equipment. Information on these machines is as follows: Xray MRI CT Scan

Production time = 2 hours Production time = 2.5 hours Production time = 4 hours

Unit contribution margin of $600 Unit contribution margin of $400 Unit contribution margin of $700

Total fixed costs for the year are $2,240,000. Based on this information, if Mejor Medical can produce any or all of the equipment items, and has no production constraints, what would the optimal product mix be in order to maximize the operating income of Mejor Medical for the period? Answer: CT Scan should be produced solely, since it contributes to operating income at a rate of $700 per unit, which is the highest unit contribution margin of the 3 products. Solution: Given that Mejor Medical Equipment has no production constraints, the criteria in decision-making with product mix with no constraints, in order to maximize operating income, the company should produce the product with the highest unit contribution margin, which in this case, is the CT Scan at $700 per unit. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 91) Bear Mountain Sporting Goods has two product lines: Sporting Goods and Hunting Gear. Bear Mountain incurs $2,660,000 in fixed costs. The unit contribution margin for Sporting Goods is $300 with an average production time per product of 3 hours, while for Hunting Gear it is $500 with an average production time per product of 6 hours. If there are no production constraints, and Bear Mountain Sporting Goods wishes to maximize its operating income, on which product line should the business focus production efforts? Answer: Hunting Gear, with a unit contribution margin of $500 Solution: Given that Bear Mountain Sporting Goods has no production constraints, the criteria in decision-making with product mix with no constraints, in order to maximize operating income, the company should produce the product with the highest unit contribution margin, which in this case, is the Hunting Gear at $500 per unit. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

92) Bear Mountain Sporting Goods has two product lines: Sporting Goods and Hunting Gear. Bear Mountain incurs $2,660,000 in fixed costs. The unit contribution margin for Sporting Goods is $300 with an average production time per product of 3 hours, while for Hunting Gear it is $500 with an average production time per product of 6 hours. If there is a production constraint that Bear Mountain has only 1,700 machine hours per month for production, and Bear Mountain Sporting Goods wishes to maximize its operating income, on which product line should the business focus production efforts? Answer: Sporting Goods, with a contribution margin per unit of constraint (machine hours) of $100 Solution: Given that Bear Mountain Sporting Goods has production constraints of 1,700 machine hours per month for production, the criteria in decision-making with product mix with constraints, in order to maximize operating income, is that the company should produce the product with the highest contribution margin per unit of constrained resource (machine hours). To compute this, the unit contribution margin for each product line should be divided by the required production time as follows: Sporting Goods, $100 ($300 ÷ 3) and Hunting Gear, $83.33 ($500 ÷ 6). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 93) Classify each cost shown below according to the type of fixed cost that it reflects, using the letter associated with the fixed cost type. Cost Type of Fixed Cost ________ 1. CEO salary a. Direct Fixed Cost ________ 2. Depreciation on equipment used b. Common Fixed Cost in multiple product lines c. Allocated Fixed Cost ________ 3. Utilities cost for one product line ________ 4. Property taxes on the factory. ________ 5. Depreciation on equipment used in one product line ________ 6. Supervisor salary for one product line Answer: Cost c 1. CEO salary b 2. Depreciation on equipment used in multiple product lines a 3. Utilities cost for one product line b 4. Property taxes on the factory. a 5. Depreciation on equipment used in one product line a 6. Supervisor salary for one product line Diff: 2 LO: 5 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 45

94) Vintendo normally produces video games which it sells in the video game stores. The cost to produce a video game includes $25 unit variable cost and $8 unit fixed cost. The average price of a video game is $80. Vintendo has been approached by an outside vendor who has proposed to digitize the video games for Vintendo which can then sell the video games directly to players as a downloadable option. Using the following independent assumptions, apply the insource versus outsource decision-making process to determine if Vintendo should continue to make its video games or outsource for a digitized version. a. Vintendo can purchase a digitized version of each video game, the price being offered by the outside vendor will be $20, with Vintendo still incurring $10 of unit variable cost for game design and $4 of unit fixed cost. Although, this means of providing video gaming is trending, should Vintendo continue to make traditional video games or purchase a digitized version to sell? b. Vintendo can purchase a digitized version of each video game, the price being offered by the outside vendor will be $15, with Vintendo still incurring $10 of unit variable cost for game design and $4 of unit fixed cost. Although, this means of providing video gaming is trending, should Vintendo continue to make traditional video games or purchase a digitized version to sell? Answer: a. Make Buy Difference Unit Variable Cost $25 $10 $15 Unit Fixed Cost 8 4 4 Purchase Price - Buy 20 (20) Total $33 $34 ($1) Vintendo should continue to make its video games since it would lose $1 in operating income by purchasing the digitized version from the outside vendor. b. Unit Variable Cost Unit Fixed Cost Purchase Price - Buy Total

Make $25 8

Buy $10 4 15 $29

$33

Difference $15 4 (15) $4

Vintendo should now purchase the digitized version of the video games since recognized $4 in cost savings which would translate to an increase in operating income of $4 per unit. Diff: 2 LO: 1, 3, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

95) Apple continues to trend in the world of technology with its most recent introduction of AirTags. Apple is trying to decide if it wishes to continue to manufacture the AirTag in-house, or if it should consider outsourcing the production of this particular accessory. The unit cost to produce one AirTag is $8 ($3 unit variable cost and $5 unit fixed cost). Apple has found a vendor that is willing to manufacture and sell the AirTag to Apple for resale at a unit price of $4 per AirTag. a. If Apple is not able to avoid any of the unit fixed costs, should it consider outsourcing the production of the AirTags? Show all computations. b. If Apple is able to avoid all of the unit fixed costs, should it consider outsourcing the production of the AirTags? Show all computations. Answer: a. Cost to manufacture (insource) = Unit variable cost + Unit fixed cost = $3 + $5 =$8 Cost to Outsource = Unit selling price + unavoidable fixed cost = $4 + $5 = $9 Apple should continue to make its own AirTags since it is better off by $1 ($8 - $9). b. Cost to manufacture (insource) = Unit variable cost + Unit fixed cost = $3 + $5 = $8 Cost to Outsource = Unit selling price + unavoidable fixed cost = $4 + $0 = $4 Apple should outsource the production of AirTags since it is better off by $4 ($8 - $4). Diff: 2 LO: 1, 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

96) Zapple Ltd. is producing and distributing a new solar light system that it sells for $125. It uses 500 units of a specific part to manufacture the solar light system. The unit costs that are incurred to manufacture the light system are as shown below: Direct Materials Direct Labor Overhead Total

$20 15 50 $85

Overhead costs include variable material handling costs of $10, which are applied to products on the basis of direct material costs which could be eliminated if the production is outsource. The remainder of the overhead costs are comprised of 50% variable costs and 50% fixed costs, which cannot be avoided if the production is outsourced. An outside supplier has offered to supply the part at a price of $77 per unit. a. Should Zapple purchase the component from the outside vendor? b. Should Zapple purchase the component from the outside vendor if it can use its facilities to manufacture another product? What information will Larkin need to make an accurate decision? Show your calculations. Answer: a. Insource Outsource Difference Direct materials $ 20 $ 0 $ 20 Direct labor 15 0 15 Material handling 10 0 10 Variable overhead 20* 0 20 Purchase price 0 77 (77) Total unit cost $65 $77 $ (12) *Variable overhead = 50% × ($50 − $10) The unit should be not be purchased from the outside vendor, as the per unit cost would be $12 more than if they made it. Fixed costs were not included, as they would not change between options. b. In order for Zapple to make a decision, it would need to know the opportunity cost of manufacturing the other product. As determined in (a), purchasing the product from outside would cost $6,000 more (500 × $12). Zapple would have to increase their contribution margin by more than $6,000 through the manufacture of the other product, before it would be economical for them to purchase the part from the outside vendor. Diff: 2 LO: 1, 3, 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

97) Crest Canoe Co. produces and distributes three types of oars to accompany its various canoe product lines. Information for the past year on these three products is as follows:

Price per Unit Units Sold Unit Variable Costs Direct Fixed Costs Production time

Paddler Stroker Ace Super Driver $50 $120 $300 4,000 3,000 2,000 $20 $70 $140 $40,000 $60,000 $110,000 2 hours 5 hours 10 hours

a. If there is no resource constraint, which of the oar types should Crest Canoe manufacture to maximize its operating income? Show computations b. If there is a resource constraint of limited machine hours, which of the oar types should Crest Canoe manufacture to maximize its operating income if it only has 2,000 machine hours per month? Show computations Answer: a. Paddler Stroker Ace Super Driver Price per Unit $50 $120 $300 Less: Unit Variable Costs 20 50 170 Unit Contribution Margin $30 $70 $130 Production time 2 hours 5 hours 10 hours Crest Canoe should focus production on the Super Driver since it has the highest unit contribution margin at $130. b. Price per Unit Less: Unit Variable Costs Unit Contribution Margin Production time Contribution Margin per Machine hour

Paddler Stroker Ace Super Driver $50 $120 $300 20 50 170 $30 $70 $130 2 hours 5 hours 10 hours $15

$14

$13

Given that Crest Canoe has a resource constraint, it should use the contribution margin per unit of constrained resource as the basis for selection. As such, Crest Canoe should therefore, focus production on the Paddler since it has the highest contribution margin per machine hours at $15. Diff: 3 LO: 1, 2, 3, 4, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

98) Mercury Motors produces three different types of engines for its boats with the following financial information reported for the most recent year: Coaster Sales $490,000 Variable expenses 325,000 Contribution margin 165,000 Fixed expenses 75,000 Oper. income (loss) $ 90,000

Steady Ace $210,000 140,000 70,000 35,000 $ 35,000

Super Drive $65,000 58,000 7,000 22,000 $ (15,000)

Total $ 765,000 523,000 242,000 132,000 $110,000

If all of the fixed expenses for the Super Drive motor product line are avoidable, since they are direct fixed costs, what will the total operating income for Mercury Motors be if the line is dropped using the decision-making framework and the total cost approach? Show all computations. Answer: $125,000, total operating income for Mercury Motors Solution: Coaster Operating Income, $90,000 + Steady Ace Operating Income, $35,000 = $125,000 total operating income for Mercury Motors Diff: 2 LO: 1, 3, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

99) Cache Company manufactures cameras. It has fixed costs of $2,120,000. Cache's sales unit contribution margins and required production time per product are shown below:

Tourist Model Amateur Model Professional Model

Contribution Margin $ 40 $ 70 $ 140

Production Time Required 1 hour 3 hours 5 hours

Assuming that Cache Company has limited production time, with only 1,500 machine hours available per month, assuming that all units produced can be sold, which product should Cache Company manufacture to maximize operating income for the month? Answer: Tourist Model should be produced since it has the highest contribution margin per machine hour of $40.00 as compared those of the other two models. Solution: Contribution Margin Contribution Margin Machine Hours per Machine Hour Tourist Model $40 ÷ 1 hour $40.00* Amateur Model $70 ÷ 3 hours $23.33 Professional Model $140 ÷ 5 hours $28.00 Diff: 2 LO: 1, 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

100) Dynamic Designs has three product lines in its retail stores: self-sticking wallpaper, faux wood panels, and wall decor. Results of the past month are presented below:

Units sold Revenue Variable departmental costs Direct fixed costs Allocated fixed costs Operating income (loss)

Wallpaper 1,000 $20,000 17,000 2,000 8,000 $ (7,000)

Panels 2,000 $40,000 22,000 3,000 8,000 $ 7,000

Wall Decor 2,000 $25,000 12,000 1,000 8,000 $ 4,000

Total 5,000 $85,000 51,000 6,000 24,000 $ 4,000

The allocated fixed costs are unavoidable. Demand of individual products are not affected by changes in other product lines. a. What will happen to total operating income if Dynamic Designs discontinues the wallpaper product line? b. Should the wallpaper product line be dropped? c. If all fixed costs were direct fixed costs instead of allocated fixed costs, what would be the effect of dropping the wallpaper product line on the company operation income? d. Given the assumption in (c), should the wallpaper product line be discontinued? Answer: a. Incremental revenue + Incremental costs = Decrease in operating profit if discontinued; [$20,000 - (Variable costs savings, $17,000 + Direct fixed costs savings, $2,000)] = Decrease in profits if discontinued, $1,000. b. No, the wallpaper product line should not be dropped since operating profits would decrease by $1,000. c. Incremental revenue + Incremental costs = Decrease in operating profit if discontinued; [$20,000 - (Variable costs savings, $17,000 + Direct fixed costs savings, $10,000)] = Increase in profits if discontinued, $7,000. d. Yes, the wallpaper product line should be dropped since operating profits would increase by $7,000. Diff: 3 LO: 1, 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

101) HomeGoods Corporation operates two divisions, the Commercial Division and the Consumer Division. The Commercial Division manufactures and sells products to wholesalers. The Consumer Division operates retail outlet which sell products directly to individuals. The company is considering disposing of the Commercial Division since it has been consistently unprofitable for a number of years. The income statements for the two divisions for the year ended December 31 are presented below:

Sales Revenues Variable Costs Contribution Margin Fixed Costs Operating Profit

Commercial $2,000,000 1,500,000 500,000 550,000 ($50,000)

Residential $1,500,000 900,000 600,000 350,000 250,000

Total $3,500,000 2,400,000 1,100,000 900,000 $ 200,000

If the Commercial Division is to be dropped, half of the fixed costs can be eliminated since they are direct fixed costs of the Commercial Division. Should HomeGoods drop the Commercial Division? Show computations. Answer: Contribution margin, Commercial, $0 - unavoidable fixed costs, (1/2 × $550,000) = decrease in operating income = $275,000. No, HomeGoods should not drop the Commercial Division since the operating income will decrease by $275,000. Diff: 2 LO: 1, 3, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

102) The Nut House sells three different types of nuts. The results of the current year are as follows:

Units sold Revenue Less variable costs Less direct fixed costs Less allocated fixed costs Net income

Peanuts 3,000 $70,000 32,000 14,000 6,000 $18,000

Brazil nuts 5,000 $50,000 26,000 19,000 10,000 $ (5,000)

Walnuts 2,000 $40,000 16,000 12,000 4,000 $ 8,000

Total 10,000 $160,000 74,000 45,000 20,000 $ 21,000

All of the allocated costs will continue even if a division is discontinued. The Nut House allocates remaining fixed costs based on the number of units to be sold. Since Brazil nuts product line experienced a net loss, the Nut House feels that it should be discontinued. The Nut House feels that if this product line is dropped, that sales of the Peanuts and Walnuts will stay the same. a. Determine the effect on operating income if the Nut House drops the Brazil nuts product line. b. Should Nut House drop the Brazil nuts product line? Briefly indicate why or why not. Answer: a. Peanuts Walnuts Total Units sold 3,000 2,000 5,000 Revenue $70,000 $40,000 $110,000 Less variable costs 32,000 16,000 48,000 Less direct fixed costs 14,000 12,000 26,000 Less allocated fixed costs 12,000 8,000 20,000 Net income $12,000 $ 4,000 $ 16,000 Using the total cost approach, the operating income for the company will decrease from $21,000 to $16,000, or $5,000 if the Nut House drops the Brazil nuts product line. b. The Nut House should not drop the Brazil nuts product line, because the operating income for the company will be $5,000 less ($21,000 - $16,000) Diff: 2 LO: 1, 3, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

103) Barton Beverages Inc. sells cases of bottled water at $25 each and has direct labor and materials costs of $10 for each case of water. Fixed costs per month are $30,000, and the accountants at Barton have reported to management that operating loss last month was ($7,500) when selling only 1,500 cases of bottled water. Barton is trying to decide whether to drop the bottled water from its product line since it has been operating at a net loss. a. If Barton is not able to eliminate the fixed costs associated with the bottled water since they are allocated fixed costs, should the business drop the bottled water product line? Show all computations. b. If Barton is able to eliminate $5,000 of the fixed costs associated with the bottled water since it they are direct fixed costs, should the business drop the bottled water product line? Show all computations. c. If Barton is able to all of eliminate the fixed costs associated with the bottled water since they are direct fixed costs, should the business drop the bottled water product line? Show all computations Answer: a. If the product line is dropped, all revenues and variable costs will be eliminated, but since none of the fixed costs are avoidable, the operating income for Barton Beverages will decrease by $22,500, which is the amount of the fixed costs of $30,000 less the previous net loss of ($7,500) or the lost contribution margin of ($25 - $10) × 1,500 = $22,500. The produce line should not be dropped because the business worse off by $22,500. b. Unit selling price - Unit variable cost = unit contribution margin; $25 - $10 = $15; Assuming that Barton Beverages is still only able to sell 1,500 cases of the bottle water, the unit contribution margin, $15 × 1,500 cases = $22,500 total contribution margin - unavoidable fixed costs ($30,000 - $5,000) of $25,000 = operating loss of ($2,500). Barton Beverages should not eliminate the bottled water line since the operating loss of ($2,500) is less than the original ($7,500), so the business is better off. c. Yes, the bottled water product line should be dropped if all of the fixed costs can be eliminated. As such, the company's operating income will be better off by the amount of the operating loss of $7,500 with operating income for the company increasing by this amount. Diff: 2 LO: 1, 2, 3, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

104) Addison Accounting LLP has the following financial information for its two primary business lines for the current year:

Service Revenues Variable Costs Contribution Margin Fixed Costs Operating Profit (Loss)

Auditing $1,900,000 1,250,000 650,000 700,000 ($50,000)

Consulting $2,300,000 900,000 1,400,000 400,000 1,000,000

Total $4,200,000 2,150,000 2,050,000 1,100,000 $950,000

Addison is considering dropping the Auditing business line since it has been reporting an operating losses for the past 3 years. If it eliminated the Auditing, half of the fixed costs cannot be avoided since they are allocated fixed costs of the entire firm. Should Addison drop the Auditing business line? Show supporting computations. Answer: Contribution Margin-Auditing, $0 - Unavoidable fixed costs, (1/2 × $700,000) = $350,000 less the original reported ($50,000) loss would reflect a net decrease in operating income for the company of $300,000. Alternatively, using a total approach, total company operating income (original), $950,000 less company income if Auditing dropped, [$1,000,000 ($700,000 × ½)] or $650,000 = decrease in operating income of $300,000. The Auditing business line should not be dropped. Diff: 2 LO: 1, 3, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

105) Elmwood Environmental manufactures compost kits. For the past year, the company reported the following operating results while operating at 50% of plant capacity: Sales (500 units) Cost of goods sold Gross profit Operating expenses Operating income

$90,000 52,000 38,000 24,000 $14,000

An analysis of costs and expenses reveals that variable cost of goods sold is $95 per unit and variable operating expenses are $35 per unit. In January, Elmwood Environmental receives a special order for 500 compost kits at $135 each from a local municipality. Acceptance of the order require an addition $1,000 of shipping costs, but would not affect the fixed expenses. a. Prepare an analysis to determine if the special order should be accepted. b. What decision should Elmwood make regarding the special order, accept or reject? Explain. Answer: a. Unit selling price - Unit variable cost = Unit contribution margin; (Unit contribution margin × special order units) = Special order contribution margin - Special order shipping costs = special order income (loss); ($135 - ($95 + $35)] = $5 × 500 special order units = $2,500 - $1,000 special order shipping costs = $1,500 special order income. b. Elmwood environmental should accept the special order because it will generate an additional $1,500 of operating income. Diff: 2 LO: 1, 3, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

106) Antsy Labs produced and sold 50,000 fidgets and is operating at 80% of its plant capacity. Unit information about its product is shown below: Sales price Variable manufacturing cost Fixed manufacturing cost ($25,000 ÷ 50,000) Profit per unit

$7 $4.50 0.50

5 $2

Antsy Labs received a special order from a local company to buy 10,000 fidgets for $5 per unit. This is a one-time only order and acceptance of this order will not affect the company's regular sales. Management of Antsy Labs is hesitant to a accept the special order since the price is lower than its current price per unit. What should Antsy Labs do? Answer: Special order price - Unit variable cost = Special Order Contribution Margin; Special Order Contribution Margin × Special Order Units = Special Order income; ($5 - $4.50) = $.50 per Unit × 10,000 special order units = $5,000 special order income. Antsy Labs should accept the special order since it will increase operating income for the company by $5,000. Diff: 3 LO: 1, 3, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

107) Vermont Teddy Bear Company makes a special teddy bear called a Lovey Buddy. The production of each consists of $15 variable costs and $10 of fixed costs, and normally sells for $70. A children's hospital would like to purchase 7,000 units of the Lovey Buddy bear for $20 per bear. The company currently has capacity to produce the special order without incurring additional fixed costs. a. Should Vermont Teddy Bear Company accept the request for this special order? Show computations to support decision. b. The children's hospital has inquired about customizing the Lovey Buddy bears for its patients. Currently, the company does not have the necessary equipment to customize the bears, but is willing to consider purchasing an embroidering machine should it prove cost effective. Research indicates that an embroidering machine will cost $8,500. The company believes that if it charges an additional $2 per Lovey Buddy, that it could accept the special order and customize each of the bears ordered. Can the company do this and still generate operating income on the special order? Answer: a. Special Order revenue (7,000 × $20) $140,000 Special Order variable costs (7,000 × $15) (105,000) Special Order Income — If Accepted $ 35,000 Special order should be accepted b. Special Order revenue [7,000 × ($20 + $2)] $154,000 Special Order variable costs (7,000 × $15) (105,000) Special Order - Embroidery Machine (8,500) Special Order Income — If Accepted $ 40,500 Special order is still accepted Diff: 2 LO: 1, 3, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

108) The following operating data was reported by Acer Sports for the month of June, during which 1,000 rackets and 4,000 packs of racquetballs were produced and sold:

Sales revenue Variable costs Contribution margin Fixed costs Operating income (loss)

Rackets $40,000 23,200 $16,800 9,200 $7,600

Ball Packs $20,000 11,000 $ 9,000 9,200 ($200)

Total $60,000 34,200 25,800 18,400 $ 7,400

Acer Sports is concerned since this is the sixth consecutive month that the Ball Packs Has reported an operating loss. Since the company feels that it is not possible to increase the unit selling price, that it should consider dropping the Ball Packs product line. Answer the following questions: a. Should companies eliminate segments or product lines if they are unprofitable? Why? b. In the case of Acer Sports, prepare an analysis to support whether the Ball Packs line should be dropped or not. Assume that none of the fixed costs can be eliminated. c. Should the Ball Packs product line be dropped? d. If all $9,200 of Ball Packs fixed costs can be eliminated, should the Ball Packs product line be discontinued? Answer: a. Companies should not eliminate segments or product lines simply because they are unprofitable. A quantitative rule of thumb for a keep versus drop decision is that any fixed costs avoided should be larger than the contribution margin given up by dropping the line. Important factors to consider in this scenario are that by dropping a product line or business segment, the related contribution margin (revenue less variable costs) will be lost, and that there may be related fixed costs that can be avoided. b. Contribution Margin — Ball Packs, $0 — Unavoidable fixed costs, $9,200 less original loss of ($200) results in a decrease in income of $9,000 or the contribution margin lost of $9,000 will result in the net decrease in operating income of $9,000 for the company. c. The Ball Packs product line should not be dropped, since company income will decrease. d. Since the avoidable fixed costs of $9,200 is greater than the contribution margin of the Ball Packs product line of $9,000, the Ball Packs product line should be eliminated. The company will be better off, or have $200 ($7,600 - $7,400) more operating income if it drops the Ball Packs product line. Diff: 3 LO: 1, 2, 3, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

109) Speed Tek produces two models of professional swim goggles–Jet and Spirit–both with fog-free acrylic lenses. Speed Tek has the following information regarding the products for the month of July:

Number of units Unit Selling Price Unit Variable Cost Unit Contribution Margin Machine Hours Required

Jet 4,400 $36 12 $24 3

Spirit 4,600 $30 10 $20 4

Olympian 4,000 $67 38 $29 5

a. If Speed Tek has no current production constraints, and wishes to maximize its operating income, which product should it produce more of? b. If Speed Tek is limited to 4,000 machine hours, which of the products should it produce to maximize its net income? c. If Speed Tek were able to get an additional 10,000 machine hours, but only has demand for the current production in units, which combination of products should it produce? Answer: a. If Speed Tek has not current production constraints, then it should focus on production of the Olympian model of the swim goggles since it has the highest unit contribution margin, to maximize operating income. b. Jet Spirit Olympian Unit Contribution Margin (a) $24 $20 $29 Machine Hours Required (b) 3 4 5 Contribution Margin per Machine hour (a) ÷ (b) $8.00 $5.00 $5.80 Now, if Speed Tek has a production constraint of machine hours, the emphasis when maximizing operating income will be to produce and sell the product with the highest contribution margin per machine hour, which in this scenario is the Jet model, which has a contribution margin per machine hour of $8.00. c. In order to maximize operating income when an additional 10,000 machine hours are added, then Speed Tek would first focus on producing as many units of the Jet Model as demand warrants (4,400 × 3 hours per unit = 13,200 hours). So out of the total available 14,000 machine hours, Speed Tek would produce the 4,400 units of the Jet model, and then the remaining 800 machine hours would be allotted to the production to the next highest contribution margin per machine hour which is $5.80 for the Olympian model, producing 160 units (800 ÷ 5 hours). Diff: 3 LO: 1, 2, 3, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

110) Pate & Murwick, CPAs, employs partners, managers and staff at its center city firm. It is considering outsourcing some of its accounting work to another firm, thus eliminating the need for all of the staff positions. The firm believes that it can outsource the work of half of the staff accountants. A local CPA firm has offered to complete this work for Pate & Murwick at a rate of $120 per hour.

Number of employees Billing rate per hour Labor cost per hour Target billable hours per employee

Partners

Managers

2 $280 $220 1,800

6 $180 $140 2,500

Staff 14 $120 $90 2,000

Total 22

The partners estimate the firm will incur variable overhead amounting to 10% of the professional labor cost and direct fixed overhead amounting to $8 per billable hour of labor. Total selling and administrative are estimated at $114,000 per year, with 60% of this being direct fixed costs for the staff accountants. a. Determine the savings (if any) if Pate & Murwick were to outsource half of the staff accounting work. Show computations. b. Should Pate & Murwick, CPAs outsource half of the work of the staff accountants? c. At what rate per hour would Pate & Murwick be willing to consider accepting the proposal to outsource half of the staff accounting work?

Answer: a. Number of employees Labor cost per hour Target billable hours per employee Total Staff Labor cost* Direct Fixed Overhead (staff)** Direct Fixed Overhead (staff)***- S & A Price to Outsource (half of staff) Total

Insource Staff

Outsource Staff

14 $90 2,000

7 $90 2,000

2,520,000 224,000 68,400

1,260,000 112,000 34,200 1,680,000^ 3,086,200

2,812,400

Difference

1,260,000 112,000 34,200 (1,680,000) (273,800)

*Total Staff Labor Cost = Number of employees × Labor cost per hour × Target billable hours per employee ** Direct Fixed Overhead (staff) = Number of employees × Target billable hours per employee × $8 per hour ***Direct Fixed Overhead (staff) S & A = $114,000/year × 60% (Insource Staff) = $114,000/year × 60% × 7/14 (Outsource Staff) ^Price to Outsource = 7 × 2,000 × $120 a. If Pate & Murwick were to outsource half of the staff accounting work, there would be no cost savings. The firm would actually decrease it overall operating income by $273,800 if it outsourced the staff accounting work. b. Since the firm would actually decrease it overall operating income by $273,800 if it outsourced the staff accounting work, it should not outsource the staff accounting work c. Total Cost (Insource), $2,812,400 - Unavoidable Staff Accounting Costs ($1,260,000 + $112,000 + $34,200) = Total to pay for outsourcing (and not lose income), $1,406,200; $1,406,200 ÷ (7 × 2,000 billable hours) = $100.44 (approximately $100) Diff: 3 LO: 1, 2, 3, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

111) A recent accounting hire at Slate Blue Industries, evaluated the operating performance of company's various divisions. The following presentation was made to company executives at a company meeting. During the presentation, the new accountant made the recommendation to eliminate the Granite Division stating that total net income would increase by $50,000, as shown in the analysis below.

Sales Cost of Goods Sold Gross Profit Operating Expenses Operating Income

Other Divisions $3,000,000 1,850,000 1,150,000 700,000 $ 450,000

Granite Division $990,000 860,000 130,000 180,000 $ (50,000)

Total $3,990,000 2,710,000 1,280,000 880,000 $ 400,000

For the other divisions, cost of goods sold is 80% variable and operating expenses are 75% variable. The cost of goods sold for the Granite Division is 30% fixed, and its operating expenses are 80% fixed. If the division is dropped, only $44,000 of the fixed operating costs will be eliminated. a. Is the statement that the new accountant made correct? Should the Granite Division be dropped? Present a schedule to support your answer. b. If all of the fixed costs could be eliminated (fixed cost of goods sold and fixed operating expenses) for the Granite Division, would your answer change? Show computations. c. What is the minimum amount of fixed costs that must be avoided in order to consider the elimination of the Granite Division to be beneficial for the Slate Blue? Show computations.

Answer: a.

Sales Variable Expenses Cost of goods sold Operating expenses Total Variable Costs Contribution Margin Fixed Expenses Cost of goods sold Operating expenses Operating Income (Loss)

Continue $990,000

Eliminate $ -0-

Net Income Increase (Decrease) $(990,000)

602,000* 36,000 638,000 352,000

-0-0-0-0-

602,000 36,000 638,000 (352,000)

258,000* 144,000 $ (50,000)

258,000 100,000 $(358,000)

-044,000 $(308,000)

Cost of goods sold total = $860,000; 70% or $602,000 is variable; 30% or $258,000 is fixed. Operating expenses = $180,000; 80% or $144,000 is fixed; 20% or $36,000 is variable. The accountant is not correct. If the Granite Division is dropped, the operating income will be $308,000 less, not $50,000 greater. Granite Division should not be eliminated. The reduction in income of $308,000 is the result of the loss of the contribution margin, $352,000, less the avoidable fixed costs of $44,000. b. If all of the fixed costs for the Granite Division could be eliminated, then the impact to operating income will cause an increase in operating income of $50,000 which results from the avoidable fixed costs of $402,000 ($258,000 + $144,000) less the lost contribution margin of $352,000. c. The minimum amount of fixed costs which would need to be eliminated in order for it to be beneficial to Slate Blue to eliminate the Granite Division would be $352,001 ($1 more than the contribution margin that would be lost if the division was dropped) Diff: 3 LO: 1, 2, 3, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

112) Magical Mystery Company makes three different products which most children find appealing. The following unit price and cost information is available for the three products:

Unit Selling Price Unit Variable Cost

Wizard Wand $10 $3

Potion Mixer $8 $5

Spell Book $6 $4

a. Assuming that Magical Mystery Company can sell all of a particular product that it can produce. On which product should it focus production to maximize its profitability? Would it make sense for Magical Mystery Company to produce only this product and stop producing the other two? Explain your answer. Show computations. b. Right after these selling prices and variable cost amounts were specified, there was a significant increase in the price of one of the materials that affected both the cost of the Wizard Wand and the Spell Book. If the unit variable costs for each of the products increased by 30%, on which product should Magical Mystery Company focus on now to maximize operating profit. Show computations. Answer: a. Wizard Wand Potion Mixer Spell Book Unit Selling Price $10 $8 $6 Unit Variable Cost $3 $5 $4 Unit Contribution Margin $7 $3 $2 Magical Mystery Company should focus on selling more of the Wizard Wand assuming that the demand exists since it has the highest unit contribution margin at $7. It probably would not make sense for the company just to produce the one product given that it has the highest unit contribution margin, because profits are determined also based on the number of units sold. As stated, it assumes that all units produced can be sold, but this may not always be the situation. Demand can change based on customer preference, and by relying on only one product could mean the demise for the company. Also, to promote sales, many companies offering special deals to promote all products by selling a complete package of all of the products, for example, the Magical Mystery Experience which would include a Wizard Wand, Potion Mixer and Spell Book for a price of $20 instead of the $24 that it would be if purchased separately. b. Wizard Wand Potion Mixer Spell Book Unit Selling Price $10 $8 $6 Unit Variable Cost $3.90 $5 $5.20 Unit Contribution Margin $6.10 $3 $.80 Magical Mystery Company should still focus on selling more of the Wizard Wand if the demand exists since it has the highest unit contribution margin at $6.10. Diff: 3 LO: 1, 2, 3, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 66

113) At Bestco Electronics, it costs $28 per unit ($15 variable and $13 fixed) to make an EarBuds. The Earbuds normally sell for $40, but a local wholesaler wishes to buy 3,000 units at $20 each. Bestco Electronics will incur special packaging costs of $1 per Earbud unit. a. Assuming that Bestco Electronics has sufficient operating capacity to accept this special order, indicate the operating income (loss) Bestco Electronics would realize by accepting the special order. Show computations. b. Now assume that Bestco Electronics has does not have sufficient operating capacity to accept this special, but that it would need to lease additional equipment for $9,500 for the special order, indicate the operating income (loss) Bestco Electronics would realize by accepting the special order. Show computations. Answer: a. Reject Accept Computations Revenues $0 $60,000 ($2 × 3,000 units) Unit Variable Cost 0 (45,000) ($15 × 3,000 units) Additional Packaging 0 (3,000) ($1 × 3,000 units) Operating Income $0 $12,000 Accept Special Order b. Revenues Unit Variable Cost Additional Packaging Equipment Lease - Special Operating Income

Reject $0 0 0 0 $0

Accept $60,000 (45,000) (3,000) (9,500) $ 2,500

Computations ($2 × 3,000 units) ($15 × 3,000 units) ($1 × 3,000 units) Accept Special Order

Diff: 3 LO: 1, 2, 3, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

114) Simplex Computer Company must decide whether to make or buy some of its components. The costs of producing 20,000 cables for its computers are as follows. Direct materials Direct labor

$18,000 $10,000

Variable overhead Fixed overhead

$15,000 $7,000

Instead of making the cables at an average cost of $2.50 ($50,000 / 20,000), the company has an opportunity to buy the cables at $2.30 per unit. If the company purchases the cables, all the variable costs and one-fourth of the fixed costs will be eliminated. a. Prepare an analysis showing whether the company should make or buy the cables. Based on your analysis, would you recommend that Simplex continue to make the cables or should the company buy the cables? Show all computations. b. Would your answer be different if the released productive capacity will generate additional income of $5,000? Show all computations. Answer: a. Insource Outsource Direct Materials $18,000 $0 Direct Labor 10,000 0 Variable O/H 15,000 0 Fixed O/H 7,000 5,250 (7,000 × ¾) Purchase Price 0 46,000 ($2.30 × 20,000) Total Cost $50,000 $51,250 ( $1,250) Simplex should continue to make the cables in this option, since operating income will decrease if the production is outsourced. b. Total Cost [from (a)] Opportunity Cost Total Updated Cost

Insource $50,000 5,000 $55,000

Outsource $51,250 0 $51,250

($1,250) 5,000 $3,750

Yes, the answer would be different. Simplex should now outsource the production of the cables since it would increase the operating income of the company by $3,750. Diff: 3 LO: 1, 2, 3, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

115) Crescent Computer Company manufactures tablets and PCs. For the last six months, the company reported the following operating results while operating at 80% of plant capacity when 3,000 units were produced and sold: Sales (3,000 units) Variable Costs: Direct Materials Direct Labor Variable MOH Variable Selling Contribution Margin Fixed Costs: Fixed MOH Fixed Selling Operating Income

$270,000 $54,000 30,000 12,000 9,000

105,000 165,000

38,000 104,000

142,000 $ 23,000

Orders for the second half of the year have been slower than usual, so when a new customer contacted the company and requested a special discount, management wanted to thoroughly evaluate this potential new customer and the possibility of the special order-offer. a. Assume that the new customer is requesting 300 units in this special order and offers $50 per unit. Since the company has contacted the company directly, there are no variable selling costs associated with the special order. If Crescent Computers has enough excess capacity to accept this order, how much better or worse off would the company be? Show computations b. Assume now, that the new customer is requesting 200 units in this special order and offers $40 per unit. Since the company has contacted the company directly, there are no variable selling costs associated with the special order. Now, though, the new customer would like special imprinting to put the company name on each tablet which will require Crescent Computers to purchase a special imprinting machine which will cost $3,000. If Crescent Computers has enough excess capacity to accept this order, how much better or worse off would the company be? Show computations c. Assume now that the new customer is requesting 150 units in this special order and offers $45 per unit. Since the company has contacted the company through a sales representative, the variable selling costs associated with the special order will now be incurred. If Crescent Computers has enough excess capacity to accept this order, how much better or worse off would the company be? Show computations

Answer: a. Revenues Direct Materials Direct Labor Variable MOH Operating Income

Reject $0 0 0 0 $0

Accept $15,000 (5,400) (3,000) (1,200) $ 5,400

Computations ($50 × 300 units) ($54,000/3,000 units) × 300 units ($30,000/3,000 units) × 300 units ($12,000/3,000 units) × 300 units Accept Special Order

Reject Accept $0 $8,000 0 (3,600) 0 (2,000) 0 (800) 0 (3,000) $0 ($1,400)

Computations ($40 × 200 units) ($54,000/3,000 units) × 200 units ($30,000/3,000 units) × 200 units ($12,000/3,000 units) × 200 units

Reject $0 0 0 0 0 $0

Computations ($45 × 150 units) ($54,000/3,000 units) × 150 units ($30,000/3,000 units) × 150 units ($12,000/3,000 units) × 150 units ($9,000/3,000 units) × 150 units Accept Special Order

b. Revenues Direct Materials Direct Labor Variable MOH Special Imprint Machine Operating Income

Do Not Accept Special Order

c. Revenues Direct Materials Direct Labor Variable MOH Variable Selling Operating Income

Accept $6,750 (2,700) (1,500) (600) (450) $1,500

Diff: 3 LO: 1, 2, 3, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

116) Casper Corporation budgeted 10,000 tablet cases for production during the current year. Casper has capacity to produce 12,000 units. Fixed factory overhead is allocated to production. The following estimated costs have been provided: Direct material ($8/unit) Direct labor ($15/hr. × 2 hrs./unit) Variable manufacturing overhead ($3/unit) Fixed factory overhead costs ($5/unit) Total Cost per unit = $46 ($460,000 ÷ 10,000)

$ 80,000 300,000 30,000 50,000 $460,000

Answer each of the following independent questions: a. Casper recently received an order for 1,000 units from a new customer in a state in which it has never done business. This new customer has offered $43 per tablet case. Should Casper accept or reject the order? Show calculations. b. Casper also received an offer from a different company to manufacture the same quality widgets for $39. Should Casper outsource the manufacturing all 10,000 widgets and instead, focus only on distribution? Show calculations. Answer: a. Special Order unit revenue per tablet case $43 Special Order unit cost per tablet case: $8 + ($15 × 2) + $3 = 41 Special Order Contribution Margin per unit $ 2 Total Special Order Operating Income = $2 × 1,000 = $2,000; Casper should accept the special order because it will increase operating income by $2,000. b. Unit Cost to make per tablet case: $8 + ($15 × 2) + $3 = $41 Unit Cost to buy per tablet case 39 Cost savings per tablet case if purchased $ 2 Total cost savings if purchased = $2 × 10,000 = $20,000; Yes, Casper should outsource the tablet case production since it will save $20,000 which will increase operating income by $20,000. Diff: 3 LO: 1, 2, 3, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

117) Speedy Sneaker Co. produces and distributes three types sneakers/running shoes. Information for the past quarter on these three products is shown below. Sport Max Price per Unit Units Sold Unit Variable Costs Direct Fixed Costs Production time

$70 4,000 $30 $40,000 2 hours

Air Force Air Max $100 $180 3,000 3,000 $50 $120 $60,000 $110,000 4 hours 6 hours

a. If there is no resource constraint, which type of sneaker should Speedy Sneaker manufacture to maximize its operating income? Show computations. b. If there is a resource constraint of limited machine hours, which type of sneaker should Speedy Sneaker manufacture to maximize its operating income if it only has 2,000 machine hours per month? Show computations. c. If Speedy Sneaker's management feels that production should be distributed equally among all product types, compute the operating income if it is assumed that 3,000 total units can be produced, with 1/3 allotted to each product line, and then compare the operating income computed if all 3,000 units were allotted to the sneaker selected in (a). Answer: a. Sport Max Air Force Air Max Price per Unit $70 $100 $180 Less: Unit Variable Costs 30 50 120 Unit Contribution Margin $40 $50 $60 Production time 2 hours 4 hours 6 hours Speedy Sneaker should focus production on the Air Max since it has the highest unit contribution margin at $60. b. Sport Max Price per Unit Less: Unit Variable Costs Unit Contribution Margin Production time Contribution Margin per Machine hour

$70 30 $40 2 hours $20

Air Force Air Max $100 $180 50 120 $50 $60 4 hours 6 hours $12.50

$10

Given that Speedy Sneaker has a resource constraint, it should use the contribution margin per unit of constrained resource as the basis for selection. As such, Speedy Sneaker should therefore, focus production on the Sport Max since it has the highest contribution margin per machine hours at $20.

c. Sport Max Air Force Air Max Price per Unit $70 $100 $180 Less: Unit Variable Costs 30 50 120 Unit Contribution Margin $40 $50 $60 Production/Sales 1,000 1,000 1,000 Operating Income $40,000 $50,000 $60,000 Total Operating Income = $40,000 + $50,000 + $60,000 = $150,000 Sport Max Air Force Air Max Price per Unit $70 $100 $180 Less: Unit Variable Costs 30 50 120 Unit Contribution Margin $40 $50 $60 Production/Sales 0 0 3,000 Operating Income $0 $0 $180,000 Total Operating Income = $0 + $0 + $180,000 = $180,000 Speedy Sneaker is better off by $30,000 ($180,000 - $150,000) if it selects to allot all production and sales to the Air Max sneaker exclusively, instead of splitting production/sales equally between the three product lines. Diff: 3 LO: 1, 2, 3, 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 118) What are the five steps in the decision-making framework? Answer: 1. Clearly outline the problem and its related unknowns; 2. Identify suitable options and gather relevant qualitative and quantitative information, making informed assumptions as need be; 3. Calculate relevant costs and benefits for each option; 4. Select the option that maximizes the benefit to the organization and meet required qualitative criteria; and 5. Implement your decision. Diff: 2 LO: 1 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge.

119) Assume you are planning to travel to your work conference in a neighboring state. You have various options for travel to the work conference: plane, train, bus or auto. Obviously, you can measure the quantitative information, but it is sometimes difficult to identify the qualitative information. List at least 3 qualitative considerations to be factored into your decision-making process. (Answers will likely differ for each student's response) Answer: 1. If flying, it will take less time than any other method of transportation. If you get to your destination faster, you can spend more time sightseeing or attending event activities. 2. If traveling by plane, train, or bus, you can use the time to do other things such as nap, work, play a game, listen to music or watch a movie on a device. 3. If traveling by any other method other than auto, you have less stress and anxiety. 4. Traveling by automobile, train or bus, you get a chance to see the view of the various states — sightsee. 5. If traveling by auto, you can set your own time schedule, and can make frequent stops. Diff: 2 LO: 1 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge. 120) In the decision-making framework, why should both relevant quantitative and qualitative information be gathered to assist in making an informed decision? Answer: In making an informed decision using the decision-making framework, it is essential to gather both relevant quantitative and qualitative information, since the decision-maker may place more weight on qualitative information than quantitative information. For example, although you may select to use air travel to reach your desired destination, even though it has a higher overall quantitative cost, qualitative information such as less time to reach your destination and time and ability to relax or do other activities while traveling evidently outweigh the additional cost over driving an automobile to your desired destination. Diff: 2 LO: 1 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge.

121) Identify and explain the types of relevant costs that should be considered when using the decision-making framework. Answer: The first costs that should be considered when using the decision-making framework are differential or incremental costs. These costs differ in amount between alternatives and help narrow the decision. The second costs that should be include in decision analysis are avoidable costs. If costs can be avoided, then they only occur under certain conditions. The last costs to be considered as relevant are future costs. Every relevant cost happens in the future since any past cost is a sunk cost and irrelevant because it cannot be changed. Diff: 2 LO: 2 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge. 122) Identify the two different types of problem-solving approaches in the decision-making framework and explain the differences between the two approaches. Answer: The two types of problem-solving approaches in the decision-making framework are the total cost approach and the relevant (differential) cost approach. In the total cost approach, all cost information (relevant and non-relevant) is gathered. This will include a large pool of costs. In this approach, you may gather too many options and costs, thus making the choices too complex. An alternative to the total cost approach in the relevant (differential) cost approach which focuses strictly on the costs that differ between alternatives. By using the relevant cost approach, you are able to narrow down the choices, speed up the decision-making process and simplify the process. Nevertheless, regardless of the approach used, if you have done either of the two approaches accurately, you will be signaled toward the same option decision in each case. Diff: 2 LO: 2 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge. 123) Describe a sunk cost and give an example of one in the decision-making process. Answer: Sunk costs are past costs that have already been incurred and cannot be undone. Sunk costs do not impact the decision-making process since they are not relevant. Examples of sunk costs are the past purchase of assets such as land, building or equipment, or expenses incurred in a previous period such are repairs and maintenance costs on assets. Diff: 2 LO: 2 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge. 75

124) Identify and describe the four broad categories of management decisions. Answer: 1. Insource versus outsource — also known as the make versus buy decision, addresses whether a business should manufacture a product or buy it from a supplier. 2. Keep versus drop — addresses whether to retain or eliminate a product line or segment of a business, because it is experiencing an operating loss or the product is obsolete. 3. Product mix decisions, with or without constrained resources — involves determining which specific products or services, and how many of each to make, stock, or offer is a company's product mix, which then leads to a company's sales mix, with or without a limited resource causing production limitations such as machine hours or labor hours. 4. Special orders — include sales opportunities that companies contemplate in the short-term to respond to a customer's special request, typically at a selling price per unit that is lower than that charged to normal customers. Companies must always address whether it has available capacity to fulfill the special order first to effectively make the correct decision. Diff: 2 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge. 125) Describe the insource versus outsource management decision and the criteria for making this decision. Answer: Insource versus outsource — also known as the make versus buy decision, addresses whether a business should manufacture a product or buy it from a supplier. In the insource versus outsource management decision, managers compare the relevant costs, including both qualitative and quantitative considerations, using a total cost approach or a relevant cost approach. Only relevant costs are evaluated in this analysis, the least costly approach is the optimal decision. Cost savings is translated into increase in operating income. Diff: 2 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge.

126) Describe the keep versus drop management decision and the criteria for making this decision. Answer: Keep versus drop - addresses whether to retain or eliminate a product line or segment of a business. A quantitative rule of thumb for a keep versus drop decision is that any fixed costs avoided should be larger than the contribution margin given up by dropping the line. Important factors to consider in this scenario are that by dropping a product line or business segment, the related contribution margin (revenue less variable costs) will be lost, and that there may be related fixed costs that can be avoided. Diff: 2 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge. 127) Describe the product mix decision and the criteria for making this decision. Answer: Product mix decisions, with or without constrained resources — involves determining which specific products or services, and how many of each to make, stock, or offer is a company's product mix, which then leads to a company's sales mix. In simple product mix decisions, products are chosen to maximize the contribution margin per unit, when then maximize the company's total contribution margin, and in turn, the operating income. For product mix decisions with a constrained resource, products are selected that maximize by using the contribution margin per unit of constrained resource, such as the contribution margin per machine hour. Diff: 2 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge.

128) Describe the special-order management decision and the criteria for making this decision. Answer: Special orders include sales opportunities that companies contemplate in the shortterm to respond to a customer's special request, typically at a selling price per unit that is lower than that charged to normal customers. Companies must always address whether it has available capacity to fulfill the special order first to effectively make the correct decision. If the company does have enough available capacity, then it can determine the special-order decision by comparing the contribution margins of the two options, excluding the fixed costs in the analysis. If available capacity does not exist to fulfill the special order, then fixed costs must be factored into the decision-making process, and operating incomes of the two options would need to be compared instead of using the contribution margins of the options. Diff: 2 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge. 129) What is an opportunity cost? Answer: An opportunity cost signifies options and benefits of alternatives in the management decision-making framework, which were explored but were rejected in arriving at the chosen outcome. The costs and benefits of those paths not taken represent the opportunity costs. Diff: 2 LO: 4 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge. 130) How are opportunity costs accounted for? Answer: Since opportunity costs are options and benefits of alternatives in management decision-making which were explored but were rejected in arriving at the chosen outcome, they are not recorded anywhere in the accounting records. These costs and benefits are simply used in the evaluation process of alternatives and options. Diff: 2 LO: 4 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge.

131) Describe direct fixed costs and their impact on the decision-making process. Answer: Direct fixed costs are fixed costs which are clearly attributable to a specific product line or business segment. Without these fixed costs, the product or product line cannot be made or the segment cannot fully function. In the decision-making process, if the product or product line are eliminated or the business segment is discontinued, then the direct fixed costs are using avoidable and as such are relevant to the decision-making process. Diff: 2 LO: 5 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge. 132) Define segment margin and its importance in the decision-making framework. Answer: Segment margin is equal to sales revenue less variable costs and direct fixed costs. Where there is more than one segment or division within a company, an income statement should show the results by segment. The segment margin measures the economic value that each segment provides to the organization. If the focus was strictly on the operating loss for each segment or division when considering whether to keep versus drop an unprofitable product, product line or segment, it may mask the true economic value of it. Diff: 2 LO: 5 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge. 133) Describe common fixed costs and how they impact management decision-making. Answer: Common fixed costs are the overall costs of providing the operations of the factory. Such costs are shared among the product lines or segments of the company. Therefore, these costs will still be incurred if one product line or business segment is dropped or discontinued. Common fixed costs are not differential and thus, are not relevant in the management decisionmaking process (make versus buy or keep versus drop.) These costs can only be avoided or eliminated if the entire company were to go out of business. Diff: 2 LO: 5 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge.

134) What are allocated fixed costs and what is their impact on management decision-making? Answer: Allocated fixed costs are centrally-incurred, nonmanufacturing fixed costs. The typically occur when an organization has a parent company or a head office that supports multiple branch or subsidiary locations. For example, the head office may provide all of the legal, accounting, marketing and research and development services for all divisions within the company. Branch managers will not control over the amount or the allocation of these costs to their divisions. These costs can only be reduced by corporate restructuring or only eliminated when the company goes out of business. Diff: 2 LO: 5 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge.

Cost Accounting, 1e (Farmer) Chapter 6 Mastering the Master Budget 1) Jaco Ltd is involved in an incremental extension of their existing budget model. Which type of budget method should be used? A) Imposed budget B) Participative budget C) Rolling budget D) Zero-based budget Answer: C Explanation: In a rolling budget, the budget period keeps on updating for future time periods, and as a result, it always represents forecasted values. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 2) Jamie Lopez is the CEO of an exciting new solar-powered car manufacturer, SolCar Inc. Jamie shared a long-term vision and mission with the management team and now is expecting to see a detailed coordinated plan across all business units in the organization. Which of the following will provide Jamie with the needed information? A) Master Budget B) Pro forma (Budgeted) Balance Sheet C) Pro forma (Budgeted) Income Statement D) Tangible short-term objectives (Stretch goals) for the upcoming year Answer: A Explanation: The Master Budget spans all of a company's operating, investing, and financing activities. As a result, three budgeted, or pro forma, financial statements (Income statement, Statement of Cash Flow, and Balance Sheet) are the intended outputs of a Master Budget process. Tangible short-term objectives (Stretch Goals) for the upcoming year do not provide a detailed coordinated plan. Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

3) Georgia has graduated now and has decided to repay all her debts so she can live debt-free. She owes some small-amount loans and some large-amount loans. Georgia chose to adopt the "Snowball Method" to reduce her debt. Which of the following statements is correct in the context of Georgia's strategy? A) Georgia paid largest loan first. B) Georgia paid smallest loan first. C) Georgia paid the interest on all the loans first. D) Georgia paid the minimum payments on each loan. Answer: B Explanation: The snowball method is a debt repayment strategy where the payer focuses on paying the smallest debts first and the larger ones later. Diff: 1 LO: 1 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 4) Kevin is preparing the budgeted income statement for Nutshell Corp. for the upcoming month February and used the following information: Expected sales, $60,000; Expected cost of Goods Sold (COGS),50% of sales; and administrative expenses, $12,000. If Kevin has ignored all information from the previous month, which type of budget is Kevin using? A) Imposed Budget B) Participative budget C) Rolling Budget D) Zero-based Budget Answer: D Explanation: Zero-based budgeting is prepared from the base value of zero each period which means all new estimates adopted in zero-based budgeting ignore previous information. Diff: 2 LO: 1 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

5) Two friends, Wei and Tee, are working as managers in two different organizations. Wei's job is to see that the budget that has been created and approved by top executives of the company is enacted. Tee's job is to see that the budget that has been created by all the managers of the organization and approved by higher authority is enacted. Which of the following statements is correct regarding Wei and Tee? A) Wei uses a participative budget, while Tee uses a rolling budget. B) Wei uses a participative budget, while Tee uses an imposed budget. C) Wei uses a rolling budget, while Tee uses an imposed budget. D) Wei uses an imposed budget, while Tee uses a participative budget. Answer: D Explanation: An imposed budget is a top-down budget that is created and approved at the top level of an organization and followed by managers throughout the organization. A participative budget is the result of the combined efforts of managers at all levels in the organization. All mangers sit together and create a budget that is then approved at a higher level with iterative adjustments. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 6) In the budgeting process, budgetary slack refers to the A) practice of overestimating budgeted expenses and revenues. B) practice of overestimating budgeted expenses and underestimating budgeted revenues. C) practice of underestimating budgeted expenses and overestimating budgeted revenues. D) practice of underestimating budgeted expenses and revenues. Answer: B Explanation: Budgetary slack is the intentional act of managers to overstate budgeted expenses and/or understate budgeted revenues to easily achieve targets. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

7) The maintenance department of an organization has been budgeted $500,000 for the current year's maintenance work. At the end of the fiscal year, the general ledger (or books) shows that they have only spent $450,000 on maintenance. To avoid being granted $450,000 the next year, the manager has decided to wastefully spend $50,000. This is an example of A) budgetary slack. B) imposed budget. C) use-it-or-lose-it mentality. D) zero-based budget. Answer: C Explanation: In the absence of proper controls, budgeting can lead to ethical issues like budgetary slack and use-it-or-lose-it attitude. With the use-it-or-lose-it attitude, managers spend all the allocated funds in the budget period to avoid being granted less funds in subsequent budgeting periods. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 8) Mike, a grocery store owner, estimates that his profits in the next month will be $3,000. Based on his expectations, he prepares a budget and assigns $650 to savings, $500 to retirement benefits plan, $1,000 to personal expenses, and decides to spend $850 for the expansion of his grocery store. Which type of budget did Mike use? A) Imposed Budget B) Participative budget C) Rolling Budget D) Zero-based Budget Answer: D Explanation: In zero-based budgeting, inflows of funds are equal to outflows of funds. Diff: 1 LO: 1 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

9) Mallards Manufacturing's budget for the next year is due by October 31. Prem Patel, the head of the purchasing department, received an Excel file with the previous year's and current year's departmental costs. Prem has been asked to use the information to create a budget for the next year. A meeting with department supervisors has been scheduled to discuss the data before the workbook is completed. Mallards Manufacturing's budget is a ________ budget. A) imposed B) participative C) rolling D) zero-based Answer: B Explanation: Budgets that are created by managers who are knowledgeable about the factors impacting their operation are called participative budgets. Diff: 1 LO: 1 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 10) All of the following are advantages of budgeting except A) budgeting improves communication within the organization. B) budgeting improves coordination among departments. C) budgeting instills a use-it-or-lose-it mindset among the managers. D) budgeting provides the basis for evaluating employee performance. Answer: C Explanation: Budgeting is an adequate way to improve and monitor revenue generation activities in any organization. But, in the absence of proper controls, budgeting can lead to ethical issues such as budgetary slack and an organizational use-it-or-lose-it attitude. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

11) Lara, a manager in the treasury department, has prepared a budget that updates the current month's budgeted ending balance to the actual end-of-month information. Lara has created a(n) A) imposed budget. B) participative budget. C) rolling budget. D) zero-based budget. Answer: C Explanation: In a rolling budget, the actual information is updated at the end of every month so that the budget begins with the real values at the start of each month. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

12) Sara has realized her dream and is now working full-time as a nature photographer. Sara works 35 hours per week and has a monthly cash inflow from wages of $3,500 (net after taxes). Sara is working on a zero-based budget for January and expects to have a cash outflow of $1,800 per month for rent, $100 per week for groceries (assume 4 weeks in the month), and $850 for other miscellaneous expenses. Sara is saving the remaining amount for a new digital camera, and it is really important to keep saving for that, no matter what. Unfortunately, Sara just found out that monthly rent is going to increase by $300 starting in January. Which of the following is the best course of action for Sara to take revise their personal monthly budget? A) Increase savings for the digital camera by $100 per month B) Increase the number of hours worked by 12 hours per month C) Lower grocery expenses by $25 per week D) Lower monthly miscellaneous expenses by $250

Answer: B Explanation: Increasing the number of hours worked by 12 hours per month will allow for an increase in expected cash inflow of $300 ($25 per hour × 12 hours) which will be enough to pay for the additional rent cash outflow. Decreasing monthly miscellaneous expense by $250 would not be sufficient to cover the rent increase, nor would lowering grocery expenses by $25 per week for 4 weeks which would only reduce outflow by $100 for the month. Finally, increasing savings by $100 is going to increase cash outflow even more rather than get the budget balance back to zero. Sara's best option is to work additional 12 hours per month to pay for extra rent. See additional explanation below:

Cash Inflow Cash Outflow Rent

Sara's Zero-Based Budget with $1,800 Monthly Rent $3,500/140 hours = $25 per hour

Original $3,500.00 $1,800.00

Groceries 4 week × $100 per week = Misc. Expenses Saving for Digital Camera $3,500 - ($1,800 + $400 + $850) = Total Cash Outflow Zero

$ 400.00 $ 850.00 $ 450.00 $3,500.00 $ 0

Sara's Zero-Based Budget with $300 increase in Rent $25 × 12 additional hours = $300 Cash Inflow $300 + $3,500 = $3,800.00 Cash Outflow Rent $1,800 + $300 = $2,100.00 Groceries 4 week × $100 per week = $ 400.00 Misc. Expenses $ 850.00 Saving for Digital Camera $3,800 - ($2,100 + $400 + $850) = $ 450.00 Total Cash Outflow $3,800.00 Zero $ 0 Diff: 3 LO: 1 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

13) Patrick prepared a production budget for a 6-month period for Hshell Corporation (or Inc.) At the end of the current month, Patrick revises the budgeted beginning inventory of the next month with an actual ending inventory of the current month. Which type of budget Patrick using? A) Imposed Budget B) Participative budget C) Rolling Budget D) Zero-based Budget Answer: C Explanation: A rolling budget is initially prepared for a fixed period and updated frequently, for example by using the ending balance of current month to update the beginning balance of the next month. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 14) Tran has worked for West End Manufacturing for the last three years as production manager for the company's skateboard assembly line. He was recently promoted to plant manager. He received the next year's budget from finance. In reviewing the budget, he noticed that there is NOT any money budgeted for a new piece of equipment he wants to buy to speed up the skateboard assembly line. When he asks about adding money to the budget for the new piece of equipment, he is told that budget cannot be changed. Which of the following is true? A) Because Tran cannot change the budget, West Manufacturing is using an imposed budget. B) By identifying new equipment for the production line, West End Manufacturing is using a participative budget. C) Tran will need to balance revenues with expenses before he can change the budget. D) Tran will need to update the previous period's balances before he can change the budget. Answer: A Explanation: When a budget is developed by management at a higher level without input from the management levels that perform the work, the budget is considered to be an imposed budget. Diff: 2 LO: 1 Bloom: AP AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

15) Juwan is updating the budget for Pittman's Cycle Shop. His manager has told him that a new piece of equipment has been purchased with a monthly loan payment of $123.50 for the next six months. Juwan completes the new budget by reviewing the budgeted amounts in different categories so that both budgeted revenue and budgeted expenses balance. Which of the following can be said about Pittman's Cycle Shop? A) Juwan must update the actual ending balances from the previous period before he can complete the budget. B) Pittman's Cycle Shop is using a rolling budget. C) Pittman's Cycle Shop is using a zero-based budget. D) Since Juwan is adding the monthly loan payment to the budget, the budget is considered a participative budget. Answer: C Explanation: To create a zero-based budget, the revenues and expenses must be reviewed to ensure that revenues minus expenses equal zero. Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 16) Cade is promoted to plant manager at Mallards Manufacturing. It is his first time having to create a budget. He reviews the budget for the previous year and compares it to the actuals for the same time period. He then creates a budget for the next year using his knowledge of what he needs. When he submits the budget to finance, he is told that he should update the last closed period with actuals and then create a budget for the next two years. Which of the following is true? A) Because Cade was told by finance that he had to change his budget, he is working with an imposed budget. B) Cade is working with a rolling budget at Mallards Manufacturing. C) The new budget that Cade will create will be less realistic than the original budget. D) The new budget will have slack built into because the actuals are being used for the last current period. Answer: B Explanation: A rolling budget is the most realistic of the budget types because it updates the most recent period with actual balances before the new budget is developed. Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

17) Mayco Manufacturing has multiple manufacturing plants throughout the southeastern United States. Once a year, the plant managers meet in the corporate headquarters where they are given their budgets for the next year. After the budgets are reviewed, the plant managers use the budgets to plan the next year at their respective plants. Which of the following can be said about Mayco Manufacturing? A) By allowing the plant managers to review the budgets, Mayco is using a participative budget. B) By not allowing the plant managers to have input to their budgets, it can be said that the plant managers are working with imposed budgets. C) Once back at the plant, the plant manager will ensure that the inflow of cash and the outflow of cash balance. D) When the plant manager gets back to his plant, they will add anything they think is missing before applying the budget to their plant's budget for the next year. Answer: B Explanation: When a budget is developed by management at higher levels without input from the management levels that perform the work, the budget is called an imposed budget. Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 18) Rashad was excited to be going to work for a What's What retail store. On his first day at the store, he attended a meeting with the store manager and all the other employees. The purpose of the meeting was for the manager to present the budget for the next year. Several of the employees suggested changes to some of the categories that would incur additional expenditures but would improve worker productivity. After a discussion, the store manager agreed to adopt the changes. Which of the following can be said about this What's What store's budgeting process? A) Because some of the categories were changed, the manager will have to review the budget in order to balance the revenues and the expenditures. B) By accepting suggestions that will affect the budget from the employees, the store manager is developing a participative budget. C) The budget for the store is a rolling budget because the store manager is updating using employee suggestions. D) This What's What retail store is using an imposed budget because the store manager presented the budget. Answer: B Explanation: A budget developed using input from the employees that are most knowledgeable about activities that affect an area is called a participative budget. Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

19) Juwan is updating the budget for Pittman's Cycle Shop. His manager has told him that a new piece of equipment has been purchased with a monthly loan payment of $123.50 for the next six months. Juwan adds the new payment to the budget and returns the budget to his boss, Laura. Laura tells him that he cannot just add the new expense, but that instead he must review the budgeted amounts in different categories so that both budgeted revenue and budgeted expenses balance. Which of the following is true? A) Laura is explaining how a zero-based budget is developed. B) Pittman's Cycle Shop is using a participative budget. C) The addition of a new payment has caused Juwan to use an imposed budget. D) The budget for Pittman's Cycle Shop will be more realistic because of the changes Juwan will make. Answer: A Explanation: To create a zero-based budget, the revenues and expenses must be reviewed to ensure that revenues minus expenses equal zero. Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 20) At the end of the year, each of the department heads is provided with a report that shows their actual expenditures compared to the budgeted amounts the departments heads submitted during the budgeting process. Tu was excited to see he was 15% under budget which meant he would get a bonus. Several of the other department heads asked how he always seems to earn the bonus. One explanation for his success could be A) he adds an extra 15% above what he thinks he will spend in his budget numbers. B) he submits a budget number less than he thinks he will spend. C) he uses the use-it-or-lose-it philosophy when creating his budget. D) management cut his budget after he submitted it. Answer: A Explanation: Increasing the budget amount above what is genuinely thought to be needed in order to make it easier to meet goals is called adding slack. Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

21) While preforming an internal audit at a production plant, the auditor notices there are a significant number of end-of-the-year purchases that the auditor cannot explain. The auditor reviewed the previous year and found a similar situation. The auditor begins to think the plant is using a ________ budgeting method. A) budgetary slack B) cost plus C) flexible D) use-it-or-lose-it Answer: D Explanation: In the use-it-or-lose-it budgeting method, managers spend all their allocated funds in the budget period to avoid being granted less funds in subsequent budgeting periods. Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 22) Mallards Manufacturing's budget for the next year is due by October 31 of the current one. Emma, the head of the production department, received an Excel file with the previous year and current year costs for her department. Emma has been asked to use the information to create the budget for the department for next year. Emma met with the department supervisors to get their input on the budget. After she met with the supervisors, she added an additional 10% to each of the categories before submitting the budget to finance. This budgeting method could be described as a(n) A) imposed budget using use-it-or-lose-it method. B) imposed budget with slack. C) participative budget using use-it-or-lose-it method. D) participative budget with slack. Answer: D Explanation: Developing a budget using input from the employees that are most knowledgeable about activities that affect an area is called a participative budget, and increasing the budget amount above what is genuinely thought to be needed in order to make it easier to meet goals is called adding slack. Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

23) John, the production supervisor at Walrus Ball Caps, is reviewing his monthly actual expenses versus budget expenses for his production line. He needs to provide finance with his budget for next year. He notices he is significantly under budget in the supplies category. To ensure his budget does NOT get reduced for the next year, he has the purchasing agent order enough supplies to bring the category to close to the budget. This budgeting method could be described as a(n) A) imposed budget using the use-it-or-lose-it method. B) imposed budget with slack. C) participative budget using the use-it-or-lose-it method. D) participative budget with slack. Answer: C Explanation: Developing a budget using input from the employees that are most knowledgeable about activities that affect an area is called a participative budget, and believing that if he does not spend all of his budget, then he will lose it, is called "use it or lose it" thinking. Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 24) Juwan is updating the budget for Pittman's Cycle Shop. His manager has told him that a new piece of equipment has been purchased with a monthly loan payment of $123.50 for the next six months. Juwan adds the new payment to the budget and returns the budget to his boss, Laura. Laura tells him that he cannot just add the new expense, but that instead he needs to review/adjust budgeted amounts in each category so that the inflow minus the outflow equal zero. Juwan updates the budget and sends it to Laura. Laura adds an additional 15% to each category before submitting the budget to finance. This an example of a(n) A) imposed budget using the use-it-or-lose-it method. B) participative budget using slack. C) rolling budget using the use-it-or-lose-it method. D) zero-based budget using slack. Answer: D Explanation: To create a zero-based budget, the revenues and expenses must be reviewed to ensure that the revenues minus the expenses will equal zero, and increasing the budget amount above what is genuinely thought to be needed in order to make it easier to meet goals is called adding slack. Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

25) Casey's Boardshorts Store's manager, Rashad, had an unexpected cleaning expense when a water pipe burst in the ceiling. At the end of each month, any unexpected expenses are added to the budget, and other categories are updated with the actual expenditures before the new budget is created. Casey's Boardshorts Store's budget is a(n) ________ budget. A) imposed B) participative C) rolling D) zero-based Answer: C Explanation: A rolling budget is the most realistic of the budget types because it updates the previous period's actual balances before the new budget is developed. Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 26) Trayvon, a supervisor at Mayco Manufacturing, was discussing issues in his production area with the plant manager. Trayvon suggested that changes to the flow of materials would increase productivity but would cost about $50,000. As the plant manager was in the process of updating his budget for the next year, he added $50,000 for the changes to the proposed budget. This is an example of a(n) ________ budget. A) imposed B) participative C) rolling D) zero-based Answer: B Explanation: A budget developed using input from the employees that are most knowledgeable about activities that affect an area is called a participative budget. Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

27) Alios recently changed jobs to become the Southeast sales manager for Waycom Electronics. He previously worked for Marcom. His first month with company, he received a budget that reflected his sales goals for the next year. This surprised him because he had always developed his sales revenue goals for the next year. When he questioned the VP of Sales at Waycom, he was told that that was not part of his responsibility at Waycom. Which of the following is true? A) Marcom was using a participative budget, and Waycom is using an imposed budget. B) Marcom was using an imposed budget, and Waycom is using a zero-based budget. C) Waycom is using a rolling budget, and Marcom was using a participative budget. D) Waycom is using a rolling budget, and Marcom was using an imposed budget. Answer: A Explanation: A budget developed using input from the employees that are most knowledgeable about activities that affect an area is called a participative budget, and when a budget is developed by management at higher levels without input from the management levels that perform the work, the budget is called an imposed budget. Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 28) Carolyn was recently hired at Thermo Chocolate Company in the role as internal auditor. To acquaint herself with company's budgeting process, she reviews the last three years Actual versus Budget reports. She notices that one of the managers seem to always spend what he budgeted even when there are significant changes to revenues. Other managers seem to have more significant differences as she what have expected given the changes in revenue. The auditor begins to think the manager is A) using a flexible budget that makes it easier to make his budget. B) using a use-it-or-lose-it budgetary method to ensure his budget is not cut in the next year. C) using budgetary slack to make his budgets. D) using cost plus to make his budget. Answer: B Explanation: In the use-it-or-lose-it method, managers spend all their allocated funds in the budget period to avoid being granted less funds in subsequent budgeting periods. Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

29) Macda is responsible for determining how to bring a new product to market. He has considered manufacturing it in the southeast but decides to have it produced in the northeast because a critical raw material is manufactured near that plant and would be easier to source from there. This planning would be considered during the ________ step of strategic planning. A) goals and objectives B) measures and targets C) mission and vision D) strategies and initiatives Answer: D Explanation: As short-term objectives are created and long-term goals are established, techniques and methods are chosen to meet short-term objectives and long-term goals. These techniques are created during the strategies and initiatives step of the strategic planning process. Diff: 2 LO: 2 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 30) Arrange the following steps in the correct order with reference to the strategic planning process: 1. Goals and objectives 2. Measures and targets 3. Results 4. Strategies and initiatives 5. Mission and vision A) 5, 1, 4, 2, and 3 B) 1, 4, 2, 3, and 5 C) 5, 1, 2, 4, and 3 D) 1, 2, 3, 4, and 5 Answer: A Explanation: The steps to the strategic planning process are: 1. Mission and vision; 2. Goals and objectives; 3. Strategies and initiatives; 4. Measures and targets; and 5. Results. Diff: 1 LO: 2 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

31) Which of the following statements is correct in the context of centralization? A) Centralization creates accountability and responsibility among the employees. B) Centralization improves managers' performances. C) Decisions are made at all levels of an organization. D) Decisions are made at the highest level of an organization. Answer: D Explanation: Centralization is the concentration of power and decision-making authority within the hands of top-level executives of an organization. Whereas, decentralization refers to the freedom of decision-making among the managers at different organizational levels. Decentralization promotes autonomy in the organization. Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 32) TWV is successful marketing company. In an interview, the company's CEO agreed that shifting the authority for some types of decision making to lower levels in the organization plays a main role in the company's overall success. What kind of organizational structure is TWV using? A) Centralized structure B) Decentralized structure C) Flat structure D) Tall structure Answer: B Explanation: A decentralized structure refers to a structure that the freedom of decision-making to be distributed among the managers at different organizational levels. This promotes the autonomy in the organization. Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

33) Walrus Ball Caps had a great year in sales, resulting in greater profits than were planned. The company has decided to use some of these profits to replace aging equipment. Jun was told to come up with a proposal that would spend $150,000 on replacement equipment. Which of the following is true? A) Because Jun was responsible for investing the $150,000 on long-term assets, he would be responsible for an investment center. B) Because profits increased, costs must have been controlled. Jun must therefore have responsibility for a cost center. C) The $150,000 that Jun was responsible for spending was the result of increased sales. This would mean he has responsibility for a revenue center. D) The $150,000 that Jun was responsible for spending was the result of increased profits. This would mean he has responsibility for a profit center. Answer: A Explanation: The investment of subsequent returns of a company's resources in long-term assets is done by an investment center. Diff: 2 LO: 2 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 34) Organizational structure and budgets are linked together. What type of budget is most commonly used in decentralized organizations? A) Imposed Budget B) Participative budget C) Rolling Budget D) Zero-based Budget Answer: B Explanation: Decentralization is an organizational structure in which decision-making power is delegated to managers of respective departments. Participative budgets are prepared with the help of different managers of those respective departments and suggestions are taken by employees related to those particular budgets. Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

35) Santiago, one of the accountants for a company, was reviewing the direct materials purchases budget for the production line and noticed a 15% increase in the budget compared to the prior period budget. What could have caused the increase in the direct materials purchases budget, and who should he talk to about the cause? A) The increase in the direct materials purchases budget could have been caused by an increase in production direct labor costs, and he should talk to the production manager who prepared the budget. B) The increase in the direct materials purchases budget could have been caused by an increase in manufacturing overhead costs, and he should talk to the plant manager who provided the budget. C) The increase in the direct materials purchases budget could have been caused by a decrease in the quantity of the direct materials needed, and he should talk to the production manager who prepared the budget. D) The increase in the direct materials purchasing budget could have been caused by an increase in the purchasing price, and he should talk to the purchasing manager who provided the budget. Answer: D Explanation: The purchasing manager is responsible for providing the direct materials purchases budget. An increase in the quantity of direct materials needed and/or an increase in purchasing prices could cause an increase in the direct materials purchases budget. Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 36) Eatsy manufacturing creates a master budget that includes budgets for each of the responsibility centers of the company using input from the person responsible for each center. Decision-making responsibility is given to each of the managers of their responsibility centers. Manuel is a production supervisor responsible for managing the packaging line that produces organic food bars. Each month, he gets a report that shows the expenditures for his line and is responsible for explaining any major discrepancies. What type of organizational structure does Eatsy use, and what kind of responsibility center does Manual manage? A) Easty has a centralized organizational structure and Manuel manages an investment center. B) Easty has a centralized organizational structure and Manuel manages a revenue center. C) Easty has a decentralized organizational structure and Manuel manages a profit center. D) Easty has a decentralized organizational structure and Manuel manages a cost center. Answer: D Explanation: By allowing the managers of the responsibility centers to make decisions, the structure should be considered decentralized. Because Manuel is only responsible for the expenditures (costs), he manages a cost center. Diff: 2 LO: 2 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 20

37) Bylue Inc. has set a long-term plan to increase production by 100% over the next five years. Jose uses this information to set up a purchase plan for new equipment for the next year that will allow an increase in production of up to 20% in the next year on the way to the 100% increase by year five. Which of the following is true? A) The 100% increase in production would have been reflected in the next year's master budget affecting the manufacturing costs. B) The purchase of new equipment would have been identified in the mission and vision step of the strategic planning process. C) The purchase plan for new equipment would have been identified during the strategies and initiatives step of the strategic planning process. D) The purchase plan was a short-term objective that was created during the goals and objectives step to support the long-term goal of 100% increase in production. Answer: D Explanation: To meet long-term goals, short-term objectives, to be accomplished in the coming year, are created to support the ultimate attainment of the long-term goals. Diff: 1 LO: 2 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 38) Henry manages the working capital, debts, stocks, plant, and machinery of the organization. Which responsibility center is managed by Henry? A) Cost Center B) Investment Center C) Profit Center D) Revenue Center Answer: B Explanation: A business unit that is managed according to its area of control is called the responsibility center. The investment center manager is responsible for profit or loss and decisions related to the company's investments. He also manages the company's assets. Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

39) Mallards Manufacturing's senior executives meet once a year to discuss where the company is going and what changes need to be made to get there. This may include adding new product lines or discontinuing existing lines. It might also include plans for new plants and sales offices. What are the expected results of this meeting? A) A mission statement and vision statement(s) were created. B) A set of goals and objectives were created that will be used to create the budget. C) A set of strategies and initiatives were written that will be used to create the company's budget. D) Measures and targets were developed to be used in employee reviews. Answer: A Explanation: As companies change directions or business environments change over time, these companies periodically review where they are going and update their mission statement to reflect the company's new direction(s). They may also update the description of what they hope to look like in the future, and this description is often called a vision statement. Diff: 2 LO: 2 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 40) In 2015, Hanson Services set a vision of entering a new area of business that would increase revenue by 25% over the next five years. The end of the year, reports for 2020 show that Hanson was successful in entering the new area of business and that they had increased revenue by 30% as a result. Given that the vision has been accomplished, what would Hanson Services need to do before they can create a master budget for the next year? A) Hanson Services would simply update the new sales budget for the next year. B) Hanson Services would need to decide where it wants to go next and update its mission and vision statements to reflect their new purpose and destination. C) Hanson Services would not need to make any changes. D) Hanson Services would update the measures and targets to reflect the 30% increase in revenue. Answer: B Explanation: As the vision reflected a goal to be accomplished in the future and drives the mission until it is realized, once the vision has been accomplished, both the mission and vision would need to be updated to reflect new purposes and objectives. Diff: 2 LO: 2 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

41) The new year has begun, and Casey has received the first month's actual expenditures. In reviewing the data provided, she realizes the key performance indicators (KPIs) set by the master budget for labor overtime has been exceeded. She asks for a detailed report of transactions that were used to calculate the KPIs. The data she was provided came from the A) actual labor hours reported by the employees. B) master budget numbers developed for the current year. C) objectives set by the company during the strategic planning process. D) techniques that were chosen to support the strategies adopted by the company. Answer: A Explanation: KPIs are created using the actual transactions that are recorded by the company for the given period. Employees would report their daily work hours. Any hours worked above the weekly normal hours would be identified as overtime and used to calculate the KPIs for overtime labor. Diff: 2 LO: 2 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 42) Aibir is preparing for his annual review with the VP. He has spent the last week reviewing the monthly reports focusing on sales made by his sales representatives. Overall, he thinks he is in a good position as he has made 103% of his key performance indicators (KPIs) for sales, and his expenses are within 1.5% of the budget. During the meeting, the VP comments that Aibir's sales numbers are good and he is happy with the expense management. What kind of responsibility center is Aibir's department? A) The department is a cost center because Aibir is only responsible for expenses. B) The department is a profit center because Aibir is responsible for generating sales revenues and maintaining expenses. C) The department is a revenue center because Aibir is only concerned with sales. D) The department is an investment center because Aibir is reviewing the monthly reports. Answer: B Explanation: When a department is evaluated based on their sales (revenue) and expenses, the department is classified as a profit center. Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

43) Gabriel has worked for Cartoon Express Manufacturing for the last three years as warehouse manager for the company's distribution center. He received next year's budget from finance, and in reviewing the budget, he noticed that there was not any money for a new piece of equipment that he wants to buy to improve stocking shelves in the warehouse. Gabriel makes a change to include the equipment purchase in his budget and sends it back to finance. The budget was returned to him without the new equipment and with a note from finance that told him additions to the budget are made by headquarters, and he cannot change the budget. Which of the following is true? A) Cartoon Express Manufacturing is a centralized decision-making organization that uses a rolling budget. B) Cartoon Express Manufacturing is a centralized decision-making organization that uses an imposed budget. C) Cartoon Express Manufacturing is a decentralized decision-making organization that uses an imposed budget. D) Cartoon Express Manufacturing is a decentralized decision-making organization that uses a rolling budget. Answer: B Explanation: A budget created and approved by top executives and then forced down on the organization is an imposed budget. Because the budget is created by headquarters, the organization of the company should be considered centralized. Diff: 2 LO: 1, 2 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

44) Johnson Retail has seven stores located throughout the state of Vermont. Once a year, store managers meet in the corporate headquarters where they are given their budgets that were created by finance for the next year. Over the course of that week, finance presents the budgets for each store allowing store managers to ask questions about their budget and to make changes to their budgets. Which of the following is true? A) Johnson Retail is a centralized decision-making organization that uses a rolling budget. B) Johnson Retail is a centralized decision-making organization that uses a participative budget. C) Johnson Retail is a decentralized decision-making organization that uses a rolling budget. D) Johnson Retail is a decentralized decision-making organization that uses a participative budget. Answer: D Explanation: The development of the budget by finance would indicate a centralized decisionmaking company, but because the plan managers can make changes, it indicates a decentralized decision-making organization. Since the plant managers, who know the most about their parts in the plant's activities, are allowed to provide input to the budget, the budget should be considered a participate budget. Diff: 2 LO: 1, 2 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 45) Victoria, a supervisor at Wholesale Foods, was in meeting with her manager discussing issues in the production area. Victoria suggested that changes to the flow of materials would increase productivity but would cost about $105,000 in new equipment. As the plant manager was in the process of updating his budget for the next year, he changed the budget to add $105,000 for the purchase of new equipment. What kind of organizational structure and budget type is described above? A) Victoria works for a company that has a centralized organizational structure and uses a rolling budget type. B) Victoria works for a company that has a centralized organizational structure and uses an imposed budget type. C) Victoria works for a company that has a decentralized organizational structure and uses a zero-based budget type. D) Victoria works for a company that has a decentralized organizational structure and uses a participative budget type. Answer: D Explanation: Decentralization is an organizational structure in which decision-making power is delegated to managers of respective departments. Participative budgets are prepared with the help of different managers of those respective departments, and suggestions are taken by employees related to those particular budgets. Diff: 2 LO: 1, 2 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 25

46) Binita had recently gone to work for Augustine Services as a division manager. She was told she would receive the next year's budget in few weeks. After receiving the budget, she suggested some additional changes to expenses for supplies. Finance told her she could make the changes but would need to balance revenues with expenses. Augustine Services has a(n) ________ budget in a ________ organization structure? A) imposed, decentralized B) participative, centralized C) rolling, centralized D) zero-based, decentralized Answer: D Explanation: To create a zero-based budget, the revenues and expenses must be reviewed to ensure that the revenues minus the expenses will equal zero. Decentralization is an organizational structure in which decision-making power is delegated to managers of respective departments. Diff: 2 LO: 1, 2 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 47) Jessica has just launched an online store where she will be selling high-end pet apparel. She wants to start this business off on the right foot and is creating a Cost of Goods Sold Budget for the month of September of this year. She has gathered as much information as possible and is ready to get to work. She made her first purchase last month in the amount of $165 but did not have any sales. She will be purchasing 500 units from a supplier with a price of $2.48 per unit. She believes she will end the month with Merchandise Inventory in the amount of $120. How much will Jessica's Cost of Goods Sold Budget be for September? A) $165 B) $1,120 C) $1,285 D) $1,525 Answer: C Explanation: The formula needed to calculate the Budgeted Cost of Goods Sold is Beginning Merchandise Inventory + Purchases - Ending Merchandise Inventory. Although Jessica is launching her business this month, it must be noted that she would have beginning inventory that had been purchased during the previous month. Start with Beginning Merchandise Inventory of $165, add her Purchases of $1,240 ($2.48 per unit × 500), and subtract her Ending Merchandise Inventory of $120 to arrive at a Budgeted Cost of Goods Sold of $1,285. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

48) Jenson is in the furniture business. He observed increasing demand for office chairs, and strongly anticipates even better results in the next quarter. Jenson decides to reconsider his production plans, and he comes up with the following production budget for the second quarter: April May June

600 units 660 units 700 units

Jenson determines that every unit needs 2 hours of direct labor (DL) time. He pays $20 per hour to his daily wage workers. Considering the given information, which of the following is correct? A) For the second quarter, total DL hours and total DL cost will be 1,200 and $24,000 respectively. B) For the second quarter, total DL hours and total DL cost will be 3,920 and $78,400 respectively. C) For the second quarter, total DL hours and total DL cost will be 1,320 and $26,400 respectively. D) For the second quarter, total DL hours and total DL cost will be 3,960 and $77,600 respectively. Answer: B Explanation: Budgeted DL Hours Needed = Budgeted Units to be Produced × Quantity of DL Hours per Unit = [(600 × 2) + (660 × 2) + (700 × 2)] = (1,200 + 1,320 + 1,400) = 3,920. Budgeted DL Cost = Budgeted DL Hours Needed × Budgeted DL Cost per Hour = 3,920 × $20 = $78,400. Diff: 3 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

49) Chaitanya, the purchasing manager of direct materials at AirFun, was reviewing the budgeted balance sheet for the upcoming year. She noticed that the accounts payable account for direct materials had increased significantly. She needs to understand what caused the increase. She should find the cause of the increase ________ and could get an explanation from ________. A) on the budgeted balance sheet under Direct Material Inventory balance, the CFO about the reason for the increase B) on the budgeted cash flow statement under the Operating Activities section, the plant manager about the reason for the increase C) on the budgeted income statement under Sales, the VP of Sales about the reason for the increase D) on the Direct Materials Purchases budget, the plant manager about the reason for the increase Answer: D Explanation: Once the production budget has been set, it is used to determine the direct materials purchases. An increase in raw materials purchases on credit and/or an increase in the materials costs would increase the accounts payable account for direct materials. Diff: 2 LO: 3 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 50) XYZ Company produces and sells chairs. Quarterly budgeted sales are as follows: Quarter 1 Quarter 2 Quarter 3 Quarter 4

4,500 5,000 3,000 4,800

The ending inventory of finished goods (FG) for a given quarter includes 5% of the next quarter's budgeted sales. Calculate the budgeted units to be produced for Quarter 3. A) 3,090 B) 4,525 C) 4,560 D) 4,900 Answer: A Explanation: Budgeted Units to be Produced = Budgeted Sales Volume + Target Ending FG Inventory - Beginning FG Inventory = 3,000 + (4,800 × 5%) - (3,000 × 5%) = 3,090 units Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

51) AP Corp is a well-known name for producing the best quality hammers in the town. Dmitri, a manager in the firm, wants to know the maximum production capacity possible within the budgeted amount. It requires 12 minutes of direct labor (DL) time to manufacture 1 hammer, and the hourly wage rate of direct labor is $11. Help Dmitri calculate the number of hammers that can be produced if the management approves a budget of $19,800 for direct labor. A) 3,630 units B) 3,960 units C) 9,000 units D) 9,900 units Answer: C Explanation: The number of hammers produced = $19,800/((12/60) × $11) = 9,000 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

52) Dave, the owner of Dave's Doughnuts, has prepared an operating budget that shows the following data for the quarter ended March 31: Projected sales January February March Selling, General, and Administrative Costs Interest Expense

1,300 Doughnuts 1,600 Doughnuts 1,425 Doughnuts $4,250 $ 500

The sales price of each doughnut is $4.75, and the cost to produce each doughnut is $3.10. The company's tax rate is 30%. Based on this information, what amount would Dave's budgeted income statement show for net income? Round all calculations to two decimal places. A) $1,670.37 B) $2,386.25 C) $2,886.25 D) $7,136.25 Answer: A Explanation: A total of 4,325 doughnuts are projected to be sold during the quarter ending March 31. The net income would be determined by preparing a budgeted income statement as follows: Dave's Doughnuts Budgeted Income Statement For the Quarter Ending March 31 Sales $20,543.75 (4,325 × $4.75) Less: Cost of Goods Sold 13,407.50 (4,325 × $3.10) Gross Margin $ 7,136.25 Less: Selling, General, and Administrative Costs 4,250.00 Operating Income $ 2,886.25 Less: Interest Expense 500.00 Income Before Tax $ 2,386.25 Less: Income Tax 715.88 Net Income $ 1,670.37 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

53) Peter, a part-time intern in an enterprise, estimates that budgeted units of production for the next month need to be 5,000 units to achieve the targeted sales. The production of one unit requires 0.30 direct labor (DL) hours, and the hourly rate of labor is $10. Based on the given data, the total budgeted DL hours required and total budgeted DL cost are A) 1,000 and $15,000 respectively. B) 1,500 and $15,000 respectively. C) 1,500 and $22,500 respectively. D) 5,000 and $10,000 respectively. Answer: B Explanation: Budgeted DL Hours Needed = Budgeted Units to be Produced × Quantity of DL Hours per Unit = 5,000 × 0.30 = 1,500; Budgeted DL Cost = Budgeted DL Hours Needed × Budgeted DL Cost per Hour = 1,500 × $10 = $15,000. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 54) XYZ Company produces and sells chairs. Monthly budgeted sales are as follows: June July August September October

450 500 300 480 430

The ending inventory of finished goods is 5% of the next month's budgeted sales. 10% of sales are budgeted as cash sales and the remaining sales are budgeted as credit sales. According to the company records, 40% of credit sales are collected in the same month, 35% are collected in the next month, 22% are collected two months after the sale, and remaining are uncollectible. If company is selling 1 chair for $150, then calculate total cash received in September. A) $55,762 B) $57,690 C) $61,260 D) $62,145 Answer: D Explanation: Budgeted Cash Receipts = Budgeted Cash Sales + Budgeted Collections on Credit Sales = (480 × $150 × 10%) + (500 × $150 × 90% × 22%) + (300 × $150 × 90% × 35%) + (480 × $150 × 90% × 40%) = $7,200 + $14,850 + $14,175 + $25,920 = $62,145. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

55) Aclass Technology is currently selling 20,000 tablets per year. The company is expecting to increase their tablet sales by 20% in the next year with a new marketing strategy. At a price-pertablet of $350, how much in budgeted sales revenue should the company expect? A) $1.4 million B) $5.6 million C) $7 million D) $8.4 million Answer: D Explanation: Budgeted Sales Revenue = Budgeted Sales Volume × Budgeted Selling Price = 20,000 (1 + 20%) × $350 = $8,400,000 or $8.4 million. Diff: 1 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 56) Joycups is currently manufacturing ice-cream cones. The company requires 7 minutes of direct labor (DL) time to manufacture 1 cone, and the direct labor rate is $12 per hour. What is the total budgeted DL cost to produce 5,000 cones? (Do not round values during intermediate calculations.) A) $4,200 B) $5,000 C) $7,000 D) $8,571 Answer: C Explanation: Budgeted DL Cost = Budgeted DL Hours Required × Budgeted DL Cost per Hour = (5,000 × 7/60) × $12 = $7,000. Diff: 1 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

57) If Mia charged $450 for the services provided to Olivia and Olivia used her credit card to pay her bill, how Mia would record this transaction? A) Debit the Cash account for the amount of sale – Amount of merchant fees; Debit the Merchant Fees Expense account for the amount of fees; and Credit the Sales account for the total amount of the sale B) Debit the Cash account for the amount of the sale; Credit the Merchant Fees Expense account for the amount of the fees; and Credit the Sales account for the amount of the sale – the amount of the merchant fees C) Debit the Sales account for the amount of the sale; Credit the Cash account for the amount of the sale – the amount of the merchant fees; and Credit the Merchant Fees Expense account for the amount of the fees D) No entry Answer: A Explanation: When a seller or service provider receives a credit card payment, they need to consider a reduction in the cash value of the transaction as a result of any credit card processing fees. In Mia's register, the entry would look like:

Cash Merchant Fees Expense Sales

Debit (450 - merchant fees (XXX)) XXX

Credit

450

Diff: 1 LO: 3 Bloom: C AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 58) Rose Bags Company plans to sell 8,000 bags in April and expects a growth rate in sales of 5% per month. The monthly target ending finished goods (FG) inventory (in bags) is 20% of the next month's planned sales. There are 2,000 bags in inventory on March 31. The number of budgeted units (in bags) to be produced in April is A) 6,000 bags. B) 7,680 bags. C) 8,320 bags. D) 9,680 bags. Answer: B Explanation: Budgeted Units to be Produced = Budgeted Sales Volume + Target Ending FG Inventory Units - Beginning FG Inventory Units. Budgeted Sales Volume is 8,000 bags + Target Ending FG Inventory Units (8,000 bags × (1 + 5%) × 20%) - Beginning FG Inventory Units 2,000 bags = 7,680 bags. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 33

59) Fedrick, of Zenith Bakery, estimates the sale of 180 cookies and the production of 200 cookies for January. Each cookie requires 10 grams of flour and costs $0.2 per gram. Budgeted ending flour requirement is estimated to be 500 grams and beginning flour inventory is 200 grams. How much flour needs to be purchased, and how much will it cost? A) 1,700 grams, $340 B) 2,700 grams, $540 C) 2,300 grams, $460 D) 2,000 grams, $400 Answer: C Explanation: The Budgeted Quantity of Direct Material (flour) = (Budgeted Units to be Produced × Budgeted Quantity of Material required) + Budgeted Ending Direct Material Inventory Quantity − Budgeted Beginning Direct Material Inventory Quantity Budgeted Quantity of Direct Material = (200 × 10) + 500 − 200 = 2,300 Budgeted Cost of Direct Material = Budgeted Quantity of Direct Material × Price per Unit of Direct Material Budgeted Cost of Direct Material = 2,300 × $0.2 = $460 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

60) Starfish Candy Manufacturing Inc. makes and distributes uniquely flavored candy to major retailers across the US (seaweed-turmeric taffy, anyone?). Premium candy costs $2 per piece and regular candy costs $1 per piece. The marketing and sales department projects credit and cash sales volume for the month of March as follows:

Debit Card Credit Card Cash/Check Credit Sales

Premium pieces Regular pieces 50 50 75 75 25 25 100 150

What is the total budgeted gross sales for March? A) $450 B) $500 C) $575 D) $800 Answer: D Explanation: Debit cards, credit cards, and credit sales are all included in the sales forecast (Sales Budget). The total budget for Premium is $500 and Regular is $300 for a total of $800. See additional explanation below:

Debit Card Credit Card Cash/Check Credit Sales Total Budget Sales Volume Price per piece Budget Gross Sales

Premium Regular Total 50 50 75 75 25 25 100 150 250 300 $ 2.00 $ 1.00 $500.00 $300.00 = $800

Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

61) Home Furniture Inc. expects to produce 5,000 finished goods (FG) units (in tables) in October and 5,500 FG units (in tables) in November. Each table needs 2 meters of direct material (DM) in wood that costs $5 (per meter of wood). Target ending DM inventory is 10% of the next month's total production needs in DM (meters of wood). There is DM of 600 meters of wood in inventory on September 30. Total budgeted cost of DM purchases of wood during October will be A) $9,500. B) $10,500. C) $52,000. D) $52,500. Answer: D Explanation: Budgeted Quantity of DM to be Purchased = (Budgeted Units to be Produced × Budgeted Quantity of DM needed per Unit) + Target Ending DM Inventory Quantity Beginning DM Inventory Quantity; Budgeted Quantity of DM to be Purchased = (5,000 × 2) + (5,500 × 2 × 10%) - 600 = 10,500 (meters of wood); Budgeted Cost of DM to be Purchased = Budgeted Quantity of DM to be Purchased × Budgeted Cost of DM (per meter of wood); Budgeted Cost of DM to be Purchased = 10,500 (meters of wood) × $5 (per meter of wood) = $52,500. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

62) From Pickwell's sales budget, the budgeted sales volume for the month of January and February is 25,000 units and 35,000 units respectively. Sam, the production head of the Pickwell, decided that the ending inventory quantity should be 10% of the next month's sale. Based on the given information, how many units are expected to be produced in January? A) 22,500 units B) 24,000 units C) 26,000 units D) 28,500 units Answer: C Explanation: Expected Number of Units to be Produced = Budgeted Sales Volume + Budgeted Ending Inventory - Budgeted Beginning Inventory Budgeted Sales Volume = 25,000 units Budgeted Ending Inventory = 10% of the next month sale i.e. 3,500 units (10% of 35,000) Budgeted Beginning Inventory = 10% of current month sale i.e. 2,500 units (10% of 25,000), because the ending inventory for the previous month will be the beginning inventory for the current month. And, the ending inventory for December is 10% of the sales for January, and the ending inventory for December will be the beginning inventory for January. Budgeted Number of Units to be Produced = 25,000 + 3,500 - 2,500 = 26,000 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

63) Mia is working on her department's budgeted annual income statement. In the process, she needs to determine the budgeted amount for selling, general, and administrative (SG&A) expenses in order to complete her budget. Sales Variable SG&A cost Advertising expense Depreciation on office equipment Other fixed SG&A costs

12,000 units $0.20 per unit $6,000 per year $8,000 per year $25,000

On the basis of the given data, what are total budgeted selling, general, and administrative (SG&A) expenses of the department? A) $16,400 B) $33,400 C) $35,400 D) $41,400 Answer: D Explanation: Total Budgeted SG&A Costs = (Budgeted Sales Volume × Budgeted Variable SG&A Cost per Unit) + Budgeted Fixed SG&A Costs = (12,000 × $0.20) + ($6,000 + $8,000 + $25,000) = $2,400 + $39,000 = $41,400. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

64) Darius is a factory supervisor, and he is currently preparing the production budget for the next quarter. The following production budget was in place for the current quarter of the year: January February March

600 units 660 units 700 units

Darius anticipates that in the first, second, and third month of the next quarter, production will increase by 5%, 7%, and 8%, respectively, compared to the previous month's production. If every unit needs 2.5 hours of direct labor (DL) time and the hourly wage rate is $15 per hour, then what will the total number of budgeted production units, the total number of direct labor hours, and the total direct labor cost for the next quarter be? (Round your calculations to the nearest whole number amounts) A) Total budgeted production units: 1,960; Total DL hours: 4,900; Total DL cost: $73,500 B) Total budgeted production units: 2,092; Total DL hours: 5,230; Total DL cost: $78,450 C) Total budgeted production units: 2,370; Total DL hours: 5,925; Total DL cost: $88,875 D) Total budgeted production units: 6,638; Total DL hours: 16,595; Total DL cost: $248,925 Answer: C Explanation: Budgeted Units to be Produced = Budgeted Production for April + Budgeted Production for May + Budgeted Production for June = 735 + 786 + 849 = 2,370. Budgeted DL Hours Needed = Budgeted Units to be Produced × Quantity of DL Hours per Unit = 2,370 Units × 2.5 Hours = 5,925 Hours. Budgeted DL Cost = Budgeted DL Hours Needed × Budgeted DL Cost per Hour = 5,925 × $15 = $88,875. See additional explanation below: Budgeted production April January 600 (increase by 5% compared to March production) 735 May February 660 (increase by 7% compared to April production) 786 June March 700 (increase by 8% compared to May production) 849 Total 1,960 Total 2,370 Total budgeted production units DL hours used (2.5 hours per unit) Total DL hours Wages: $15 per hour Total DL cost

2,370 X 2.5 5,925 X $15 $88,875

Diff: 3 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

65) Sue works in a company that manufactures shirts for school uniforms. For the past two years, she has been handling the production department's budgets for the company. The company has a policy to stock 10% of next month's sales in finished goods (FG) inventory and 20% of direct material inventory from the next month's direct materials (DM) requirement. The following production budget was in place for the current quarter of the year.

Budgeted Sales Targeted Ending FG Inventory Total units required Beginning FG Inventory Budgeted Units to be produced

Oct. 2,100 Pairs 205 Pairs 2,305 210 2,095

Nov. 2,050 Pairs 250 Pairs 2,300 205 2,095

Dec. Quarter 2,500 Pairs 6,650 2,500 250 210 2,250 6,440

Assume that the quantity of direct material required is 2 meters of cloth for one shirt and the direct material cost per meter is $1.50. Help Sue calculate the total budgeted cost of ending DM inventory for the month of November. A) 1,257 B) 1,350 C) 6,285 D) 6,750

Answer: B Explanation: Targeted Ending DM Inventory for November = DM Required for December × 20%; 4,500 × 20% = 900 Total Budgeted Cost of Ending DM Inventory for November = Targeted Ending DM Inventory for November × Cost per Meter; 900 × $1.5 = $1,350 See additional explanation below: Production budget: Budgeted sales Add: Targeted ending FG inventory Total units required Less: Beginning FG inventory Budgeted units to be produced

Oct. 2,100 205 2,305 210 2,095

Nov. Dec. Quarter 2,050 2,500 6,650 250 2,300 2,500 205 250 210 2,095 2,250 6,440

Direct materials purchase budget: Budgeted units to be produced Quantity of DM per unit DM required (in meters) Targeted ending DM inventory DM cost per meter Total Budgeted cost of ending DM inventory

Oct. Nov. Dec. Quarter 2,095 2,095 2,250 6,440 X 2 X 2 X 2 X 2 4,190 4,190 4,500 12,880 838 900 X 1.50 X 1.50 1.50 1.50 1,257

1,350

Diff: 3 LO: 3 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

66) Jack is preparing the production budget for Candy Cane Corporation (CCC). Jack determines that the production department generally holds 20% of the following month's budgeted sales in ending inventory each month. From the sales and marketing department, Jack learned that budgeted unit sales for the next 3 months are: January; 1,000 units, February; 1,500 units, and March; 2,500 units. How many units should Jack have the production department produce in February? A) 1,100 units B) 1,700 units C) 2,000 units D) 3,300 units Answer: B Explanation: For February, start with a sales volume of 1,500. Then, add 500 for the target ending inventory. Next, subtract the beginning inventory of 300 for February from the budgeted units to be produced. See additional explanation below: 20% of next month's budgeted sales January February

Ending Inventory Production Budget Budgeted Sales Volumes Add: Target Ending Finished Goods (FG) Inv. (20% of next month's sales)

1,000

1,500

300

500

Total Units Needed Less: Beginning FG Inv. (Previous Month's Target Ending FG Inv. or 20% of current month sales)

1,300

2,000

200

300

Budgeted Units to be produced

1,100

1,700

Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

67) Sheer, an accountant at a Trader Joe's store, is working on the cost of goods sold (COGS) budget. He extracts some data from the purchase budget to complete the COGS budget. Based on the purchasing budget, the budgeted beginning and the ending finished goods inventories are 170 and 200 units respectively, and the budgeted purchases are 540 units at $4.30 per unit. What will the expected COGS be for the month of August? A) $2,193 B) $2,451 C) $2,800 D) $2,913 Answer: A Explanation: Budgeted COGS = Beginning Inventory + Purchases - Ending Inventory = (170 × $4.30) + (540 × $4.30) - (200 × $4.30) = $731 + $2,322 - $860 = $2,193. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 68) AXN Corporation is a well-known name in the production of high-quality metal boxes. The VP of store operations has asked the sales manager to provide him the sales forecasts for the third quarter of the year. The sales manager, Kevin, has provided him the following information:

Month June July August September October

Budgeted Sales 540 640 720 760 780

Budgeted Sales Price per Unit $24.00 $25.00 $25.40 $25.50 $25.60

What will the budgeted gross sales be for the third quarter of the year? A) $16,000 B) $18,288 C) $53,000 D) $53,668 Answer: D Explanation: Budgeted Gross Sales = Budgeted Sales Units × Budgeted Selling Price = (640 × $25) + (720 × $25.40) + (760 × $25.50) = $16,000 + $18,288 + $19,380 = $53,668. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

69) July, the current operating month of XBL Corporation has reported less production, and it is determined that this month will end with more raw material inventory than budgeted. Based on the records, July's ending raw materials inventory will be 560 kilograms. The head of finance for the company has asked Joshua, the head of the purchasing department, to submit the department's direct materials purchases budget for August 2021. From the production budget, Joshua saw that budgeted production for August is determined to be 750 units, and that it would require 6 kilograms of raw material to produce one unit. The Company has a policy of maintaining a safety stock of 450 kilograms of raw material, and one kilogram of raw material costs the company $8. What will the budgeted cost of direct material (DM) to be purchased be for August 2021? A) $4,390 B) $6,000 C) $35,120 D) $36,000 Answer: C Explanation: Budgeted Quantity of DM to be Purchased = (Budgeted Units to be Produced × Budgeted Quantity of DM Needed per Unit) + Targeted Ending DM Inventory - Beginning DM Inventory = (750 × 6) + 450 - 560 = 4,500 + 450 - 560 = 4,390Kg Budgeted Cost of DM to be Purchased = Budgeted Quantity of DM to be Purchased × Budgeted Cost of DM= 4,390 × $8 = $35,120 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

70) The head of finance for Squish Corporation wants to know the expected manufacturing variable overhead cost for the third quarter of this year. In the second quarter, the company reported the manufacturing of 7,000 units and a total variable manufacturing overhead of $56,000. In addition to this, the production department has provided him the details below:

Month July August September

Budgeted Number of Units to be Manufactured 450 470 490

On the basis of the data above, what will the total variable manufacturing overhead cost of the third quarter of the year be? A) $3,600 B) $11,000 C) $11,280 D) $56,000 Answer: C Explanation: Variable Manufacturing Overhead rate per Unit = Total Manufacturing Overhead Cost/Number of Units Produced = $56,000/7,000 = $8 per Unit Budgeted Variable Manufacturing Overhead Cost = Budgeted Number of Units to be Produced × Variable Manufacturing Overhead cost per Unit July: Budgeted Variable Manufacturing Overhead Cost = 450 × $8 = $3,600 August: Budgeted Variable Manufacturing Overhead Cost = 470 × $8 = $3,760 September: Budgeted Variable Manufacturing Overhead Cost = 490 × $8 = $3,920 Total Variable Manufacturing Overhead Cost = $11,280. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

71) NBN Corporation has planned to produce 7,000 units each of NPS 1 (length 12 meters) and NPS 3 (length 12 meters) steel pipes in the month of August. It is estimated that it will takes 3 hours to produce each type of pipe. The following table provides the additional information on this: NPS 1 Quantity of Direct Material (DM) per unit (Steel) DM cost per kilogram

25 kg $2

NPS 3 28 kg $2

If the expected rate for direct labor is $15 per hour, then the total expected direct labor cost for August will be A) $84,000. B) $105,000. C) $315,000. D) $630,000. Answer: D Explanation: Budgeted Direct Labor Cost = (Budgeted Production Units × Quantity of Direct Labor Hours per Unit) × Budgeted Direct Labor Cost per Hour = (14,000 × 3) × $15 = $630,000. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

72) Mallards Manufacturing produces waterproof tarps for camping, and the company has been in business since 1955. The following budget information has been provided for the 2024 production year: Budgeted Sales Volume (Units) Targeted Ending Finished Goods Beginning Finished Goods Beginning Direct Material (Yards) Targeted Ending Direct Material (Yards) Quantity of Direct Material per Unit (Yards) Cost of Direct Materials per Yard Direct Labor Hours per Unit Direct Labor Cost per Hour

105,000 45,000 25,000 34,000 56,250 1.25 $23.50 2.3 $17.25

What is the budgeted quantity of direct materials to be purchased? A) 65,998 B) 122,247 C) 178,500 D) 209,749 Answer: C Explanation: The units to be produced must be calculated first (Sales Volume + Targeted Ending Finished Goods Quantity - Beginning Finished Goods Quantity) = 105,000 + 45,000 25,000 = 125,000. The quantity to be produced is used to calculate the quantity of direct material to be purchased ((Quantity to be Produced × Direct Material per Unit) + Targeted Ending Direct Material Quantity - Beginning Direct Material Quantity) = (125,000 × 1.25) + 56,250 - 34,000 = 178,500. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

73) Forecasted sales of Great Inc. for Quarter 1 (January / February / March) are 2,580 units, 2,780 units, 2,900 units respectively. Budgeted sales for the month of April are 3,000 units. The company has a target policy to hold ending inventory equal to 20% of the forecasted sales for next month. You are required to calculate the total units produced during Quarter 1 of the year. A) 8,344 units B) 8,433 units C) 8,434 units D) 8,443 units Answer: A Explanation: Budgeted Units to be Produced = Budgeted Sales Volume + Target End. Inv. Beg. Inv. = (2,580 + 2,780 + 2,900) + (556 + 580 + 600) - (516 + 556 + 580) = 8,344. See additional explanation below: Particulars Dec. Jan. Feb. Mar. Apr. Sales 2,580 2,780 2,900 3,000 Add: Target ending inventory 516 556 580 600 Total 516 3,136 3,360 3,500 Less: Beginning inventory 516 556 580 Budgeted Units to be Produced 2,620 2,804 2,920 Total Production for Quarter 1 8,344 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

74) ASF Corporation is manufacturing three types of products, namely L, M, and N, and is currently in process of reviewing the quarterly budgets for its products. Quarterly budgets for the company show that there are two different cash costs of manufacturing overhead (MOH) reported by the production head and the cost accountant for product M. Based on this information, the head of production has decided to reconsider all the available information and resubmit his budget. He has taken the following information to determine the budgeted cash cost of manufacturing overhead: Expected Number of Units to be Produced Budgeted Cost of Raw Material Budgeted Number of Labor Hours Required per Unit Budgeted Hourly Labor Rate Variable Manufacturing Overhead Rate per Unit Depreciation of Factory Equipment Allocated to Product M Rent Allocated to Product M

6,700 units $672,000 3 $14 $4 $2,700 $200

Based on your calculation, the budgeted cash cost of MOH for product M reported by the production head should be A) $26,800. B) $27,000. C) $29,700. D) $281,400. Answer: B Explanation: Budgeted Variable Manufacturing Overhead Cost = Budgeted Number of Units to be Produced × Variable Manufacturing Overhead Cost per Unit Budgeted Variable Manufacturing Overhead Cost = 6,700 × $4 = $26,800 Budgeted Fixed Manufacturing Overhead Cost = Depreciation Allocated to Product M + Rent Allocated to Product M = $2,700 + $200 = $2,900 Total Budgeted Manufacturing Overhead Cost = Variable Manufacturing Overhead Cost + Fixed Manufacturing Overhead Cost Total Budgeted Manufacturing Overhead Cost = $26,800 + $2,900 = $29,700 Total Budgeted Cash Cost of Manufacturing Overhead = Total Budgeted Manufacturing Overhead Cost - Depreciation Allocated to Product M = $29,700 - $2,700 = $27,000. Diff: 3 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

75) Ley Corporation, a producer of paper bags, hires Zoey as a finance intern. As an intern, Zoey is tasked with collecting and comparing actual financial data with budgets. In the process, Zoey found that company neglected to plan for manufacturing overhead costs. Zoey's manager provided the following information, and asked her to prepare the manufacturing overhead budget: Budgeted Sales Budgeted Cost of goods manufactured Budgeted cost of direct material Budgeted cost of direct labor

$760 million 45% of sales 20% of sales 10% of sales

If the company has a policy of maintaining zero work-in-progress, then what manufacturing overhead cost will Zoey calculate based on the information she was given? A) $114 million B) $190 million C) $228 million D) $418 million Answer: A Explanation: Budgeted Cost of Manufacturing Overhead = Budgeted Cost of Goods Manufactured - Budgeted Cost of Direct Material - Budgeted Cost of Direct Labor = ($760 × 45%) - ($760 × 20%) - ($760 × 10%) = $342 million - $152 million - $76 million = $114 million Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

76) Ashley, a student in a cost accounting course, gets an assignment to submit by end of the day. He is stuck in the calculation of the budgeted cost of manufacturing overhead and anxiously asks for your help. Ashley provided you with the following information and is looking forward to getting a timely response from you. Depreciation on Factory Equipment Cost of Direct Material Factory Rent Cost of Direct Labor Supervisor's Salary Budgeted Sales Commission

$4,000 $280,000 $5,000 $7,000 $6,000 $3,400

You assist Ashley with the calculation and conclude that the total budgeted manufacturing overhead costs equal A) $15,000. B) $289,000. C) $291,000. D) $295,000. Answer: A Explanation: Budgeted Cost of Manufacturing Overhead = Depreciation on Factory Equipment + Supervisor's Salary + FactoryRent= $4,000 + $5,000 + $6,000 = $15,000 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

77) Joseph is calculating the budgeted cost of goods sold for Landes Inc., a manufacturer of leather bags, to verify their sales revenue. From the company's policy, it is known that the company maintains zero work-in-process (WIP) inventory. Departmental managers provided him their budgeted reports, but Joseph realized that there is much to interpret. To save his time Joseph decided to pull the following figures from all available reports: Budgeted Cost of Direct Material Used Budgeted Cost of Direct Labor Incurred Budgeted Cost of Manufacturing Overhead Incurred Budgeted Beginning Finished Goods Inventory Budgeted Number of Units to be Produced Budgeted Ending Finished Goods Inventory

$40,250 $8,760 $2,560 260 units 500 units 10% of units produced

Joseph's analysis shows that the company's budgeted cost of goods sold is (Do not round intermediate calculations, and round the final answer to the nearest dollar.) A) $51,000. B) $51,570. C) $73,000. D) $73,229. Answer: D Explanation: Budgeted Cost of Goods Manufactured = Budgeted Cost of Direct Material Used + Budgeted Cost of Direct Labor Incurred + Budgeted Cost of Manufacturing Overhead Incurred; Budgeted Cost of Goods Sold = Budgeted Beginning Finished Goods Inventory + Budgeted Cost of Goods Manufactured- Budgeted Ending Finished Goods Inventory; Budgeted Cost of Goods Manufactured = $40,250 + $8,760 + $2,560 = $51,570 Budgeted Unit Cost = (Budgeted Cost of Goods Manufactured)/(Budgeted Number of Units Produced)= $51,570/500 = $103.14 Budgeted Cost of Goods Sold = (260 × $103.14) + $51,570 - (50 × $103.14) = $26,816.4 + $51,570 - $5,157 = $73,229.4 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

78) Sarah, the sales head for MGF Corporation is reviewing the half-yearly performance of her team. She notices that while the company is doing well in terms of profits and market share, there is a visible gap between the actual and budgeted results. In an attempt to further encourage her team, Sarah decides to review the selling, general, and administrative (SG&A) budget for July 2024. The values for July are as follows: Expected Sales: 4,670 units @ $27 per unit;Expected Production: 5,500 units; Monthly Depreciation on Office Equipment: $1,200; Monthly Property Taxes and Insurance on office: $800; Sales commission: $2.30 per unit sold; Advertising expenses: $400 per month; Webhosting: $200 per month. Based on the data given, what will the July budgeted SG&A costs be? A) $602.30 B) $629.30 C) $13,341 D) $290,607 Answer: C Explanation: Budgeted SG&A Expenses = (Budgeted Sales Volume × Budgeted Variable SG&A Expenses per Unit) + Budgeted Fixed SG&A Expenses = (4,670 × $2.30) + $1,200 + $800 + $400 + $200 = $13,341. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

79) Sarah owns a small jewelry booth at a local flea market, and she is in the process of creating a Cost of Goods Sold budget for the month of July of this year. She has collected information from her past records and notes that her Merchandise Inventory Balance for the end of June is $220. She will be purchasing 1,000 units from a supplier at a price of $0.42 per unit. She believes her Ending Merchandise Inventory will be $98. What is Sarah's Cost of Goods Sold budget for July? A) $102 B) $542 C) $640 D) $4,322 Answer: B Explanation: The formula needed to calculate the Budgeted Cost of Goods Sold is Beginning Merchandise Inventory plus Purchases minus Ending Merchandise Inventory. In this question, first note that the Ending Balance of Merchandise Inventory for June becomes the Beginning Balance of Merchandise Inventory for July. In Sarah's case she starts with her Beginning Merchandise Inventory of $220, then adds her Purchases of $420 ($0.42 per unit × 1,000), and finally subtracts her Ending Inventory of $98 to arrive at a Budgeted Cost of Goods Sold of $542. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

80) Roger is a producer of small cat toys, and he is in the process of creating a Production Budget for March of this year. He budgeted for 150 units of sales in February and expects to see a 10% increase in sales every month. Roger has created a policy where he will produce and retain 5% of next month's sales in his Finished Goods (FG) Inventory. How many Budgeted Units will Roger plan to produce for March? (Round all calculations to nearest whole unit). A) 148 B) 157 C) 166 D) 174 Answer: C Explanation: To calculate the correct number of budgeted units, employ the following formula: Budgeted Sales Volume plus Target Ending FG Inventory minus Beginning FG Inventory. To calculate Budgeted Sales, take the Budgeted Sales from February (the previous month) and multiply by 1.10 to account for the 10% increase Roger anticipates, so this would be 165 units. To calculate the target Ending FG Inventory, multiply next month's Budgeted Sales by the 5% retention that Roger would like to maintain. Next month's Sales will take 165 units (budgeted sales in March) × 1.10 (to account for the increase), so that comes out to 182 units (rounding to the nearest whole unit). Now, multiply this value by the 5% retention to arrive at 9 additional units needed. The final item to calculate is the Beginning FG Inventory. The Ending Balance for February becomes the Beginning Balance for March. To calculate this, take the 165 units budgeted for March and multiply by 5% to get 8 units (rounded to the nearest whole unit). Now, calculate − 165 units plus 9 units minus 8 units, and that equals 166 Budgeted Units that need to be to be produced. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

81) John is working on his company's financial statements for the month of June, and he would like to account for any potential accounts receivable that he is not likely to collect. John's company typically allows his clients up to 60 days to make payments, so he opts to use an accrual-based method to account for those uncollectible accounts. During June, the company sold $60,000, 75% of which was on credit. In John's experience, 15% of sales made on credit become uncollectible. What amount would John record in his monthly journal entry to account for uncollectible credit sales, and which accounts would he use? A) Debit Accounts Receivable- Customer × $6,750, Credit Bad Debt Expense $6,750 B) Debit Allowance for Doubtful Accounts $45,000, Credit Bad Debt Expense $45,000 C) Debit Bad Debt Expense $45,000, Credit Accounts Receivable-Customer × $45,000 D) Debit Bad Debt Expense $6,750, Credit Allowance for Doubtful Accounts $6,750 Answer: D Explanation: The first step to solving this question is to determine what Sales should be subjected the uncollectible percentage estimate. John's Sales for June are $60,000, and 75% of those sales are on credit. That results in a total of $45,000 of Credit Sales. John anticipates that 15% of this value will become uncollectible, so that would be an overall total of $6,750. Since John allows 60 days to make a payment, there could be a delay in learning what accounts will become uncollectible, so he will use an Allowance for Doubtful Accounts for credit. Choice D is the only answer to have both the correct total of uncollectible accounts and the proper debit and credit accounts. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

82) Fescue, Inc. is in a lawncare business that specializes in residential services. A large majority of their customers have set up accounts to pay their bills for services the month after the service has been rendered while other customers pay as soon as the work is completed. Artemis estimates that Fescue, Inc. will collect 40% of their payments in the month that the services are provided, 45% of their payments in the month after the services have been provided, and the remaining 15% of their payments two months after the services have been provided. Fescue's sales were as follows: August, $10,000; September, $13,000; October, $9,500; and November, $7,300. What will the total amount of cash collected in October be? A) $9,500 B) $9,650 C) $11,150 D) $32,500 Answer: C Explanation: This question requires you to not only calculate the sales collected in the given month but also to factor in how the collection percentages for work from previous months will contribute to the total. The correct answer is $11,150. To get the correct total for October, add $1,500 ($10,000 × 15% from 2 months prior) + $5,850 ($13,000 × 45% from the previous month) + $3,800 ($9,500 × 40% collected in the month that services are provided). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

83) Daisy Company is a customer service organization that is in the process of working on various components of their Cash Budget. Elizabeth, the accountant, is working on completing a Cash Disbursements Schedule and has decided to calculate Daisy's cash payment on Accounts Payable first. They pay their bills in the following manner - 60% of purchases are paid in month of the purchase, 30% of purchases are paid in the month following the purchase, and the remaining 10% of purchases are paid in the second month following the purchase. They made the following purchases: March, $25,600; April, $16,200; May, $22,300; June, $27,900; and July, $19,850. What will the total amount paid out by Accounts Payable for June be? A) $23,430 B) $25,050 C) $27,900 D) $66,400 Answer: B Explanation: This question requires you to not only calculate the payments made by Accounts Payable in the given month but also to factor in how their payment percentages from purchases in previous months contribute to the total. The correct answer is $25,050. To get the correct total for June, add $16,740 ($27,900 × 60% of purchases paid in the month of the purchase) + $6,690 ($22,300 × 30% of purchases paid for purchases from the previous month) + $1,620 ($16,200 × 10% of purchases paid for purchases two months prior). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 84) Sara, working as a manager in the company, is asked to submit the cash budget for the third quarter of the year. Sara's analysis shows that the third quarter will report an opening cash balance of $7,000, expected cash receipts of $22,000, and expected cash disbursements of $24,500. If the company is required to keep a minimum quarterly cash balance of $8,000, then in order to meet this requirement, the company must borrow A) $3,500. B) $4,500. C) $9,500. D) $12,500. Answer: A Explanation: Required Borrowings = Minimum Quarterly Cash Balance Required - (Beginning Cash Balance + Cash Receipts - Cash Disbursements) = $8,000 - ($7,000 + $22,000 - $24,500) = $3,500. Diff: 1 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

85) The following table represents the credit sales of Seneca Foods for the first five months of this year:

Month January February March April May

Credit Sales $40,000 $55,000 $45,000 $51,000 $55,000

According to their records, the company is expecting to receive payments for credit sales as follows: 60% in the month of sale, 20% in the first month after the sale, 15% in the second month after the sale, and the remainder becomes uncollectible. How much cash should Seneca expect to receive in May as a result of credit sales? A) $7,650 B) $11,000 C) $12,300 D) $49,950 Answer: D Explanation: Budgeted Cash Receipts in June = [(March's credit sales of $45,000 × 15% collected in May) + (April's credit sales of $51,000 × 20% collected in May) + (May's credit sales of $55,000 × 60% collected in May)] = [$6,750 + $10,200 + $33,000] = $49,950. See additional explanation below:

Month January February March April May

Credit Collection 15% in the 20% in the second 60% in the first month month Credit month of after the after the Sales sale sale sale Total $40,000 $24,000 $24,000 $55,000 $33,000 $8,000 $41,000 $45,000 $27,000 $11,000 $6,000 $44,000 $51,000 $30,600 $9,000 $8,250 $47,850 $55,000 $33,000 $10,200 $6,750 $49,950

Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

86) The following table represents the credit sales of Seneca Foods for the first five months of the current year:

Month January February March April May

Credit Sales $40,000 $55,000 $45,000 $51,000 $55,000

According to their records, the company is expecting to receive payments for credit sales as follows: 60% in the month of sale, 20% in the first month after the sale, 15% in the second month after the sale, and the remainder becomes uncollectible. Calculate the amount of uncollectible accounts for Seneca as a result of these credit sales. A) $7,650 B) $11,000 C) $12,300 D) $18,650 Answer: C Explanation: Budgeted Uncollectible = Budgeted Credit Sales - Budgeted Credit Collections = ($40,000 + $55,000 + $45,000 + $51,000 + $55,000) - ($147,600 + $49,200 + $36,900) = $246,000 - $233,700 = $12,300. See additional explanation below:

Month January February March April May June July Totals

20% in the 60% in the first month 15% in the Credit month of after the second month Sales sale sale after the sale $40,000 $24,000 $55,000 $33,000 $8,000 $45,000 $27,000 $11,000 $6,000 $51,000 $30,600 $9,000 $8,250 $55,000 $33,000 $10,200 $6,750 $11,000 $7,650 $8,250 $147,600 $49,200 $36,900

Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

87) Mike is concerned about the cash receipts schedule of his business since all of the business's customers deal in credit instead of cash. Based on historical data, he is expecting to receive collections on accounts receivable (A/R) as follows: 55% in the month of sale, 40% in the next month after the sale, and 5% becomes uncollectible. Mike has decided to write off the business's uncollectible A/R at the end of second month after the sale. The following table provides the month-by-month summary of sales for Mike's business: January February March

$10,000 $15,000 $15,000

How much uncollectible A/R will Mike write off at the end of May? A) $500 B) $750 C) $1,500 D) $2,000 Answer: B Explanation: The amount of uncollectible A/R that would be written off at the end of May = 5% of March credit sales = $750. See additional explanation below:

Credit 55% in the Month Sales month of sale January $10,000 $5,500 February $15,000 $8,250 March $15,000 $8,250 April May

40% in the next month after the sale 5% uncollectible $4,000 $6,000 $6,000

Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

$500 $750 $750

88) The following table shows the cash schedule of XYZ Co for the first quarter of 2021: Particulars January February March Cash sales $45,000 $62,000 $55,000 Cash collections from previous month's sales $30,000 $38,000 $40,000 Cash disbursements $23,000 $44,000 $38,000 XYZ has an opening cash balance of $23,000 for the month of January. The budgeted ending cash balance at the end of the quarter will be A) $188,000. B) $226,000. C) $394,000. D) $499,000. Answer: A Explanation: Budgeted ending cash balance at the end of the quarter = $188,000. See additional explanation below: Particulars January February Beginning cash balance Cash sales $23,000 $75,000 Cash collections from previous month's 45,000 62,000 sales 30,000 38,000 Total cash available $98,000 $175,000 Less: Cash disbursements 23,000 44,000 Budgeted ending cash balance $75,000 $131,000

March $131,000 55,000 40,000 $226,000 38,000 $188,000

Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

89) DymundGroup reports the sale of 16,000 units for $22 per unit in the current quarter. 70% of these sales are credit sales. Management forecasts a 6% growth in sales each quarter, and according to their records, the company is expecting to receive full payment for credit sales in the next quarter. If the selling price and the credit sale ratio remain the same, then cash receipts for the next quarter are expected to be A) $111,936. B) $246,400. C) $358,336. D) $373,120. Answer: C Explanation: Budgeted Cash Receipts = Budgeted Cash Sales + Budgeted Collections on Credit Sales; Budgeted Sales in the Next Quarter = (16,000 × (1 + 6%) × $22) = $373,120; Budgeted Cash Sales in the Next Quarter = $373,120 × 30% = $111,936; Budgeted Credit Collection (of previous quarter) = 16,000 × $22 × 70% = $246,400; Budgeted Cash Receipts = $111,936 + $246,400 = $358,336. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 90) The Green Retail store is planning to open new credit department that only makes credit sales. Its budgeted credit sales for the first year by quarter are as follow: Quarter 1, $10,000; Quarter 2, $11,000; Quarter 3, $12,100; and Quarter 4, $13,310. From the company's market study, the credit department will collect its customers' Accounts Receivable balances according to the following pattern: 70% in the quarter of sale, 28% in the following quarter after the sale, and the balance is uncollectible and will be directly written off of the Accounts Receivable balance during the 2nd following quarter after the sale. What are the budgeted collections on credit sales for quarter 3 of first year? A) $8,470 B) $10,500 C) $11,550 D) $11,858 Answer: C Explanation: Budgeted Cash Receipts = Budgeted Cash Sales + Budgeted Collections on Credit Sales = $0 + (28% of Q2 Credit Sales + 70% of Q3 Credit Sales) = (28% × $11,000) + (70% × $12,100) = $3,080 + $8,470 = $11,550. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

91) Sea Salt Manufacturing Company's policy is to maintain a safe minimum end of the month cash balance of $54,000. Its May cash budget information is as follows: Beginning cash balance, $60,000; cash receipts, $31,000; and cash disbursements, $42,000. The budgeted financing amount the company would have to borrow from the bank in May is A) $0. B) $5,000. C) $17,000. D) $54,000. Answer: B Explanation: Required Borrowings = Minimum Cash Balance Required - (Beginning Cash Balance + Cash Receipts - Cash Disbursements) Bank's Borrowing in May = $54,000 - $60,000 - $31,000 + $42,000 = $5,000. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 92) The CFO of M Corp estimates the number of units sold for May and June to be 5,000 units and 6,000 units respectively. These units will be sold at a price of $40 per unit. The CFO estimates that 40% of sales will be credit sales and 60% of the credit sales amount will be received in a month after the sales are made with balance paid off in the following month. How much cash is expected to be collected in June? A) $144,000 B) $192,000 C) $200,000 D) $264,000 Answer: B Explanation: Expected Cash Receipts = Expected Cash Sales + Expected Accounts Receivable Expected Cash Receipt = Cash Sales for the Month of June + Accounts Receivable for June = (6,000 × $40 × 60%) + (5,000 × $40 × 40% × 60%) = $144,000 + $48,000 = $192,000. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

93) What amount should Windshell Corp borrow to maintain an ending cash balance of $4,000, if the beginning cash balance is $5,000, expected cash receipts are $1,000, and expected cash payments are $3,500? A) $1,000 B) $1,500 C) $3,500 D) $4,000 Answer: B Explanation: Borrowed Amount = Minimum Ending Cash Balance - (Beginning Cash Balance + Expected Cash Receipts - Expected Cash Payments); Borrowed Amount = $4,000 - ($5,000 + $1,000 - $3,500) = $1,500 Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 94) Mallards Manufacturing produces tarps for camping, and the company has been in business since 1955. The company's budgeted beginning cash balance for the year 2024 is $7,143,234 with budgeted cash collections from sales for 2024 of $34,567,423 and budgeted cash disbursements of $38,895,156. What is the budgeted ending cash balance? A) -$4,327,733 B) $2,815,501 C) $34,567,423 D) $41,710,657 Answer: B Explanation: Budgeted Ending Cash Balance = Budgeted Beginning Cash Balance + Budgeted Cash Sales + Budgeted Cash Collections from Sales - Budgeted Cash Disbursements $7,143,234 +$ 0 + $34,567,423 - $38,895,156 = $2,815,501 Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

95) The Green Retail store is planning to open a new department that only makes credit sales. Its budgeted credit sales for the first year by quarter are as follow: Quarter 1, $10,000; Quarter 2, $11,000; Quarter 3, $12,100; and Quarter 4, $13,310. From the company's market study, the credit department will collect its customers' Accounts Receivable (A/R) balances according to the following pattern: 70% in the quarter of sale, 28% in the following quarter after the sale, and the balance is uncollectible and will be directly written off of Accounts Receivable balance during the 2nd following quarter after the sale. What is the ending Accounts Receivable balance that will be presented in the year-end budgeted balance sheet for the first year? A) $ 4,235 B) $ 4,655 C) $ 41,755 D) $ 46,410 Answer: A Explanation: Ending Accounts Receivable Balance = Beginning A/R Balance + Budgeted Total Credit Sales - Budgeted Total Cash Receipts - Direct Write-Offs of Uncollectible A/R Ending Accounts Receivable Balance = $0 (first year) + ($10,000 + $11,000 + $12,100 + $13,310) - [(98% × $10,000) + (98% × $11,000) + (98% × $12,100) + (70% × $13,310)] - [(2% × $10,000) + (2% × $11,000) = $0 + $46,410 - $41,755 - $420 = $4,235. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 96) Brianna is trying to figure out the budgeted amount of cash receipts for the next month of operations. From June's records, she determines that in the next month, 60% of total sales will result in accounts receivable. Considering the records, she is expecting to receive the collections on accounts receivable (A/R) as follows: 55% in the month of sale, 40% in the next month after the sale, and 5% become uncollectible. In her budget, Brianna shows the budgeted sales of $80,000 and $84,000 for June and July respectively. What will the total amount of budgeted cash receipts be in July? A) $27,720 B) $46,920 C) $80,520 D) $84,000 Answer: C Explanation: Budgeted Cash Sales + Budgeted Collections on Credit Sales = [(July's Cash Sales of $33,600) + (July's Credit Sales of $50,400 × 55%) + (June's Credit Sales of $48,000 × 40%)] = [$33,600 + $27,720 + $19,200] = $80,520. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

97) Mike is concerned about the cash receipts schedule of his business since all of the business's customers deal in credit instead of cash. Based on historical data, he is expecting to receive collections on accounts receivable (A/R) as follows: 55% in the month of sale, 40% in the next month after the sale, and 5% becomes uncollectible. Mike has decided to write off the business's uncollectible A/R at the end of second month after the sale. The following table provides the month-by-month summary of sales for Mike's business: January February March

$10,000 $15,000 $15,000

Considering the above data, which of the following statements is correct? A) In the month of April, uncollectible sales of $750 are taken as a direct write-off to A/R, and the budgeted ending balance of A/R on April 30 is $750. B) In the month of February, uncollectible sales of $500 are taken as a direct write-off to A/R, and the budgeted ending balance of A/R on February 28 is $6,750. C) In the month of January, uncollectible sales of $4,500 are taken as a direct write-off to A/R, and the budgeted ending balance of A/R on January 31 is $0. D) In the month of March, uncollectible sales of $500 are taken as a direct write-off to A/R, and the budgeted ending balance of A/R on March 31 is $7,250. Answer: A Explanation: Since Mike has decided to write off the business's uncollectible A/R at the end of second month after the sale, written-off of uncollectible A/R will start after March. The amount of uncollectible sales written off at the end of March = 5% of January credit sales = $500; The amount of uncollectible sales written off at the end of April = 5% of February credit sales = $750; The amount of uncollectible sales written off at the end of May = 5% of March credit sales = $750. See additional explanation below: January Beginning A/R Credit sales for the month Collections from January Collections from February Collections from March Total cash collections A/R write-off Closing A/R

February March April May $ 4,500 $ 7,250 $7,500 $750 $10,000 $15,000 $15,000 $ 5,500 $ 4,000 $ 8,250 $6,000 8,250 $6,000 $ 5,500 $12,250 $14,250 $6,000 $ 0 $500 $ 750 $750 $ 4,500 $ 7,250 $7,500 $ 750 $ 0

Diff: 3 LO: 4 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 67

98) Natalia is excited for her new start-up and visits the bank to open a business checking account. Her relationship manager at the bank, Max, informs her about overall process and about the bank's requirement to maintain a minimum cash balance of $10,000 in her account at all times. Max also tells her about the easy access to lines of credit from the first day of the month, if the need for them arises. The annual interest on lines of credit is 10%, and it must be paid every month if there is an outstanding balance, but there is no need to make the principal payments each month. The following table provides additional information on this: Opening cash balance in July Closing cash balance in July Cash deposited in August Cash disbursements in August

$10,000 $12,000 $85,000 $90,000

If Natalia borrowed funds in increments of $100, then which of the following is correct for the month of August in the given scenario? (Round your calculations to the nearest whole number, if required.) A) Natalia can wait for next month's deposits; there is no need to borrow on a line of credit. B) Natalia will borrow $3,000 to maintain the minimum cash balance, and her books will show the budgeted ending cash balance of $10,000. C) Natalia will borrow $3,100 to maintain the minimum cash balance, and her books will show the budgeted ending cash balance of $10,074. D) Natalia's books will show at least the sufficient amount of funds, and there will be no need to borrow. Answer: C Explanation: After making cash payments of $90,000, Natalia's bank account will have a deficit of $3,000 against the minimum requirement. Hence, to maintain the minimum cash balance of $10,000, Natalia will need to borrow on a line of credit. See additional explanation below:

Beginning Cash Balance Add: Cash Receipts Total Cash Available Less: Cash Disbursements Cash Surplus Financing: Proceeds from borrowing Less: Principal Repayments Less: Interest Payments Ending Cash Balance

August $12,000 85,000 $97,000 90,000 $ 7,000 3,100 – 26 $10,074

Diff: 3 LO: 4 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

99) Patricia handles the sales and marketing department for the organization and is currently busy in the marketing of new product. Based on her analysis, the company will achieve their target sales of 250 units in the first month of product's launch and 275 units in the following month. The cost of the product to the company is $230 per unit, and the company has decided to sell this product at maximum retail price (MRP) of $300. The company is expecting a sales return of 7% and factored in a prompt payment discount of 1.5% from its suppliers. What will the net sales be in the first month assuming Patricia's assumptions are correct? (Do not round values during your intermediate calculations.) A) $53,475 B) $68,704 C) $69,750 D) $75,000 Answer: C Explanation: Budgeted Revenue = Budgeted Sales Volume × Budgeted Sales Price = 250 × $300 = $75,000; Sales Returns = $75,000 × 7% = $5,250; Budgeted Net Sales = Budgeted Revenue - Sales Returns = $75,000 - $5,250 = $69,750. Diff: 3 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 100) Keith, a manager of a store in Florida, is involved in the preparation of the sales budget for August 2024.He estimates that in August the sales volume will be around 5,000 units @ $20 per unit. Keith expects an average of 6% sales return, and to boost sales, he decides to offer a flat discount of 22% of the original selling price to all customers. Based on the given information, budgeted net sales for August 2024 will be A) $72,000. B) $73,320. C) $79,320. D) $94,000. Answer: A Explanation: Budgeted Net Sales = Gross Sales - Sales Returns - Sales Discounts; Gross Sales = Number of Units Sold × Sales Price per Unit = 5,000 × $20 = $100,000 Sales Returns = Gross Sales × Sales Return Percentage = $100,000 × 6% = $6,000 Sales Discounts = Gross Sales × Sales Discount Percentage = $100,000 × 22% = $22,000 Budgeted Net Sales = $100,000 - $6,000 - $22,000 = $72,000 Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

101) G mart deals in retail sales of consumer goods. The head of G mart finance estimates the sales volume of a particular product to be 4,000 units at a price of $20 per unit. 17% sales return is estimated for this product and a 1% discount is provided to all customers. How much in budgeted net sales of that particular product is G mart expecting? A) $65,600 B) $65,736 C) $66,400 D) $67,200 Answer: A Explanation: Budgeted Net Sales for Retailers = (Budgeted Sales Volume × Budgeted Sale Price) - Sales Returns - Discounts; Budgeted Net Sales = (4,000 × $20) - (4,000 × $20 × 17%) - (4,000 × $20 × 1%) Budgeted Net Sales = ($80,000 - $13,600 - $800) = $65,600 Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 102) Olivia, the purchasing head of a small retail store dealing in cases to fit all types of specs, is preparing the budget for August 2024. July records show an ending inventory balance of 670 units, and Joe, the sales head of the store, gives her a sales estimate of 8,000 units for August. Olivia changes the minimum inventory requirement and makes a policy to maintain an ending inventory of 470 units from August onwards. If the budgeted purchase price per unit is $5.60 and the store successfully adds a purchase discount of 15% for payment within the discounted period, then the budgeted amount of net purchase for August 2024 will be A) $37,128. B) $36,780. C) $37,654. D) $39,528. Answer: A Explanation: Budgeted Net Purchases = Total Budgeted Purchases - Purchase Discounts; Total Budgeted Purchases = (Budgeted Sales Volume + Target Ending Inventory - Target Beginning Inventory) × Purchase Price = (8,000 + 470 - 670) × $5.60 = $43,680 Purchase Discounts = Total Budgeted Purchase × Percentage of Purchase Discount = $43,680 × 15% = $6,552 Budgeted Net Purchases = $43,680 - $6,552 = $37,128. Diff: 2 LO: 5 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

103) Teal's Supplies sells camping equipment to people walking the Appalachian Trail. One of the fastest selling items is a tarp that can be used to lay on the ground or strung between trees for cover. The budgeted sales of that tarp are 25,000 units at a selling price of $35 with 5% returns and a 1.5% discount. What are the budgeted net sales for the tarp? A) $818,125 B) $831,250 C) $861,875 D) $875,000 Answer: A Explanation: Budgeted sales revenue is calculated by multiplying the budgeted sales units by the budgeted selling price. (25,000 × $35) = $875,000. Budgeted net sales are calculated by subtracting the sales returns and sales discounts from the budgeted sales revenue. Sales Returns ($875,000 × 5%) = $43,750, and Sales Discounts ($875,000 × 1.5%) = $13,125. Budgeted Net Sales = $875,000 - $43,750 - $13,125 = $818,125. Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

104) JumpStart is a retail store in downtown Glen Ellyn that sells athletic footwear and apparel. The budgeted shoe sales for August are 200 pairs of shoes at an average selling price of $75, and the athletic wear sales are 300 items at an average selling price of $40 per item. JumpStart is a popular store and sells quality products, but sometimes customers are not happy with their purchases. In recent months, JumpStart customers have returned an average of 5% of shoe purchases and 3% of athletic wear purchases. JumpStart has given customers an average of a 2% discount off of the original selling price for all products. What will JumpStart's total budgeted net sales be for August? A) $11,160 B) $13,950 C) $25,110 D) $25,350 Answer: D Explanation: Athletic shoes budgeted net sales are $13,950, and athletic wear budgeted net sales are $11,400 for a total budgeted net sales of $25,350. See additional explanation below:

Diff: 3 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

105) Irina is a managing partner at a firm and is handling the sales and marketing group. She is currently busy in a new product launch. Sales for the new product are expected to be 250 units in July and 280 units in August. Inventory purchases are made at the beginning of the month, and the firm has a policy to stock 10% of the next month's sales in FG inventory. The cost of the product to the company is $200 per unit, and after a careful analysis, Irina has decided to sell the product at a profit margin of 40%. Irina is expecting a sales return of 7% and factored in a prompt payment discount of 1.5% from its suppliers by paying within the discounted period of 15 days. Determine the budgeted cash payments for the merchandise purchases made in July. (Round your calculations to nearest whole number.) A) $54,766 B) $50,600 C) $52,766 D) $55,600 Answer: A Explanation: Budgeted Cost of Merchandise to be Purchased = (Budgeted Quantity of Merchandise to be Purchased × Budgeted Cost of Merchandise) - Purchase Discount = (278 × $200) - $834 = $54,766. See additional explanation below: July Budgeted sales volume (units) Add: desired ending inventory (units) Total units available for sale Less: Beginning inventory (units) Units to be purchased × Purchase price per unit Total budgeted purchases Less: Purchase discount Budgeted cash payments for purchases

250 28 278 0 278 $ 200 $55,600 834 $54,766

Diff: 3 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

106) George owns a small IT parts supply store, and he is in the process of creating a sales budget for next month. George predicts the following budgeted numbers: Sales Volume of 500 with a Budgeted Selling Price of $18 per unit. On average, George's store has experienced an average 5% rate of sales returns and discounts of 1.2% of the original selling price. What will the Budgeted Net Sales be for George next month? A) $7,470 B) $8,442 C) $8,550 D) $8,892 Answer: B Explanation: To calculate Budgeted Net Sales, you must first calculate the Budgeted Gross Revenue, Sales Returns, and Sales Discounts. Budgeted Gross Revenue is calculated for 500 units by multiplying by $18 per unit for a total of $9,000. From that value, subtract Sales Returns of $450 ($9,000 × 0.050) and Sales Discounts of $108 ($9,000 × 0.012). So, the Budgeted Net Sales for the month will be $8,442 ($9,000 - $450 - $108). Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 107) Marvin owns a clothing boutique, and he is in the process of creating a purchases budget for August, which is next month. Marvin has gathered the following budgetary data: Budgeted Sales Volume, 800 units; Target Ending Merchandise Inventory, 250 units; and Beginning Units in Merchandise Inventory, 75 units. The purchase price per unit is $14, and Marvin takes advantage of a $50 purchase discount. What are Marvin's Budgeted Net Purchases for August? A) $13,600 B) $13,650 C) $14,600 D) $14,650 Answer: A Explanation: To calculate Budgeted Net Purchases, first calculate the Total Quantity of Units to Purchase, which is comprised of units available for Sale minus Beginning Units in Merchandise Inventory. Total Units Available for Sale equals the Budgeted Sales Volume of 800 plus the Target Ending Merchandise Inventory of 250 units for a Total of 1,050. From this value, subtract Beginning Units in Merchandise Inventory of 75 units, and the result is 975 units, and that is the number of units that will need to be purchased. Next, multiply the Units to Purchase by the Purchase Price of $14 per unit, and the Total Budgeted Purchases value will equal $13,650. Finally, you must subtract the $50 Purchase Discount to arrive at the final Net Purchases value of $13,600. Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 74

108) Veronica owns and operates a landscaping business, and she is creating a sales budget for July, which is next month. Veronica has had a good year and an even better summer thus far. She forecasts the following budgeted numbers: Sales volume of 350 (yards landscaped) with a budgeted selling price of $75 per yard that she services. Typically, Veronica is able to leave all of her customers satisfied, but she is going to budget an expected return/refund rate of 4% of sales and discounts of 1% of the original selling price for customers who remit payment promptly. What will the Budgeted Net Sales be for Veronica for July? A) $24,937.50 B) $25,200.00 C) $25,987.50 D) $26,250.00 Answer: A Explanation: To calculate Budgeted Net Sales, first calculate a Budgeted Gross Revenue, a Sales Returns amount, and a Sales Discounts value. Budgeted Gross Revenue equals 350 units times $75.00 per yard or $26,250.00. Next, calculate and subtract Sales Returns of $1,050.00 ($26,250.00 × 0.04) and Sales Discounts of $262.50 ($26,250.00 × 0.01). The Budgeted Net Sales value is $24,937.50 ($26,250.00 - $1,050.00 - $262.50). Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 109) During the month of April, Caroline sold $6,000 worth of products to one of her customers. Once the items arrived, her customer realized that some merchandise had been damaged, and the customer promptly returned $1,800 worth of products. Caroline has offered her terms of 3/10, net 30, with an agreement that Caroline will assume responsibility for shipping charges. Caroline has incurred the overall shipping cost of $150 that she paid up front. If the customer pays within the discount period, what is the overall amount that Caroline will be able to collect from her customer during April? A) $4,020 B) $4,074 C) $4,224 D) $5,820 Answer: B Explanation: To arrive at the correct total, you must use the following formula: (Sales Returns) × (1 - Discount Rate). The shipping costs will not be added to the total as that will be paid by Caroline. $4,074 is the only choice that appropriately applies the formula: ($6,000 $1,800) × 0.97. Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

110) Tanzeena is an accountant for Teal Vista Sales and has been asked to calculate budgeted sales returns and sales discounts for the next month. The sales budget for next month is 675,000 units at an average sales price of $105. Sales returns are budgeted at the 0.75% of sales, and sales discounts are budgeted at 3% of sales. What is the dollar amount of the sales discounts, and how many units are expected to be returned (round up to whole units)? A) $2,126,250; 5,063 units B) $2,126,250; 506,250 units C) $21,262,500; 5,063 units D) $21,262,250; 20,250 units Answer: A Explanation: Budgeted sales dollars must be calculated first, 675,000 × $105 = $70,875,000. Sales Discounts equal Budgeted Sales dollars × Sales Discount = $70,875,000 × 0.03 = $2,126.250. Sales Returns Units equal Sales Units × Sales Return Percentage = 675,000 × 0.0075 = 5,062.5 rounded up to 5,063 units. Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 111) Briefly describe what a budget is, and name the four main types of budgets. Why are budgets a powerful tool for management to use in planning? Answer: A budget is a plan created with the intention of planning for and monitoring the use of resources. The four main types of budgets include rolling budgets, zero-based budgets, imposed budgets, and participative budgets. Each of these four budget types has its own pros and cons, and their effectiveness should be evaluated by management prior to implementation. Budgets are a powerful tool for management as managers will find themselves empowered with knowledge pertaining to the actual use and allocation of company resources. By measuring the actual use of resources against what was initially planned to be used, management can implement meaningful changes to make the company more successful. Diff: 2 LO: 1 Bloom: K AACSB: Knowledge, Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

112) Briefly describe the concept of Budgetary Slack. Why is this practice so detrimental to the overall success of the budgetary process and to a company's ability to meet their goals? Answer: Budgetary Slack, which is sometimes referred to as "padding the budget," occurs when the person that creates the budget chooses to intentionally overstate their expenses or understate their revenues in their budgeted totals. This intentionally deceptive act can create false expectations so that when a manager arrives at their budgeted goals and their expenses are less than budgeted or their revenues are higher, it paints a false picture of success. When a budget has been created including padding of this nature, it can also make it far more difficult for managers to appropriately plan and budget in the future. This lack of accuracy can cumulatively make it almost impossible to fully achieve realistic goals that should have been set forth. Diff: 2 LO: 1 Bloom: K AACSB: Knowledge, Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 113) Why are feedback and follow-up important to the overall budgeting process? What are some potential consequences of not performing either? Answer: If someone chooses to skip out on the budget-versus-actual comparison by using feedback and follow-up, then that defeats the entire purpose of the budgeting process. A crucial component to the success of the overall budgeting process involves management taking the time to follow-up with the results of a budget-versus-actual comparison and then providing feedback to those who have been tasked with overseeing the budgetary inputs. A potential consequence of not performing follow-up and feedback would include not being able to successfully and accurately measure a manager's and their respective department's performance against predefined benchmarks. This may in turn impact the creation of the budget for the following year. Another consequence could be that management may feel as though their efforts have gone unnoticed or unappreciated, and that could lead to a detrimental decrease in overall morale. Diff: 2 LO: 2 Bloom: K AACSB: Knowledge, Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

114) Which budget is prepared directly after the sales are forecasted? Are there any organizations that can skip this type of budget, and if so, then why? Answer: A budget prepared directly after the sales are forecasted is a Production Budget. This budget uses the sales forecast data to determine the quantity of items that will need to be produced during a given period of time. The budgeted units to be produced can be calculated by adding budgeted sales volume to target finished goods inventory and subtracting the beginning finished goods inventory. This type of budget will assist management in making important decisions pertaining to direct materials, direct labor, and manufacturing overhead. Both merchandisers and service organizations can skip this budget as they do not create or manufacture their own goods. Diff: 2 LO: 3 Bloom: K AACSB: Knowledge, Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 115) Briefly describe the purpose and importance of a Cash Budget. How might a cash budget differ for companies with cash-based accounting compared to those who use accrual-based accounting? Answer: The Cash Budget is one of the last budgets prepared, and it is comprised of decisions that have come before it which is why it is completed at the end of the budgeting process. Cash is a very important asset, and it is often considered the most accurate representation of the viability of an organization. Organizations often consider this their most precious resource, and they will want to ensure that they are properly monitoring and budgeting all activity that directly impacts the cash in their accounts. Accrual-based accounting means that revenues are recorded when the work occurs and that expenses are recorded when they are incurred without regard to cash inflow or outflow. This means that the cash budget and activity will not fully reconcile with the net income of an accrual-based business as some of their income may not be collected until later, if at all. Cash-based businesses will record their revenue as they are paid and their expenses as money is spent. Therefore, their cash account and budget are more likely to align with their net income than an accrual-based business. Diff: 2 LO: 4 Bloom: K AACSB: Knowledge, Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

116) Although retailers have only one category of inventory for which they must budget and are not generating their own products, why could you compare their budgeting to that of a manufacturer? Please discuss both the similarities and the differences. Answer: Retailers will typically have one category of inventory called Merchandise Inventory, and it is similar to Finished Goods Inventory, an account that would be used by a manufacturer. Drawing this parallel affords one the opportunity to more readily compare budgets for retailers and manufacturers. Retailers must additionally account for sales returns and discounts offered to customers along with possible purchase returns and applied discounts. Manufacturers have an added category of Direct Materials Inventory to track that will also factor into their work-inprocess and finished goods inventory. Diff: 2 LO: 5 Bloom: K AACSB: Knowledge, Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 117) Amanda has recently decided to pursue her dream of opening a small online store where she will sell her handmade jewelry. Amanda would eventually like to open a brick-and-mortar location, but she will need to save at least $2,000 in order to afford a place of her own. Her goal can be achieved over time by implementing a zero-based budget. Her monthly business expenses include the following: Supplies to make Jewelry, $100; Phone, $30; Domain for Website, $40; Internet Access, $80; and Shipping and Packaging Materials, $150; She projects that she will sell 100 pieces of Jewelry per month with an overall revenue of $1,000. Assuming these numbers remain consistent, use a zero-based budget to determine how many months will it take Amanda to achieve her savings goal of at least $2,000 so she can open her brick-and-mortar location? Answer: It will take Amanda 4 months to achieve her savings goal. Inflow: Outflows:

Zero:

$1,000 Sale of Jewelry $100 Supplies for making Jewelry 30 Phone 40 Domain for Website 80 Internet Access 150 Shipping and Packaging Materials 600 Savings $0

By combining all necessary expenses for her online shop, it is clear that Amanda is spending $400 of her sales income on business-related expenses. This leaves her with $600 per month to place into her savings account. It will take her approximately 4 months ($2,000/$600 a month = 3 1/3 months) in order to save enough to open a brick-and-mortar location. Diff: 2 LO: 1 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting. 79

118) Sarah has recently graduated from college and is trying to determine how much she can afford to pay towards rent. She would prefer to move into an apartment of her own rather than moving back in with her parents, so a budget is crucial to achieving this goal. She has secured a job at a small advertising firm where she will take home $2,700 after taxes. She has the opportunity to work at a local café on the weekends for 10 hours per month where she will earn $12 per hour after taxes. Her monthly expenses include the following: Phone, $80; Internet, $60; Car Payment, $300; Car Insurance, $32; Groceries and Household Supplies, $420; Eating Out and Entertainment, $150; and Student Loans, $725. Using zero-based budgeting, how much rent could Sarah afford only with just the income from her full-time job without working the weekend part-time hours at the café? Answer: If Sarah only works at her full-time job, she will be able to afford $933 a month for rent. Inflow: Outflows:

Zero:

$2,700 Income from full-time Job 80 Phone 60 Internet 300 Car Payment 32 Car Insurance 420 Groceries and Household Supplies 150 Eating Out and Entertainment 725 Student Loans 933 Money Left for Rent $0

By adding up all of Sarah's monthly expenses, she currently spends $1,767 which would leave $933 to spend on rent per month. She could always explore adding the part-time hours if she wanted to increase her budget. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

119) Theresa has recently graduated from college and is trying to determine how much she can afford to save each month for retirement. She would prefer to set up a retirement account with a local broker, so a budget is crucial to achieving this goal. She has secured a job at a small firm where she will take home $2,550 after taxes. She has the opportunity to work at a local bookstore on the weekends for 8 hours per month where she will earn $13 per hour after taxes. Her monthly expenses include the following: Rent (including utilities), $800; Phone, $90; Internet, $67; Car Payment, $318; Car Insurance, $28; Groceries and Household Supplies, $478; Personal Loan, $127; and Student Loans, $630. Using zero-based budgeting, how much could Theresa afford to save for retirement if she decides to work at both the full-time job as well as working 8 hours part-time on the weekends at the café? Answer: If Theresa works at her full-time job as well as 8 part-time hours on the weekends, she will be able to afford $116 a month for retirement. Inflow: Outflows:

Zero:

$2,654 Income from both Jobs 800 Rent (including utilities) 90 Phone 67 Internet 318 Car Payment 28 Car Insurance 478 Groceries and Household Supplies 127 Personal Loan 630 Student Loans 116 Money Left to Save for Retirement $0

By adding up all of Theresa's monthly expenses, she currently spends $2,538 which would leave $116 to save for retirement per month as she has added an extra $104 to her inflow. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

120) After completing their sales forecast, Fido Treats LLC has decided that they would like to create a production budget. Their goal is to ensure that they will be able to produce enough dog treats to cover the sales they have projected for the entire first quarter. Fido has projected the following sales: January, 1,109 units; February, 1,242 units; and March, 1,391 units for an overall total of 3,742 units for the entire quarter. The company has a policy of keeping 15% of the next month's projected sales on hand in their Finished Goods (FG) Inventory. Using the format below, calculate the number of budgeted units that need to be produced for each month and for the entire quarter. Production Budget Budgeted Sales Volume Add: Target Ending FG Inventory Less: Beginning FG Inventory Budgeted Unit to be Produced Answer: Production Budget Budgeted Sales Volume Add: Target Ending FG Inventory Less: Beginning FG Inventory Budgeted Unit to be Produced

January February March First Quarter Total 1,109 1,242 1,391 3,742

January February 1,109.00 1,242.00

March First Quarter Total 1,391.00 3,742.00

186.30

209.65

394.95

166.35

186.30

208.65

561.30

1,128.95 1,264.35

1,182.35

3,575.65

This exercise requires you to calculate both the target Ending FG Inventory and the Beginning FG Inventory by utilizing the 15% retention percentage given in the problem. Target FG Inventory is calculated as follows: January, 1,242 (units from February) × 0.15; February, 1,391 (units from March) × 0.15; and March will have no information as there is no projection for what the budgeted sales volume for April will be. Beginning FG Inventory is calculated as follows: January, 1,109 (units from January) × 0.15; February, 1,242 (units from February) × 0.15; and March, and 1,391 (units from March) × 0.15. After these calculations have been completed, work vertically through the budget, and that should result in the following numbers of budgeted units to be produced: January, 1,128.95; February, 1,264.35; and March, 1,182.35; and this gives a final total for the quarter of 3,575.65 budgeted units to be produced. Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

121) Bellflower, Inc. is a small company that sells coffee mugs that feature local artists from their region. Jeff, the chief financial officer (CFO), is in the process of compiling a Budgeted Income Statement for 2024 so that they can apply for a loan at their local bank. Jeff has budgeted for sales of 10,000 mugs at a sales price of $12.50 per mug. They originally paid $3.75 per mug when they acquired them. They have selling, general & admin (SG&A) expenses of $39,750 and have an existing loan of $5,000 with an annual percentage rate (APR) of 2%. Their tax rate is a flat 21%. What is the amount of operating income that Jeff will report on the budgeted income statement for 2024? Answer: Bellflower will report Operating Income of $47,750. Bellflower, Inc. Budgeted Income Statement For the Year Ending December 31, 2024

Sales Less: Cost of Goods Sold Gross Margin Less: SG&A Expenses Operating Income

$125,000 37,500 $87,500 39,750 $ 47,750

Using a partial income statement or the formula of Sales - Cost of Goods Sold - Selling, General & Administrative Expenses, the Operating Income is $47,750. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

122) Fido Treats LLC is an Internet-based business that specializes in the production and sale of specialty dog treats. They were established 2 years ago, and they have experienced consistent growth in sales every month since then. In an effort to be more prepared for the coming year, they are creating a sales forecast. In December of the previous year, they were able to sell 990 units, and based on their records, they anticipate an additional 12% growth every month. They have set their selling price for each unit at $9.50. Using the format below, calculate the budgeted gross revenue for each month and the quarter. (Remember to round up the sales volume.) Sales Forecast: Budgeted Sales Volume Budgeted Selling Price Budgeted Gross Revenue

January

February

March

First Quarter

$9.50

Answer: First Sales Forecast: December January February March Quarter Budgeted Sales Volume 1,109.00 1,242.00 1,391.00 3,742.00 × Budgeted Selling Price 990.00 $ 9.50 $ 9.50 $ 9.50 $ 9.50 Budgeted Gross Revenue $10,535.50 $11,799.00 $13,214.50 $35,549.00 See additional explanation below: Fido Treats will have a Budgeted Gross Revenue for January in the amount of $10,535.50, $11,799.00 for February, $13,214.50 for March, and a total of $35,549.00 for the Quarter. In order to calculate the correct budgeted sales volume for each month, take the previous month's budget and multiply it by 1.12 to account for the monthly 12% projected increase. January will use the total from the previous month December. After calculating the correct number of units needed, multiply that value by the selling price to arrive at the Budgeted Gross Revenue. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

123) Forager Plants, LLC is a retail business that specializes in acquiring and reselling houseplants. They are working on compiling budgets for the next year, and they would like to create a Cost of Goods Sold budget for January of the coming year. The company has a policy of keeping 10% of the next month's projected sales on hand in their Inventory. They have provided the following information pertaining to their inventory counts as of December: Inventory on Hand Snake Plants Spider Plants Ferns Lillies Pothos

Units 10 9 22 18 26

Cost per Unit $4 $3 $3 $5 $6

Forager Plants predicts that they will need to purchase $7,000 worth of products to meet the demand for January. The company has projected that they will sell a total of $7,600 in January and $8,000 in February. Using this information, prepare a Cost of Goods Sold budget for Forager Plants, LLC. Answer: Beginning Inventory $379 Add: Purchases 7,000 Cost of Goods Available for Sale $7,379 Less: Ending Inventory 800 Cost of Goods Sold $6,579 To begin with, this problem first requires the calculation of the January beginning inventory. This can be accomplished by taking each inventory item from December and multiplying the onhand quantity by the per-unit cost for each type of plant. The sum of these items will become the Beginning Inventory balance for January. Purchases are given in the problem. Next, calculate the Ending Inventory total by taking the projected sales for February and multiplying it by the company's retention policy of 10%. The overall formula to calculate Cost of Goods Sold is Beginning Inventory ($379) + Purchases ($7,000) - Ending Inventory ($800), and this results in a Cost of Goods Sold in the amount of $6,579. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

124) Bellflower, Inc. is a small company that sells coffee mugs that feature local artists from their region. Jeff, the chief financial officer (CFO), is in the process of compiling a Budgeted Income Statement for 2024 so that they can apply for a loan at their local bank. Jeff has budgeted for sales of 10,000 mugs at a sales price of $12.50 per mug. They originally paid $3.75 per mug when they acquired them. They have selling, general & admin (SG&A) expenses of $39,750 and have an existing loan of $5,000 with an annual percentage rate (APR) of 2%. Their tax rate is a flat 21%. What is the amount of income tax expense that Jeff will report on the budgeted income statement for 2024? Answer: Bellflower will report income tax expense of $10,006.50. Bellflower, Inc. Budgeted Income Statement For the Year Ending December 31, 2024

Sales Less: Cost of Goods Sold Gross Margin Less: SG&A Expenses Operating Income Less: Interest Expense Income before Income Taxes Income Tax Expense

$125,000.00 37,500.00 $ 87,500.00 39,750.00 $ 47,750.00 100.00 $ 47,650.00 10,006.50

Using a partial income statement or the formula of Sales - Cost of Goods Sold - Selling, General & Administrative Expenses, the Operating Income is $47,750. You will then need to subtract Interest Expenses that are calculated by taking the loan amount of $5,000 and multiplying it against their APR of 2% for a total interest expense of $100. After subtracting Interest Expense from the Operating Income, you will arrive at an Income before Income Taxes of $47,650. The last step to calculating Income Tax Expense is to multiply the Income before Income Taxes of $47,650 by their Tax Rate of 21% for an Income Tax Expense of $10,006.50. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

125) Wallflower, LLC is a small company that sells decorative picture frames from local artisans. John, the chief financial officer (CFO), is in the process of compiling a Budgeted Income Statement for 2024 so that they can apply for a loan at their local bank. John has budgeted for sales of 6,200 mugs at a sales price of $15.50 per mug. They originally paid $2.48 per mug when they acquired them. They have selling, general & admin (SG&A) expenses of $46,800 and have an existing loan of $7,200 with an annual percentage rate (APR) of 3.2%. Their tax rate is a flat 21%. What is the amount of net income that John will report on the budgeted income statement for 2024? All calculations should be rounded to the nearest whole number. Answer: Wallflower will report Net Income of $26,618. Wallflower, Inc. Budgeted Income Statement For the Year Ending December 31, 2024

Sales Less: Cost of Goods Sold Gross Margin Less: SG&A Expenses Operating Income Less: Interest Expense Income before Income Taxes Income Tax Expense Net Income

$96,000 15,376 $80,724 46,800 $33,924 230 $33,694 7,076 $26,618

Using a partial income statement or the formula of Sales - Cost of Goods Sold - Selling, General & Administrative Expenses, the Operating Income is $33,924. Then, subtract Interest Expenses that are calculated by taking the loan amount of $7,200 and multiplying it against their APR of 3.2% for a Total Interest Expense of $230. After subtracting Interest Expense from the Operating Income, the Income before Income Taxes is $33,694. Next, multiply the Income before Income Taxes of $33,694 by their tax rate of 21% for an Income Tax Expense of $7,076. The last step to calculating Net Income will be to subtract the Income Tax Expense of $7,076 from the Income before Income Taxes of $33,694 for a Total Net Income of $26,618. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

126) Butterfly, LLC is a landscaping business and specializes in providing services to suburban homes. A large majority of their customers have set up accounts to where they will pay their bill for services in the month following when the service is rendered while other customers will pay as the work is completed. Butterfly estimates that it will collect 30% of its sales in the month it occurs, 62% of its sale in the following month, and the remaining 8% in the second month following the sale. Their sales have been as follows: June, $4,000; July, $7,600; August, $9,000; and September, $8,200. What will the total cash collected during July be? Answer: Butterfly will collect $4,760 during July.

Sales Collections: From Jun. Sales From Jul. Sales From Aug. Sales From Sep. Sales Total

Jun. Jul. Aug. Sep. $4,000 $7,600 $9,000 $8,200

$ 320 $ 608 $2,480 4,712 5,580 $1,200 2,280 2,700 2,460 $1,200 $4,760 $7,732 $8,648

In order to calculate the total for July's cash collections, account for 62% of the sales in June and 30% of the sales for July, the current month. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

127) Monarch, LLC is a landscaping business that specializes in providing services to homes in a small, rural community. A majority of their customers have set up accounts where they will pay their bill for services in the month following the month when the service is rendered while other customers will pay in the same month as the work is completed. Monarch estimates that it will collect 63% of its sales in the month it occurs, 34% of its sale in the following month, and the remaining 3% in the second month following the sale. Their sales have been as follows: July, $3,400; August, $8,760; September, $8,900; and October, $7,240. What will the total cash collected during September be? All calculations should be rounded to the nearest whole number. Answer: Monarch will collect $8,687 during September.

Sales Collections: From Jul. Sales From Aug. Sales From Sep. Sales From Oct. Sales Total

Jul. Aug. Sep. Oct. $3,400 $8,760 $8,900 $7,240

$ 102 $ 263 $1,156 2,978 3,026 $2,142 5,519 5,607 4,561 $2,142 $6,675 $8,687 $7,850

In order to calculate the total for September's cash collections, account for 3% of the sales in July, 34% of the sales in August, and 63% of the sales for September, the current month. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

128) Hayley sells graphic t-shirts on her website, and she would like to be more proactive in her planning. She has decided to create a Sales Budget for the month of September. She was able to sell 100 units in August, and she has seen a 5% increase in sales volume every month. She intends to keep her selling price at $14 per unit. She offers a sales discount to anyone who buys at least five shirts which is normally 1.3% of her gross revenue. She is anticipating a sales return percentage of 7%. Calculate her budgeted net sales for September. Answer: Sales Budget Budgeted Sales Volume 105 Budgeted Selling Price $14.00 Budgeted Gross Revenue $1,470.00 Less: Sales Returns @ 7.00% of Gross 102.90 Less: Sales Discount @ 1.30% of Gross 19.11 Budgeted Net Sales $1,347.99 The first step in this calculation is to determine the sales volume for September. This is accomplished by taking August sales of 100 units and multiplying by 1.05 to account for the 5.00% increase that Hayley anticipates. Hayley expects to sell 105 units in September which is then multiplied by $14 per unit to arrive at a Budgeted Gross Revenue of $1,470. From that value, subtract Projected Sales Returns of $102.90 ($1,470 × 0.07) and projected Sales Discounts of $19.11 ($1,470 × 0.013) to arrive at a Budgeted Net Sales value of $1,347.99 for the month of September. Diff: 2 LO: 5 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

129) JJ is working his way through college. He has 2 part-time jobs that allow him to cover his expenses. He has the following accounts in his budget: Cash from Dog Walking Cash from Working in the Library, after tax Car Payments Groceries Car Insurance Rent Cell Phone Savings College Fees All of expenses are fixed except for Groceries and Savings.

$19,980 $25,000 $ 2,400 $ 6,000 $12,000 $13,200 $ 920 $ 780 $ 9,680

JJ has learned that next year he will get a raise at the library which will increase his after tax pay to $26,500. He would like to use the additional income to rent a better apartment and has found one that will cost him $14,760 for the year. He has also decided to use zero-based budgeting for his future financial planning. Using the information above, answer the following: a. What is a zero-based budget? b. What would JJ's budget look like for the current year? c. Using the planned changes information for next year, what would his budget look like for next year? Explain the changes you made. All calculations should be rounded to the nearest whole number.

Answer: a. A zero-based budget starts each period without input from previous periods. Every account must be justified to be included. Inflows (cash in) and outflows (expenses) must serve a purpose to be included in the budget. The outflows are subtracted from the inflows and should equal 0 in a zero-based budget. b. Inflows: Outflows:

Zero:

$19,980 Dog Walking, cash 25,000 Paycheck from Library, after tax 2,400 Car Payments 6,000 Groceries 920 Cell Phone 12,000 Car Insurance 13,200 Rent 780 Savings 9,680 College Fees $0

Inflows ($44,980) minus outflows ($44,980) = 0 c. JJ can budget his expenses in two ways: 1) Inflows: $19,980 Dog Walking, cash 26,500 Paycheck from Library, after tax Outflows: 2,400 Car Payments 6,000 Groceries 920 Cell Phone 12,000 Car Insurance 14,760 Rent 720 Savings 9,680 College Fees Zero: $0 Inflows ($46,480) minus outflows ($46,480) = 0

2) Inflows: Outflows:

Zero:

$19,980 Dog Walking, cash 26,500 Paycheck from Library, after tax 2,400 Car Payments 5,940 Groceries 920 Cell Phone 12,000 Car Insurance 14,760 Rent 780 Savings 9,680 College Fees $0

Inflows ($46,480) minus outflows ($46,480) = 0 The pay raise at the library will result in an additional $1,500 for the year. This would give him a budget of $14,700 for rent. He is short $60 from the rent on the new apartment, so he would have to reduce one of his other accounts. The rent is increased to $14,760 to reflect the cost of the new apartment. In solution one, Savings are reduced by $60 to bring budget to zero. In solution 2, Groceries are reduced by $60 to bring the budget to zero. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

130) Christina has recently graduated from college and is trying to determine how much she can afford to pay towards car payment. She would love to buy a new car rather than lease or take public transportation, so a budget is crucial to achieving this goal. She has just been offered a job at a local accounting firm where she will take home $3,400 per month after taxes. She has the opportunity to work as a freelance bookkeeper in her spare time where she will earn an additional $20 per hour after taxes. She believes that she can work 2 extra hours per week for a total of 8 hours per month. Her monthly expenses include the following: Phone, $100; Internet, $45; Rent (her share, including utilities), $1,100; Metro/Bus Fare, $33; Groceries and Household Supplies, $460; Additional Items are: Eating Out and Entertainment, $180; and Student Loans, $925. Using zero-based budgeting, answer the following questions. a. How much of a car payment could Christina afford only with just the income from her fulltime job? b. How much of a car payment could Christina afford working at both her full-time job and as a freelance bookkeeper? c. If Christina would like to buy a new car in cash for an amount of $20,000, then how many months would it take for her to save up for this goal with just the income from her full-time job?

Answer: a. Inflow: Outflows:

Zero:

$3,400 Income from Her Job 100 Phone 45 Internet 1,100 Rent 33 Metro/Bus Fare 460 Groceries and Household Supplies 180 Eating Out and Entertainment 925 Student Loans 557 Money Left to Save for Car Payment $0

By using zero-based budgeting, Christina would be able to afford a car payment in the amount of $557. We take her income from the full-time job of $3,400 and subtract each of her monthly expenses. This leaves an amount of $557 that she could then save for her car payment each month. Once we subtract/allocate this to the car payment, we see that our budget now has a 0 balance as we desired. b. Inflow: $3,560 Income from Both Job Outflows: 100 Phone 45 Internet 1,100 Rent 33 Metro/Bus fare 460 Groceries and Household Supplies 180 Eating Out and Entertainment 925 Student Loans 717 Money Left to Save for Car Payment Zero: $0 By using zero-based budgeting, Christina would be able to afford to set aside $717 to save for her car payment. We take her income from the full-time job of $3,400 plus her part time income of $160 (2 hours per week for four weeks at a rate of $20/hour) and subtract each of her monthly expenses. This left an amount of $717 that she would then be able to save for her car payment each month. Once we subtract/allocate this to the car payment, we see that our budget now has a 0 balance as we desired.

c. Inflow: Outflows:

Zero:

$3,400 Income from Her Job 100 Phone 45 Internet 1,100 Rent 33 Metro/Bus fare 460 Groceries and Household Supplies 180 Eating Out and Entertainment 925 Student Loans 557 Money Left to Save for Car Payment $0

For this question, we can use the information we calculated in a) in a different way. Christina will be able to place the money that we calculated for her car payment, $557 per month, and place into a savings account where she will save up to purchase her new vehicle. She would like to spend $20,000 total for the new vehicle so we divide that number by her monthly savings ($20,000/$557) and learn that it will take her at least 36 months to be able to purchase the vehicle outright. Christina may want to consider taking on extra freelance work to achieve this goal in less time. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

131) Carlos is the production supervisor at West Coast Tarps. West Cost Tarps manufactures tarps that are popular with campers as they are waterproof and lightweight. Carlos has been given the following information:

Direct Labor $87,500.00 (DL): 20% Hours per Unit $ 105.00 Cost per Hour Manufacturing Overhead 30% (MOH): Variable Costs 26,250.00 per Yard Fixed Overhead

Sales for June Increase in Sales each month Sales Price Target Ending Finished Goods (FG) Inventory (% of next month's Sales) Ending Finished Goods Inventory, June Direct Materials (DM): Quantity of Direct Material per Unit (in Yards) DM Cost per Yard Ending DM Inventory, June (Yards) Target Ending DM Inventory (% of next month's production needs)

1.50 45.75 34,000.00

Depreciation

4.20 17.25

$ 7.50 $ 10,000.00 $ 4,500.00

30%

Using the information provided above, create the following: (All calculations should be rounded to the nearest whole number.) a. Production budget for the next 6 months. b. Direct material purchasing budget for the next 6 months. c. Direct labor budget for the next 6 months. d. What are the total direct costs for the month of September? Explain how that amount was calculated.

Answer: a. Production budget for the next 6 months: Production Budget Budgeted Sales Volume Add: Targeted Ending FG Inventory Total Quantity needed Less: Beginning FG Inventory Budgeted Units to be Produced

July

August September October

November

December

January

105,000

126,000

151,200

181,440

217,728

261,274

313,529

37,800

45,360

54,432

65,318

78,382

94,059

112,871

142,800

171,360

205,632

246,758

296,110

355,333

426,400

26,250

37,800

45,360

54,432

65,318

78,382

94,059

116,550

133,560

160,272

192,326

230,792

276,951

332,341

The production budget begins with the budgeted sales volume. Ending inventory is then added to the budgeted sales volume to determine the total quantity needed. FG ending inventory is calculated by multiplying the next month budgeted sales volume by 30%. To calculate the December units to produce, January's budgeted sales volume is needed. The company expects sales to increase 20% each month, so January's sales can be calculated by multiplying the December budgeted sales volume by 20%, 261,274 × 20% = 52,255. This would be added to the December number, 261,274 + 52,255, to yield 313,529. The January sales volume would be multiplied by targeted FG ending inventory 30%, 313,529 × 0.30, to get 94,059. The budgeted sales volume would be added to the targeted ending FG inventory to get the total quantity needed. The beginning inventory for each period would be determined next. The beginning FG inventory for June is given in the description (26,250). Each month after that, the beginning inventory would be equal to the previous month's ending inventory, August = 37,800. Finally, the beginning inventory for each month would be subtracted from the total quantity needed to determine the budgeted units to produce, July = 142,800 - 26,250 = 116,550.

Direct materials purchases budget for the next 6 months.

Beginning with the number of units to produce from the production schedule, the units are multiplied by the quantity of DM per unit to determine the total production needs, July = 116,550 × 1.5 = 174,825. This calculation will be made for each month through January. Ending inventory of DM is calculated by multiplying the next month's production needs by 30%, July = 133,560 × 30% = 60,102. The desired ending DM inventory would be added to the total production needs to determine the total DM inventory needs, July = 174,825 + 60,102 = 234,927. The beginning inventory for each month would be calculated next. The beginning inventory for July, 34,000, is given in the description. The beginning inventory for each month after July will be equal to the previous month's ending inventory, August = July (60,102). Budgeted DM to be purchased would be calculated by subtracting the beginning inventory for each month from the Total DM inventory needs, July = 234,927 − 34,000 = 200,927. Finally, the budgeted DM to be purchased is multiplied by the DM cost ($45.75), to determine the total budgeted cost of DM purchases, July = 200,927 × $45.75 = $9,192,410. c.

Direct labor budget for the next 6 months:

The quantity of budgeted units to produce for each month is multiplied by the DL hours per unit resulting in the quantity of DL hours needed to produce, July = 116,550 × 4.2 = 489,510. Finally, the Total budgeted DL hours needed is multiplied by the DL cost ($17.25), to determine the Total budgeted DL costs, July = 489,510 × $17.25 = $8,444,048. These calculations would be made for each month.

d. The total direct costs for the month of September would be $23,270,310. This value is calculated by adding the total budgeted cost of DM purchases plus the total budgeted DL costs, $11,658,610 + $11,611,700 = $23,270,310. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

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132) Carolina Production sales embroidered baseball caps. The company procures the caps and then caps are embroidered in accordance with the customer's instructions. The company has been growing significantly over the last year at a rate of 45%. Because Carolina Production has had recent problems with getting direct materials, a portion of the next period's sales is completed in the current period. Chara works in the embroidery plant. She has been given the following information: Beginning Finished Goods (FG) Inventory Budgeted Ending FG Inventory Budgeted DM Quantity needed (Caps)

Budgeted Labor Hours needed Budgeted Operating Income Budgeted Gross Revenue

2,148,800.00 Budgeted Cost of Direct Materials (DM) Used $ 13,860,756.00 Budgeted Cost of Direct Labor (DL) Used 1,110,451 Budgeted Variable Manufacturing Overhead (MOH) per Cap 1,163,194 Budgeted Fixed- MOH Costs: $ 6,123,456.00 Depreciation on Plant Assets $109,477,410.00 Other Fixed-MOH Costs

$18,145,136.00 $80,452,156.00 $

7.50

$ 27,000.00 $ 33,000.00

Using the information provided above, create the following: (All calculations should be rounded to the nearest whole number.) a. Manufacturing overhead budget for the year. b. Scheduled cost of goods sold for the year. c. What does the Budgeted Cost of Goods Available for Sale represent? d. What is the gross margin for the year? Explain how this amount was calculated. e. What would the SG&A expenses be if the operating income is as shown above? Explain how you calculated the amount.

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Answer: a. Manufacturing overhead (MOH) costs for the year. MOH Budget: Budgeted DM Quantity needed × Budgeted Variable-MOH Rate Total Budgeted Variable-MOH Costs Add: Budgeted Fixed-MOH Costs: Depreciation on Plant Assets Other Fixed-MOH Costs Total Budgeted MOH Costs Less: Noncash MOH Cost Total Budgeted Cash Cost of MOH

1,110,451.00 $ 7.50 $8,328,383.00 27,000.00 33,000.00 $8,388,383.00 27,000.00 $8,361,383.00

The company has a manufacturing overhead that is variable based on the number of units produced. They also have fixed manufacturing overhead composed of depreciation on the production equipment and other fixed costs. The budgeted DM quantity needed is multiplied by the variable rate per unit, 1,110,451 × $7.50, and that yields the budgeted variable-MOH costs of $8,328,383. The fixed costs of depreciation on the plant assets, $27,000, and the other fixedMOH costs, $33,000, are added to the total budgeted variable-MOH to yield the total budgeted MOH costs, $8,388,383. Finally, the noncash MOH cost (Depreciation) is subtracted from the total budgeted MOH costs, to determine the total budgeted cash cost of MOH = $8,388,383 $27,000 = $8,361,383. b.

Scheduled cost of goods sold (COGS) for the year.

c. Budgeted Cost of Goods Available for Sale represents the sum of beginning FG inventory and everything that was manufactured during the period. Because Carolina Production completes a portion of the next month budgeted sales in the current period, the budgeted ending FG inventory need to be removed to accurately reflect the COGS for the period. d. Gross Margin: Budgeted Gross Revenue Less: Total Budgeted COGS Gross Margin

$109,477,410 95,273,719 $14,203.691

Using the revenue expected to be earned from the budgeted sales, the production costs of the FG units produced are then subtracted with the remainder as the gross margin. The gross margin represents the revenue that is available to cover all of the other expenses of the company. 102

e. The SG&A Expenses would be $8,080,235. Operating Income is calculated by subtracting the SG&A Expenses from the Gross Margin: Gross Margin minus SG&A Expenses = Operating Income. By rearranging the formula, Gross Margin ($14,203,691) minus Operating Income ($6,123,456) = SG&A Expenses ($8,080,235). SG&A Expenses: Gross Margin Less: Operating Income SG&A Expenses

$14,203,691 6,123,456 8,080,235

Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

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133) The following information was provided to Jacob: Average Selling Price Sales Return Rate Sales Discount Rate

$45.75 Beginning Units in Merchandise Inventory, January 340 3.50% Purchasing Discount 1.50% 2.50% April Budgeted Sales Volume 4,300

Budgeted Sales Volume

Jan. Feb. Mar. Quarter Total 2,000 3,000 3,500 8,500

Jacob works for a large store, Shamrock Camping, in the northeast. Shamrock Camping sells all types of camping equipment, specializing in equipment used on long hikes. To save time in creating a quarterly budget, Jacob has been given an average price and average cost so he does not have to calculate each product sold separately. Jacob has used this method in the past, and management has been satisfied with the results. The store manager has informed Jacob that average purchase price of merchandise has increased from last quarter's price of $13.75 per unit to $14.25 per unit. According to the store manager, the new supplier has been selected and shall start supplying in January. Shamrock Camping keeps 15% of the next period's sales in merchandise inventory at the end of the current period. Using the information provided above, create the following: a. Sales budget for the first quarter b. Purchases budget for the first quarter c. Cost of Goods Sold (COGS) budget for the first quarter d. What is the difference between COGS for a retailer versus a manufacturer? Do not round your calculations.

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Answer: a. Sales budget for the first quarter.

Sales Budget Jan. Budgeted Sales Volume 2,000.00 × Budgeted Selling Price $ 45.75 Budgeted Gross Revenue $91,500.00 Less: Sales Return 3,202.50 Less: Sales Discounts 2,287.50 Budgeted Net Sales $86,010.00

Feb. 3,000.00 $ 45.75 $137,250.00 4,803.75 3,431.25 $129,015.00

Mar. 3,500.00 $ 45.75 $160,125.00 5,604.38 4,003.13 $150,517.50

Quarter Total 8,500.00 $ 45.75 $388,875.00 13,610.63 9,721.88 $365,542.50

The sales budget begins with the budgeted sales volume that was given in the data. The calculations will be the same for each month. For the month of January, the budgeted sales volume, 2,000, is multiplied by the average selling price, $45.75, and that yields $91,500 in Budgeted Gross Revenue. Shamrock has 3.5% of its revenue returned and offers a discount of 2.5% on large orders. The returns percentage, 3.5%, is multiplied by the gross revenue yielding $3,202.50 and the discount percentage, 2.5%, is multiplied by the gross revenue yielding $2,287.50. Both these quantities are then subtracted from the budgeted gross revenue resulting in the budgeted net sales, $86,010.00. The quarterly total is the sum of all three months in the quarter.

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b. Purchases budget for the first quarter.

Purchase Budget Budgeted Sales Volume Add: Target Ending Units in Merchandise Inventory Total Units Needed Less: Beginning Units in Merchandise Inventory Budgeted Quantity in Units to Purchase × Purchase Price per Unit Total Budgeted Cost of Purchases Less: Purchase Discounts Net Purchases

Jan. 2,000.00

Feb. 3,000.00

Quarter Mar. Total 3,500.00 8,500.00

450.00 2,450.00

525.00 3,525.00

645.00 4,145.00

645.00 9,145.00

340.00

450.00

525.00

340.00

2,110.00 $ 14.25

3,075.00 $ 14.25

3,620.00 $ 14.25

8,805.00 $ 14.25

$30,067.50 $43,818.75 $51,585.00 $125,471.25 451.01 657.28 773.78 1,882.07 $29,616.49 $43,161.47 $50,811.23 $123,589.18

The purchase budget starts with the budgeted sale volume. The targeted ending units is calculated by multiplying the next period's sales volume by 15%, Jan. = Feb. (3,000) × 15% = 450. The target ending inventory would be added to the budgeted sales volume to determine the total units needed. The beginning inventory for each month would be calculated next. The beginning inventory for January, 340, is given in the description. The beginning inventory for each month after Jan. will be equal to the previous month's ending inventory, Feb. = Jan. (450). Quantity in units to purchase is calculated by subtracting the beginning inventory from the total units needed, Jan: 2,450 − 340 = 2,110. Then, the budgeted quantity in units to purchase is multiplied by the purchase price, $14.25 resulting in total budgeted cost of purchases, $30,067.50. The final step is to calculate the purchase discount by multiplying the total budgeted cost of purchases, $30,067.50 by the purchase discount, 1.50%, yielding net purchases of $29,616.49. All periods will perform these calculations. The Quarter total is the sum of the three periods.

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c. COGS budget for the first quarter. COGS Budget: 1st Quarter Beginning Merchandise Inventory Add: Net Purchases Budgeted Cost of Goods Available for Sale Less: Budgeted Ending Merchandise Inventory Cost of Goods Sold

Total $ 4,675.00 123,589.18 $128,264.18 9,191.25 $119,072.93

The COGS budget for the quarter begins with beginning inventory for the first period of the quarter, which is 340. The 340 is multiplied by the $13.75 to calculate the dollars associated with the beginning inventory, 340 × $13.75 = $4,675. The beginning inventory, $4,675, is added to the net purchases for the three periods, $29,616.49 + $43,161.47 + $50,811.23 = $123,589.18, resulting in a cost of goods available for sales of $128,264.18. The ending inventory for the quarter would be from the March period, 645, multiplied by the purchase price, $14.25 = $9,191.25. Finally, budgeted ending merchandise inventory is subtracted from the budgeted costs of goods available for sale to yield budgeted cost of goods sold for the quarter of $119,072.93. d. Unlike manufacturers, a retailer purchases its products in finished form, so it does not have raw materials inventory, work-in-process inventory, and manufacturing cost of direct material, direct labor, and overhead. The only inventory that retailers hold is merchandise inventory. Retailer COGS consists of units (merchandise inventory) purchased and sold times purchasing price per unit. Whereas, manufacturer COGS consists of units manufactured and sold times cost of goods manufactured per unit. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

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134) Ollie, LLC is an online business that specializes in the production and sale of handmade dog sweaters. They were established one year ago and have seen consistent growth in sales month-to-month. In an effort to be more prepared for their second year, they are creating a sales forecast. In December of the previous year, they were able to sell 575 units and anticipate 5% growth every month in the coming year. They have set their selling price for each sweater at $34.99. Please answer the following questions. (All budgeted sales volume figures should be rounded to the nearest whole number.) a. What is their budgeted gross sales in units for the February? b. What is their budgeted gross revenue for the March? c. If they increased their sales by 8% month-to-month, as opposed to 5%, then what percentage increase would Ollie see in their Budgeted Gross Revenue for the quarter? (Round your answer to the nearest whole percent.)

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Answer: Sales Forecast Budgeted Sales Volume × Budgeted Selling Price Budgeted Gross Revenue

January February March 604.00 634.00 666.00 $ 34.99 $ 34.99 $ 34.99 $21,133.96 $22,183.66 $23,303.34

First Quarter Total 1,904.00 $ 34.99 $66,620.96

a. The budgeted gross sales for January will be 604 units. This is calculated by taking the budgeted sales from December of 575 units and adding in the 5% increase they anticipate. 575 × 1.05 = 604 units. The budgeted gross sales for February will be 634 units. This is calculated by taking the budgeted sales from January of 604 units and adding in the 5% increase they anticipate. 604 × 1.05 = 634 units. b. The budgeted gross revenue for March will $23,303.34. In order to determine this number, you must first calculate the budgeted sales volume for March which involves taking the budgeted sales volume from February of 634 units and adding in the 5% increase. 634 × 1.05 = 666 units. Lastly, you will multiply the budgeted sales volume by the budgeted sales price of $34.99, 666 units × $34.99 = $23,303.34. c. Before measuring change, you must determine how the extra increase of budgeted sales volume impacts the budgeted gross revenue. Each month's budgeted sales volume is calculated by taking the previous month and multiplying by 1.08. Overall, Ollie has budgeted sales volume of 2,017 units. Once you multiply this against the budgeted sales price of $34.99, you will arrive at a budgeted gross revenue of $70,574.83.

Sales Forecast Budgeted Sales Volume × Budgeted Selling Price Budgeted Gross Revenue

First Quarter January February March Total 621.00 671.00 725.00 2,017.00 $ 34.99 $ 34.99 $ 34.99 $ 34.99 $21,728.79 $23,478.29 $25,367.75 $70,574.83

You are now able to calculate the percentage increase in budgeted gross revenue. To do this, you use the following formula: (New Forecast - Original Forecast)/Original Forecast. ($70,574.83 $66,620.96)/$66,620.96 = 0.05935 or 6% (rounded). Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

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135) Knope, Inc. is an online retailer that sells personalized Christmas wreaths, and they have had a successful first year. Karen, the owner, surpassed her initial sales goal of 200 units last year, selling 270. She anticipates a 10% increase this coming year and is able to sell each Christmas wreath for $28 with a cost to her of $11 per wreath. Karen is debating adding Halloween wreaths this year that would cost her $12.50 each and that she could sell for $33 per wreath. She anticipates the demand for these to be a bit lower and is aiming to sell 75 wreaths. Her selling, general, and administrative (SG&A) expenses will be $2,472, and she has an existing $2,000 loan with a 1% Annual Percentage Rate (APR). Knope, Inc. has a flat tax rate of 21%. Please answer the following questions: a. If Knope, Inc. chooses to only continue selling Christmas wreaths, then what will their net income be for the upcoming year? b. If Knope, Inc. decides to also sell the Halloween wreaths, then what will their net income be for the upcoming year? c. What is the gross margin percentage for both a) and b), and what does this indicate about each choice for Karen and Knope, Inc.?

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Answer: a. If Knope chooses to only continue selling Christmas wreaths, then their net income will be $2,020.03. This is calculated as follows: Sales (297 × $28.00) Less: Cost of Goods Sold ($11.00 × 297) Gross Margin Less: SG&A Expenses Operating Income Less: Interest Expense ($2,000.00 × 1%) Income Before Income Taxes Less: Income Tax Expense ($2,557.00 × 21%)

$8,316.00 3,267.00 $5,049.00 2,472.00 $2,577.00 20.00 $2,557.00 536.97

Net Income

$2,020.03

b. If Knope chooses to also sell Halloween wreaths, then their net income will be $3,234.65. This is calculated as follows: Sales (297 Christmas Wreaths × $28) + (75 Halloween Wreaths × $33.00) Less: Cost of Goods Sold ($11.00 × 297) + ($12.50 × 75) Gross Margin Less: SG&A Expenses Operating Income Less: Interest Expense ($2,000.00 × 1%) Income Before Income Taxes Less: Income Tax Expense ($4,094.50 × 21%) Net Income

$10,791.00 4,204.50 $ 6,586.50 2,472.00 $ 4,114.50 20.00 $ 4,094.50 859.85 $ 3,234.65

c. The Gross Margin percentage is calculated by taking the Gross Margin and dividing it by net sales. This percentage demonstrates how well Knope, Inc. manages their costs and both a) and b) indicate that Knope, Inc. is able to keep over 60% of their sales with only around 40% going to cover the costs of products sold. Both scenarios present a pretty consistent model that would serve the business well. The Gross Margin percentage for scenario a) is $5,049/$8,316 = 60.71%. The Gross Margin percentage for scenario b) is $6,586.50/$10,791 = 61.04%. Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

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136) Kicks Shoes is an online store that sells custom-made sneakers. The shoes are sold for $235.00, and the base shoe is purchased for $123.35 from a manufacturer in Vietnam. Because they experience shipping disruptions, they keep 60% of the next month's projected sales forecast in their ending inventory of base shoes. They sold 1,234 units during the month of June, and they expect sales to increase by 10% for each month over the next seven months. They offer generous credit terms that allow the customer to pay 50% when they place their order with the remainder due the following month. Kicks Shoes has experienced a 15% uncollectable rate on their sales. Ending base shoe inventory for June was 814, and sales for June were $289,990. Using the information provided above, create the following: (All calculations should be rounded to 0 decimals.) a. Sales forecast for the next 6 months. b. Schedule of cash receipts for the next 6 months. c. Purchasing budget for base shoes for the next 6 months. d. What is the amount of uncollected sales dollars from August's total sales? Explain how this was calculated.

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Answer: a. Sales Forecast Budgeted Sales Units × Budgeted Sales Price Budgeted Gross Revenue

June

July

1,234 $

235

August September October November December

1,357 $

1,493

235 $

235

$289,990 $318,895 $350,855

1,642 $

235 $

1,806 235

$385,870 $424,410

1,987

2,186

235

$ 235

$466,945

$513,710

The company sold 1,234 pairs of shoes in the last month, June. Each month after June, sales are expected to increase by 10%. After the monthly quantities have been determined, those quantities are multiplied by the budgeted sales price to determine the budgeted gross revenue. July = (1,234 × 1.1) = 1,357 August = (1,357 × 1.1) = 1,493 September = (1,493 × 1.1) = 1,642 October = (1,642 × 1.1) = 1,806 November = (1,806 × 1.1) = 1,987 December = (1,987 × 1.1) = 2,186 b.

Kicks Shoes collects 50% of the sales revenue in the month the order is placed and another 35% in the following month. Over time, Kicks shoes has determined that roughly 15% of the sales revenue will not be collected. To calculate cash receipts by month, the sales revenue for the previous month is multiplied by 35% and the sales revenue for the current month is multiplied by 50%.

Collected in July Collected in August Collected in September Collected in October Collected in November Collected in December

Sales month June July July August August September September October October November November December

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= $289,990 × 0.35 = $318,895 × 0.50 = $318,895 × 0.35 = $350,855 × 0.50 = $350,855 × 0.35 = $385,870 × 0.50 = $385,870 × 0.35 = $424,410 × 0.50 = $424,410 × 0.35 = $466,945 × 0.50 = $466,945 × 0.35 = $513,710 × 0.50

c. Purchasing Budget for base shoes. Kicks Shoes wants 60% of the next month's budgeted sales to already be in inventory at the end of the month. To determine what needs to be ordered, Kicks Shoes starts with the budgeted sales units for the month and calculates 60% of the budgeted sales units for the next month. Added together, it gives the additional amount needed for that month.

d. Amount of sales dollars uncollected from the August total sales: Kicks Shoes collects 50% of a sales order during the month the order is placed and another 35% the following month. Using historical data, Kicks Shoes has determined that 15% of their sales revenue is never collected due to bad debt. That means that overall, on any given order they expect to collect 85% of the sales revenue, or put another way, they expect to lose 15% of income from all orders. For the month of August, Kicks Shoes has a budgeted gross revenue of $350,855. To determine the uncollectable amount, the budgeted gross revenue ($350,855) times the uncollectable rate (15%) equals $52,628. $350,855 × 15% = $52,628. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

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137) Rachel is a staff accountant at Bowl More, Inc. She has been assigned the task of preparing the company's purchases budget and schedule of cash disbursements for the quarter ended June 30. During her review of the company's purchasing and payment policies, she determines the following information: • The company's budgeted purchases of bowling balls for the next quarter are as follows: ∘ April: 800 bowling balls ∘ May: 950 bowling balls ∘ June: 860 bowling balls • The company purchases bowling balls from its vendor for $100 each. • Freight charges of $6 per bowling ball are invoiced to Bowl More by the vendor. These are shown on the same invoice as the bowling balls and are charged to accounts payable. • The company's payment schedule for accounts payable is as follows: ∘ 10% of payables are paid during the month of purchase ∘ 55% of payables are paid the month following purchase ∘ 35% of payables are paid two months following purchase • The accounts payable (A/P) balance as of March 31 is $16,200. Of this amount, 60% is for purchases made in February and 40% is for purchases made in March. a. Determine the total cost of purchasing bowling balls for each month and the total for the quarter. b. Prepare a schedule of cash disbursements for the quarter ended June 30. c. Determine Bowl More's accounts payable balance as of June 30. d. Explain how Rachel's work on these items will impact the company's budgeted balance sheet for the quarter ended June 30.

Budgeted Purchases of Bowling Balls Dollar Value of Bowling Balls Purchase ($100 each) Dollar Value of Freight Costs ($6 each) Total Dollar Value of Purchases

April 800

May 950

June Quarter 860 2,610

$80,000 $95,000 $86,000 $261,000 4,800 5,700 5,160 15,660 $84,800 $100,700 $91,160 $276,660

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Answer: a. Total value of purchases for the quarter ended June 30. April May June Quarter Budgeted Purchases of Bowling Balls 800 950 860 2,610 Dollar Value of Bowling Balls Purchase ($100 each) $80,000 $95,000 $86,000 $261,000 Dollar Value of Freight Costs ($6 each) 4,800 5,700 5,160 15,660 Total Dollar Value of Purchases $84,800 $100,700 $91,160 $276,660 b. Schedule of cash disbursements for the quarter ended June 30. April May June Quarter Total Dollar Value of Purchases $84,800.00 $100,700.00 $91,160.00 $276,660.00 Payments on Purchases made during the month (10%) $8,480.00 $10,070.00 $9,116.00 Payments on Purchases made the previous month (55%) 3,960.00* 46,640.00 55,385.00 Payments on Purchases made two months ago (35%) 9,720.00** 2,520.00 29,680.00 Total Budgeted Cash Disbursements $22,160.00 $59,230.00 $94,181.00 $175,571.00 *Of the $16,200 beginning A/P balance, $6,480 ($16,200 × 40%) is from March purchases, which represents 90% of March total purchases. Total March purchases are $7,200 ($6,480 ÷ 90%). Payments made in April on March purchases are $3,960 ($7,200 × 55%). **Of the $16,200 beginning A/P balance, $9,720 ($16,200 × 60%) is from February purchases, which represents the unpaid portion (35%) of February purchases. c. Accounts Payable balance as of June 30. May Purchases in Accounts Payable (35% of $100,700) Add: June Purchases in Accounts Payable (90% of $91,160) Accounts Payable Balance as of June 30

$ 35,245 82,044 $117,289

Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

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138) Monarch, LLC is a graphic design business that specializes providing services to other small businesses. A large majority of their customers have set up accounts to where they will pay their bill for services in the month following when the service was rendered while other customers will pay as the work is completed. Monarch estimates that it will collect 25% of its sales in the month it occurs, 55% of its sales in the following month, 15% in the second month after the sale, and they will write off the remaining 5% as uncollectible at the end of the second month after the sale. Their credit sales have been as follows: April, $5,600; May, $9,200; June, $4,300; and July, $2,800. Please answer the following questions: a. What will the total cash collected during May be? b. What will the total cash collected during June be? How much of this total came from sales during previous month(s)? c. How much of their sales will they write off during the month of July? Answer: Total Cash April May June July Receipts Credit Sales $5,600 $9,200 $4,300 $2,800 Collected in April $1,400 $1,400 Collected in May $3,080 $2,300 $5,380 Collected in June $ 840 $5,060 $1,075 $6,975 Collected in July $1,380 $2,365 $ 700 $4,445 Uncollectible Accounts Receivable (A/R) Write off $ 280 $ 460 a. The amount of cash collected during May will be $5,380 which is comprised of 25% of its current month's credit sales and 55% of the previous month's credit sales. This is calculated as follows: $2,300 ($9,200 × 0.25) + $3,080 ($5,600 × 0.55). b. The amount of cash collected during June will be $6,975 which is comprised of 25% of its current month's credit sales, 55% of the previous month's credit sales, and 15% of the sales from two months prior. This is calculated as follows: $1,075 ($4,300 × 0.25) + $5,060 ($9,200 × 0.55) + $840 ($5,600 × 0.15). The amount of cash collected from previous months, April and May, would total $5,900, calculated as $5,060 ($9,200 × 0.55) + $840 ($5,600 × 0.15). c. During the month of July, the company will write off $460. This is calculated by multiplying sales from two months prior by the company's estimated uncollectible percentage of 5%. You would take May's sales of $9,200 and multiply by 5% for a total of $460. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

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139) Anna has recently started Dapper Doggies, a dog grooming business in her hometown. She is debating whether she would like to have a brick-and-mortar location located in the heart of downtown or a mobile grooming truck that would allow her to travel all over the city. The brickand-mortar store would allow her to have a consistent place to see clients. She would be able to charge $40 per dog and anticipates that she would see 100 dogs a month. Using a mobile truck would afford her the opportunity to see 150 dogs a month, but she would only be able to charge $33 per dog which also includes a convenience fee of $3 per dog. Below is a listing of monthly costs associated with each type of location she may choose: Brick-and-Mortar Rent Insurance Cleaning supplies Grooming supplies Treats for customers Phone and utilities

$2,000 $ 125 $ 75 $5/dog $0.50/dog $ 300

Mobile Unit Truck Payment Insurance Cleaning supplies Grooming supplies Treats for customers Phone and utilities Permits

$2,650 $ 278 $ 83 $5/dog $0.50/dog $ 250 $ 80

Anna has decided to use zero-based budgeting to assist her in making a final selection. a. Calculate the amount left for Anna to put into retained earnings if she decides to go with the brick-and-mortar location. b. Calculate the amount left for Anna to put into retained earnings if she decides to go with the mobile truck. c. Assume that Anna would really like to pursue the mobile truck as she enjoys the versatility. How many additional dogs would she need to groom each month to create the same outcome as the brick-and-mortar location? (Note: If needed, round up the final answer.) d. Now, assume that Anna would prefer to pursue the brick-and-mortar location, but she would like to increase the amount remaining for each month to $1,200. What approach should she implement in order to achieve this amount? e. Why is zero-based budgeting considered helpful when making decisions pertaining to allocating both new and existing funds?

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Answer: a. Zero-based budgeting for the brick-and-mortar location will leave $950 for Anna to put into retained earnings at the end of the month. This is calculated as follows: Inflow Outflow: Rent Insurance Cleaning Supplies Grooming Supplies Treats Phone and Utilities Total Cash Outflow Retained Earnings

$40 per dog × 100 dogs

$5/dog × 100 dogs $0.50/dog × 100 dogs

$4,000.00 $2,000.00 $ 125.00 $ 75.00 $ 500.00 $ 50.00 $ 300.00 $3,050.00 $ 950.00

b. Zero-based budgeting for the mobile truck would leave $784 for Anna to put into retained earnings at the end of the month. This is calculated as follows:

Inflow Outflow: Truck Payment Insurance Cleaning Supplies Grooming Supplies Treats Phone and Utilities Permits Total Cash Outflow Retained Earnings

$33 (Grooming, plus convenience fee)/dog × 150 dogs

$5/dog × 150 dogs $0.50/dog × 150 dogs

$4,950.00 $2,650.00 $ 278.00 $ 83.00 $ 750.00 $ 75.00 $ 250.00 $ 80.00 $4,166.00 $ 784.00

c. In order to achieve at least the same amount of money left over for Anna as the brick-andmortar location would yield, Anna would need to see an additional 6 dogs. This is calculated as follows: $950 From brick-and-mortar − 784 From mobile unit $166 Additional income needed $166/$33 (amount charged per dog at mobile unit) = 6 dogs (round up) d. The brick-and-mortar location would leave $950 for Anna which is not enough to meet her new goal. Anna could choose to increase her service charges by $2.50 ($1,200 − $950)/100 dogs to increase her remaining profits without having to increase the number of dogs that she would have to see per month. Alternatively, Anna could also choose to cut down her expenses by a total amount of $250. A balanced approach of both increasing revenue while also decreasing expenses would be ideal, but an increase in revenue would be the more easily achievable recommendation. 119

e. Zero-based budgeting is an incredibly helpful tool due the budgeter starting from zero and justifying each item being added in. This form of budgeting requires justification for both new and existing items listed in the budget. This form of budgeting requires allocation of every dollar that comes in and will place any overage in a category of its own, usually a goal of the person making the budget. The overall goal of Zero-based budget is for the amount remaining after reconciliation to be zero which means that all available funds will have been allocated where they are needed. Diff: 2 LO: 1 Bloom: AN AACSB: Analytic, Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

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140) Carolyn has been promoted to the position of production manager for DC, Inc. DC produces button-down shirts that are very popular with teenagers. Carolyn would like to produce a budget for the manufacturing facility to help her better manage the plant. The budgeted sales for the next month are 1,200,000 shirts to be sold for $75 each. The budgeted beginning inventory of finished product is 10,000 shirts at a cost of $55.00 per shirt with ending inventory of 15,000 shirts at a cost of $55.38 per shirt. The shirt is made up of 2 yards of fabric costing $8 per yard and 8 buttons costing $0.25 per button. Direct labor is $12 per hour, and it takes 3 hours to complete a shirt. Variable manufacturing overhead is budgeted at $1.25 per completed shirt. The budgeted beginning inventory for the fabric is 18,000 yards and the budgeted ending inventory is 22,000 yards. Beginning and ending inventories for the buttons have been budgeted at 2,500 and 2,000 respectively. The following financial information is also available: • Fixed manufacturing overhead is $156,000 per month. • Manufacturing overhead expenses are paid in the month incurred. • Purchases of direct materials and labor costs are paid for in the month acquired. • Selling, General, and Administrative (SG&A) expenses are variable based on shirts sold at a rate of $0.75 per shirt. • There is also a fixed amount of SG&A expenses of $126,300 for each month, including $45,000 of depreciation. • All expenses are paid in the month incurred. Answer the following questions: a. Using the information provided, what is the variable manufacturing cost of one shirt? b. How many shirts need to be produced during the month? c. Why are the no. of shirts to be produced different than the budgeted sales shirts? d. Considering the budgeted sales of 1,200,000 shirts, what would the budgeted operating income be for the month? e. What is the purchasing budget for the direct materials for the month?

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Answer: a. The variable manufacturing cost of the shirt is made up of the direct material costs plus the direct labor costs plus the variable manufacturing overhead costs. It would be calculated as follows: Direct Materials: Fabric 2 yards × $8.00 per yard = $16.00 Buttons 8 × $0.25 = $2.00 Total Direct materials = $16.00 + $2.00 = $18.00 Direct Labor: 3 hours × $12.00 = $36.00 Variable Manufacturing Overhead: 1 shirt × $1.25 = $1.25 Total Variable Manufacturing Cost per Shirt = $18.00 + $36.00 + $1.25 = $55.25 b. The number of shirts to produce during the month is calculated by beginning with the budgeted sales volume plus the ending inventory of finished product minus the beginning inventory of finished product. The calculation would be: Budgeted Production: 1,200,000 + Ending Inventory of Finished Product: 15,000 − Beginning Inventory of Finished Product: 10,000 = 1,205,000 c. DC, Inc. plans to have a portion of the next month's sales available at the end of the current month. To do this, the plant must produce more than their budgeted sales volume. Because each month ends with finished product, the next month will begin with that amount in finished product. The production quantity would be the Sales Budget Volume + Ending Inventory − Beginning Inventory resulting in what is to be produced. The quantity to produce will always exceed the sales volume.

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d. Budgeted Operating Income is calculated by subtracting the Budgeted Cost of Goods Sold (COGS) and Budgeted SG&A Expenses from the Budgeted Sales. The following calculations will need to be made: Budgeted Sales Budgeted Sales 1,200,000 × Sales Price $75 = $90,000,000 Budgeted Cost of Goods Sold = Budgeted Beginning Finished Goods (FG) Inventory + Budgeted Cost of Goods Manufactured (COGM) − Budgeted Ending FG Inventory Budgeted COGM is equal to Budgeted Cost of Direct Material (DM) used + Budgeted Direct Labor (DL) Cost + Budgeted Manufacturing Overhead (MOH) Cost Budgeted Cost of Direct Materials used: Fabric 2 Yards × Shirts to Produce 1,205,000 × Cost per yard $8.00 = $19,280,000 Buttons 8 × Shirts to Produce 1,205,000 × Cost per Button $0.25 = $2,410,000 Budgeted Direct Labor cost: Hours per shirt 3 × Shirts to Produce 1,205,000 × Cost per Hour $12.00 = $43,380,000 Budgeted Manufacturing Overhead Cost: Variable Manufacturing Overhead Cost = Shirts to produce 1,205,000 × Variable Manufacturing Overhead per Shirt $1.25 = $1,506,250 Fixed Manufacturing Overhead Cost $156,000 Budgeted Cost of Goods Manufactured = Direct Materials: $19,280,000 + $2,410,000 + Direct Labor: $43,380,000 + Variable Manufacturing Overhead: $1,506,250 + Fixed Manufacturing Overhead: $156,000 = $66,732,250 Budgeted Cost of Goods Sold (COGS) = (10,000 × $55.00) + $66,732,250 − (15,000 × $55.38) = $550,000 + $66,732,250 − $830,700 = $66,451,550 SG&A Expenses: SG&A Expenses = (Budgeted Sales 1,200,000 × Variable Cost per Shirt $0.75) + Fixed SG&A Expenses $126,300 = $1,026,300 Budgeted Operating Income = Budgeted Sales $90,000,000 − Budgeted COGS $66,451,550 − SG&A Expenses $1,026,300 = $22,522,150

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e. The purchasing budget would include the fabric for the shirt and the buttons. The following calculations would be made Fabric amount = Production Quantity needed: 1,205,000 × 2 yards × Cost: $8.00 ($19,280,000) + Ending Inventory: 22,000 × Cost $8.00 ($176,000) - Beginning Inventory: 18,000 × Cost $8.00 ($144,000) = $19,312,000 Buttons amount = Production Quantity needed, 1,205,000 × 8 × Cost: $0.25 ($2,410,000) + Ending Inventory: 2,000 × Cost: $0.25 ($500) - Beginning Inventory: 2,500 × Cost: $0.25 ($625) = $2,409,875 Total Purchase Budget = Fabric ($19,312,000) + Buttons ($2,409,875) = $21,721,875 Diff: 2 LO: 3 Bloom: AN AACSB: Analytic, Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

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141) Sharon is a baker who owns a small bakery called Pie in the Sky that sells cherry pies. She has been debating adding new pies into her offerings, including blackberry and apple. Sharon is preparing a budgeted income statement for April so she can compare budgeted net income, when selling just cherry pies, to budgeted net income when selling other types of pies as well. She has decided that she will be able to sell the pies for the following prices: Cherry, $12; Blackberry, $10; and Apple, $13. Sharon will be able to produce 400 pies a month regardless of what kinds of pies she chooses to bake and sell. The pies have the following costs associated with them: Cherry (per pie) Blackberry (per pie) Crust $0.30 Crust $0.30 Filling $0.75 Filling $0.82 Topping $0.60 Topping $0.34

Apple (per pie) Crust $0.30 Filling $0.80 Topping $0.44

Sharon took out a $10,000 loan with an Annual Percentage Rate (APR) of 12% to begin her business, and she will have a flat tax rate of 21%. Her monthly fixed selling, general, and administrative (SG&A) expenses include the following: Rent Phone and Utilities Insurance Baking Supplies

$2,300 $ 400 $ 150 $ 600

a. If Sharon decides to only sell cherry pies, then what will her budgeted sales revenue be for April? b. Assuming that Sharon proceeds with a), what would her gross margin and budgeted net income be for April? c. If Sharon decides to sell 200 cherry pies and 100 each of both blackberry and apple, then what would her budgeted gross revenue be for April? d. Assuming that Sharon proceeds with c), what would her budgeted gross margin and net income be for April? e. Based upon what you have learned from choices b) and d), which approach would you encourage Sharon to utilize?

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Answer: a. Sharon's budgeted sales revenue would be $4,800 for April. Budgeted Sales Revenue = Budgeted Sales Volume × Budgeted Selling Price = 400 pies × $12.00 = $4,800 b. For April, Sharon's gross margin would be $4,140 and her budgeted net income would be $466.10. Gross Margin = Budgeted Sales - Cost of Goods Sold To calculate Cost of Goods Sold, you would need to calculate the cost per pie: Cherry Pie Crust Filling Topping Cost per Pie

$0.30 0.75 0.60 $1.65

Now, take the projected Sales Revenue and subtract the Cost of Goods Sold to arrive at Gross Margin: Sales (400 Cherry Pies × $12) Less: Cost of Goods Sold ($1.65 × 400 pies)

$4,800.00 660.00

Gross Margin

$4,140.00

Net Income = Gross Margin − SG&A Expenses − Interest Expense − Income Tax Expense Gross Margin $4,140.00 Less: SG&A Expenses ($2,300 + $400 + $150 + $600) 3,450.00 Operating Income $ 690.00 Less: Interest Expense ($10,000 × 1%) 100.00 Income Before Income Taxes $ 590.00 Less: Income Tax Expense ($590 × 21%) 123.90 Net Income $ 466.10 c. If Sharon decides to use the described sales mix of pies, then her budgeted gross revenue would be $4,700 for April. Budgeted Gross Revenue = (Budgeted Sales Volume for Pie 1 × Budgeted Selling Price for Pie 1) + (Budgeted Sales Volume for Pie 2 × Budgeted Selling Price for Pie 2) + (Budgeted Sales Volume for Pie 3 × Budgeted Selling Price for Pie 3) = (200 cherry pies × $12) + (100 blackberry pies × $10) + (100 apple pies × $13) = $2,400 + $1,000 + $1,300 = $4,700

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d. If Sharon proceeds with c), then she can expect a gross margin of $4,070 and Net Income $410.80 for April. Gross Margin = Budgeted Sales − Cost of Goods Sold To calculate Cost of Goods Sold, calculate the costs per pie: Cherry Pie Crust Filling Topping Cost per pie

Blackberry Pie Apple Pie $0.30 $0.30 0.75 0.82 0.60 Crust 0.34 Crust $1.65 Cost per pie $1.46 Cost per pie

$0.30 0.80 0.44 $1.54

COGS = (200 × $1.65) + (100 × $1.46) + (100 × $1.54) = $630 Now, take the projected Sales Revenue and subtract the Cost of Goods Sold to arrive at Gross Margin: Sales (from requirement c) Less: Cost of Goods Sold

$4,700.00 630.00

Gross Margin

$4,070.00

Net Income = Gross Margin - SG&A Expenses - Interest Expense - Income Tax Expense Gross Margin Less: SG&A Expenses ($2,300 + $400 + $150 + $600) Operating Income Less: Interest Expense ($10,000 × 1%) Income Before Income Taxes Less: Income Tax Expense ($520 × 21%) Net Income

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$4,070.00 3,450.00 $ 620.00 100.00 $ 520.00 109.20 $ 410.80

e. Based upon the numbers calculated in both b) and d), the best recommendation for Sharon would be to continue selling only cherry pies as it yields a higher gross margin and a higher net income. Should she choose to diversify her pie offerings in the future, she may want to determine whether she can increase the selling price on the proposed pie additions or to try and cut some of the cost associated with the new pies. This could involve calling suppliers and asking for additional discounts. Diff: 3 LO: 3 Bloom: AP AACSB: Analytic, Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Strategy, Planning & Performance: Budgeting and Forecasting.

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Cost Accounting, 1e (Farmer) Chapter 7 Capital Budgeting Choices and Decisions 1) Capital budgeting is typically used in considering what types of projects? A) The potential acquisition of current assets. B) Does not provide long-range economic benefits in the form of a target return. C) Long-term time horizon projects that do not require a significant cash outflow. D) Projects that require significant cash outflows and span a long-term time horizon. Answer: D Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 2) Which statement is NOT true concerning the "Circle of Life" relationship? A) The "Circle of Life" relationship involves most organizations' operating, financing, and investing activities. B) The "Circle of Life" relationship starts with the operating activities. C) The operating activities of an organization are the results of the products and services it provides. D) Financing activities include obtaining and/or repaying capital from lenders. Answer: B Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 3) One way to calculate the return on investment (ROI) is A) investment divided by net income. B) operating income divided by investment. C) investment divided by return. D) operating income divided by net income. Answer: B Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

4) Cost accounting utilizes the return on investment to A) capture all transactions for the business. B) capture only financing activities of a business. C) optimize the outcomes of investing activities only. D) optimize the outcomes of operating and investing activities. Answer: D Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 5) Which of the following would NOT change the return on investment (ROI)? A) Increase total invested assets. B) Increase operating income and total invested assets by the same amount. C) Decrease sales and expenses by the same dollar amount. D) Decrease sales and expenses by the same percentage. Answer: C Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 6) Which statement is true regarding the definition of an investment, as it applies to return on investment (ROI)? A) All companies use long-term assets to comprise the investment in the ROI calculation. B) All companies use total assets to comprise the investment in the ROI calculation. C) Companies will use their own interpretation of which assets on the balance sheet comprise the investment in the ROI calculation. D) All companies will use total assets, less intangibles to comprise the investment in the ROI calculation. Answer: C Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

7) Which of the following changes would increase return on investment (ROI)? A) Increase total invested assets. B) Increase operating income and total invested assets by the same amount. C) Decrease sales and expenses by the same dollar amount. D) Decrease sales and expenses by the same percentage. Answer: B Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 8) MacBeth Company had the following information: Sales Cost of goods sold Gross margin Other expenses Operating income

$200,000 90,000 110,000 35,000 $75,000

Calculate the company's return. A) $75,000. B) $110,000. C) $125,000. D) $200,000. Answer: A Explanation: $75,000 - the company's return equals its operating income. Diff: 2 LO: 1 Bloom: AP AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

9) MacBeth Company had the following information: Sales Cost of goods sold Gross margin Other expenses Operating income

$200,000 90,000 110,000 35,000 $75,000

If the company exactly met its required 10% ROI for the year, what must be its investment? A) $7,500. B) $20,000. C) $750,000. D) $2,000,000. Answer: C Explanation: $75,000 ÷ .10 = $750,000 (op inc. ÷ ROI) Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 10) Hamlet Inc. had the following information: Invested assets Operating income Net income

$1,500,000 175,000 85,000

Calculate the company's return on investment (ROI), using the financial perspective. A) 5.7% B) 8.6% C) 11.7% D) 48.6% Answer: A Explanation: $85,000 ÷ $1,500,000 = 5.7% (net inc. ÷ inv. assets) Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

11) Hamlet Inc. had the following information: Operating income Net income ROI

$175,000 85,000 11.2%

Calculate the company's invested assets if the ROI was calculated using the cost accounting perspective. A) $75,893. B) $156,250. C) $758,929. D) $1,562,500. Answer: D Explanation: $175,000 ÷ .112 = $1,562,500 (op. inc. ÷ ROI) Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 12) Hamlet Inc. had the following information: Invested assets ROI

$3,200,000 8.6%

Calculate the company's operating income. A) $275,200 B) $2,752,000 C) $3,720,930 D) $37,209,302 Answer: A Explanation: $3,200,000 × .086 = $275,200 (inv. assets × ROI) Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

13) The statement of cash flows is separated into three sections, operating, investing, and financing. All three are essential to the "Circle of Life." However, the process starts with which activity? A) Operating B) Investing C) Financing D) All three options are correct. Answer: C Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 14) The correct order of events for the "Circle of Life" is A) operating, investing, and then financing. B) financing, operating, and then investing. C) Investing, financing, and then operating. D) financing, investing, and then operating. Answer: D Diff: 2 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 15) Positive net earnings on the statement of cash flows signifies A) a positive net income. B) a thriving business. C) the company is liquid and can pay off its operating expenses. D) both a positive net income and/or a thriving business. Answer: D Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

16) On the statement of cash flows, one of the purposes of buying long-term investments is to A) generate a target return. B) obtain financing from lenders. C) repay its creditors. D) None of the options are correct. Answer: A Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 17) All of the following are essential elements of capital budgeting decisions except A) cash flows. B) tax rates. C) inventory. D) depreciation. Answer: C Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 18) Which statement is NOT true concerning timelines? A) Only industry standards inform companies on a particular asset's useful life. B) Projects must have the same length of time for comparison purposes. C) Tax codes and industry guidelines inform companies on a particular asset's useful life. D) The market's reaction to a product can affect the timeline. Answer: A Diff: 1 LO: 2 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

19) To calculate the present value, you need all of the following except the A) future value. B) rate of return. C) number of periods. D) current cost of the investment. Answer: D Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 20) All of the following are needed to calculate the future value of a single sum except A) principal. B) number of periods. C) interest rate. D) maturity value. Answer: D Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 21) Which of the following is NOT needed to calculate the future value of an ordinary annuity? A) interest rate. B) number of periods. C) amount of the payments. D) maturity value. Answer: D Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

22) The factor 1.34587 is taken from the 2% column and 15 periods row in a certain table. From what table is this factor taken? A) Future value of a single sum B) Future value of an ordinary annuity of 1 C) Present value of a single sum D) Present value of an ordinary annuity of 1 Answer: A Diff: 2 LO: 2 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 23) If $25,000 is put in a savings account paying interest of 6% compounded annually, what amount will be in the account at the end of five years? A) $33,456 B) $18,682 C) $140,927 D) $105,309 Answer: A Explanation: $25,000 × 1.33823 = $33,456 (FVIF n = 5, i = 6% × PV) = FV Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 24) The future value of 1 factor will always be A) less than 1. B) greater than 1. C) equal to the interest rate. D) equal to 1. Answer: B Diff: 1 LO: 2 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

25) If $5,000 is put into a savings account at the end of each year and the account pays interest of 4% compounded annually, what amount will be in the account at the end of six years? A) $6,327 B) $3,952 C) $33,165 D) $26,211 Answer: C Explanation: $5,000 × 6.63298 = $33,165 (Annuity × FV annuity factor, n = 6, i = 4%) = FV Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 26) Which discount rate will produce the smallest present value? A) 2%. B) 6%. C) 10%. D) 12%. Answer: D Diff: 2 LO: 2 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 27) If you can earn an 12% rate of return, what amount would you need to invest to have $20,000 on year from now? A) $22,400. B) $17,857. C) $20,000. D) $17,587. Answer: B Explanation: $20,000 × .89286 = $17,857 (FV × PVIF annuity factor, n = 1, i = 12%) = PV Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

28) Allied Company is considering the purchase of a machine. The machine will produce cash flows for the next two years as follows: Year 1 Year 2

$80,000 $90,000

What is the maximum price Allied should pay for this machine if they have a cost of capital of 12%? A) $143,176 B) $170,000 C) $202,496 D) $223,533 Answer: A Explanation: ($80,000 × .89256) + ($90,000 × .79719) = $143,176 (FV × PVIF, n = 1, I = 12%) + (FV × PVIF, n = 2, I = 12%) Diff: 3 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 29) To compute the present value of an annuity, the company must know the 1. discount rate. 2. number of discount periods and the amount of the periodic payments or receipts A) both 1 and 2. B) 1. C) 2. D) both 1 and 2, and additional information is needed. Answer: A Diff: 1 LO: 2 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

30) The difference between the future value of an annuity and the future value of an annuity due is A) the future value of an annuity has recurring payments or receipts, and the future value of an annuity due receives or pays the amount only once. B) the future value of an annuity due has recurring payments or receipts, and the future value of an annuity receives or pays the amount only once. C) the future value of an annuity due receives payments at the beginning of each period, and the future value of an ordinary annuity receives payments at the end of each period. D) the future value of an annuity receives payments at the beginning of each period, and the future value due of an annuity receives payments at the end of each period. Answer: C Diff: 2 LO: 2 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 31) Ducky Company purchased a machine that requires annual payments of $25,000 to be paid at the end of each of the next seven years. The discount rate is 8%. What amount will be used to record the machine? A) $14,587 B) $223,070 C) $130,159 D) $140,572 Answer: C Explanation: $25,000 × 5.20637 = $130,159 (Annuity × PVAF, n = 7, i = 8%) = PV Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

32) Ducky Company purchased a machine that requires annual payments of $25,000 to be paid at the beginning of each of the next seven years. The discount rate is 8%. What amount will be used to record the machine? A) $14,587 B) $223,070 C) $130,159 D) $140,572 Answer: D Explanation: $25,000 × 5.62288 = $140,572 (Annuity × PVAF, n = 7, i = 8%) = PV Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 33) Companies must use a rate to determine the present value of future cash flows. All of the following can be considered the discount rate except A) actual rate of return. B) hurdle rate. C) weighted-average cost of capital. D) tax rate. Answer: D Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 34) Companies typically use a(n) ________ in capital budgeting decisions. A) after-tax basis B) pre-tax basis C) actual tax liability D) quarterly tax payment Answer: A Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

35) Following is selected financial information for Epic Inc. Revenues Operating expenses (including depreciation) Depreciation Decrease in accounts receivable balance Tax rate

$225,000 $100,000 $ 15,000 $ 5,000 21%

Calculate the after-tax net cash flows for the year. A) $90,850 B) $102,700 C) $86,900 D) $82,950 Answer: A Explanation: ($225,000 + $5,000) - (100,000 - $15,000) = $115,000 × (1 - .21) = $90,850 (Rev. + Dec. in AR) - (Op. Exp. - Depr.) = cash basis op. inc. × (1 - tax rate) Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 36) Which of the following statements is true regarding depreciation? A) All expenses that are deductible for accounting purposes are also deductible for tax purposes. B) All expenses that are deductible for tax purposes are also deductible for accounting purposes. C) Tax deductions (like depreciation) are cash savings. D) Buying a long-term asset to generate income entitles a company to a one-year tax deduction. Answer: C Diff: 2 LO: 2 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

37) Random Company is considering purchasing a machine to create a widget. The following information pertains to the purchase: Cost of machine Useful Life Salvage value Tax rate

$77,000 7 years $7,000 21%

Calculate the tax shield if the company makes the purchase. A) $2,100 B) $2,310 C) $14,700 D) $16,170 Answer: A Explanation: [($77,000 - $7,000) ÷ 7 years] × .21 = $2,100 [(cost - sal. val.) ÷ years] × tax rate Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 38) Which of the following capital budgeting tools uses net income instead of cash flows? A) Net present value B) Internal rate of return C) Payback period D) Annual rate of return Answer: D Diff: 1 LO: 3 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 39) Which of the following capital budgeting tools does NOT consider the time value of money? A) Net present value B) Internal rate of return C) Simple payback period D) Profitability index Answer: C Diff: 1 LO: 3 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 15

40) Which of the following statements is false when considering the net present value (NPV)? A) The NPV is the preferred capital budgeting tool used in most businesses. B) The NPV captures the surplus but not the deficit the project generates in today's dollar. C) The NPV can be used to rank competing projects. D) The NPV can accommodate non-uniform cash flows from one year to the next. Answer: B Diff: 1 LO: 3 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 41) If the net present value is positive, which of the following statements is true? A) The cost of capital is less than the discount rate. B) The investment is not profitable and should be rejected. C) It measures the increase in the value of a company that results from an investment. D) It measures the rate at which the discount rate has decreased. Answer: C Diff: 2 LO: 3 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 42) A business is considering an investment that has a net present value (NPV) of $0 when they use a discount rate of 10%. A discount rate of 8% will result in a(n) A) NPV of $0. B) positive NPV. C) negative NPV. D) There is not enough information to provide a solution. Answer: B Diff: 2 LO: 3 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

43) Blender Inc. purchased a new piece of equipment that cost $120,000. The equipment is will be used for 10 years and will have a salvage value of $10,000. The annual operating cash inflows will be $45,000, and the annual operating cash outflows will be $30,000. The tax rate is 21%, and the company requires an after-tax rate of return of 8%. Calculate the net present value (NPV) of the equipment. A) ($20,353) B) $73,051 C) ($17,384) D) $68,419 Answer: A Explanation: (($45,000 - $30,000) × 6.71008 × (1 - .21)) + ((($120,000 - $10,000) ÷ 10) × 6.71008 × .21) + ($10,000 × .46319) - $120,000 = -$20,353 ((Cash in. - Cash out) × PVAF, n = 10, i = 8% × (1 - tax rate)) + (((cost - sal. val.) ÷ years) × PVAF, n = 10, i = 8% × tax rate) + (sal. val × PVIF, n = 10, i = 8%) - cost Diff: 3 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 44) A projected project requires an investment of $100,000 and has an expected life of four years. The project expects annual cash flows of $40,000 in year 1, $48,000 in year 2, $76,000 in year 3 and $56,000 in year 4. If the company has a discount rate of 8%, what is the net present value (ignoring income taxes)? A) $49,680 B) $79,682 C) ($79,682) D) ($49,680) Answer: B Explanation: ($40,000 × .92593) + ($48,000 × .85734) + ($76,000 × .79383) + ($56,000 × .73503) - $100,000 = $79,682 (year 1 cash × PVIF, n = 1, i = 8%) + (year 2 cash × PVIF, n = 2, i = 8%) + (year 3 cash × PVIF, n = 3, i = 8%) + (year 4 cash × PVIF, n = 4, i = 8%) - cost Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

45) Sky High Company is considering the purchase of an investment of $250,000. Data related to the investment are as follows: Cash flows (at the end of the next four years) Salvage value Tax Rate

$125,000 $25,000 21%

With a discount rate of 9%, what is the net present value of the investment? A) $354,910 B) $189,185 C) $158,140 D) $125,902 Answer: D Explanation: ($125,000 × 3.23972 × (1 - .21)) + ((($250,000 - $25,000) ÷ 4) × 3.23972 × .21) + ($25,000 * .708430) - $250,000 = $125,902 (Cash flows × PVAF, n = 4, i = 9% × (1 - tax rate)) + (((cost - sal. val.) ÷ years) × PVAF, n = 4, i = 9% × tax rate) + (sal. val × PVIF, n = 4, i = 9%) - cost Diff: 3 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 46) Which of the following does NOT consider a company's discount rate? A) Net present value B) Internal rate of return C) Accounting rate of return D) Simple payback period Answer: D Diff: 1 LO: 3 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

47) Which capital budgeting tool takes into account both the discounted cash flows and the original investment? A) Annual rate of return B) Profitability index C) Annual rate of return before depreciation D) Simple payback period Answer: B Diff: 2 LO: 3 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 48) All of the following are true regarding the internal rate of return (IRR), except A) the greater the project's IRR, the greater the project's desirability. B) the IRR is expressed as a percentage making it easier to compare projects. C) the IRR can be used to rank competing projects. D) the IRR is expressed as a percentage making it harder to compare projects. Answer: D Diff: 2 LO: 3 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

49) Blender Inc. purchased a new piece of equipment that cost $120,000. The equipment is will be used for 10 years and will have a salvage value of $10,000. The annual operating cash inflows will be $45,000, and the annual operating cash outflows will be $30,000. The tax rate is 21%, and the company requires an after-tax rate of return of 8%. Using Excel calculate the internal rate of return (IRR) of the equipment A) 4.3%. B) 3.1%. C) 6.0%. D) 2.6%. Answer: A Explanation: (($45,000 - $30,000) × (1 - .21)) + ((($120,000 - $10,000) ÷ 10) × .21) = $14,160 (years 1 - 9) $14,160 + $10,000 = $24,160 (year 10), -,120,000 (year 0) =IRR (-$120,000, $14,160, $14,160, $14,160, $14,160, $14,160, $14,160, $14,160, $14,160, $14,160, $24,160) = 4.3% ((Cash in. - Cash out) × (1-tax rate)) + (((cost - sal. val.) ÷ years) × tax rate) = years 1 - 9, Years 1 - 9 + sal. val = (Year 10) - cost (Year 0) Diff: 3 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 50) Sky High Company is considering the purchase of an investment of $250,000. Data related to the investment are as follows: Cash flows (at the end of the next four years) Salvage value Tax Rate

$125,000 $25,000 21%

With a discount rate of 9%, what is the internal rate of return of the investment? A) 9.0% B) 24.0% C) 32.5% D) 26.3% Answer: C Explanation: ($125,000 × (1 - .21)) + ((($250,000 - $25,000) ÷ 4) × .21) = $$116,337.50 (Years 1 - 3), $116,337.50 + $25,000 = $141,337.50 (year 4), - $250,000 (Year 0) = IRR (-$250,000, $116,337.50, $116,337.50, $116,337.50, $141,337.50) = 32.5%% ((Cash in. - Cash out) × (1-tax rate)) + (((cost - sal. val.) ÷ years) × tax rate) = years 1 - 3, Years 1 - 3 + sal. val = (Year 4) - cost (Year 0) Diff: 3 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 20

51) Which of the following formulas correctly depicts the payback period? A) Net initial investment divided by average net income B) Investment divided by the net initial investment C) Annual cash inflows divided by net initial investment D) Net initial investment divided by annual cash inflows Answer: D Diff: 1 LO: 3 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 52) The primary difference between the simple payback period and the discounted payback period is A) the simple method puts cash flows into present value terms while the discounted method does not. B) the discounted method puts cash flows into present value terms while the simple method does not. C) the simple method uses a non-uniform cash flows approach, and the discounted method does not. D) the discounted method uses a non-uniform cash flows approach, and the simple method does not. Answer: B Diff: 2 LO: 3 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 53) If the Alpha project has a lower payback period than the Omega project, it may indicate that the Omega project may have a A) lower NPV and be less profitable. B) higher NPV and be less profitable. C) higher NPV and be more profitable. D) lower NPV and be more profitable. Answer: A Diff: 2 LO: 3 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

54) Peaches Inc. is considering the purchase of a new machine for $140,000. The machine will generate an annual cash flow before depreciation and taxes of $52,688 for four years. At the end of four years, the machine will not have a salvage value. The company's rate of return is 10 percent, with a tax rate of 21%. What is the net after-tax cash flow per year? A) $48,974 B) $18,414 C) $69,274 D) $38,714 Answer: A Explanation: ($52,688 × (1 - .21)) + (($140,000 ÷ 4) × .21) = $48,974 (ann. Cash flows × (1 - tax rate)) + ((cost ÷ life) × tax rate) Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 55) Justys Company is considering the purchase of equipment for $90,000. The equipment will generate an annual cash flow before depreciation and taxes of $32,887 for five years. At the end of five years, the equipment will not have a salvage value. The company's rate of return is 8 percent, with a tax rate of 21%. What is the net after-tax cash flow per year? A) $21,126. B) $40,201. C) $10,686. D) $29,761. Answer: D Explanation: ($32,887 × (1 - .21)) + (($90,000 ÷ 5) × .21) = $29,761 (ann. Cash flows × (1 - tax rate)) + ((cost ÷ life) × tax rate) Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 56) If a project has a payback period that is greater than the useful life, the A) project's return will always be greater than the discount rate. B) project will only be accepted if the project has a lower discount rate. C) entire initial investment will not be recovered. D) project will always be profitable. Answer: C Diff: 2 LO: 3 Bloom: AN AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 22

57) Blender Inc. purchased a new piece of equipment that cost $120,000. The equipment included an investment in working capital of $19,000. The equipment is will be used for 10 years and will have a salvage value of $10,000. The annual operating cash inflows will be $45,000, and the annual operating cash outflows will be $30,000. The tax rate is 21%, and the company requires an after-tax rate of return of 8%. Calculate the simple payback period of the equipment. A) 9.3 years B) 8.6 years C) 8.0 years D) 2.7 years Answer: A Explanation: ($120,000 + $19,000) ÷ ($45,000 - $30,000) = 9.3 years (cost + work cap.) ÷ (cash in - cash out) Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 58) Sky High Company is considering the purchase of an investment of $250,000. Data related to the investment are as follows: Cash flows (at the end of the next 4 years) Salvage value of new investment Proceeds from disposal of old investment Investment in working capital Tax Rate

$125,000 $25,000 $22,000 $14,000 21%

With a discount rate of 9%, what is the simple payback period of the investment? A) 2.1 years B) 2.0 years C) 1.9 years D) 1.8 years Answer: C Explanation: ($250,000 + $14,000 - $22,000) ÷ $125,000 = 1.9 years (cost + work cap. - Disp. proc.) ÷ (cash in - cash out) Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

59) Sky High Company is considering the purchase of an investment of $250,000. Data related to the investment are as follows: Year 1 cash flows Year 2 cash flows Year 3 cash flows Year 4 cash flows Salvage value of new investment Proceeds from disposal of old investment Investment in working capital Tax Rate

$133,000 $137,000 $125,000 $130,000 $25,000 $22,000 $14,000 21%

With a discount rate of 9%, what is the payback period with non-uniform cash flows of the investment? A) 2.1 years B) 2.0 years C) 1.9 years D) 1.8 years Answer: D Explanation: ($250,000 + $14,000 - $22,000) = $242,000, ($133,000 + $137,000) = $270,000, ($242,000 - $133,000) ÷ $137,000 = .8 + 1 = 1.8 years (cost + work cap. - Disp. proc.) = cost of invest., (year 1 + year 2) = cum year 2, (cost of invest. year 1) ÷ ÷ year 2 + 1 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

60) Sky High Company is considering the purchase of an investment of $250,000. Data related to the investment are as follows: Year 1 cash flows Year 2 cash flows Year 3 cash flows Year 4 cash flows Salvage value of new investment Proceeds from disposal of old investment Investment in working capital Tax Rate

$133,000 $137,000 $125,000 $130,000 $25,000 $22,000 $14,000 21%

With a discount rate of 9%, what is the discounted payback period of the investment? A) 2.05 years B) 2.0 years C) 1.9 years D) 1.4 years Answer: A Explanation: ($250,000 + $14,000 - $22,000) = $242,000, ($133,000 × PVF, n = 1, i = 9% + $137,000 × PVF, n = 2, i = 9% + $125,000 × PVF, n = 3, i = 9%) = $333,851, ($242,000 $237,328) ÷ $96,523 = .05 + 2 = 2.05 years (cost + work cap. - Disp. proc.) = cost of invest., (PV year 1 + PV year 2 + PV year 3) = cum year 3, (cost of invest. - PV year 2) ÷ PV year 3 + 2 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 61) Which of the following is true when the simple payback period and the accounting rate of return is compared? A) Both methods ignore profitability and the time value of money. B) Both methods ignore profitability, and only the accounting rate of return takes into consideration the time value of money. C) Both methods ignore the time value of money, but only the accounting rate of return takes into consideration profitability. D) Both methods take into consideration the time value of money, but only the accounting rate of return takes into consideration profitability. Answer: C Diff: 2 LO: 3 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

62) The accounting rate of return on the initial investment is calculated as A) initial investment divided by average annual after-tax operating income. B) average annual after-tax operating income divided by debt. C) average annual after-tax operating income divided by the initial investment. D) total assets divided by total debt. Answer: C Diff: 1 LO: 3 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 63) All of the following statements regarding the accounting rate of return (ARR) are true except A) the ARR is helpful when analyzing projects with a positive net present value. B) the ARR is the only method that uses accrual accounting instead of cash flows. C) the ARR uses total annual after-tax operating income earned by the projects over its lifespan. D) the ARR is most often used by managers that have bonuses tied to divisional profits. Answer: C Diff: 2 LO: 3 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

64) Sky High Company is considering the purchase of an investment of $250,000. Data related to the investment are as follows: Cash flows (at the end of the next four years) Salvage value of new investment Proceeds from disposal of old investment Book value of old investment Investment in working capital Tax Rate

$125,000 $25,000 $22,000 $24,500 $14,000 21%

With a discount rate of 9%, what is the accounting rate of return of the investment? A) 19.8% B) 32.6% C) 27.4% D) 22.4% Answer: B Explanation: ($250,000 + $14,000 - $22,000) = $242,000, ($125,000 - ($24,500 - $22,000) (($250,000 - $25,000) ÷ 10) = $100,000 × (1-.21) = $79,000, $79,000 ÷ $242,000 = 32.6% (cost + work cap. - Disp. proc.) = cost of invest., (cash flow - (book - proc.) - ((cost - sal. val.) ÷ 10) = Op. Inc. × (1- tax rate) = avg net inc., avg net inc. ÷ cost of invest Diff: 3 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 65) Project Duke has a present value of cash flows of $50,000 and an original investment of $35,000. Project Prince has a present value of cash flows of $90,000 and an original investment of $95,000. Both projects have the same useful life. Using the profitability index, which project should be accepted? A) Project Duke B) Project Prince C) Both projects should be accepted. D) Neither project should be accepted. Answer: A Explanation: Profitability Index = Present Value of future cash flows ÷ Initial Investment Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

66) The profitability index is computed by dividing the A) total future cash flows by the initial investment. B) present value of future cash flows by the initial investment. C) initial investment by the total future cash flows. D) initial investment by the present value of future cash flows. Answer: B Diff: 1 LO: 3 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 67) If a company's required rate of return is 6%, and a project has an index greater than 1, in using the profitability index method, this indicates that the project's rate of return is A) greater than 6%. B) less than 6%. C) equal to 6%. D) not acceptable for investment. Answer: A Diff: 2 LO: 3 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 68) The capital budgeting tool that takes into account both the size of the initial investment and the present value of future cash flows is the A) profitability index. B) simple payback method. C) annual rate of return. D) internal rate of return. Answer: A Diff: 1 LO: 3 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

69) The profitability index A) can only be less than 1. B) will not take into account the present value of future cash flows. C) is calculated by dividing total cash flows by the initial investment. D) allows projects to be compared on the relative desirability with different initial investments. Answer: D Diff: 2 LO: 3 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 70) The capital budgeting tool that allows projects to be compared based on relative desirability with different initial investments is the A) accounting rate of return. B) internal rate of return. C) net present value. D) profitability index. Answer: D Diff: 1 LO: 3 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

71) Mead Company is considering the purchase of an investment. The following information pertains to the potential investment: Initial investment Net annual cash flows Net present value Salvage value Useful life

$225,000 23,500 42,867 20,000 10 years

What is the profitability index of the potential investment? A) 1.19. B) 1.10. C) 1.21. D) 1.11. Answer: A Explanation: ($42,867 + $225,000) ÷ $225,000 = 1.19 ((Net present value + Initial investment) ÷ Initial investment = Profitability index) Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 72) Jabber Company is considering the purchase of an investment with a 4-year life span. The initial investment is $65,000 and net annual cash flows were $28,000 for year 1; $22,000 for year 2; $25,000 for year 3; and $30,000 for year 4. There is no salvage value. If the company has a cost of capital of 10%, what is the investment's profitability index? A) 3.34. B) 0.34. C) 1.31. D) 1.28. Answer: D Explanation: $25,455 + $18,182 + $18,783 + $20,490 = $82,910 as the PV of future net annual cash flows. $82,910 ÷$65,000 = 1.28. ([(Annual Cost Savings Year 1 × PV of 1 at 10% factor) + (Annual Cost Savings Year 2 × PV of 1 at 10% factor) + (Annual Cost Savings Year 3 × PV of 1 at 10% factor) + (Annual Cost Savings Year 4 × PV of 1 at 10% factor) + Initial investment)) ÷ Initial Investment Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

73) Twosome Company is considering a capital project costing $82,000 with a 3-year life span. The project is expected to have annual cost savings of $26,000 for the first two years and $20,000 for the third year. There is no salvage value. If the company has a cost of capital of 6%, what is the investment's profitability index? A) .56 B) .79 C) 1.23 D) .49 Answer: B Explanation: (($26,000 × 1.83339) + ($20,000 × .83962) ÷ $82,000 = ( $47,668 +$16,792 ) ÷ $82,000 = .79 ((Net Cash Flow for years 1 and 2 × PV of an Annuity of 1 at 6%) + (Net Cash Flow for year 3 × PV of 1 at 6%) ÷ Initial Investment = Profitability Index Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 74) Maximus Company has a cost of capital of 9% and is considering a capital project costing $210,000. The project is expected to have annual cost savings of $45,000 for the first two years and $75,000 for years 3 and 4. There is no salvage value. What is the investment's profitability index? A) .91 B) .93 C) 1.53 D) .71 Answer: A Explanation: (($45,000 × 1.75911) + ($75,000 × .77218) + ($75,000 × .70843)) ÷ $210,000 = ($79,160 + $57,914 + $53,132 ÷ $210,000 = .91 ((Cash flows for years 1 and 2 × Present Value of an Annuity of 1 at 18%) + (Cash flow for year 3 × Present value of $1 at 18%) + (Cash flow for year 4 × Present value of $1 at 18%) ÷ Initial Investment = Profitability Index Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

75) If a project has a profitability index greater than 1, then the A) project should always be accepted. B) project should always be accepted if funds are available. C) project's net present value is negative. D) project has an internal rate of return that is less than the discount rate. Answer: B Diff: 2 LO: 3 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 76) If a project has a profitability index less than 1, then the A) project should be rejected. B) project's net present value if zero. C) project's net present value is positive. D) project has an internal rate of return that is greater than the discount rate. Answer: A Diff: 2 LO: 3 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 77) A project has a profitability index of 1.325. The project also has a future cash flows of $21,350 and an internal rate of 12%. What was the initial investment? A) $16,113 B) $28,289 C) $3,395 D) $14,775 Answer: A Explanation: $21,350 ÷ x = 1.325; x = $16,113 (Present Value of net cash flows ÷ initial investment (x) = Profitability index Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

78) A company is considering the following four projects. These projects have the following information: A B C D NPV $100 $250 $3,000 $3,200 IRR 9% 11% 8% 10% Which project is preferred? A) A B) B C) C D) D Answer: D Explanation: Project D has the highest NPV. Diff: 2 LO: 3 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 79) When comparing the net present value (NPV) and the internal rate of return (IRR), what is the most significant difference? A) Profitability is measured in relative terms using NPV and absolute terms using IRR. B) The time value of money is used to calculate the NPV, but not the IRR. C) The time value of money is used to calculate the IRR, but not the NPV. D) The NPV assumes that each cash inflow received is reinvested at the rate of return, but the IRR assumed that each cash inflow is reinvested at the computed IRR. Answer: D Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

80) Daesha Inc. is considering several capital budgeting projects. The projects are as follows:

Initial investment Present value of net cash flows

X $130,000 120,000

Y $110,000 100,000

Z $150,000 180,000

Rank the projects using the profitability index. A) X, Y, Z B) Z, Y, X C) Z, X, Y D) Y, Z, X Answer: C Explanation: (X) $120,000 ÷ $130,000 = .92; (Y) $100,000 ÷ $110,000 = .91; (Z) $180,000 ÷ 150,000 = 1.20 (Present Value of net cash flows ÷ Initial Investment = Profitability index) Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 81) Daesha Inc. is considering several capital budgeting projects. The projects are as follows:

Initial investment Present value of net cash flows

X $130,000 120,000

Y $110,000 100,000

Z $150,000 180,000

Using the profitability index, how many of the projects are acceptable? A) 0 B) 1 C) 2 D) 3 Answer: B Explanation: (X) $120,000 ÷ $130,000 = .92; (Y) $100,000 ÷ $110,000 = .91; (Z) $180,000 ÷ 150,000 = 1.20 (Yes) (Present Value of net cash flows ÷ Initial Investment = Profitability index) Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

82) If a project has a positive net present value then its profitability index will be A) Cannot be determined. B) 1. C) greater than 1. D) less than 1. Answer: C Diff: 2 LO: 3 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 83) If a project has a profitability index of 1.10, the project's internal rate of return is A) equal to 10%. B) equal to the rate of return. C) less than the rate of return. D) greater than the rate of return. Answer: D Diff: 2 LO: 3 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 84) A company using a variety of outcome estimates to get a sense of the variability amount potential returns is using what type of analysis? A) financial analysis B) managerial analysis C) post-audit analysis D) sensitivity analysis Answer: D Diff: 1 LO: 4 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

85) The purpose of the sensitivity analysis is to answer the question, A) how much tolerance the company is willing to accept? B) what-if the estimates provided are incorrect? C) why is the net present value zero? D) how much should the project duration be? Answer: B Diff: 1 LO: 4 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 86) A project has a projected initial investment of $125,000, net annual cash flows of $56,000 for five years, and a rate of return of 10%. With a tax rate of 21% and a net present value of $62,606, how much cash flows must be earned to be left with $56,000 after-tax? A) $70,887 B) $266,667 C) $298,123 D) $79,248 Answer: A Explanation: $56,000 ÷ (1 - .21) = $70,887 After-tax cash flows ÷ (1 - tax rate) Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 87) A project has a projected initial investment of $125,000, net annual cash flows of $56,000 for five years, and a rate of return of 10%. With a tax rate of 21% and a net present value of $62,606, what are the breakeven cash flows to provide a net present value of zero? A) $39,629 B) $157,022 C) $32,975 D) $41,741 Answer: D Explanation: $125,000 ÷ 3.79079 = $32,975 ÷ (1 - .21) = $41,741 Int. Cost ÷ PVOA, n=5, i= 10% = after tax cash flow ÷ (1 - tax rate) Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

88) A project has a projected initial investment of $125,000, net annual cash flows of $56,000 for five years, and a rate of return of 10%. With a tax rate of 21% and a net present value of $62,606, how much can the project be off in the cash flow estimate before the project is less impressive with a net present value of zero? A) $70,887 B) $29,145 C) $41,740 D) $39,619 Answer: B Explanation: $56,000 ÷ (1 - .21) = $70,886, $125,000 ÷ 3.79079 = $32,975 ÷ (1 - .21) = $41,741, $70,886 - $41,741 = $29,145 After-tax cash flows ÷ (1 - tax rate) = before-tax NPV, Int. Cost ÷ PVOA, n = 5, i = 10% = after tax cash flow ÷ (1 - tax rate) = before tax BE cash flows, before-tax NPV - before tax BE cash flows = difference Diff: 3 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 89) The first step in the decision-making framework is, A) identify suitable options and gather relevant information. B) outline the problem. C) select the option that maximizes the benefits of the company. D) calculate relevant costs and benefits for each option. Answer: B Diff: 1 LO: 5 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 90) The second step in the decision-making framework is, A) identify suitable options and gather relevant information. B) outline the problem. C) select the option that maximizes the benefits of the company. D) calculate relevant costs and benefits for each option. Answer: A Diff: 1 LO: 5 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

91) The third step in the decision-making framework is, A) identify suitable options and gather relevant information. B) implement your choice. C) select the option that maximizes the benefits of the company. D) calculate relevant costs and benefits for each option. Answer: D Diff: 1 LO: 5 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 92) The fourth step in the decision-making framework is, A) identify suitable options and gather relevant information. B) implement your choice. C) select the option that maximizes the benefits of the company. D) calculate relevant costs and benefits for each option. Answer: C Diff: 1 LO: 5 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 93) The fifth step in the decision-making framework is, A) identify suitable options and gather relevant information. B) implement your choice. C) select the option that maximizes the benefits of the company. D) calculate relevant costs and benefits for each option. Answer: B Diff: 1 LO: 5 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

94) The five steps in the decision-making framework, in order, are, A) outline the problem, identify options, calculate relevant costs, select the option that maximizes benefits and implement the choice. B) outline the problem, identify options, select the option that maximizes benefits, calculate relevant costs, and implement the choice. C) outline the problem, select the option that maximizes benefits, identify options, calculate relevant costs, and implement the choice. D) identify options, outline the problem, calculate relevant costs, select the option that maximizes benefits and implement the choice. Answer: A Diff: 2 LO: 5 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 95) All of the following are true regarding a post-investment audit except A) post-investment audits are designed to detect problems and compare actual results to projected results. B) conducting a post-investment audit at the proper time is crucial to get accurate feedback. C) seasonal effects should not influence the outcomes of the investment. D) if a post-investment audit is conducted too early, the project's outcomes may not be stable. Answer: C Diff: 2 LO: 6 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 96) A post-investment audit should be performed using A) an independent third-party. B) estimated amounts instead of actual figures. C) different evaluation techniques than used to make the original decision. D) the same evaluation technique using to make the original decision. Answer: D Diff: 1 LO: 6 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

97) A thorough evaluation of how well a project's actual performance matches the original project's performance is called a A) risk analysis. B) sensitivity analysis. C) post-investment audit. D) pre-investment audit. Answer: C Diff: 1 LO: 6 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 98) Performing a post-investment audit is crucial because A) they provide a formal mechanism to determine if the project should be terminated. B) managers are more likely to make more accurate projections when they make investment proposals. C) they improve the development of future proposals because managers can evaluate their past failures and successes. D) All of these. Answer: D Diff: 2 LO: 6 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 99) A post-investment audit compares A) actual benefits and costs with estimated benefits and costs. B) actual benefits with actual costs. C) estimated benefits with estimated costs. D) estimated benefits and costs with projected benefits and costs. Answer: A Diff: 2 LO: 6 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

100) A project has a projected initial investment of $125,000, net annual cash flows of $56,000 for five years, and a rate of return of 10%. With a tax rate of 21% and a net present value of $62,606, how much can the project be off in the cash flow estimate before the project is less impressive with a net present value of zero? A) $70,887 B) $29,147 C) $41,740 D) $39,619 Answer: B Explanation: $56,000 ÷ (1 - .21) = $70,887, $125,000 ÷ 3.79079 = $32,975 ÷ (1 - .21) = $41,740, $70,887 - $41,740 = $29,147 After-tax cash flows ÷ (1 - tax rate) = before-tax NPV, Int. Cost ÷ PVOA, n = 5, i = 10% = after tax cash flow ÷ (1 - tax rate) = before tax BE cash flows, before-tax NPV - before tax BE cash flows = difference Diff: 3 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 101) Complete the table for the missing data from a cost accounting perspective. (Round to the nearest two decimal places.) Bookkeeping $70,000 $60,000 $ (a) 20.00%

Taxes $130,000 $110,000 $900,000 (b)%

Operating Income Net Income Investment Return on investment Answer: (a) $350,000 (b) 14.44% (c) $181,500 Solution: (a) $70,000 ÷ (a) = 20.00%, $70,000 ÷ .2000 = $350,000 (b) $130,000 ÷ $900,000 = 14.44% (c) (c) ÷ $1,100,000 = 16.50%, $1,100,000 × .1650 = $181,500 Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

Audits $( c) $175,000 $1,100,000 16.50%

102) If a company wants to invest in a new building in five years that will cost $1,200,000, how much would the company need to invest today to have the necessary funds, using a discount rate of 6%? (round to the nearest dollar) Answer: $896,712 Solution: $1,200,000 × .74726 (table 7.2, n = 5, I = 6%) = $896,712 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 103) Using the following setup, compare and contrast the different capital budgeting tools: net present value (NPV), internal rate of return (IRR), simple payback period and accounting rate of return (ARR).

Uses time value of money

(Yes or No in each Box) Uses a rate of Profitability is return Determined

Uses Cash Flows

NPV IRR Payback ARR Answer:

NPV IRR Payback ARR

Uses time value of money Yes Yes No No

(Yes or No in each Box) Uses a rate of Profitability is return Determined Yes Yes No Yes No No No No

Uses Cash Flows Yes Yes Yes No

Diff: 2 LO: 3 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

104) Outline the five steps in the capital budgeting decision-making framework. Answer: Step 1 — Outline the problem Step 2 — Identify suitable options and gather relevant qualitative and quantitative information. May need to make informed assumptions. Step 3 — Calculate relevant costs and benefits for each option. Step 4 — Select the option that maximizes benefits to the organization and meets required qualitative criteria. Step 5 — Implement your choice. Diff: 1 LO: 5 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 105) Define a post-investment audit and list two benefits. Answer: A post-investment audit detects problems and compares expectations to reality. Benefits: They provide a formal mechanism to determine if the project should be terminated. Managers are more likely to make more accurate projections when they make investment proposals. They improve the development of future proposals because managers can evaluate their past failures and successes. Students could provide additional benefits as well. Diff: 2 LO: 6 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

106) Lakota is deciding between two vehicles that will be leased for the next three years. The SUV will require a monthly lease of $350 that will be paid at the beginning of each month. The sedan will have payments due at the end of each month with the same $350 lease payment. Lakota will have a 36% discount rate associated with the lease. What is the present value (PV) for the two vehicles, and which should she choose based on your calculations? (round calculations to the nearest dollar) Answer: SUV present value = $7,871 Sedan PV = $7,641 Lakota should choose the sedan because it has a lower PV than the SUV. Solution: SUV present value = $350 × 22.48722 (table 7.5 PVAD, n = 36 (12 × 3), i = 3% (36% ÷ 3)) Sedan PV = $350 × 21.83225 (table 7.4 PVOA, n = 36 (12 × 3), i = 3% (36% ÷ 3)) Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

107) Manuela is looking into purchasing a building for her new business. The building would cost $350,000 and have a life of 20 years. The building would have a salvage value of $40,000. She is estimating that the net operating cash flows will be $25,000. Determine the internal rate of return (IRR) and simple payback period of the building if the business will be subject to a 21% tax rate. (Calculate IRR using excel, round to the nearest 2 decimals) Answer: IRR = 3.41% Simple Payback = 14 years Solution: Simple Payback = $350,000 ÷ $25,000 = 14 years IRR: Depreciation = $15,500 (($350,000 - $40,000) ÷ 20) Tax Savings from Depreciation = $15,500 × .21 = $3,255 After tax cash flows = $25,000 × (1 - .21) = $19,750 Annual after tax cash flows = $19,750 + $3,255 = $23,005 Year 20 cash inflow = $23,005 + $40,000 = $63,005

Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

108) Taya and Herman are partners in a business. They have approached each other regarding possible investments to aid their business in creating more revenue. Taya's investment would require an initial outlay of cash of $40,000 but would provide an additional revenue stream of $22,000 per year. Herman's investment would cost $55,000 and would bring in additional revenue of $28,000 per year. Both investments would provide revenue for four years. Using a discount rate of 10%, calculate the discounted payback period for each investment and determine which investment would better use the company's resources. (Round intermediary calculations to the nearest whole dollar and the final payback period to the nearest hundredth. Ignore taxes.) Answer: Taya's payback period = 2.11 years Herman's payback period = 2.30 years Taya's investment would be a better use of the company's resources because it has a lower discounted payback period. Solution: Taya's Investment Cumulative Discounted Year Cash Inflows PV Calculation Cash Flows 1 $22,000 $22,000 × .90909 = $20,000 $20,000 2 $22,000 $22,000 × .82645 = $18,182 $20,000 + $18,182 = $38,182 3 $22,000 $22,000 × .75132 = $16,529 $38,182 + $16,529 = $54,711 4 $22,000 $22,000 × .68301 = $15,026 $54,711 + $15,026 = $69,737 After year 2 - $40,000 - $38,182 = $1,818 $1,818 ÷ $16,529 = .11, so 2.11 Years Herman's Investment Year Cash Inflows PV Calculation 1 $28,000 $28,000 × .90909 = $25,455 2 $28,000 $28,000 × .82645 = $23,141 3 $28,000 $28,000 × .75132 = $21,037 4 $28,000 $28,000 × .68301 = $19,124

Cumulative Discounted Cash Flows $25,455 $25,455 + $23,141 = $48,596 $48,596 + $21,037 = $69,633 $69,633 + $19,124 = $88,757

After year 2 - $55,000 - $48,596 = $6,404 $6,404 ÷ $21,037 = .30, so 2.30 Years Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

109) Waggoner Cabins expects to see an increase in operating income over the next five years based on an initial investment of $85,000. Waggoner estimates that year one operating income will increase by $10,000, years 2 and 3 by $15,000, and years 4 and 5 by $20,000. The rate of return is estimated to be 8%, and the tax rate is 21%. What is the ARR of this investment, and should the company proceed with the investment? (round to the nearest 2 decimals) Answer: ARR = 14.87% Because the ARR is higher than the RRR, the company should invest. Solution: Year Op. Income After-Tax Calculation 1 $10,000 $10,000 × (1 - .21) = $7,900 2 $15,000 $15,000 × (1 - .21) = $11,850 3 $15,000 $15,000 × (1 - .21) = $11,850 4 $20,000 $20,000 × (1 - .21) = $15,800 5 $20,000 $20,000 × (1 - .21) = $15,800 Average after tax operating income = $7,900 + $11,850 + $11,850 + $15,800 + $15,800 = $63,200 ÷ 5 = $12,640 ARR = $12,640 ÷ $85,000 = 14.87% Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

110) Parsons and Sons wants to replace a fleet of vehicles with electric cars. The following is the relevant data associated with this investment: Cost of old fleet Book value of old fleet Selling price of old fleet Purchase price of new Estimated salvage of new Estimated useful life Estimated annual net operating cash inflows (per year for 5 years) Discount rate Tax rate

$110,000 $10,000 $10,000 $180,000 $20,000 5 years $23,800 8% 21%

What is the net present value (NPV) for the new fleet, and should the company invest? Answer: NPV = $(54,486) Because the NPV is less than zero, the company should not invest in the new fleet of electric cars. Solution: Depreciation = ($180,000 - $20,000) ÷ 5 = $32,000

Item Investment Proceeds from sale Annual net op. cash flows Depreciation tax shield Salvage value Net present value

Cash Flow $(180,000) 10,000 23,800 32,000 20,000

Tax Rate N/A N/A (1 - .21) .79 .21

Present PV Factor Value N/A $(180,000) N/A 10,000 3.99271 75,071 3.99271 26,831 .68058 13,612 $ (54,486)

PVOA factor (5 years, 8%) is 3.99271, Table 7.4 PV factor (5 years, 8%) is .68058, Table 7.2 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

111) Celeste runs a daycare for pets. She is having issues finding employees to assist and needs to cut back on her hours. She is hoping to fully retire in 7 years. Her current NPV is $20,000, using a tax rate of 21% and a discount rate of 6%. She understands by cutting back hours, her NPV will drop. However, she would still like to maintain a NPV of $8,000 for the next 7 years. At what amount of revenue (before-tax) could she earn to meet her desired NPV? (round to the nearest dollar) Answer: Before tax cash flows = $1,814 per year for 7 years at a 6% discount rate Solution: Before tax cash flows × (1-.21) × 5.58238 = $8,000 $8,000 ÷ 5,58238 ÷ .79 = $1,814 PVOA, n = 7, i = 6%, Table 7.4 = 5.58238 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

112) Barney is looking into the purchase of a machine for his manufacturing company. He has narrowed his decision down to 2 options. Both investments are expected to have a useful life of 3 years, and Barney uses a required rate of return of 5%. The first option will require an initial investment of $45,000 and provide net after-tax cash flows of $21,000. The second investment will require an initial cash outlay of $62,000 but will provide net after-tax cash flows of $29,000. Both after-tax cash flows factor in the depreciation tax shield. Calculate the NPV and IRR for both investments. Which investment appears to be the better option?

Answer: Option 1: NPV = $12,188 IRR = 19% Option 2:

NPV = $16,974 IRR = 19%

Option 2 will be the better option as the NPV is higher. The IRR for both option are about 19%, so the company should reply more on the NPV. Solution: Option 1: Item Cash Flow PV Factor Present Value Investment $(45,000) N/A $(45,000) Annual net op. cash flows 21,000 2.72325 57,188 Net present value $12,188 PVOA factor (3 years, 5%) 2.72325 Table 7.4 Cashflows Amount Initial investment (45,000) Cash flow yr 1 21,000 Cash flow yr 2 21,000 Cash flow yr 3 21,000 IRR Calculation 19% =IRR(B2:B5) Option 2: Item Investment Annual net op. cash flows Net present value

Cash Flow $(62,000) 29,000

PV Factor N/A 2.72325

Present Value $(62,000) 78,974 $16,974

PVOA factor (3 years, 5%) 2.72325 Table 7.4 Cashflows Amount Initial investment (62,000) Cash flow yr 1 29,000 Cash flow yr 2 29,000 Cash flow yr 3 29,000 IRR Calculation 19% =IRR(B2:B5) Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

113) Victor is considering investing in a new restaurant. He also already used the necessary capital budgeting tools and calculated the following: Required rate of return IRR Payback period Useful life NPV

8% 9% 8.5 years 10 years $2,500

Should Victor invest in the new restaurant based on his calculations? Answer: Yes, Victor should invest in the new restaurant. The IRR is greater than the RRR. The payback period is less than the useful life, and the investment has a positive NPV. Diff: 2 LO: 5 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions. 114) Perry Inc purchased three companies last year. The company uses a rate of return of 7% of its investments and is now reviewing these investments. Information for the three purchases are as follows:

Company 1 Company 2 Company 3

Expected Cash inflow

Actual Cash inflow

$30,000 120,000 60,000

$32,500 128,000 48,000

Expected Actual IRR IRR 9% 6% 7%

10% 6.5% 6.5%

Based on the post-audit information, will the corporation get rid of any companies? Answer: Company 3 is not performing as it should. Perry should consider selling that company. Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

115) Venus just won $23,150,000 in the Powerball. She has an option of receiving the lump sum today or annual payments of $350,000 for the next 25 years. Based on the current market, Venus could earn an 8% return on her investment. Instructions a. Which option should Venus choose? b. What would the annual payments need to be for Venus to be indifferent to the monetary options? c. If she decided to take the lump-sum payment, she would invest for the next 25 years, retire, and purchase a jet to travel the world. How much will she have to invest in the jet and travel the world in 25 years with an 8% return on investment? What if she only earns a 6% return? Answer: a. Annual payments. The annual payments have a PV of $3,736,173, while the lump sum has a PV of $3,380,363. b. Approximately $316,668 c. 8% = $158,542,081 6% = $99,356,791 Solution: a. $23,150,000 × .14602 (PV, n = 25, i = 8%) = $3,380,363 $350,000 × 10.67478 (PVOA, n = 25, i = 8%) = $3,736,173 b. $3,380,363 ÷ 10.67478 = $316,688 (rounded) c. $23,150,000 × 6.84847 (FV, n = 25, i = 8%) = $158,542,081 $23,150,000 × 4.29187 (FV, n = 25, i = 6%) = $99,356,791 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

116) Reyes Consulting is considering an investment in equipment for $175,000. Information related to this purchase is as follows: Year 1 cash flows Year 2 cash flows Year 3 cash flows Year 4 cash flows Salvage value Estimated useful life Discount rate Tax rate

$40,000 45,000 60,000 35,000 $0 4 years 12% 21%

Instructions a. Determine the net present value of the investment. b. Calculate the simple payback period for the investment. c. Using Excel, calculate the internal rate of return for the investment. d. Calculate the profitability index. e. Should the investment be undertaken? Answer: a. $(39,230) b. 3.86 or 3 years 10.3 months c. 0% d. .78 e. No, the investment has a negative NPV, a PI less than 1, an IRR of close to zero and will take almost the entire useful life to payback the investment. Solution: Depreciation = $175,000 ÷ 4 = $43,750 a. NPV: Item Cash Flow Tax Rate PV Factor Present Value Investment $(175,000) N/A N/A $(175,000) Year 1 cash flow 40,000 (1 - .21) .79 .89286 28,214 Year 2 cash flow 45,000 (1 - .21) .79 .79719 28,340 Year 3 cash flow 60,000 (1 - .21) .79 .71178 33,738 Year 4 cash flow 35,000 (1 - .21) .79 .63552 17,572 Depreciation tax shield 43,750 .21 3.03735 27,906 Net present value $(39,230)

b. Simple payback period Year 1 2 3 4

Cash Flow $40,000 45,000 60,000 35,000

Cumulative cash flows $40,000 $40,000 + $45,000 = $85,000 $85,000 + $60,000 = $145,000 $145,000 + $35,000 = $180,000

It would take until year 4 to fully recover the investment. By the end of year 3, only $145,000 has been recovered, leaving an additional $30,000 ($175,000 - $145,000) to be recovered in year 4. $30,000 ÷ $35,000 = .86 of one year or (12 months × .86 = 10.3 months). c. IRR: Tax Savings from Depreciation = $43,750 × .21 = $9,188 After tax cash flows year 1 = $40,000 × (1 - .21) = $31,600 + 9,188 = $40,788 After tax cash flows year 2 = $45,000 × (1 - .21) = $35,550 + 9,188 = $44,738 After tax cash flows year 3 = $60,000 × (1 - .21) = $47,400 + 9,188 = $56,588 After tax cash flows year 4 = $35,000 × (1 - .21) = $27,650 + 9,188 = $36,838 Cashflows Initial investment Cash flow yr 1 Cash flow yr 2 Cash flow yr 3 Cash flow yr 4 IRR Calculation

Amount (175,000) 40,788 44,738 56,588 36,838 0.90% =IRR(B2:B6)

d. From part a: $28,214 + $28,340 + $33,738 + $17,572 + $27,906 = $135,770 $135,770 ÷ $175,000 = .78 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

117) Artful Crossing Services is considering three new projects. Each project will last three years and will require an initial investment of $81,000 and they will not have a salvage value when completed. The following cash flow information is provided: Year 1 2 3

Alpha $39,000 $39,500 $47,000

Delta $42,000 $42,000 $42,000

Artful has a cost of capital of 10% and a tax rate of 21%. Instructions a. Calculate the discounted payback period for each investment. b. Based on the payback period, rank the projects from best to worst. c. Compute the net present value of each project. d. Does the ranking prepared in part b change?

Oscar $50,000 $44,000 $30,000

Answer: a. Alpha = 2.37, Delta = 2.26, Oscar = 1.98 b. Oscar, Delta, Alpha c. Alpha = 14,795, Delta = 15,615, Oscar = 15,542 d. Yes, Delta is now slightly better than Oscar. New ranking would be Delta, Oscar, Alpha. Solution: a. Alpha: Cumulative Discounted Year Cash Inflows PV Calculation Cash Flows 1 $39,000 $39,000 × .90909 = $35,455 $35,455 2 $39,500 $39,500 × .82645 = $32,645 $35,455 + $32,645 = $68,100 3 $47,000 $47,000 × .75132 = $35,312 $68,100 + $35,312 = $103,412 After year 2 - $81,000 - $68,100 = $12,900 $12,900 ÷ $35,312 = .37, so 2.37 Years Delta: Year 1 2 3

Cash Inflows PV Calculation $42,000 $42,000 × .90909 = $38,182 $42,000 $42,000 × .82645 = $34,711 $42,000 $42,000 × .75132 = $31,555

Cumulative Discounted Cash Flows $38,182 $38,182 + $34,711 = $72,893 $72,893 + $31,555 = $104,448

After year 2 - $81,000 - $72,893 = $8,107 $8,107 ÷ $31,555 = .26, so 2.26 Years Oscar: Year 1 2 3

Cash Inflows PV Calculation $50,000 $50,000 × .90909 = $45,455 $44,000 $44,000 × .82645 = $36,364 $30,000 $30,000 × .75132 = $22,540

After year 1 - $81,000 - $45,455 = $35,545 $35,545 ÷ $36,364 = .98, so 1.98 Years

Cumulative Discounted Cash Flows $45,455 $45,455 + $36,364 = $81,819 $81,819 + $22,540 = $104,359

c. Depreciation = $81,000 ÷ 3 = $27,000 Alpha: Item Cash Flow Investment $(81,000) Year 1 cash flow 39,000 Year 2 cash flow 39,500 Year 3 cash flow 47,000 Depreciation tax shield 27,000 Net present value

Tax Rate N/A (1 - .21) .79 (1 - .21) .79 (1 - .21) .79 .21

PV Factor N/A .90909 .82645 .75132 2.48685

Present Value $(81,000) 28,009 25,789 27,897 14,100 $14,795

Tax Rate N/A (1 - .21) .79 (1 - .21) .79 (1 - .21) .79 .21

PV Factor N/A .90909 .82645 .75132 2.48685

Present Value $(81,000) 30,164 27,422 24,929 14,100 $15,615

Delta: Item Cash Flow Investment $(81,000) Year 1 cash flow 42,000 Year 2 cash flow 42,000 Year 3 cash flow 42,000 Depreciation tax shield 27,000 Net present value Oscar: Item Cash Flow Tax Rate PV Factor Present Value Investment $(81,000) N/A N/A $(81,000) Year 1 cash flow 50,000 (1 - .21) .79 .90909 35,909 Year 2 cash flow 44,000 (1 - .21) .79 .82645 28,727 Year 3 cash flow 30,000 (1 - .21) .79 .75132 17,806 Depreciation tax shield 27,000 .21 2.48685 14,100 Net present value $15,542 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

118) Luis is a CPA and manages several accounting firms. He is in the process of upgrading the firm's copiers. He believes he has chosen the right copiers but wants an analysis done to be sure he makes the best decision for the firms. He has hired you to analyze the potential investment. The current machines are leased and would be returned to the lessor. The new copiers would require an initial investment of $25,000 and would be expected to last 5 years and have a salvage value of $3,000. The firms have a cost of capital of 9% and a tax rate of 21%. They are expected to generate a cash inflow of $8,100 per year and would cost $1,500 per year to maintain. Instructions a. Calculate the net present value of the copiers. b. Calculate the profitability index of the copiers. c. Should Luis purchase the copiers? d. If the firm's cost of capital was 10%, would that change your decision? e. If the copiers were only going to generate $7,000 at 9%, would your answer to part b change?

Answer: a. $825 b. 1.03 c. Yes, the NPV is positive d. No, the NPV is stil positive $131. e. Yes, because the NPV would be a negative $2,555. Solution: a. Depreciation = ($25,000 - $3,000) ÷ 5 = $4,400 Net cash flows = $8,100 - $1,500 = $6,600 Item Cash Flow Investment $(25,000) Net cash flows 6,600 Depreciation tax shield 4,400 Salvage value 3,000 Net present value

Tax Rate N/A (1 - .21) .79 .21 N/A

PV Factor N/A 3.88965 3.88965 .64993

Present Value $(25,000) 20,281 3,594 1,950 $825

b. PV of future cash flows = $20,281 + 3,594 + $1,950 = $25,825 $25,825 ÷ $25,000 = 1.03 d. Item Cash Flow Investment $(25,000) Net cash flows 6,600 Depreciation tax shield 4,400 Salvage value 3,000 Net present value

Tax Rate N/A (1 - .21) .79 .21 .N/A

PV Factor N/A 3.79079 3.79079 .62092

Present Value $(25,000) 19,765 3,503 1,863 $131

e. Net cash flows = $7,000 - $1,500 = $5,500 Item Cash Flow Tax Rate PV Factor Present Value Investment $(25,000) N/A N/A $(25,000) Net cash flows 5,500 (1 - .21) .79 3.88965 16,901 Depreciation tax shield 4,400 .21 3.88965 3,594 Salvage value 3,000 .N/A .64993 1,950 Net present value $(2,555) Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

119) Torro's construction company wants to expand its operations. To do this, the company will need to purchase a new excavator. There are several possible options for the new purchase. All options will have a 10-year life with no salvage value. The company has a 21% tax rate and a cost of capital of 9%. The following options have been provided.

Cost

130G $780,000

245G $960,000

470G $1,200,000

• The 130G will provide a consistent annual operating cash inflow of $110,000 per year for the 10 years. • The 245G will provide annual operating cash inflows for years 1 and 2 of $170,000. Years 3 - 7 will drop to $130,000 per year, and years 8 - 10 will drop to $90,000 per year. • The 470G will have no cash flows in year 1, $170,000 in years 2 - 8, and $220,000 in year years 9 and 10. Instructions a. Calculate the simple payback period for each option. b. If Torro's will only accept investments with a payback period of 8 years or less, would any of the options work for the company? c. What are the total cash flows for each of the options over the 10-year life? Are these amounts taken into consideration when using the payback period? Answer: a. 130G = 7.09 years 245G = 6.77 years 470G = 8.05 years b. Yes, both excavators 130G and 245G have payback periods of less than 8 years. c. 130G = $1,100,000 245G = $1,260,000 470G = $1,630,000 No, the payback period only considers how quickly the investment can be paid back. This method will not consider the total profitability of the investments, but can be used as a quick screening tool.

Solution: a. 130G = $780,000 ÷ $110,000 = 7.09 years 245G Year 1 2 3 4 5 6 7 8 9 10

Cash Flow $170,000 170,000 130,000 130,000 130,000 130,000 130,000 90,000 90,000 90,000

Cumulative cash flows $170,000 $170,000 + $170,000 = $340,000 $340,000 + $130,000 = $470,000 $470,000 + $130,000 = $600,000 $600,000 + $130,000 = $730,000 $730,000 + $130,000 = $860,000 $860,000 + $130,000 = $990,000 $990,000 + $90,000 = $1,080,000 $1,080,000 + $90,000 = $1,170,000 $1,170,000 + $90,000 = $1,260,000

It would take until year 7 to fully recover the investment. By the end of year 6, only $860,000 has been recovered, leaving an additional $100,000 ($960,000 - $860,000) to be recovered in year 7. $100,000 ÷ $130,000 = .77 of one year, so 6.77 years. 470G Year 1 2 3 4 5 6 7 8 9 10

Cash Flow $0 170,000 170,000 170,000 170,000 170,000 170,000 170,000 220,000 220,000

Cumulative cash flows $0 $0 + $170,000 = $170,000 $170,000 + $170,000 = $340,000 $340,000 + $170,000 = $510,000 $510,000 + $170,000 = $680,000 $680,000 + $170,000 = $850,000 $850,000 + $170,000 = $1,020,000 $1,020,000 + $170,000 = $1,190,000 $1,190,000 + $220,000 = $1,410,000 $1,410,000 + $220,000 = $1,630,000

It would take until year 9 to fully recover the investment. By the end of year 8, only $1,190,000 has been recovered, leaving an additional $10,000 ($1,200,000 - $1,190,000) to be recovered in year 9. $10,000 ÷ $220,000 = .05 of one year, so 8.05 years. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

120) WhiteCare Dry Cleaning has decided they need to open an additional facility. The younger generation would prefer to have their clothes dry cleaned instead of the hassle of doing laundry. The information for the additional facility is as follows: Cost Additional operating costs per year (Excluding depreciation) Additional gross margin in year 1 Salvage value Useful life Average ARR Tax Rate

$550,000 21,000 45,000 $400,000 15 years 6% 21%

Instructions a. Calculate the accounting rate of return (ARR) for the first year of business. b. Based on your calculations in part a, should WhiteCare move forward with the purchase? c. In the 2nd year of business, they are expecting their gross margins to double by the end of the year. What is the ARR for year 2? What is the ARR for the average of years 1 and 2? d. The company believes the gross margin should equal year 2 for years 3 - 15. Based on these assumptions what will the ARR be over the useful life of the building? e. Based on your calculations in part d, should WhiteCare make the investment?

Answer: a. 2.01% b. No, an ARR of 2.01% is lower than the companies average ARR of 6%. c. Year 2 — 8.47% Average years 1 & 2 — 5.24% d. 8.04% e. Yes, with an average 8.04% ARR over the life the building, White Clean should invest in the new building. Solution: a. Gross margin $45,000 Operating costs 21,000 Depreciation 10,000 (($550,000 - $400,000) ÷ 15) Operating income $14,000 Income taxes 2,940 ($14,000 × 21%) After-tax operating income $11,060 $11,060 ÷ $550,000 = 2.01% c. Gross margin Operating costs Depreciation Operating income Income taxes After-tax operating income

$90,000 ($45,000 × 2) 21,000 10,000 (($550,000 - $400,000) ÷ 15) $59,000 12,390 ($12,390 × 21%) $46,610

$46,610 ÷ $550,000 = 8.47% ($46,610 + $11,060) ÷ 2 = $28,835, Average after-tax operating income $28,835 ÷ $550,000 = 5.24% d. ($11,060 + ($46,610 × 14) ÷ 15 = $44,240, Average after-tax operating income $44,240 ÷ $550,000 = $8.04% Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

121) You and your spouse are not on the same page. You want to go back to school and obtain your master's degree to allow you more career options, and your spouse wants you to continue with your current job, get experience and move up within the company ranks. You believe the master's degree will pay off in the long run. The cost of borrowing would be 6%, and you have a current tax rate of 22%. If you obtain your master's degree and earn more money, your tax rate will increase to 24%. The following information pertains to the two different career paths.

Years until retirement Average salary *Master's (Years 3 - 25) Current (Years 1 - 25) Cost of Tuition (Years 1 - 2)

Master's degree 25

No additional education 25

$80,000 $62,000 $15,000

*The master's earning is considered a deferred annuity. Instructions a. What is the present value of each option, and should you spend the two years to get your master's degree? b. If the borrowing costs you 8%, what is the present value of the future cash flows? c. Will it be beneficial for you to obtain your master's degree using the 6% borrowing rate? 8% borrowing rate. Answer: a. Master's degree = $638,257 No additional education = $618,203

b. Master's degree = $513,856 No additional education = $516,232 c. 6% - Yes 8% - No

Solution: a. Master's degree after tax income $80,000 × (1 - .24) = $60,800 No additional education after tax income $62,000 × (1 - .22) = $48,360 Master's degree Item After-tax income (years 3 — 25) Less: After-tax income (years 1 — 2) Deferred annuity PV Less: Cost of tuition (years 1 — 2) Present value No additional education Item After-tax income (years 1 — 25)

Amount $60,800 60,800

PV Factor 12.78336 1.83339

Present Value $777,228 111,470 $665,758 27,501 $638,257

15,000

1.83339

Amount $48,360

PV Factor 12.78336

Present Value $618,203

Amount $60,800 60,800

PV Factor 10.67478 1.78326

15,000

1.78326

Present Value $649,027 108,422 $540,604 26,749 $513,856

Amount $48,360

PV Factor 10.67478

Table 7.4, PVOA, n = 25 years, i= 6%, 12.78336 Table 7.4, PVOA, n = 2 years, i= 6%, 1.83339 b. Master's degree Item After-tax income (years 3 - 25) Less: After-tax income (years 1 - 2) Deferred annuity PV Less: Cost of tuition (years 1 - 2) Present value No additional education Item After-tax income (years 1 - 25)

Present Value $516,232

Table 7.4, PVOA, n = 25 years, i = 8%, 10.67478 Table 7.4, PVOA, n = 2 years, i = 8%, 1.78326 Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

122) InterCo Systems and Services is going green. They are looking into a wind turbine to help power their facility. The initial cost of the turbine should reduce utility costs for the next 40 years. You are tasked with investigating this new project and are given the following parameters: Initial cost Salvage value After-tax cost savings Cost of capital Tax rate

$2,000,000 $0 $145,000 per year 8% 21%

Instructions a. If the company wants to generate a breakeven NPV on this project, how much should it commit towards the investment? b. If the company meets its cost savings above but decides to spend $2,000,000, will the earnings be less than 8%, more than 8%, or the same 8% return? Be sure to prove your answer. c. If the company is willing to spend $2,000,000 on the turbine, how much in after-tax cost savings would the company need to generate to have a NPV of zero? Answer: a. $1,729,068 b. Less than 8%, NPV will be a negative 270,932 c. $167,720 per year Solution: a. PV factor, Table 7-4, n = 40, i = 8%, 11.92461 $145,000 × 11.92461 = $1,729,068 b. Item Initial Investment After-tax cash savings Net present value

Amount $(2,000,000) $145,000

PV Factor N/A 11.92461

Present Value $(2,000,000) $1,729,068 $(270,932)

c. $2,000,000 ÷ 11.92461 = $167,720 Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

123) You have decided you're tired of working for someone else and would like to start up a business venture. You've applied to Shark Tank for investment but were turned down. You think the best fit for you is a fitness center, where you will be a personal trainer, sell nutrition supplements and sell a clothing line. You will need to find a location for your business, hire employees, buy equipment, and consider all of the other overhead items you will need to run your business. Following is the information you have obtained so far: Initial costs for equipment Estimated net annual operating cash inflows Estimated net annual operating cash outflows Estimated tax rate Required rate of return

$190,000 120,000 80,000 21% 12%

You would like to run the fitness center for 10 years and then decide to sell or continue the operations. (Note, depreciation will be calculated on the estimated 10-year life) Instructions a. Calculate the following 1. NPV 2. simple payback 3. IRR (using excel) 4. ARR 5. profitability index b. Should you invest in this new business venture? c. What is the project's breakeven before-tax and after-tax cash flows that will provide an NPV of zero? d. What are the project's current net before-tax and after-tax operating cash flows? e. How much can you be off on your cash flow estimates and still have the business survive? f. What does part e tell you about your estimated before-tax cash flows? Answer: a. 1. 11,091 2. 4.75 years 3. 13.41% 4. 8.73% 5. 1.06 b. Yes, based on the above calculations the business venture looks to be profitable for the next 10 years. c. $29,637 after-tax cash flows $37,515 before-tax cash flows d. $40,000 before-tax cash flows $31,600 after-tax cash flows e. $2,485 f. This tells us that the before-tax cash flows can be reduced by $2,485 and still have a zero NPV.

Solution: a. Depreciation = $190,000 ÷ 10 = $19,000 Net cash flows = $120,000 - $80,000 = $40,000 NPV Item Cash Flow Tax Rate PV Factor Investment $(190,000) N/A N/A Net cash flows 40,000 (1 - .21) .79 5.65022 Depreciation tax shield 19,000 .21 5.65022 Net present value

Present Value $(190,000) 178,547 $22,544 $11,091

Simple payback period $190,000 ÷ $40,000 = 4.75 years IRR Tax Savings from Depreciation = $19,000 × .21 = $3,990 After tax cash flows years 1 - 10 = $40,000 × (1 - .21) = $31,600 + 3,990 = $35,590 Cashflows Initial investment Cash flow yr 1 Cash flow yr 2 Cash flow yr 3 Cash flow yr 4 Cash flow yr 5 Cash flow yr 6 Cash flow yr 7 Cash flow yr 8 Cash flow yr 9 Cash flow yr 10 IRR Calculation

Amount (190,000) 35,590 35,590 35,590 35,590 35,590 35,590 35,590 35,590 35,590 35,590 13.41% =IRR(B2:B12)

ARR Net operating costs 40,000 Less: Depreciation 19,000 Operating income $21,000 Income taxes 4,410 ($21,000 × 21%) After-tax operating income $16,590 $16,590 ÷ $190,000 = 8.73% Profitability Index PV of future cash flows (from part a) = $178,547 + $22,544 = $201,091 $201,091 ÷ $190,000 = 1.06

c. ($190,000 - $22,544) ÷ 5.65022 = $29,637 after-tax cash flows $29,637 ÷ (1 - .21) = $37,515 before-tax cash flows d. $40,000 × (1 - .21) = $31,600 e. Before-tax (part d) $40,000 Less: Before-tax (part c) $37,515 Different $2,485 Diff: 3 LO: 3, 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

124) Alexys, Justys, and Skylar are competing for a job as CEO of Athletic Angels, Inc. As part of the hiring process, they have been charged with choosing a suitable investment for the company that will bring in more student-athletes. The current board of directors has asked them to keep the proposal within a 4-year time frame. The minimum rate of return the company will accept is 10%, and its corporate tax rate is 21%. As outgoing CEO, you need to evaluate the three proposals and recommend one to the board of directors. Information for the three projects are as follows: Alexys's Project Item Upfront investment cost Salvage value Expected cash outflows Expected cash inflows

Justys's Project Item Upfront investment cost Salvage value Expected cash outflows Expected cash inflows

Skylar's Project Item Upfront investment cost Salvage value Expected cash outflows Expected cash inflows

Amount $150,000 15,000 25,000 50,000 75,000 60,000

Timing Immediate Year 4 Years 1 - 4 Year 1 Years 2 - 3 Year 4

Amount $90,000 0 10,000 35,000 45,000 55,000

Timing Immediate Year 4 Years 1 - 4 Years 1 - 2 Year 3 Year 4

Amount $210,000 40,000 60,000 130,000

Timing Immediate Year 4 Years 1 - 4 Years 1 - 4

Instructions a. For each of the three investments, calculate the 1. NPV. 2. IRR (using Excel). 3. ARR. 4. Profitability Index. b. Rank the projects from most desirable to least desirable. Are there any proposals that should be immediately disregarded? Why? c. Which proposal would you suggest to the board of directors? d. Would your suggestion change if Skylar's proposal had estimated outflows per year of $70,000? Recalculate the NPV, IRR, ARR, and profitability index to prove your answer. e. For the proposal suggested in part c, calculate the project's breakeven before-tax and after-tax cash flows that will provide an NPV of zero. f. How much can the proposal you chose in part c be off and still be a reliable investment? g. If Justys's proposal was chosen and year 1's data showed Cash outflow of $12,000 and cash inflow of $44,000, recalculate the NPV and IRR using years 1's numbers is they are expected to continue for the next three years. Was this a good investment choice, and should the project continue for the additional 3 years?

Answer: a. Alexys's 1. $(18,127) 2. 4.73% 3. 3.29% 4. .88 Justys's 1. $4,310 2. 12.00% 3. 8.78% 4. 1.05 Skylar's 1. $20,904 2. 14.18% 3. 10.35% 4. 1.10 b. Skylar, Justys, Alexys c. Skylar's project appears to the be most profitable. d. NPV = $(4,138) IRR = 9.16% ARR = 6.58% PI = .98 Yes, with a cash outflow of $70,000 per year, Skylar's proposal is no longer profitable with a Negative NPV. Justys's proposal would not be ranked #1. e. After-tax = $48,705 Before-tax = $61,652 f. $8,348 g. NPV = $5,112 IRR = 12.60% Yes, both the NPV and IRR have exceeded the original expectations of the proposal. The project should be continued.

Solution: PV Factors: Table 7.4, PVOA, n = 4, i = 10%, 3.16986 Table 7.4, PVOA, n = 2, i = 10%, 1.73554 Table 7.2, PV, n = 1, i = 10%, .90909 Table 7.2, PV, n = 2, i = 10%, .82645 Table 7.2, PV, n = 3, i = 10%, .75132 Table 7.2, PV, n = 4, i = 10%, .68301 a. Alexys: Depreciation = ($150,000 - $15,000) ÷ 4 = $33,750 Year 1 Net cash flows = $50,000 - $25,000 = $25,000 Year 2 & 3 Net cash flows = $75,000 - $25,000 = $50,000 Year 4 Net cash flows = $60,000 - $25,000 = $35,000 NPV Item Investment Year 1 net cash flows Year 2 net cash flows Year 3 net cash flows Year 4 net cash flows Depreciation tax shield Salvage value Net present value

Cash Flow $(150,000) 25,000 50,000 50,000 35,000 33,750 15,000

Tax Rate N/A (1 - .21) .79 (1 - .21) .79 (1 - .21) .79 (1 - .21) .79 .21 N/A

PV Factor N/A .90909 .82645 .75132 .68301 3.16986 .68301

Present Value $(150,000) 17,955 32,645 29,677 18,885 22,466 10,245 $(18,127)

IRR Tax Savings from Depreciation = $33,750 × .21 = $7,087.50 After tax cash flows year 1 = $25,000 × (1 - .21) = $19,750 + 7,087.50 = $26,838 After tax cash flows years 2 & 3 = $50,000 × (1 - .21) = $39,500 + 7,087.50 = $46,588 After tax cash flows year 4 = $35,000 × (1 - .21) = $27,650 + 7,087.50 + 15,000 = $49,738 Cashflows Initial investment Cash flow yr 1 Cash flow yr 2 Cash flow yr 3 Cash flow yr 4 IRR Calculation

Amount (150,000) 26,838 46,588 46,588 49,738 4.73% =IRR(B2:B6)

ARR Net cash flows Depreciation Operating income Income taxes After-tax operating income

Year 1 25,000 33,750 (8,750) (1,838) $(6,913)

Years 2 & 3 50,000 33,750 16,250 3,413 $12,838

Year 4 35,000 33,750 1,250 263 $988

(($(6,913) + $12,838 + $12,838 + $988) ÷ 4) ÷ $150,000 = 3.29% Profitability Index PV of future cash flows (from NPV) = $17,955 + 32,645 + 29,677 + 18,885 + 22,466 + 10,245 = $131,873 $131,873 ÷ $150,000 = .88 Justys: Depreciation = $90,000 ÷ 4 = $22,500 Years 1 & 2 Net cash flows = $35,000 - $10,000 = $25,000 Year 3 Net cash flows = $45,000 - $10,000 = $35,000 Year 4 Net cash flows = $55,000 - $10,000 = $45,000 NPV Item Cash Flow Investment $(90,000) Years 1 & 2 net cash flows 25,000 Year 3 net cash flows 35,000 Year 4 net cash flows 45,000 Depreciation tax shield 22,500 Net present value

Tax Rate PV Factor Present Value N/A N/A $(90,000) (1 - .21) .79 1.73554 34,277 (1 - .21) .79 .75132 20,774 (1 - .21) .79 .68301 24,281 .21 3.16986 14,978 $4,310

IRR Tax Savings from Depreciation = $22,500 × .21 = $4,725 After tax cash flows years 1 & 2 = $25,000 × (1 - .21) = $19,750 + 4,725 = $24,475 After tax cash flows year 3 = $35,000 × (1 - .21) = $27,650 + 4,725 = $32,375 After tax cash flows year 4 = $45,000 × (1 - .21) = $35,550 + 4,725 = $40,275 Cashflows Initial investment Cash flow yr 1 Cash flow yr 2 Cash flow yr 3 Cash flow yr 4 IRR Calculation

Amount (90,000) 24,475 24,475 32,375 40,275 12.00% =IRR(B2:B6)

ARR Net cash flows Depreciation Operating income Income taxes After-tax operating income

Years 1 & 2 25,000 22,500 2,500 525 $1,975

Year 3 35,000 22,500 12,500 2,625 $9,875

Year 4 45,000 22,500 22,500 4,725 $17,775

(($1,975 + 1,975 + 9,875 + 17,775) ÷ 4) ÷ $90,000 = 8.78% Profitability Index PV of future cash flows (from NPV) = $34,277 + 20,774 + 24,281 + 14,978 = $94,310 $94,310 ÷ $90,000 = 1.05 Skylar: Depreciation = ($210,000 - $40,000) ÷ 4 = $42,500 Years 1 - 4 Net cash flows = $130,000 - $60,000 = $70,000 NPV Item Cash Flow Tax Rate Investment $(210,000) N/A Years 1 - 4 net cash flows 70,000 (1 - .21) .79 Depreciation tax shield 42,500 .21 Salvage value 40,000 N/A Net present value

PV Factor N/A 3,16986 3.16986 .68301

Present Value $(210,000) 175,293 28,291 27,320 $20,904

IRR Tax Savings from Depreciation = $42,500 × .21 = $8,925 After tax cash flows years 1 - 3 = $70,000 × (1 - .21) = $55,300 + 8,925 = $64,225 After tax cash flows year 4 = $64,225 + $40,000 = $104,225 Cashflows Initial investment Cash flow yr 1 Cash flow yr 2 Cash flow yr 3 Cash flow yr 4 IRR Calculation

Amount (210,000) 64,225 64,225 64,225 104,225 14.18% =IRR(B2:B6)

ARR Years 1 - 4 Net cash flows 70,000 Depreciation 42,500 Operating income 27,500 Income taxes 5,775 After-tax operating income $21,725 21,725 ÷ $210,000 = 10.35% Profitability Index PV of future cash flows (from NPV) = $175,293 + 28,291 + 27,320 = $230,904 $230,904 ÷ $210,000 = 1.10 d. Skylar: Depreciation = ($210,000 - $40,000) ÷ 4 = $42,500 Years 1 - 4 Net cash flows = $130,000 - $70,000 = $60,000 NPV Item Cash Flow Investment $(210,000) Years 1 - 4 net cash flows 60,000 Depreciation tax shield 42,500 Salvage value 40,000 Net present value

Tax Rate N/A (1 - .21) .79 .21 N/A

PV Factor Present Value N/A $(210,000) 3,16986 150,251 3.16986 28,291 .68301 27,320 $(4,138)

IRR Tax Savings from Depreciation = $40,000 × .21 = $8,925 After tax cash flows years 1 - 3 = $60,000 × (1 - .21) = $47,400 + 8,925 = $56,325 After tax cash flows year 4 = $56,325 + $40,000 = $96,325 Cashflows Initial investment Cash flow yr 1 Cash flow yr 2 Cash flow yr 3 Cash flow yr 4 IRR Calculation

Amount (210,000) 56,325 56,325 56,325 96,325 9.16% =IRR(B2:B6)

ARR Net cash flows Depreciation Operating income Income taxes After-tax operating income

Years 1 - 4 60,000 42,500 17,500 3,675 $13,825

$13,825 ÷ $210,000 = 6.58% Profitability Index PV of future cash flows (from NPV) = $150,251 + 28,291 + 27,320 = $205,862 $205,862 ÷ $210,000 = .98 e. See NPV from Part c: $210,000 - 28,291 - 27,320 = $154,389 ÷ 3.16986 = $48,705 after-tax $48,705 ÷ ( 1 - .21) = $61,652 before tax f. Part c net cash flows Less: Part e before tax cash flows Difference

$70,000 61,652 $8,348

g. Justys: Years 1 - 4 Net cash flows = $44,000 - $12,000 = $32,000 NPV Item Investment Years 1 - 4 net cash flows Depreciation tax shield Net present value

Cash Flow Tax Rate PV Factor Present Value $(90,000) N/A N/A $(90,000) 32,000 (1 - .21) .79 3,16986 80,134 22,500 .21 3.16986 14,978 $5,112

IRR Tax Savings from Depreciation = $22,500 × .21 = $4,725 After tax cash flows years 1 - 4 = $32,000 × (1 - .21) = $25,280 + 4,725 = $30,005 Cashflows Initial investment Cash flow yr 1 Cash flow yr 2 Cash flow yr 3 Cash flow yr 4 IRR Calculation

Amount (90,000) 30,005 30,005 30,005 30,005 12.60% =IRR(B2:B6)

Diff: 3 LO: 2, 3, 4, 6 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Capital Investment Decisions.

Cost Accounting, 1e (Farmer) Chapter 8 Job Costing 1) A "job" A) can only be found in a manufacturing environment. B) is a distinct unit of production (output) with unique costs assigned to it. C) includes period costs but not product costs. D) will never be used for determining costing in service firms. Answer: B Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 2) The main difference between normal costing and actual costing is the treatment of A) direct labor cost. B) direct material cost. C) manufacturing overhead cost. D) period costs. Answer: C Diff: 1 LO: 1 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 3) A job cost sheet is A) the control or overview document which compiles direct materials, direct labor, and applied manufacturing overhead costs used to complete each job. B) the list of raw materials needed to manufacture the product. C) the document that records the workers scheduled on a production run. D) does not include manufacturing overhead costs. Answer: A Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

4) Which of the following is NOT included in a job cost sheet? A) Direct material Cost B) Direct labor Cost C) Product retail selling price D) Applied manufacturing overhead Cost Answer: C Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 5) Which of the following is equivalent to indirect costs? A) Direct materials B) Manufacturing overhead C) Direct labor D) Accounts Receivable Answer: B Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 6) Which of the following is an indirect cost? A) Factory electric bill B) Direct materials cost C) Direct labor cost D) Salesperson's salary Answer: A Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

7) Which of the following would typically never be considered an indirect cost? A) Factory rent B) Direct materials cost C) Factory utility bills D) Factory supplies Answer: B Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 8) Raw materials cost on the balance sheet consists of A) raw materials invoice cost plus freight-in cost. B) raw materials invoice cost plus direct labor cost. C) freight-in cost only. D) indirect materials cost only. Answer: A Explanation: Invoice cost for direct material and indirect material purchases plus freight-in costs are recorded in the raw materials inventory account. The raw materials inventory account is an asset on the balance sheet. Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 9) Raw Materials Inventory consists of A) direct materials and direct labor. B) direct materials only. C) direct materials and indirect materials. D) indirect materials only. Answer: C Explanation: Both direct materials and indirect materials are included in the raw materials inventory account. Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

10) The Manufacturing Overhead Control account includes A) actual manufacturing overhead only. B) applied manufacturing overhead only. C) both actual manufacturing overhead and applied manufacturing overhead. D) direct material cost and direct labor cost. Answer: C Explanation: Normal costing requires tracking of both actual MOH and applied MOH. This is done by using the manufacturing overhead control account. Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 11) The dollar amount of manufacturing overhead to "apply" to Work-In-Process (WIP) Inventory is computed using which of the following formulas? A) Budgeted Manufacturing Overhead Rate × Actual Usage of Cost Driver B) Budgeted Manufacturing Overhead Rate × Budgeted Usage of Cost Driver C) Actual Manufacturing Overhead Rate × Actual Usage of Cost Driver D) Actual Manufacturing Overhead Rate × Budgeted Usage of Cost Driver Answer: A Diff: 1 LO: 2 Bloom: AP AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 12) Within the Manufacturing Overhead Control account, if no manufacturing overhead has been applied, the posted entries for "actual manufacturing overhead" will generate a A) "debit balance" or "credit balance." B) "debit balance." C) "credit balance." D) zero balance, throughout the period. Answer: B Explanation: During production, as we incur actual MOH costs, we debit the MOH Control account. All the actual MOH is on the debit side of the MOH Control account, and all applied MOH is on the credit side of the MOH Control account. Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

13) Within the manufacturing overhead control account, if no manufacturing entries have been posted for actual manufacturing overhead incurred, then the posted entries for "applied manufacturing overhead" will A) generate a "debit balance" or "credit balance." B) generate a "debit balance." C) generate a "credit balance." D) not affect the account since "applied manufacturing overhead" amounts are not included in the manufacturing overhead control account. Answer: C Diff: 1 LO: 2 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 14) The journal entry to record actual depreciation on factory is a A) debit to Manufacturing Overhead Control and a credit to Applied Manufacturing Overhead. B) debit to Applied Manufacturing Overhead and a credit to Manufacturing Overhead Control. C) debit to Manufacturing Overhead Control and a credit to Work-In-Process Inventory. D) debit to Manufacturing Overhead Control and a credit to Accumulated Depreciation-Factory. Answer: D Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 15) In a normal costing system, another term for the budgeted overhead rate is the A) predetermined manufacturing overhead rate. B) actual manufacturing overhead rate. C) cost-of-goods-sold rate. D) work-in-process rate. Answer: A Diff: 1 LO: 2 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

16) The journal entry to move a completed job out of production is a A) debit to Work-In-Process Inventory and credit to Finished Goods Inventory. B) debit to Work-In-Process Inventory and credit to Raw Materials Inventory. C) debit to Finished Goods Inventory and credit to Work-In-Process Inventory. D) debit to Cost of Goods Sold and credit to Finished Goods Inventory. Answer: C Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 17) A "smart thermostat" learning a household's schedule and then, adjusting the temperature, accordingly, is an example of A) job costing. B) process costing. C) normal costing. D) data analytics. Answer: D Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Data Analytics. 18) The journal entry to assign direct materials into production involves a A) debit to Accounts Payable and a Credit to Raw Materials Inventory. B) debit to Raw Materials Inventory and a credit to Accounts Payable. C) debit to Raw Materials Inventory and a credit to Cash. D) debit to Work-In-Process Inventory and a credit to Raw Materials Inventory. Answer: D Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

19) The journal entry to record the purchase of raw materials on account involves a A) debit to Accounts Payable and a credit to Raw Materials Inventory. B) debit to Raw Materials Inventory and a credit to Accounts Payable. C) debit to Raw Materials Inventory and a credit to Cash. D) debit to Work-In-Process Inventory and a credit to Raw Materials Inventory. Answer: B Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 20) The journal entry to record the assignment of indirect materials into production involves a A) debit to Manufacturing Overhead Control and a credit to Raw Materials Inventory. B) debit to Manufacturing Overhead Control and a credit to Finished Goods Inventory. C) debit to Manufacturing Overhead Control and a credit to Work-In-Process Inventory. D) debit to Cost of Goods Sold and a credit to Raw Materials Inventory. Answer: A Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 21) The journal entry to record direct labor worked on a particular job involves a A) debit to Manufacturing Overhead Control and a credit to Salaries and Wages Payable. B) debit to Salaries and Wages Payable and credit Work-In-Process Inventory. C) debit to Work-In-Process Inventory and credit Finished Goods Inventory. D) debit to Work-In-Process Inventory and credit Salaries and Wages Payable. Answer: D Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

22) The budgeted manufacturing overhead rate is determined by dividing A) actual manufacturing overhead costs for the year by total actual usage of cost driver. B) actual manufacturing overhead costs for the year by total budgeted usage of cost driver. C) budgeted manufacturing overhead costs for the year by total budgeted usage of cost driver. D) budgeted manufacturing overhead costs for the year by total actual usage of cost driver. Answer: C Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 23) The journal entry to assign applied manufacturing overhead to Work in Process inventory is a A) debit to Work-in-Process Inventory and a credit to Manufacturing Overhead Control. B) debit to Manufacturing Overhead Control and a credit to Work-in-Process Inventory. C) debit to Finished Goods Inventory and a credit to Manufacturing Overhead Control. D) debit to Raw Material Inventory and a credit to Manufacturing Overhead Control. Answer: A Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 24) Which of the following costs would typically be considered an "actual manufacturing overhead" cost? A) Salesperson's vehicle expense B) Factory supplies C) Advertising expense D) Sales commission Answer: B Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

25) Which of the following costs would typically be considered an "actual manufacturing overhead" cost? A) Depreciation on factory equipment B) Salesperson's salary C) Advertising expense D) Sales commission Answer: A Diff: 2 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 26) Which of the following cost would typically be considered an "actual manufacturing overhead" cost? A) Salesperson's hourly wage B) Newspaper advertising cost C) Rent for factory. D) Utility cost for sales showroom Answer: C Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 27) Which of the following would typically be considered an "Actual Manufacturing Overhead" Cost? A) Repairs and maintenance for factory B) Salary of vice president of marketing C) Advertising costs D) Wages for employees on sales floor Answer: A Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

28) Which of the following would typically be considered an "Actual Manufacturing Overhead" Cost? A) Factory supervisor's salary B) Salary of vice president of marketing C) Advertising costs D) Wages for employees on sales floor Answer: A Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 29) Typically, a labor-intensive manufacturing process would most likely include which of the following as its cost driver? A) Direct labor hours B) Machine hours C) Raw material pounds D) Linear feet Answer: A Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Economics. 30) The entry to move a completed job from production to Finished Goods Inventory, involves a A) debit to Finished Goods Inventory and credit to Raw Materials Inventory. B) debit to Finished Goods Inventory and a credit to Cost of Goods Sold. C) debit to Cost of Goods Sold and a credit to Finished Goods Inventory. D) debit to Finished Goods Inventory and a credit to Work-in-Process Inventory. Answer: D Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

31) The entry to record a sale with the removal of the cost of the finished good involves a A) debit to Finished Goods Inventory and credit to Raw Materials Inventory. B) debit to Finished Goods Inventory and a credit to Cost of Goods Sold. C) debit to Cost of Goods Sold and a credit to Finished Goods Inventory. D) debit to Finished Goods Inventory and a credit to Work-in-Process Inventory. Answer: C Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 32) Product costs are transferred from the balance sheet to the income statement only when the goods are A) completed. B) moved from Work-In-Process Inventory. C) sold. D) moved to Finished Goods Inventory. Answer: C Diff: 1 LO: 3 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 33) When products are sold, the account, ________, is debited. A) Finished Goods Inventory B) Work-in-Process Inventory C) Cost of Goods Sold D) Accounts payable Answer: A Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

34) Synergy Corporation applies manufacturing overhead based on direct labor hours. Synergy estimates its budgeted manufacturing overhead cost for the coming year to be $400,000 and its budgeted direct labor hours to be 100,000 hours. What is Synergy's budgeted overhead rate? A) $.25 per direct labor hour B) $25 per direct labor hour C) $250 per direct labor hour D) $4 per direct labor hour Answer: D Explanation: $400,000 Budgeted MOH / 100,000 direct labor hours = Budgeted MOH rate = $4 per direct labor hour. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Decision Analysis. 35) Linear Technologies Inc. applies manufacturing overhead based on machine hours. Budgeted manufacturing overhead cost for the coming year is $600,000 and budgeted machine hours are 300,000 hours. Actual manufacturing overhead totaled $80,000. Manufacturing overhead was overapplied by $20,000. How many machine hours were actually used during the year? A) 300,000 machine hours B) 30,000 machine hours C) 50,000 machine hours D) 600,000 machine hours Answer: C Explanation: Actual MOH $80,000 + Overapplied MOH $20,000 = Applied MOH $100,000. Budgeted MOH, $600,000 / Budgeted MOH, 300,000 machine hours = Budgeted MOH rate $2 /machine hour. $2/machine hour × 50,000 machine hours = $100,000 Applied MOH. Therefore, $100,000 / $2 = 50,000 machine hours actually used. Diff: 3 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

36) The account, Raw Materials Inventory, includes which of the following costs? A) Indirect materials, direct materials, and manufacturing overhead costs B) Only indirect materials cost C) Only direct materials cost D) Direct materials and indirect materials costs Answer: D Diff: 1 LO: 3 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 37) The cost for the factory rent for a manufacturer would be A) shown on the income statement as rent expense. B) accounted for as a product cost, and then, assigned to the Work-in-Process Inventory. C) expensed immediately, when incurred, regardless of when the product is sold. D) shown on the balance sheet as rent expense. Answer: B Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 38) All of the following costs will be accounted for as product costs, except A) factory maintenance. B) factory utility costs. C) factory property taxes D) rent on corporate headquarters Answer: D Diff: 2 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

39) Because the Manufacturing Overhead Control account does NOT appear on the financial statements at the end of the period, this account must be A) closed. B) increased. C) opened. D) expensed. Answer: A Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 40) The Manufacturing Overhead Control account will A) appear on the balance sheet as a current asset. B) appear on the balance sheet as part of Raw Materials Inventory. C) appear on the balance sheet as part of accumulated depreciation. D) not appear on any financial statement. Answer: D Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting. 41) If a company has a sound business idea and is successful at selling its products, at the end of the year, the majority of product costs should be in A) Work-in-Process Inventory. B) Finished Goods Inventory. C) Cost of Goods Sold. D) Raw Materials Inventory. Answer: C Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

42) If a company chooses to "prorate and apportion" the difference between Actual Manufacturing Overhead and Applied Manufacturing Overhead, at end-of-period, the difference will be prorated and apportioned between which of the following three accounts? A) Raw Materials Inventory, Work-In-Process Inventory, Finished Goods Inventory B) Raw Materials Inventory, Work-In-Process Inventory, Cost of Goods Sold C) Work-In-Process Inventory, Finished Goods Inventory, Cost of Goods Sold D) Raw Materials Inventory, Finished Goods Inventory, Costs of Goods Sold Answer: C Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 43) The two commonly used approaches to eliminate the balance of under- or over-applied manufacturing overhead costs are A) "Direct Write-Off Method" and "Prorated Method." B) "Expensing Method" and "Capitalizing Method." C) "Direct Write-Off Method" and "Capitalizing Method." D) "Prorated Method" and "Capitalizing Method." Answer: A Diff: 2 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 44) In accordance with Generally Accepted Accounting Principles (GAAP), in which Balance Sheet account shown below, do we find a unit's "product cost"? A) Cash B) Accounts Receivable C) Finished Goods Inventory D) Supplies Answer: C Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting.

45) In accordance with Generally Accepted Accounting Principles (GAAP), in which income statement account shown below, do we find a unit's "product cost"? A) Cost of Goods Sold B) Revenue C) General and Administrative Expense D) Finished Goods Inventory Answer: A Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting. 46) For the most recent period, Ratesh Company recorded sales of $25,000 and Cost of Goods Sold of $5,000. What is Ratesh Company's gross margin? A) $30,000 B) $25,000 C) $20,000 D) $5,000 Answer: C Explanation: Sales - COGM = GM; $25,000 - $5,000 = $20,000 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting. 47) For the most recent period, Chen Company recorded sales of $25,000 and reported a gross margin of $19,000. What is Chen Company's Cost of Goods Sold? A) $6,000 B) $19,000 C) $44,000 D) $25,000 Answer: A Explanation: Sales - COGS = GM; Restated, Sales - GM = COGS; $25,000 - $19,000 = $6,000 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting.

48) For the most recent period, Shanice Corporation recorded the following information: Total sales = $100,000. Selling price = $10/unit. Product cost = $2/unit What was Shanice Corporation's gross margin for the period? A) $120,000 B) $50,000 C) $80,000 D) $180,000 Answer: C Explanation: (Unit SP - Unit product cost) × units sold; $100,000 ÷ $10 = 10,000 units sold; ($10 - $2) = $8 × 10,000 units = $80,000 Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting. 49) For the most recent period, Zidan Company earned sales of $120,000 and a gross margin of $30,000. If the selling price per unit was $4, what is the product cost per unit? A) $7 B) $6 C) $5 D) $3 Answer: D Explanation: Sales - GM = COGS; $120,000 - $30,000 = $90,000; $120,000/$4 per unit = 30,000 units; $90,000/30,000 units = $3 Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

50) A footwear manufacturer using RFID (radio-frequency identification) to track inventory through the supply chain to determine which items are selling, is an example of implementing A) job costing. B) process costing. C) normal costing. D) data analytics. Answer: D Diff: 2 LO: 4 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Data Analytics. 51) Intentionally misrepresenting job costs is A) acceptable business practice. B) allowable creative accounting. C) fraud. D) ethical. Answer: C Diff: 2 LO: 5 Bloom: C AACSB: Ethics AICPA: FC: Measurement, Analysis, and Interpretation; PC: Ethical Conduct IMA: Business Applications. 52) An accounting firm is considered to be a A) service firm. B) manufacturer. C) retailer. D) wholesaler. Answer: A Diff: 1 LO: 5 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Economics.

53) Typically, a service firm would NOT have which of the following items on its income statement? A) Cost of sales B) Sales C) Gross margin D) Cost of Goods Sold Answer: D Diff: 2 LO: 5 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting. 54) Typically, a service firm would NOT have which of the following accounts on its balance sheet? A) Accounts Receivable B) Accrued Liabilities C) Wages Payable D) Raw Materials Inventory Answer: D Diff: 2 LO: 5 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting. 55) The three most commonly used "cost drivers" for manufacturers are A) machine hours, direct labor hours and direct labor cost. B) machine hours, direct labor hours and raw material cost. C) raw materials cost, direct Labor hours and direct labor cost. D) machine hours, raw material cost and direct labor cost. Answer: A Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

56) The ________ is the home for all accounts in an accounting system. A) balance sheet B) income statement C) general ledger D) job cost sheet Answer: C Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting. 57) A ________ is simply a general ledger account that contains all transactions of a certain type. A) sub-ledger B) journal C) job cost sheet D) balance sheet Answer: A Diff: 2 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting. 58) The control document which compiles direct materials, direct labor and the applied manufacturing overhead is called the A) bill of materials. B) labor timesheet. C) materials requisition sheet. D) job cost sheet. Answer: D Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

59) Akio Company uses the direct write-off method to eliminate the difference between actual MOH and applied MOH. At year-end, Akio makes this adjustment by debiting Manufacturing Overhead Control, $10,000. Assuming that at year-end, the total applied MOH was $80,000, what was the total for actual MOH, just prior to adjustment? A) $90,000 B) $70,000 C) $80,000 D) $10,000 Answer: B Explanation: $80,000 applied MOH - $10,000 overapplied MOH = $70,000 actual MOH Diff: 3 LO: 3 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 60) Kiara Corporation is a service company and uses the direct write-off method to eliminate the difference between actual overhead and applied overhead. At year-end, Kiara makes this adjustment by crediting Manufacturing Overhead Control, $20,000. Assuming that at year-end, the total for applied overhead was $60,000, what was the total for actual overhead, just prior to adjustment? A) $60,000 B) $70,000 C) $10,000 D) $80,000 Answer: D Explanation: $60,000 applied MOH + $20,000 underapplied MOH = $80,000 actual MOH Diff: 3 LO: 6 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

61) Assume that prior to period-end adjustments, Latonya Company reported Cost of Goods Sold of $15,000, and Sales of $85,000. If Latonya Company had underapplied manufacturing overhead of $5,000, what amount of gross margin will appear on the income statement, after adjustments? A) $75,000 B) $80,000 C) $65,000 D) $85,000 Answer: C Explanation: Sales, $85,000 - ($15,000, COGS + $5,000 under-applied MOH) = $65,000 Gross Margin Diff: 3 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 62) Recording too many costs for a job will result in A) under-charging. B) accurate charging. C) over-charging. D) balanced charging. Answer: C Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 63) Omitting costs for a job will result in A) under-charging. B) accurate charging. C) over-charging. D) balanced charging. Answer: A Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

64) Stating that a job is 90% complete, when it is in effect only 70% complete, results in A) accurate costing. B) balanced Charging. C) correctly representing the completion of a job. D) misrepresenting the completion of a job. Answer: D Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 65) Creative Accountant CPAs, LLC is a service firm, reporting a gross margin of $60,000 and adjusted Cost of Goods Sold of $50,000. What were their sales for this same period? A) $10,000 B) $60,000 C) $110,000 D) $100,000 Answer: C Explanation: Sales - COGS = GM; Restated, GM + COGS = Sales; $60,000 + $50,000 = $110,000 Sales Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: FSA. 66) Wessling Consultants, LLC is a service firm, reporting a negative gross margin of ($30,000) and adjusted Cost of Goods Sold of $60,000. What was Wessling Consultant's sales for this same period? A) $0 B) $60,000 C) $90,000 D) $30,000 Answer: D Explanation: Sales - COGS = GM; Restated, GM + COGS = Sales; -$30,000 Gross Margin + $60,000 COGS = Sales $30,000 Diff: 3 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: FSA.

67) Companies that use actual costing, include the actual MOH cost when costing a product or service, which indicates that they choose to prioritize A) relevance/timeliness of information over the accuracy of information. B) accuracy of information over the relevance/timeliness of that information. C) inaccuracy of information over the relevance/timeliness of that information. D) irrelevance of information without regard to timeliness of information. Answer: B Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting. 68) Product costs are classified as A) direct materials, direct labor, and selling cost. B) direct materials, direct labor, and administrative cost. C) direct materials, direct labor, and manufacturing overhead cost. D) selling costs, direct labor, and selling costs. Answer: C Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 69) When a manufacturer makes purchases of raw materials, these purchases will normally include A) both direct and indirect materials. B) only direct materials. C) only indirect materials. D) neither indirect materials nor direct materials. Answer: A Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

70) Direct labor is tracked through A) materials requisition forms. B) overhead application forms. C) labor timesheets. D) finished goods forms. Answer: C Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting. 71) Production costs are expensed when they are sold to adhere to the A) Expense Recognition Principle B) Revenue Recognition Principle C) Under-Charging Principle D) Over-Charging Principle Answer: A Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: FSA. 72) Which of the following documents is used to make a formal request to remove items from the raw materials storage area? A) Bill of materials. B) Labor timesheet C) Job cost sheet D) Materials requisition sheet Answer: D Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

73) The journal entry to apply manufacturing overhead involves a A) debit to Manufacturing Overhead Control and a credit to Work-in-Process Inventory. B) debit to Work-in-Process Inventory and a credit to Manufacturing Overhead Control. C) debit to Work-in-Process Inventory and a credit to Finished Goods Inventory. D) debit to Work-in-Process Inventory and a credit to Cost of Goods Sold. Answer: B Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 74) At the start of each new accounting period, the Manufacturing Overhead Control account will have a ________ balance. A) debit B) credit C) zero D) impossible to determine Answer: C Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 75) When purchasing raw materials, the cost will include items such as A) freight-in and non-recoverable taxes. B) advertising and salesperson's salaries. C) direct labor cost. D) salaries of administrators. Answer: A Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

76) Indirect labor cost is part of A) direct Labor. B) raw materials. C) advertising. D) manufacturing overhead. Answer: D Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 77) The Manufacturing Overhead Account is considered to be a(n) A) clearing account. B) asset. C) liability. D) selling expense. Answer: A Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting. 78) An automated manufacturing process would most likely include which of the following as its cost driver? A) Direct labor cost B) Machine hours C) Raw materials pounds D) Linear feet Answer: B Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

79) Which of the following terms best describes the concept of a cause-and-effect relationship when determining the MOH predetermined rate in a job cost environment? A) Raw materials B) Direct materials C) Direct labor D) Cost driver Answer: D Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 80) The best place to find the amounts that specific customers owe the company is in the A) General Ledger. B) Balance Sheet. C) Income Statement. D) Accounts Receivable Sub-Ledger. Answer: D Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting. 81) The ________ is the home of all accounts in an accounting system. A) General Ledger B) Balance Sheet C) Income Statement D) Job Cost Sheet Answer: A Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting.

82) The document that records the workers scheduled on production runs, on which job number they're working, and the actual hours worked on each job, is referred to as A) Bill of materials. B) Labor timesheet. C) Materials requisition form. D) General ledger. Answer: B Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Internal Control. 83) Selling Expenses are considered A) product costs. B) period costs. C) manufacturing overhead costs. D) work-in-process costs. Answer: B Diff: 2 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 84) In examining the relationship between a ledger and a sub-ledger, going from the ledger to the sub-ledger is A) going one level, deeper in detail. B) staying at the same level of detail. C) decreasing the level of detail. D) an unknown relationship. Answer: A Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting.

85) Stingray Corporation has recorded the following costs for Job #101: Total Cost: Direct Materials: Direct Labor:

$1,200 $ 600 $ 400

What is the amount of manufacturing overhead cost for Job #101? A) $2,200 B) $1,200 C) $1,000 D) $200 Answer: D Explanation: Total Cost - (Direct Materials + Direct Labor) = $1,200 - ($600 + $400) = $200 MOH cost Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 86) Foster Company, a labor-intensive manufacturer, compiled the following data for the current period: Budgeted Manufacturing Overhead Budgeted Direct Labor Hours Budgeted Direct Labor Cost Budgeted Machine Hours Actual Manufacturing Overhead incurred Actual Direct Labor Hours used Actual Direct Labor Cost incurred

$600,000 200,000 hours $300,000 100,000 machine hours $500,000 150,000 hours $325,000

Assuming that Foster Company uses direct labor hours as a cost driver, determine the budgeted manufacturing overhead rate for the current period? A) $2/direct labor hour B) $3/direct labor hour C) $6/direct labor hour D) $8/direct labor hour Answer: B Explanation: $600,000 budgeted MOH/200,000 budgeted DLH = $3/direct labor hour Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

87) Jesse Company, a labor-intensive manufacturer, compiled the following data for the current period: Budgeted Manufacturing Overhead Budgeted Direct Labor Hours Budgeted Direct Labor Cost Budgeted Machine Hours Actual Manufacturing Overhead incurred Actual Direct Labor Hours used Actual Direct Labor Cost incurred

$600,000 200,000 hours $300,000 100,000 machine hours $500,000 150,000 hours $325,000

Assuming that Jesse Company uses direct labor cost as a cost driver, determine the manufacturing overhead application rate for the current period? A) $2/direct labor dollar B) $3/direct labor dollar C) $6/direct labor dollar D) $8/direct labor dollar Answer: A Explanation: $600,000 budgeted MOH/$300,000 budgeted DL cost = $2/direct labor dollar Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

88) Advanced Analytics Corporation utilizes robotics in its manufacturing process and uses machine hours as a cost driver. Determine the budgeted manufacturing overhead rate for the current period? Budgeted Manufacturing Overhead Budgeted Direct Labor Hours Budgeted Direct Labor Cost Budgeted Machine Hours Actual Manufacturing Overhead incurred Actual Direct Labor Hours used Actual Direct Labor Cost incurred

$600,000 200,000 hours $300,000 100,000 machine hours $500,000 150,000 hours $325,000

A) $2/machine hour B) $3/ machine hour C) $6/ machine hour D) $8/ machine hour Answer: C Explanation: $600,000 budgeted MOH/100,000 budgeted MHs = $6/machine hour Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

89) Brianna Corporation compiled the following information for the current period. Brianna Corporation uses Direct Labor Hours as a cost driver. How much Manufacturing Overhead did Brianna Corporation apply during the current period? Budgeted Manufacturing Overhead Budgeted Direct Labor Hours Budgeted Direct Labor Cost Budgeted Machine Hours Actual Manufacturing Overhead incurred Actual Direct Labor Hours used Actual Direct Labor Cost incurred

$600,000 200,000 hours $300,000 100,000 machine hours $500,000 150,000 hours $325,000

A) $350,000 B) $600,000 C) $450,000 D) $500,000 Answer: C Explanation: ($600,000 budgeted MOH/200,000 budgeted DLHs) × 150,000 actual DLHs = $450,000 applied MOH Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

90) Algo Corporation utilizes robotics in its manufacturing process and uses machine hours as a cost driver. How much manufacturing overhead did Algo Corporation apply during the current period? Budgeted Manufacturing Overhead Budgeted Direct Labor Hours Budgeted Direct Labor Cost Budgeted Machine Hours Actual Manufacturing Overhead incurred Actual Direct Labor Hours used Actual Machine Hours used

$600,000 200,000 hours $300,000 100,000 machine hours $500,000 110,000 hours 80,000 hours

A) $720,000 B) $600,000 C) $480,000 D) $500,000 Answer: C Explanation: ($600,000 budgeted MOH/100,000 budgeted MHs) × 80,000 actual MHs = $480,000 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

91) Moor Cowbell Corporation compiled the following information for the current period. Moor Cowbell uses direct labor cost as a cost driver. How much manufacturing overhead did Moor Cowbell apply during the current period? Budgeted Manufacturing Overhead Budgeted Direct Labor Hours Budgeted Direct Labor Cost Budgeted Machine Hours Actual Manufacturing Overhead incurred Actual Direct Labor Hours used Actual Direct Labor Cost incurred

$600,000 200,000 hours $300,000 100,000 machine hours $500,000 150,000 hours $325,000

A) $350,000 B) $600,000 C) $450,000 D) $650,000 Answer: D Explanation: ($600,000 budgeted MOH/300,000 budgeted DL cost) × $325,000 actual DL cost = $650,000 applied MOH Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

92) Hernandez Company, a labor-intensive manufacturer and compiled the following data for the current period: Budgeted Manufacturing Overhead Budgeted Direct Labor Hours Budgeted Direct Labor Cost Budgeted Machine Hours Actual Manufacturing Overhead incurred Actual Direct Labor Hours used Actual Direct Labor Cost incurred

$600,000 200,000 hours $300,000 100,000 machine hours $550,000 150,000 hours $325,000

Assuming that Hernandez Company uses direct labor hours as a cost driver, determine the amount of underapplied or overapplied overhead for the current period. A) Underapplied by $50,000 B) Overapplied by $150,000 C) Underapplied by $150,000 D) Underapplied by $100,000 Answer: D Explanation: Actual MOH $550,000 - (Applied MOH ($600,000 budgeted MOH/200,000 budgeted DLHs) × 150,000 actual DLHs) = $100,000 underapplied MOH Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

93) Shannon Company, a labor-intensive manufacturer, compiled the following data for the current period: Budgeted Manufacturing Overhead Budgeted Direct Labor Hours Budgeted Direct Labor Cost Budgeted Machine Hours Actual Manufacturing Overhead incurred Actual Direct Labor Hours used Actual Direct Labor Cost incurred

$600,000 200,000 hours $300,000 100,000 machine hours $500,000 150,000 hours $325,000

Assuming that Shannon Company uses direct labor cost as a cost driver, determine the amount of overapplied or underapplied overhead for the current period. A) Underapplied by $50,000 B) Overapplied by $150,000 C) Overapplied by $50,000 D) Underapplied by $100,000 Answer: B Explanation: Actual MOH $500,000 - (Applied MOH ($600,000 budgeted MOH/$300,000 budgeted DL cost) × $325,000 actual DL cost) = $150,000 overapplied MOH Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

94) TracyWood Company, a highly automated manufacturer, compiled the following data for the current period: Budgeted Manufacturing Overhead Budgeted Direct Labor Hours Budgeted Direct Labor Cost Budgeted Machine Hours Actual Manufacturing Overhead incurred Actual Direct Labor Hours used Actual Machine Hours used

$600,000 200,000 hours $300,000 100,000 machine hours $500,000 110,000 hours 80,000 hours

Assuming that TracyWood Company uses machine hours as a cost driver, determine the amount of overapplied or underapplied overhead for the current period. A) Underapplied by $20,000 B) Overapplied by $150,000 C) Underapplied by $50,000 D) Underapplied by $100,000 Answer: A Explanation: Actual MOH $500,000 - (Applied MOH ($600,000 budgeted MOH/100,000 budgeted MHs) × 80,000 actual MHs) = $20,000 underapplied MOH Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 95) For a manufacturer, the numerator to determine the budgeted MOH rate for overhead application, is A) budgeted direct labor hours. B) budgeted direct labor cost. C) budgeted manufacturing overhead cost. D) budgeted raw material usage. Answer: C Diff: 2 LO: 2 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Economics.

96) Caitlin Company has the following cost information pertaining to their Raw Materials Inventory account: -

December 31, balance (Ending) $20,000 Material purchases $70,000 Materials used during year $60,000

What was the Raw Materials Inventory balance on January 1 (Beginning)? A) $5,000 B) $50,000 C) $100,000 D) $10,000 Answer: D Explanation: (Materials used during the year + December 31, ending balance) - Materials purchases = Raw Materials January 1, balance (Beginning) = ($60,000 + $20,000) - $70,000 = $10,000 Diff: 3 LO: 3 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Reporting. 97) Creative Accountant CPAs, LLC is a service firm and applies overhead based upon direct labor cost. For the year 2025, the actual overhead cost incurred totaled $50,000. Creative Accountant CPAs, LLC had underapplied overhead cost of $10,000. The company utilized an overhead application rate of 50% of direct labor cost. What was the total direct labor cost incurred for the year? A) $20,000 B) $50,000 C) $80,000 D) $40,000 Answer: C Explanation: Actual MOH cost - Underapplied MOH = Applied MOH = ($50,000 - $10,000) = $40,000; Applied MOH/DL MOH rate = $40,000/50% = $80,000 actual direct labor cost incurred Diff: 3 LO: 5 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

98) A manufacturer that utilizes numerous robots and very few human workers in its manufacturing process would most likely use which of the following as a cost driver for applying manufacturing overhead? A) Direct labor hours B) Direct labor cost C) Machine hours D) Raw materials pounds Answer: C Diff: 1 LO: 3 Bloom: C AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Economics. 99) Genesis Corporation eliminates its overapplied or underapplied overhead by using the prorated method. For the year 2025, Genesis had the following balances: -

Cost of Goods Sold, $50,000 Finished Goods Inventory, $20,000 Work-in-Process Inventory, $30,000 Actual Manufacturing Overhead, $70,000 Applied Manufacturing Overhead, $60,000

After adjustment, what will be the impact on the account balances in Work-in-Process Inventory, Finished Goods Inventory, and Cost of Goods Sold using the prorated method? A) Work-in-Process Inventory, increases by $3,000; Finished Goods Inventory, increases by $2,000; and Cost of Goods Sold increases by $5,000. B) Work-in-Process Inventory, decreases by $3,000; Finished Goods Inventory decreases by $2,000; and Cost of Goods Sold decreases by $5,000. C) Work-in-Process Inventory, increases by $2,000; Finished Goods Inventory increases by $3,000; and Cost of Goods Sold increases by $5,000. D) Work-in-Process Inventory, increases by $5,000; Finished Goods Inventory increases by $2,000; and Cost of Goods Sold increases by $5,000. Answer: A Diff: 3 LO: 3 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

100) Garcia Company uses the direct write-off method to eliminate its under-applied overhead. Assume that Garcia incurred actual overhead costs, totaling $85,000 and applied overhead costs of $80,000. Unfortunately, at year-end, Garcia's chief cost accountant inadvertently forgot to adjust Cost of Goods Sold for the required adjustment amount. What effect will this error have on Garcia's Cost of Goods Sold and Gross Margin? A) Cost of Goods Sold will be overstated by $5,000, and Gross Margin will be understated by $5,000. B) Cost of Goods Sold will be understated by $5,000, and Gross Margin will be overstated by $5,000. C) Cost of Goods Sold will be understated by $5,000, and Gross Margin will be understated by $5,000. D) Cost of Goods Sold will be overstated by $5,000, and Gross Margin will be overstated by $5,000. Answer: B Explanation: $85,000, Actual MOH - $80,000, Applied MOH = $5,000 under-applied overhead. The adjustment to Cost of Goods Sold should have increased Cost of Goods Sold by $5,000 and correspondingly, decreased Gross Margin by this same amount. Diff: 3 LO: 3 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

101) Futuristic Analytics Inc. reports the following cost information for the period, utilizing normal costing and applying overhead based upon machine hours: Budgeted Manufacturing Overhead Budgeted Machine Hours Actual Machine Hours used Factory Depreciation Factory Supervisors Salaries Factory Electricity Indirect Materials Indirect Labor Factory Insurance Factory Rent

$800,000 100,000 Machine Hours 110,000 Machine Hours $200,000 $300,000 $120,000 $ 90,000 $ 80,000 $ 50,000 $ 60,000

Determine the amount of underapplied or overapplied overhead. Answer: Underapplied Overhead = $20,000 $800,000/100,000 machine hours = Budgeted MOH Rate $8/MH × 110,000 actual machine hours = $880,000 Applied MOH - Actual MOH ($200,000 + $300,000 + $120,000 + $90,000 + $80,000 + $50,000 + $60,000) = $880,000, Applied MOH - $900,000, Actual MOH = Underapplied MOH, $20,000. Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 102) Sustainable Consulting, LLC is a service firm that applies overhead based upon direct labor hours. The information below was provided for the current period. Budgeted Manufacturing Overhead Cost Budgeted Direct Labor Hours Budgeted Direct Labor Cost Actual Overhead Manufacturing Cost incurred Actual Direct Labor Hours used

$800,000 100,000 Hours $400,000 $450,000 80,000 Hours

Determine the budgeted manufacturing overhead rate for the most recent period. Answer: $800,000 Budgeted MOH/100,000 budgeted DL hours = $8/Direct Labor Hour Diff: 1 LO: 2 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

103) Akito Yamamoto, an accounting manager at Precision Ball Bearings Inc. has been asked to determine information that was lost due to a recent computer hack of the company's Information Technology system. Specifically, Akito's task is to determine the total budgeted manufacturing overhead cost for the most recent period. Precision Ball Bearings is a highly automated company that applies manufacturing overhead, based upon machine hours. In conducting an internal audit, Akito found the following journal entry, eliminating any overapplied or underapplied overhead for the period:

MOH Control COGS

Debit 20,000

Credit 20,000

Akito, also had access to the additional information, for the most recent period. Budgeted Machine Hours Budgeted Direct Labor Hours Budgeted Direct Labor Cost Actual Manufacturing Overhead Cost incurred Actual Direct Labor Hours used Actual Direct Labor Cost incurred Actual Machine Hours used

300,000 Machine Hours 100,000 Hours $ 400,000 $ 500,000 80,000 Hours $1,600,000 260,000 Hours

Based upon the information provided, determine the Estimated Manufacturing Overhead Cost for the period. Answer: $600,000 Since the Manufacturing Overhead Control account has been debited, it must have had overapplied MOH of $20,000 (credit balance). Working backwards, Actual MOH of $500,000 plus overapplied MOH of $20,000 = Total Applied MOH of $520,000. Then, $520,000 Applied MOH/ 260,000 actual machine hours used = Budgeted MOH Rate of $2/machine hour. Lastly, $2/machine hour × 300,000 Budgeted machine hours = Total Budgeted Manufacturing Overhead of $600,000. Diff: 3 LO: 3 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

104) Maria Sanchez was recently hired as a financial consultant at Vandelay Industries. Vandelay eliminates any overapplied or underapplied manufacturing overhead by using the "Prorated Method." For the most recent year, Vandelay recorded the following information: Cost of Goods Sold Finished Goods Ending Inventory Balance Work-in-Process Ending Inventory Balance Raw Materials Ending Inventory Balance Total Actual Manufacturing Overhead Cost Total Applied Manufacturing Overhead Cost

$100,000 $80,000 $20,000 $18,000 $90,000 $80,000

Due to the severe shortage of Cost Accountants, Maria was asked to assist the Accounting Department in allocating any underapplied or overapplied overhead to the appropriate accounts. After adjustment using the Prorated Method, what will the new account balances be in Work-in- Process Inventory, Finished Goods Inventory and Cost of Goods Sold? Answer: Adjusted ending amounts: WIP Inventory: $21,000 FG Inventory: $84,000 COGS: $105,000 MOH is underapplied by $10,000 = Total Actual MOH, $90,000 - Total Applied MOH, $80,000 Using the "Prorated Method", allocation percentages are determined as follows: ($20,000, WIP + $80,000, FG + $100,000, COGS) = $200,000 total WIP Inventory: $20,000/$200,000 = 10% FG Inventory: $80,000/$200,000 = 40% COGS: $100,000/$200,000 = 50% Adjusted balances are computed as follows: WIP Inventory: $20,000 + (10% × $10,000) = $21,000 FG Inventory: $80,000 + (40% × $10,000) = $84,000 COGS: $100,000 + (50% × $10,000) = $105,000 Diff: 3 LO: 3 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management, Reporting.

105) Ahmed Karim recently began working at Luce Laminating Company as a Cost Accountant. In order to prepare financial statements, Ahmed was provided the following information for the most recent period. Direct Materials Used Direct Labor Manufacturing Overhead Applied Beginning WIP Inventory Ending WIP Inventory Beginning FG Inventory Ending FG Inventory

$10,000 $10,000 $20,000 $25,000 $35,000 $60,000 $45,000

Based upon the information provided, determine the Cost of Goods Manufactured for the period. Answer: To determine Cost of Goods Manufactured: [(Direct Materials Used + Direct Labor + Applied Manufacturing Overhead) + Beginning WIP Inventory] - Ending WIP Inventory = Cost of Goods Manufactured Hence: [($10,000 + $10,000 + $20,000) + $25,000] - $35,000 = $30,000 Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

106) Ahmed Karim recently began working at Luce Laminating Company as a Cost Accountant. In order to prepare financial statements, Ahmed was provided the following information for the most recent period. Direct Materials Used Direct Labor Manufacturing Overhead Applied Beginning WIP Inventory Ending WIP Inventory Beginning FG Inventory Ending FG Inventory

$10,000 $10,000 $20,000 $25,000 $35,000 $60,000 $45,000

Based upon the information provided, determine the Cost of Goods Sold for the period. Answer: Cost of Goods Manufactured must first be determined: [(Direct Materials Used + Direct Labor + Applied Manufacturing Overhead) + Beginning WIP Inventory] - Ending WIP Inventory = Cost of Goods Manufactured (COGM) Hence to determine Cost of Goods Manufactured (COGM): (($10,000 + $10,000 + $20,000) + $25,000) - $35,000 = $30,000 Cost of Goods Sold (COGS) = Beginning FG Inventory + COGM - Ending FG Inventory Cost of Goods Sold (COGS) = ($60,000 + $30,000) - $45,000 = $45,000 Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

107) Jose Sanchez is assisting to prepare financial statements for Kramerica Publishing, a company that publishes books about coffee tables. Assume the following information for the most recent period: Unadjusted Cost of Goods Sold (prior to adjustments) Sales Actual Manufacturing Overhead Applied Manufacturing Overhead

$600,000 $850,000 $ 70,000 $ 72,000

Given that Kramerica Publishing uses the "Direct Write-Off Method" to eliminate any underapplied or overapplied overhead, determine the amount of gross margin that will appear on Kramerica's income statement after adjustments. Answer: Sales - Adjusted COGS = Gross Margin Hence: Overapplied MOH, $2,000 = Actual MOH, $70,000 - $72,000, Applied MOH $850,000 - ($600,000 - overapplied MOH $2,000) = $252,000 Diff: 3 LO: 3 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management, Reporting. 108) Jose Sanchez is assisting to prepare financial statements for Kramerica Publishing, a company that publishes books about coffee tables. Assume the following information for the most recent period: Unadjusted Cost of Goods Sold (prior to adjustments) Sales Actual Manufacturing Overhead (MOH) Applied Manufacturing Overhead (MOH)

$600,000 $850,000 $ 70,000 $ 72,000

Given that Kramerica Publishing uses the "Direct Write-Off Method" to eliminate any underapplied or overapplied overhead, provide the journal entry to close any underapplied or overapplied MOH. Answer: MOH is Overapplied by $2,000 = Actual MOH $70,000 - Applied MOH $72,000 = $2,000, Overapplied MOH

MOH Control COGS

Debit 2,000

Credit 2,000

Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 47

109) Britany Wellington, CPA, an accountant at Advanced Macro Device Corporation has been asked to determine the amount of Applied MOH for Job #101. She was provided with the information below, pertaining to the job: Total Cost: Direct Materials: Direct Labor:

$1,000 $ 500 $ 100

What was the amount of Applied Manufacturing Overhead Cost? Answer: Total Cost - (Direct Materials + Direct Labor) = $1,000 - ($500 + $100) = $400 Diff: 2 LO: 2 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 110) Don Chess, CMA, a cost accountant at Bridgewater Industries, has been asked to determine the Beginning Raw Material Inventory value, based upon the following provided information: Raw Materials Inventory, Ending Balance Raw Material Purchases for the period Raw Materials used during period

$40,000 $70,000 $80,000

What was the value of the Beginning Raw Material Inventory? Answer: (Raw Materials used during the period + Raw Materials Inventory, Ending Balance) Raw Materials Purchases for the period = Raw Materials Inventory, Beginning Balance = ($80,000 + $40,000) - $70,000 = $50,000 Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

111) Chris Regington, an entry-level accountant at Global Foods Inc., has been asked to provide the required journal entry to indicate the cost of completed jobs moved from production to the Finished Goods Inventory. Chris was provided with the cost information below: Finished Goods Inventory, Beginning Balance Direct Materials Direct Labor Applied MOH Finished Goods Inventory, Ending Balance Work-in-Process Inventory, Beginning Balance Work-in-Process Inventory, Ending Balance

$18,500 $15,000 $15,000 $10,000 $8,500 $6,000 $7,000

Based upon provided information, prepare the journal entry indicating Global Food's, Cost of Goods Manufactured for the period. Answer: Debit Credit Finished Goods Inventory $39,000 Work-in-Process Inventory $39,000 The transfer of cost between Work-in-Process and Finished Goods Inventory represents the Cost of Goods Manufactured. To determine Cost of Goods Manufactured: [(Direct Materials Used + Direct Labor + Applied Manufacturing Overhead) + Beginning WIP Inventory] - Ending WIP Inventory = Cost of Goods Manufactured Hence to determine Cost of Goods Manufactured: [($15,000 + $15,000 + $10,000) + $6,000] - $7,000 = $39,000 Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

112) Marconi Industries manufactures WiFi enabled digital radios. Below is cost information for the current period.

Beginning Inventory Ending Inventory

Raw Materials $10,000 $5,000

Work in Process $20,000 $30,000

Finished Goods $40,000 $10,000

Additional Information: Raw Material Purchases $15,000 Direct Labor $10,000 Applied Manufacturing Overhead $40,000 Note that zero indirect materials were used during the period and that total Actual Manufacturing Overhead equaled total Applied Manufacturing Overhead. Based upon provided information, determine Marconi's Cost of Goods Manufactured. Answer: Cost of Goods Manufactured: (RM Inventory, Beginning, $10,000 + RM Purchases, $15,000) - RM Inventory, Ending, $5,000 = $20,000, Direct Materials used; [(Direct Material used, $20,000 + Direct Labor, $10,000 + Applied MOH, $40,000) + Beginning Work-in-Process Inventory, $20,000] - Ending Work-InProcess Inventory, $30,000 = $60,000, Cost of Goods Manufactured. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

113) Marconi Industries manufactures WiFi enabled digital radios. Below is cost information for the current period.

Beginning Inventory Ending Inventory

Raw Materials $10,000 $5,000

Work in Process $20,000 $30,000

Finished Goods $40,000 $10,000

Additional Information: Raw Material Purchases $15,000 Direct Labor $10,000 Applied Manufacturing Overhead $40,000 Note that zero indirect materials were used during the period and total Actual Manufacturing Overhead equaled total Applied Manufacturing Overhead. Based upon provided information, determine Marconi's Cost of Goods Sold. Answer: Cost of Goods Manufactured must be computed first as follows: (RM Inventory, Beginning, $10,000 + RM Purchases, $15,000) - RM Inventory, Ending, $5,000 = $20,000, Direct Materials used; [(Direct Material used, $20,000 + Direct Labor, $10,000 + Applied MOH, $40,000) + Beginning Work-in-Process Inventory, $20,000] - Ending Work-InProcess Inventory, $30,000 = $60,000*, Cost of Goods Manufactured. Cost of Goods Sold can then be computed using the Cost of Goods Manufactured from above: Beginning FG Inventory, $40,000 + Cost of Goods Manufactured, $60,000* - Ending FG Inventory, $10,000 = Cost of Goods Sold, $90,000. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management, Reporting.

114) Regington Computers uses a job-order costing system. The following transactions occurred during May. While interning at Regington Computers, Nicki Olson was asked to prepare journal entries, in good form, for the following transactions: 1. Raw materials purchased on account, $200,000. 2. Raw materials used in production, $180,000 ($170,000 direct materials and $10,000 indirect materials). 3. Direct labor cost of $70,000 and indirect labor cost of $20,000. 4. Depreciation recorded on factory equipment, $60,000. 5. Other manufacturing overhead costs accrued during May, $50,000. 6. The company applies manufacturing overhead cost to production using a predetermined rate of $30 per direct labor hour. A total of 5,000 direct labor hours were used in May. 7. Jobs costing $500,000 according to their job cost sheets were completed during May and transferred to Finished Goods. 8. Jobs that had cost $400,000 to complete according to their job cost sheets were shipped to customers during the month. These jobs were sold on account at 130% of manufacturing cost. a. Prepare journal entries to record the transactions provided above. b. Determine the amount of overapplied MOH or underapplied MOH. c. Prepare the journal entry to eliminate any overapplied MOH or underapplied MOH, using the direct write-off method.

Answer: a. 1. Raw Materials (RM) Inventory Accounts Payable 2.

Debit 200,000

Credit 200,000

Work-in-Process (WIP) Inventory Manufacturing Overhead (MOH) Control Raw Materials (RM) Inventory

170,000 10,000

Work-in-Process (WIP) Inventory Manufacturing Overhead (MOH) Control Salaries and Wages Payable

70,000 20,000

Manufacturing Overhead (MOH) Control Accumulated Depreciation — Factory Equipment

60,000

Manufacturing Overhead (MOH) Control Accounts Payable

50,000

Work-in-Process (WIP) Inventory Manufacturing Overhead (MOH) Control (5,000 DLHs × $30 per DLHs) = $150,000

150,000

Finished Goods (FG) Inventory Work-in-Process (WIP) Inventory

500,000

Cost of Goods Sold (COGS) Finished Goods (FG) Inventory

400,000

Accounts Receivable Sales ($400,000 × 1.30)

520,000

180,000

90,000

60,000

50,000

150,000

500,000

400,000

520,000

b. Actual MOH, ($10,000 + $20,000 + $60,000 + $50,000) - Applied MOH, (5,000 DLHs × $30/DLH) = $140,000 - $150,000 = Overapplied MOH $10,000 c. Debit Credit MOH Control 10,000 COGS 10,000 Diff: 2 LO: 1, 2, 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 53

115) Honest Auto Repairs is a service firm that uses a job costing system. Direct labor consists of mechanics' pay. Direct materials consist of auto parts. Manufacturing overhead costs include items such as the shop manager's salary, utilities, insurance and other sundry indirect costs. As the shop is highly labor-intensive, Honest Auto Repairs has decided to apply manufacturing overhead on the basis of direct labor hours. The following estimates for the coming year were made at the start of the year: Budgeted Manufacturing Overhead Budgeted Direct Labor Hours

$100,000 2,500 hours

a. Determine the Budgeted MOH rate. b. A long-time customer scheduled work to be done on her vehicle. Honest Auto Repairs, recorded the work on job cost sheet #1402. The following cost information was recorded on this customer's job. Direct Materials (auto parts) Direct Labor Cost Direct Labor Hours used (mechanic's time)

$420 $120 4 hours

Determine the cost of this customer's repair job. c. If Honest Auto Repairs maintains a markup of 130% of manufacturing cost, what amount will the customer be billed for? d. Calculate the gross margin that Honest Auto earned on this particular repair job. Answer: a. $100,000 budgeted MOH /2,500 Direct labor hours = $40/DLH Budgeted MOH rate b. DM, $420 + DL, $120 + Applied MOH [4 DLHs × $40/DLH (from a)] = $700 c. $700 job cost (from b) × 1.30 markup factor = $910 Sales Revenue (billed customer) d. Sales - Cost of Goods Sold = Gross Margin = $910 - $700 = $210 Diff: 2 LO: 1, 2, 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management, Reporting.

116) Luca Pacioli, CPA, founder of Double-Entry Accountants, LLC, a service firm, provides the following information for the most recent year of operations. Direct Labor Cost Sales Actual Overhead Cost

$450,000 $980,000 $84,000

Double-Entry Accountants, LLC, applies overhead at a rate of 20% of Direct Labor Cost. Any underapplied or overapplied overhead is eliminated by closing the amount out to Cost of Sales, using the Direct Write-Off Method. Instructions: Students should compute the following items based upon the provided information. a. Determine the amount of underapplied or overapplied manufacturing overhead. b. Prepare the journal entry to dispose of any overapplied or underapplied manufacturing overhead. c. Compute firm's gross margin that will appear on Double-Entry Accountant's income statement, after adjustments are made. Answer: a. $6,000 Overapplied Manufacturing Overhead Actual Manufacturing Overhead (given) $84,000 - Applied Manufacturing Overhead, $90,000 (20 % × $450,000) = $6,000 b. Debit Credit MOH Control 6,000 Cost of Sales 6,000 c. $446,000 Gross Margin = Sales - Cost of Sales Hence, the Gross Margin will be $440,000, before adjustment of the $6,000 Overapplied Manufacturing Overhead: $980,000 - [($450,000 + ($450,000 × 20%)] = $440,000 Cost of Sales will be reduced by the $6,000 of Overapplied Overhead, correspondingly, causing Gross Margin to increase by $6,000. Gross Profit before adjustment for Overapplied Overhead + Overapplied Overhead = Adjusted Gross Margin $440,000 + $6,000 = $446,000 Diff: 3 LO: 5 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management, Reporting, Cost Measurement.

117) Cool Vision Inc. produces polarized sunglasses. During the most recent period, Cool Vision incurred the following costs (amounts are in thousands):

Cost Item

Amount ($000) Sunglass lenses $ 400 Sunglass frames 210 Insurance on factory 110 Insurance on corporate headquarters 85 Utility cost in corporate headquarters 20 Advertising 25 Wages for factory workers 320 Utility costs in plant 68 Plant supervisor salaries 180 Depreciation of plant assets 55 Salaries and commissions of salespeople 200

Product or Period

Direct or Indirect

Required: a. Complete the above table by classifying each cost as either a product cost or a period cost; for costs classified as product costs, further classify as a direct or an indirect cost. b. Calculate total direct costs and total indirect (MOH) costs. c. Assume Cool Vision used a budgeted MOH rate to apply MOH costs this year of $400,000. How much did the company underapply or overapply for its MOH costs? How could this difference happen?

Answer: a. Amount Cost Item ($000) Sunglass lenses $ 400 Sunglass frames 210 Insurance on factory 110 Insurance on corporate headquarters 85 Utility cost in corporate headquarters 20 Advertising 25 Wages for factory workers 320 Utility costs in plant 68 Plant supervisor salaries 180 Depreciation of plant assets 55 Salaries and commissions of salespeople 200

Product or Period Product Product Product Period Period Period Product Product Product Product

Direct or Indirect Direct Direct Indirect

Direct Indirect Indirect Indirect

Period

b. Total direct costs = ($400 + $210 + $320) = $930 Total indirect costs (MOH) = ($110 + $68 + $180 + $55) = $413 c. MOH costs were underapplied by $13,000 ($413,000, actual MOH- $400,000 applied MOH) his happened because the applied MOH amount was based on budgeted MOH and actual MOH costs exceeded this amount. Diff: 2 LO: 1 Bloom: AN, AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management, Reporting.

118) Alexa Anderson, the manager of Aromatic Air Purifiers, is analyzing the company's MOH costs from last year. Alexa has always followed an actual costing system when determining the costs of its air purifiers but Alexa is wondering if it would be better to switch to a normal costing system, as she had recently read about its advantages in an industry trade magazine. As Aromatic Air Purifiers has a highly machine-intensive operation, machine hours are used as its MOH cost driver. Here are the costs and other MOH information Alexa is analyzing: Budgeted MOH cost Actual MOH cost Budgeted machine hours Actual machine hours

$380,000 $390,000 47,500 39,000

Required: a. Determine the actual MOH rate and the budgeted MOH rate Aromatic would have used last year under actual costing and normal costing, respectively. b. Calculate total applied MOH under normal costing for last year. c. How much would Aromatic have been underapplied or overapplied in its MOH costs if it had followed a normal costing system? d. What are the key advantages and disadvantages of both of these systems, and what would that mean for Aromatic's ability to price its products if it bases its selling price on cost? Answer: a. Actual MOH rate = $390,000 actual MOH / 39,000 MHS = $10/MH Budgeted MOH rate = $380,000 budgeted MOH /47,500 MHS = $8/MH b. Total applied MOH under normal costing: $8/MH × 39,000 MHS = $312,000 c. Under Normal Costing MOH was underapplied by $78,000 Actual MOH $390,000 - Applied MOH $312,000 d. Key advantage of Actual Costing: Companies that use actual costing include the actual MOH cost when costing a product or service; this means they choose to prioritize accuracy of information over the relevance/timeliness of that information. Key Advantage of Normal Costing: Companies that use normal costing utilize an estimate of MOH, which means they prioritize timeliness and relevance over accuracy of information. Because Normal Costing provides more timely costing information, companies that use Normal Costing are better positioned to adjust prices during the period. Diff: 3 LO: 1, 2, 3, 4 Bloom: AN, AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management, FSA.

119) Precision Construction Company is concerned about ongoing, large differences between MOH costs actually incurred and budgeted MOH costs. Hoping that a consultant could Recommend improved procedures, Precision retained Stephanie Storlazzi, CMA. Stephanie immediately requested a listing of construction overhead costs that included, nails, staples drywall tape, supervisory salaries, plaster patches, glue, depreciation on factory equipment and several miscellaneous items. It immediately became evident that these MOH costs, totaling $380,000, substantially exceeded Precision's budgeted MOH of $290,000. In the past, Precision assigned MOH costs to individual jobs based on the direct labor (DL) hours of its employees. At the beginning of the year, based on the work they had planned and still hoped to earn at that time, Precision budgeted for 110,000 DL hours. In reviewing the payroll records of their employees, Precision now sees that they actually worked 125,000 hours this year while receiving an average wage of $20 per hour. Required: a. Based on the above information, determine the budgeted MOH rate based on direct labor hours, apply MOH for the year, and determine underapplied or overapplied MOH for the year. b. Precision wondered if they should consider a different allocation base, since this construction business is both labor-intensive and material-intensive. Stephanie agrees and determines that total DM costs incurred for the jobs worked on this year amounted to $1,306,897. At the beginning of the year, Precision's budgeted DM costs (for the projects he knew about at the time) were $1,000,000. Determine what the budgeted MOH rate would have been if Precision had used direct material cost as the cost driver, the applied MOH, and underapplied or overapplied MOH. c. Which cost driver would you recommend Precision use going forward? Why? Answer: a. Budgeted MOH rate $290,000 budgeted MOH / 110,000 budgeted DLHs = $2.64/DLH Applied MOH $2.64 × actual DLHs, 125,000 = $330,000 Underapplied MOH $380,000, actual MOH - $330,000, applied MOH = underapplied MOH, $50,000 b. Budgeted MOH rate = $290,000 budgeted MOH / $1,000,000 budgeted DM costs = $.29/DM$ Applied MOH = $1,306,897 actual DM costs × $.29/DM$ = $379,000 Underapplied MOH = $380,000 - $379,000 = $1,000 underapplied MOH c. Precision should switch their cost driver to Direct Material Cost as the differential between actual and applied MOH, is reduced significantly (from $50,000 to $1,000). Diff: 2 LO: 1, 2, 3, 4 Bloom: AN, AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management, FSA, Business Economics.

120) In its job costing system, Jupiter Co. applies MOH to jobs using a budgeted MOH rate based on direct labor (DL) cost. The rate,100% of direct labor cost, was calculated last December, and will be used throughout the current year. On July 1, Jupiter had one job, #101, in process, with direct material costs of $1,000 and direct labor costs of $2,000. During July, direct material and direct labor costs were added to Job #101, as well as new Jobs #102 and #103, as follows: Job #101 Direct materials Direct labor

0 $2,000

Job #102 $1,000 $3,000

Job #103 $2,000 $1,500

Actual MOH cost for the month of July was $9,000. During the month, Jupiter completed Jobs #101 and #102. Required: a. What was Jupiter's Cost of Goods Manufactured for the month of July? b. What was the balance in Work-in-Process Inventory at the end of July? c. Was MOH underapplied or overapplied for the month of July? What does this mean for any balances in WIP Inventory and Finished Goods Inventory on the balance sheet? What does this mean for COGS on the income statement?

Answer: Cost of goods manufactured = Beg. WIP + Total manufacturing costs - End. WIP 16,000 = $5,000 + $16,000 - $5,000 Beg WIP (Job #101) = $1,000 + $2,000 + $2,000 = $5,000 Tot. manufacturing costs = Costs added during July $16,000 = (Job #101: $2,000 + $2,000) + (Job #102: $1,000 + $3,000 + $3,000) + (Job #103: $2,000 + $1,500 + $1,500) End. WIP (Job #103) = $2,000 + $1,500 + $1,500 = $5,000 WIP Beg. Inv. = DM + DL + MOH $5,000 = $1,000 + $2,000 + $2,000 (Job #101) Added WIP cost during July: Job #101 DM + DL + MOH 0 + $2,000 + $2,000 = $4,000 Job #102 DM + DL + MOH $1,000 + $3,000 + $3,000 = $7,000 Job #103 DM + DL + MOH $2,000 + $1,500 + $1,500 = $5,000 Completed jobs = Cost of Goods Manufactured Job 101 + Job 102 ($5,000 + $4,000) = $9,000, Job #101 + $7,000, Job #102 = $16,000 b. Balance in WIP Job 103 DM + DL + MOH $5,000 = $2,000 + $1,500 + $1,500

c. MOH is underapplied by $500 Actual MOH - Applied MOH $9,000 - ($2,000 + $3,000 + $1,500) = $2,500 underapplied The underapplication of MOH will impact accounts differently depending on which approach is used to eliminate the underapplied MOH. If the Direct Write-Off method is used, Cost of Goods Sold on the income statement will be increased, and there will be no change in the balance sheet accounts of Work-In-Process Inventory and Finished Goods Inventory. Use of the Prorated Method will result in an increase in Cost of Goods Sold in the income statement and increases in Work-in-Process Inventory and Finished Goods Inventory on the balance sheet. Diff: 3 LO: 1, 2, 3 Bloom: AN, AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management, Reporting, FSA.

121) In 2025, Bancroft Company was the victim of a serious data breach. Due to the data breach into their I.T. system, Bancroft was unable to determine their January 1, 2025 balances in Raw Materials Inventory, Work-in-Process Inventory and Finished Goods Inventory. Additionally, due to the breach, Bancroft could not determine the amount of actual manufacturing overhead incurred during 2025. To resolve these issues, Bancroft Company hired famed forensic accountant, Pacioli Columbo, CPA to recreate selected accounting records. Pacioli was provided with the following information that includes the debit balances in its trial balance for the selected accounts, dated December 31, 2025: Raw Materials (RM) Inventory Work-In-Process (WIP) Inventory Finished Goods (FG) Inventory Factory MOH Cost of Goods Sold

$ 12,000 32,400 50,400 6,000 72,000

In the process of working backwards to recreate the beginning balances for several accounts for the year, Pacioli uncovered the additional following information: Cost of raw materials purchased during 2025 Cost of direct materials requisitioned in 2025 (no indirect materials were used in 2025) Cost of goods manufactured during 2025 Applied MOH (120% of direct labor cost)

$ 41,000 47,000 110,000 48,000

Required: a. Determine beginning RM Inventory as of Jan. 1, 2025. b. Calculate beginning WIP Inventory as of Jan. 1, 2025. c. Determine beginning FG Inventory as of Jan. 1, 2025. d. Determine the actual MOH cost incurred in 2025.

Answer: a. RM Inv., Jan. 1, 2025 = $18,000 b. (RM requisitioned, $47,000 + end. RM, $12,000) - RM purchased, $41,000 = $18,000 c. WIP Inv., Jan. 1, 2025 = $7,400 (Cost of Goods Manufactured, $110,000 + WIP end inv., $32,400) - (manufacturing costs added during year, MOH applied, $48,000 + DM, $47,000 + DL, $40,000) = $7,400 Note: To determine Direct Labor Cost - MOH is applied at 120% of Direct Labor, therefore, Applied MOH of $48,000 / 1.2 = Direct Labor Cost of $40,000 d. FG Inv., Jan. 1, 2025 = $12,400 e. (Cost of Goods Sold, $72,000 + FG end inv. $50,400) - Cost of Goods Manufactured, $110,000 = $12,400 f. Actual MOH cost incurred = $54,000 g. (Applied MOH $48,000 + underapplied MOH as indicated by debit MOH balance, $6,000) = $54,000 Diff: 2 LO: 1, 2, 3, 4 Bloom: AN, AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management, FSA.

122) Caitlin's Custom Decorations provides a service, decorating homes. Its Direct Material Inventory consists primarily of festive, seasonal decorations. MOH costs are low due to the nature of the business. The applied MOH rate is $10 per direct labor hour. As of November 30, the company the following balances in its inventory accounts: Direct Materials Inventory WIP Inventory Finished Goods Inventory

$ $ $

6,000 7,600 0

During December, the following events occurred: 1. Purchased direct materials costing $10,000 on account. 2. Used $12,600 of direct materials for jobs. No indirect material costs were incurred during the month. 3. Paid wages for 100 hours of labor ($25/hr). 4. Applied MOH cost to jobs. 5. Actually incurred $1,800 in MOH costs. 6. Completed all jobs by the end of the month. 7. Billed clients $50,000 for jobs completed. Required: a. Calculate the ending balances in all inventory accounts as of December 31. b. Close any underapplied or overapplied MOH directly to COGS. c. Determine the company's total cost of goods completed and COGS in December. d. How much gross margin did the company earn in December? Answer: a. RM end. Inventory = $3,400 (DM Inventory, $6,000 + RM purchases, $10,000) - DM used, $12,600 = $3,400 WIP end. inv. = $0 since all jobs were completed by end of period. FG end. inv. = $0 due to the nature of the industry. b. Underapplied MOH = $800 Applied MOH, $1,000 (100 DLHs × $10/DLH) - Actual MOH, $1,800 = $800 c. Cost of Goods completed and Cost of Goods Sold will both be $23,700 as there is no Finished Goods ending Inventory. WIP Inventory, $7,600 + DM used, $12,600 + DL, $2,500 (100 DHLs × $25/DLH) + $1,000 Applied MOH (100 DHLs × $10/DLH) = $23,700 d. Gross Margin = $26,300 Billed Sales Revenue, $50,000 - COGS, $23,700 (from c) = $26,300 Diff: 2 LO: 1, 2, 3, 5 Bloom: AN, AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management, Reporting.

123) Smartbells Inc. manufactures intelligent, Wi-Fi enabled dumbbells, allowing users to record workout data onto the cloud. Smartbell's CEO, Arnold, is trying to strengthen his analytical skills by better understanding the relationships between accounts and working backwards to determine account balances. This year's manufacturing costs are as follows: Total manufacturing costs Total applied MOH (based on MOH rate of 2.00/DL $) Total cost of goods completed Beginning balance in Work-in-Process Inventory

$ 600,000 200,000 430,000 42,000

From taking an introductory accounting course, in college, Arnold recalls the importance of gross margin and that gross margin percentage is determined by dividing gross margin by sales. Required: a. How much direct labor cost was incurred last year? b. What was the cost of direct materials used? c. What was the ending balance in WIP Inventory last year? d. If Finished Goods Inventory had no ending balance and Cost of Goods Sold was $650,000, what was the beginning balance in Finished Goods Inventory last year? e. Given the company's goal to generate a very high gross margin percentage on these products (70%), how much revenue does the company need to earn on its COGS ($650,000) (round to nearest whole dollar)? Answer: a. DL = $100,000 Applied MOH / $2/DL$; $200,000 / $2 = $100,000 b. DM = $300,000 Total Manufacturing costs - DL - Applied MOH; $600,000 - $100,000 - $200,000 c. WIP end. balance = $212,000 (Beg. WIP $42,000 + Total manufacturing costs, $600,000 - Cost of goods completed $430,000 = $212,000 d. Beg. FG balance = $220,000 (COGS $650,000 + End. FG 0) - Cost of goods completed, $430,000 = $220,000 e. Total required sales revenue = $2,166,667 If gross margin percentage is 70%, therefore, COGS % must be 30% (100% - 70%) of sales revenue. COGS / 30% = Total required sales revenue $650,000 / 30% = $2,1666,667 Diff: 3 LO: 1, 2, 3 Bloom: AN, AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management, Reporting.

124) TempTech manufactures digital thermometers. During the most recent year, TempTech's cost of goods sold, totaled $300,000. The company's Finished Goods Inventory and Work-inProcess Inventory are typically low. However, due to shortages of vital electronic parts, TempTech has been maintaining relatively higher inventories of raw materials. The ending inventories in Work-In-Process and Finished Goods are $20,000 and $30,000, respectively. The ending inventory in Raw Materials (all Direct Materials) is $90,000. TempTech uses normal costing and its budgeted MOH rate is $2/direct labor hour. Budgeted MOH at the beginning of the year was $200,000; actual MOH costs incurred during the year were $120,000. TempTech actually used 50,000 direct labor hours during the year. Required: a. Was TempTech's MOH cost for the year underapplied or overapplied? By how much? b. Record the journal entry to close out that MOH difference by using the direct write-off method. c. Record the journal entry to close out the MOH difference by prorating it to the appropriate inventory/cost accounts based on their ending balances, before proration (round proportions to four decimal places if needed). d. Which of these closing entries is most appropriate for TempTech this year? Explain. Note that TempTech considers any percentage of underapplied or overapplied MOH over 2% to be relatively significant.

Answer: a. Underapplied MOH = $20,000 Actual MOH, $120,000 - Applied MOH, (50,000 DLHs × $2/DLH) = $120,000 - $100,000 = $20,000 b. Debit 20,000

COGS MOH Control

Credit 20,000

WIP FG COGS Total

Balances $20,000 30,000 300,000 350,000

% of total

Underapplied MOH 5.71 $20,000 8.57 20,000 85.72 20,000 100.00

relative allocation 1,142 1,714 17,144 $20,000

new adjusted balances $21,142 31,714 317,144 370,000

Step One:

Determine relative percentages (each individual balance, before adjustment / Total) Step Two: Multiple relative percentages by amount of underapplied or overapplied MOH, resulting in "relative allocation" amounts. Step Three: If eliminating "underapplied MOH", add these amounts to original balances to determine "new adjusted balances". If disposing of overapplied MOH", subtract these amounts from original balances to determine "new adjusted balances". e. Significance test: f. underapplied MOH / Total Actual MOH $20,000/$120,000 = 16.67% Since 16.67% is significantly more than the 2% threshold, the Prorated Method to eliminate underapplied or overapplied MOH should be used. Diff: 2 LO: 1, 2, 3 Bloom: AN, AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

125) Tabatha Tablets, Inc. manufactures hand-held electronic devices. The following T-accounts provide selected data about Tabatha Tablet's financial results for the year. Unfortunately, several key components were lost after a hacker broke into Tabatha's I.T. system. RM Inventory beg. bal. 21,400 ? 77,000 ? end. bal. 16,000

beg. bal. DM DL Applied MOH end. bal.

WIP Inventory 51,000 62,000 200,000 70,000 98,000 ?

FG Inventory beg. bal. 70,000 ? ? end. bal. 72,000

MOH Control (total debits 111,000 ? during the year) You have been hired to determine the missing amounts below. Required: a. What is the amount of indirect material cost incurred during this period? b. Determine the COGS amount for this period (before any MOH difference would have been closed out). c. Specify whether MOH for the period was underapplied or overapplied, and by how much. Also, prepare the journal entry to close out the MOH difference, given that the company wants to prorate it to the appropriate accounts based on their ending balances (before proration) (round proportions to 4 decimal places, if necessary.

Answer: a. $20,400 b. RM beg. Inv., $21,400 + RM purchases, $77,000 - RM end Inv., $16,000 = $82,400, total cost of RM transferred out., $82,400 - DM, $62,000 = Indirect Materials, $20,400. c. $198,000 (FG beg. Inv., $70,000 + cost of goods manufactured, $200,000) - FG end. Inv., $72,000 = $198,000 d. MOH is underapplied by $13,000 Actual MOH, $111,000 - Applied MOH, $98,000 = $13,000

WIP Inventory FG Inventory COGS MOH Control

WIP FG COGS Total

Balances $81,000 72,000 198,000 351,000

Debit 3,000 2,667 7,333

Credit

13,000 % of total 23.08 20.51 56.41 100.00

underapplied MOH relative allocation $13,000 3,000 13,000 2,667 13,000 7,333 $13,000

Step One:

Determine relative percentages (each individual balance, before adjustment / Total) Step Two: Multiple relative percentages by amount of underapplied or overapplied MOH, resulting in "relative allocation" amounts. Step Three: If eliminating "underapplied MOH", add these amounts to original balances to determine "new adjusted balances". If disposing of overapplied MOH", subtract these amounts from original balances to determine "new adjusted balances". Diff: 2 LO: 1, 2, 3 Bloom: AN, AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

126) Samantha Stephens, CPA is owner of Witches' Brew, a producer of enchanting, holistic herbal teas. The following T-accounts provide selected data about Witches' Brew financial results for the year. Unfortunately, several key components were lost after a hacker broke into their I.T. system. RM Inventory 22,000 ? 78,000 ? end. bal. 18,000 beg. bal.

WIP Inventory beg. bal. 61,000 DM 60,000 200,000 DL 70,000 Applied MOH 96,000 end. bal. ? FG Inventory 70,000 ? ? end. bal. 82,000 beg. bal.

MOH Control (total debits 80,000 ? during the year) You have been hired to determine the missing amounts below. Required: a. What is the amount of indirect material cost incurred during this period? b. Determine the COGS amount for this period (before any MOH difference would have been closed out). c. Specify whether MOH for the period was underapplied or overapplied, and by how much. Prepare the journal entry to close out the MOH difference, given that the company uses the direct write-off method.

Answer: a. $22,000 RM beg. Inv., $22,000 + RM purchases, $78,000 - RM end Inv., $18,000 = $82,000 total cost of RM transferred out. $82,000 - DM, $60,000 = Indirect Materials, $22,000. b. $188,000 (WIP beg balance, $61,000 + DM, $60,000 + DL, $70,000 + Applied MOH $96,000) - End. WIP inventory, $87,000 = Cost of Goods Manufactured, $200,000. (FG beg balance, $70,000 + Cost of Goods Manufactured (from above calculation), $200,000) FG end inventory, $82,000 = COGS, $188,000 c. MOH is overapplied by $16,000 Actual MOH, $80,000 - Applied MOH, $96,000 = $16,000

MOH Control COGS

Debit 16,000

Credit 16,000

Diff: 2 LO: 1, 2, 3 Bloom: AN, AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management, FSA.

127) Pedalless Bicycle Corporation, manufactures motor-assisted bicycles. Pedalless began operations on January 1, 2025. During 2025, Pedalless incurred the following costs:

Cost Item Wheels Frames Motors Handlebars Miscellaneous other direct material parts Insurance on corporate headquarters Utility cost in corporate headquarters Advertising Wages for factory workers Utility costs in plant Plant supervisor salaries Depreciation of plant assets Salaries and commissions to salespeople

Amount $300,000 240,000 510,000 130,000 50,000 85,000 25,000 22,000 310,000 69,000 160,000 59,000 202,000

Product or Direct or Period Cost Indirect Cost

Required: a. Complete the above table by classifying each cost as either a product cost or a period cost; for items classified as product costs, further classify as a direct cost or an indirect cost. b. Calculate total direct costs and total indirect (MOH) costs. c. For year ended December 31, 2025, determine gross margin and operating income. Assume that all units started were completed and sold during the year, and that there were no ending inventories in any manufacturing related accounts. Assume that total actual MOH = total applied MOH. Revenue for 2025 totaled, $2,100,000.

Answer: a. Product or Direct or Amount Period Cost Indirect Cost $300,000 Product Direct 240,000 Product Direct 510,000 Product Direct 130,000 Product Direct 50,000 Product Direct 85,000 Period 25,000 Period 22,000 Period 310,000 Product Direct 69,000 Product Indirect 160,000 Product Indirect 59,000 Product Indirect 202,000 Period

b. Total direct costs = $1,540,000 $300,000 + $240,000 + $510,000 + $130,000 + $50,000 + $310,000 = $1,540,000 Total indirect costs (MOH) = $288,000 $69,000 + $160,000 + $59,000 = $288,0000 c. Gross margin = $272,000 Sales revenue, $2,100,000 - COGS, ($1,540,000 + $288,000) = $272,000 Operating income (loss) = ($62,000) Gross margin, $272,000 - Selling, Gen. & Admin. Costs/Period Costs, $334,000 ($62,000) (Note: This is a net loss.) Total Period costs = ($85,000 + $25,000 + $22,000 +$202,000) = $334,000 Diff: 2 LO: 1, 2, 3 Bloom: AN, AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management, Reporting.

128) Atlas Analytics Inc. produces voice-activated navigation systems. A competitor committed a willful act of sabotage, breaching Atlas Analytics weak internal control systems. Significant data, including intellectual properties, research and financial information, was compromised. Unfortunately, Atlas did not backup its data. The following T-accounts provide data about Atlas Analytics financial results for the year. Management is aware that you graduated with a degree from one of the top accounting programs in our region and has asked you to recreate selected account information and provide relevant journal entries. RM Inventory 20,000 ? 68,000 ? end. bal. 8,000 beg. bal.

WIP Inventory beg. bal. 61,000 DM 50,000 ? DL 60,000 Applied MOH 86,000 end. bal. 51,000 FG Inventory beg. bal. 80,000 ? ? end. bal. 82,000

MOH Control (total debits 82,000 ? during the year) Required: a. What is the amount of indirect material cost incurred during this period? b. In good form, provide the journal entry, indicating the cost of goods manufactured for the period. c. In good form, provide the journal entry, indicating the Cost of Goods Sold (before any MOH difference would have been closed out). Specify whether MOH for the period was underapplied or overapplied, and by how much. Prepare the journal entry to close out the MOH difference, given that the company uses the direct write-off method.

Answer: a. $30,000 RM beg. Inv., $20,000 + RM purchases, $68,000 - RM end Inv., $8,000 = $80,000, cost of RM transferred out; $80,000 - DM, $50,000 = Indirect materials, $30,000. b. Debit Credit Finished Goods (FG) Inventory 206,000 Work-In-Process (WIP) Inventory 206,000 $206,000 (WIP beg. balance, $61,000 + DM, $50,000 + DL, $60,000 + Applied MOH, $86,000) - End. WIP inventory, $51,000 = Cost of Goods Manufactured, $206,000 c. Cost of Goods Sold (COGS) Finished Goods (FG) Inventory

Debit 204,000

Credit 204,000

$204,000 (FG beg. balance, $80,000 + Cost of Goods Manufactured (from above calculation) $206,000) FG end. Inventory, $82,000 = COGS, $204,000 d. MOH is overapplied by $4,000 Actual MOH, $82,000 - Applied MOH, $86,000 = $4,000 Debit MOH Control 4,000 Cost of Goods Sold (COGS) Diff: 2 LO: 1, 2, 3, 4 Bloom: AN, AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

Credit 4,000

129) Wright Bros. Inc. manufacturers retro bicycles. Their accountant, left unexpectedly, resulting in incomplete processing of ledger postings. Wilbur, one of the owners, has asked you to determine selected information based upon the following incomplete data. Assume that no indirect material cost was incurred during the period. RM Inventory 4,000 ? 16,000 end. bal. 6,000 beg. bal.

WIP Inventory beg. bal. 35,000 DM ? ? DL 15,000 Applied MOH 20,000 end. bal. 10,000 FG Inventory 8,000 ? ? end. bal. 6,000 beg. bal.

MOH Control ? ?

Additionally, the following journal entries were made available to you. Debit 70,000

Finished Goods (FG) Inventory Work-In-Process (WIP) Inventory

Credit 70,000

Cost of Goods Sold (COGS) Finished Goods (FG) Inventory

72,000

Cost of Goods Sold (COGS) MOH Control

1,000

72,000

1,000

Required: a. Determine the cost of direct materials used for the period. b. Determine total actual MOH cost for the period. c. Does Wright Bros. Inc. use the direct write-off method or the prorated method to eliminate any overapplied or underapplied MOH? How can you tell? Explain.

Answer: a. $14,000 b. RM beg. Inv., $4,000 + RM purchases, $16,000 - RM end. inv., $6,000 = $14,000 c. $21,000 d. Applied MOH $20,000 + underapplied MOH (found in journal entry) $1,000 = $21,000 e. Direct write-off method. f. Because the entire amount of underapplied MOH is eliminated by debiting COGS, we can ascertain that the direct write-off method was used. Diff: 2 LO: 1, 2, 3 Bloom: AN, AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

130) Ketogenic Inc. produces delicious, healthy snack bars, based on the Keto diet. Ketogenic's factory is highly automated, utilizing numerous robots and employs very few human workers. Machine hours are used as the cost driver. The company determines a budgeted OH rate at the beginning of the year. This year's MOH rate is budgeted at $2.80/machine hour. Ketogenic uses the direct write-off method to eliminate any underapplied or overapplied MOH. The following events occurred this year (amounts are in thousands): 1. Purchased pumpkin seeds, tapioca fiber, cocoa, MCT oil and other ingredients $450 direct/$50 indirect) 2. Assigned cost of direct materials into production 3. Incurred direct labor cost for factory workers 4. Transferred indirect materials into production 5. Incurred salary for factory supervisors 6. Received utility bill for factory 7. Incurred labor cost for maintenance employees in factory 8. Applied MOH based on 100,000 actual machine hours used 9. Recorded cost of goods completed 10. Recognized revenue for snack bars sold 11. Unadjusted Cost of Goods Sold balance

($000) 500 420 290 22 140 73 44 ? 1,200 3,555 1,500

The following balances existed in these accounts at the beginning of the year: (amounts are in thousands) Raw Materials Inventory Work-in-Process Inventory Finished Goods Inventory

$400 ($330 direct materials, $70 indirect materials) 500 400

Required: a. Does Ketogenic utilize an actual costing system or a normal costing system? How can you tell? b. Of the three commonly used cost drivers for manufacturers, why do you think Ketogenic chose Machine Hours? c. Record the journal entries to account for the production-related events described above. d. Post your journal entries to all inventory and Cost of Goods Sold accounts, and then calculate ending balances for each. Cost of Goods Sold should be calculated after adjustment for any overapplied or underapplied MOH. e. How much gross margin did this company generate this year? f. Would Ketogenic consider this a significant MOH difference? Explain.

Answer: a. Ketogenic utilizes a normal costing system as it records applied MOH. b. Ketogenic chose machine hours as its cost driver since its operations are highly automated. c. 1. Purchase raw materials on account: Debit Credit Raw Materials Inventory 500,000 Accounts Payable 500,000 2. Release direct materials from Raw Materials WIP Inventory Raw Materials Inventory

420,000

3. Record direct labor: WIP Inventory Salaries and Wages Payable

290,000

420,000

290,000

4. Release indirect materials from Raw Materials Inventory: MOH Control (Actual MOH) 22,000 Raw Materials Inventory

22,000

5., 6., & 7. Record other actual MOH costs incurred: MOH Control 257,000 Factory supervisor's salaries (5) Factory utilities (6) Factory maintenance employees

140,000 73,000 44,000

8. Assign applied MOH to WIP Inventory: WIP Inventory MOH Control (Applied MOH) (100,000 MHS × $2.80/MH)

280,000 280,000

9. Release costs of goods completed to Finished Goods Finished Goods Inventory 1,200,000 WIP Inventory 10. & 11. Record Sales: Accounts Receivable Sales (10) Cost of Goods Sold (11) Finished Goods Inventory

3,555,000 1,500,000

12. Disposal of Overapplied MOH using Direct Write-Off Debit: MOH Control 1,000 Credit: Cost of Goods Sold

1,000

d. RM Inventory beg. bal. 400,000 420,000 (2) (1) 500,000 end. bal. 458,000

22,000 (4)

WIP Inventory beg. bal. 500,000 DM (2) 420,000 1,200,000 DL (3) 290,000 Applied MOH (8) 280,000 end. bal. 290,000 FG Inventory beg. bal. 400,000 (9) 1,200,00 1,500,000(10) 0 end. bal. 100,000 MOH Control (4)22,000 (5)140,000 (6)73,000 (7)44,000 279,000 1,000 COGS

28,000(8)

applied

1, (12)

1,000 (12) bal. 0 Adj. Bal. 1,000 (12) (10)1,500,000 End. bal. $1,499,000

Ending inventory balances Raw Materials $458,000 Work-In-Process $290,000 Finished Goods $100,000 Raw Materials ending inventory: $458,000 (RM beg. Inv., $400,000 + RM purchases, $500,000) - (RM used, $420,000 +22,000) = RM end. inv., $458,000 Work-In-Process ending inventory: $290,00 (WIP beg. inv., $500,000 + DM, $420,000 + DL, $290,000 + MOH $280,000) - Cost of Goods Manufactured, $1,200,000 = $290,000 Finished Goods ending inventory: $100(FG beg. Inv., $400,000 + Cost of Goods Manufactured, $1,200,000) - Cost of Goods Sold, $1,500,000 = $100,000 Cost of Goods Sold: $1,499 = Unadjusted COGS (given) $1,500,000 - overapplied MOH, $1,000 = $1,499,000 (see solution "f" for overapplied MOH calculation)

e. Gross Margin: $2,055,000 Sales Revenue, $3,555,000 - COGS, $1,499,000 = $2,056,000 f. MOH overapplied by $1,000 Applied MOH, $280,000 (100,000 MHS × $2.80/MH) - Actual MOH, $279,000 = $1,000 Ketogenic would not consider this amount to be significant as it is less than 1% of Actual MOH. $1,000/$279,000 = .0036 Diff: 2 LO: 1, 2, 3, 4 Bloom: AN, AP AACSB: Analytic, Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: FSA, Business Economics.

131) PPE Inc. manufactures highly specialized, custom protective personal equipment for hospitals and research labs. Due to chronic product shortages, orders are incomplete. PPE is concerned about maintaining a competitive profit margin while also maintaining the highest quality standards. The following are the job cost sheets for their custom face shields, reflecting work in January and so far in February: Job #8745 Direct Material

Date 1/30/24 2/2/24 1/31/24 2/3/24 1/31/24 2/3/24

$ $ $ $ $ $

Amount 30.00 50.00 20.00 46.00 10.00 23.00

2/3/24 2/4/25

$ $

179.00 179.00

Date 1/25/24 2/3/24 1/30/24 2/4/24 1/30/24 2/4/24

Amount $ 52.50 $ 55.00 $ 130.00 $ 65.00 $ 65.00 $ 32.50

Job Status: Completed Sold

2/4/24 2/5/25

$ $

400.00 400.00

Job #3772 Direct Material Direct Labor

Date 2/5/24 2/6/24

$ $

Amount 90.00 60.00

MOH

2/6/24

30.00

Direct Labor MOH Job Status: Completed Sold Job #4490 Direct Material Direct Labor MOH

Job Status: In Process

Selling Price

313.25 Selling Price

$600.00 Selling Price

Required: a. What MOH budgeted rate is PPE using to apply MOH costs to their jobs? (Hint: Their allocation base is direct labor cost). b. Based on the job cost sheet information, what is the total cost of direct materials requisitioned in January? c. What is the total amount of direct labor cost, direct material cost and MOH cost incurred during the month of January? d. Assuming there was no beginning WIP Inventory balance in January, what is the ending WIP Inventory balance as of January 31? e. What is PPE's Cost of Goods sold in January? February? Assume that in both months total actual MOH equaled total applied MOH. f. What is PPE's current WIP Inventory balance as of 2/6/24? Is PPE pricing custom items by using a steady mark-up based on product cost? Provide evidence to support your answer. What would need to be done differently if PPE wanted to use a steady mark-up percentage based on costs. Answer: a. PPE is using a MOH budgeted rate of 50% of direct labor cost. Proof: Job #4490 1/30/24 Direct Labor = $130 1/30/24 MOH applied = $65 $65/$130 = 50% b. The total cost of direct materials requisitioned during January is $82.50 Job #8745, $30 + Job #4490, $52.50 = $82.50 c. Total amount of direct material cost, direct labor cost and MOH cost for January is $307.50 d. ($30 + $20 + $10 + $52.50 + $130 + $65) e. Total ending WIP Inventory for January is also $307.50 (see above) as there was no beginning, WIP inventory, $307.50 of additional cost was incurred in January and no products were sold. f. January COGS is zero as no jobs were sold during January. February COGS is $579 Job #8745, $179 + Job # 4490, $400 = $579 g. PPE's current balance in WIP on 2/6/24 is $180 Job #3772: $90 + $60 + $30 PPE is not using a steady markup percentage as indicated by a 75% markup on Job #8745 selling price − cost / cost = ($313.25 − $179) / $179 = $75% and a markup of markup of only 50% on Job #4490 selling price - cost / cost = ($600 - $400) / $400 = 50%. As there is a market shortage of units, PPE should achieve the highest, reasonable markup on all custom jobs, without price gouging its customers. To ensure this, controls can be enacted, ensuring that jobs are priced correctly based upon the job cost sheets. Diff: 3 LO: 1, 2, 3, 4 Bloom: AN, AP AACSB: Analytic, Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Cost Management, Reporting. 84

132) Pizza3.144 Inc. produces tactical laser-guided pizza cutters, resulting in perfect straight-line cuts! As Pizza3.144 holds a patent on this item, it enjoys monopolistic favor within the high-tech pizza cutter industry sector. On December 31, 2024, Pizza3.144 reported the following for its Inventory section of the Balance Sheet: Raw Materials Inventory WIP Inventory

$6,000 6,000

Finished Goods Inventory

9,500 $21,500

The first few items from the company's income statement are as follows: Sales Revenue

$458,000

Cost of Goods Sold Gross Margin

343,500 $114,500

Required: a. In 2025, the following information summarizes the key product-related transactions throughout the year: • Total material purchases, $165,000 • Total materials used in production, $127,000 • Total direct labor costs, $60,000 • Total applied MOH, $28,000 • Cost of Goods Manufactured, $210,000 • Cost of Goods Sold, $180,000 • Sales Revenue, $360,000 Present the Inventory section of the Balance Sheet for 2025. b. Present a partial Income Statement through gross margin for the year ended December 31, 2025. c. Assuming that no indirect materials were used during 2025, and that MOH was underapplied by $2,000. What was the total actual MOH cost incurred? d. Assuming that Pizza3.144 applies MOH based upon direct labor cost, what was the budgeted MOH rate for 2025?

Answer: a. 2025 inventory section, Balance Sheet presentation: Raw Materials Inventory WIP Inventory

$44,000 11,000

Finished Goods Inventory

39,500 $94,500

Raw materials inventory: $6,000 + $165,000 - $127,000 = $44,000 WIP inventory: $6,000 + $127,000 + $60,000 + $28,000 - $210,000 = $11,000 Finished goods inventory: $9,500 + $210,000 - $180,000 = $39,500 b. 2025 partial Income Statement through gross margin: Sales Revenue

$360,000

Cost of Goods Sold Gross Margin

180,000 $180,000

c. $30,000 d. Applied MOH, $28,000 + underapplied MOH, $2,000 = $30,000 e. 46.67% of Direct labor cost f. MOH Applied, $28,000/Direct labor cost, $60,000 = 46.67% Diff: 3 LO: 1, 2, 3, 4 Bloom: AP AACSB: Analytic, Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Cost Management, Reporting.

133) The Sunshine Corporation produces solar panels. At the end of the most recent fiscal year, Sunshine's cost accountant, Beth, reviewed relevant cost data, focusing on MOH. Since her company uses normal costing, she anticipated a difference in the amount of MOH that was applied compared to the amount that was actually incurred. However, Beth was shocked at the size of the differential. Here is what she found within the MOH account, as well as detail from the beginning of the year when the budgeted MOH rate was determined: Budgeted MOH cost Budgeted direct labor hours Actual MOH cost Actual direct labor hours

$40,000 20,000 hours $50,000 10,000 hours

Beth is aware of the following company policy regarding any MOH difference: "any MOH difference that is deemed not significant should be written off in full, in the current period; any MOH difference that is deemed significant should be prorated to the appropriate accounts so as to better approximate actual costs". Beth also accessed the following additional information related to the inventory accounts.

Direct Materials Inventory Work in Process Inventory Finished Goods Inventory Cost of Goods Sold

Ending Balance 6,000 10,000 30,000 60,000

Applied MOH (Within End. Bal.) $5,000 5,000 10,000

While she does not yet have a clear understanding of what amount might be considered significant yet, Beth knows she must first calculate the difference between actual MOH and applied MOH. Required: a. Calculate the budgeted MOH rate for Beth's company, assuming that direct labor hours is the cost driver. b. Determine whether the MOH is under or overapplied, and by how much. c. Since Beth is unsure if the amount of overapplied or underapplied would be considered significant, she decides to do the work for both options so that she can bring it to her supervisor and ask for additional guidance regarding significance. (For the following, round any rates or proportions to four decimal places, and round final dollar amounts to the nearest dollar). 1. Prepare the journal entry if the MOH difference between MOH applied and MOH actually incurred is to be written off entirely in the current period. 2. Prepare the calculations and journal entry necessary if the difference between MOH applied and MOH actually incurred is to be prorated to the appropriate inventory and cost accounts based on their ending balances.

Answer: a. Budgeted MOH rate = $2/DLH Budgeted MOH, $40,000 / Budgeted DLHs, 20,000 DLHs = $2/DLH b. MOH is underapplied by $30,000 Actual MOH, $50,000 - Applied MOH, $20,000 = $30,000 [Applied MOH = $5,000 + $5,000 = $10,000] 1. Elimination of underapplied MOH using Direct Write-Off method: Debit Credit Cost of Goods Sold 30,000 MOH Control 30,000 2. Disposal of underapplied MOH using Proration method based upon account ending balances: Debit Credit Cost of Goods Sold 18,000 WIP Inventory 3,000 Finished Goods Inventory 9,000 MOH Control 30,000

WIP FG COGS Total

Balances % of total $10,000 10.00 30,000 30.00 60,000 60.00 $100,000

Underapplied MOH 30,000 30,000 30,000

Relative allocation $3,000 9,000 18,000 $30,000

Step One: Determine relative percentages (each individual balance, before adjustment / Total). Step Two: Multiply relative percentages by amount of underapplied or overapplied MOH, resulting in "relative allocation" amounts. Diff: 3 LO: 2, 3 Bloom: AP AACSB: Analytic, Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Cost Management.

134) Boston Bean Counter Corporation produces advanced, highly accurate, laser-enabled, digital bean counters for the food industry. For years, they have been plagued by cost overruns and excessive inventory levels. Management is determined to remedy these issues by using Cost Accounting techniques for improved management decision making. Below are selected inventory balances for the year 2024: Ending inventory balances - 2024 Raw Materials $50,000 Work-In-Process $60,000 Finished Goods $70,000 Below are selected journal entries for activities occurring during the year 2025: Entry a. Debit Credit Raw Materials Inventory 30,000 Accounts Payable 30,000 Entry b. WIP Inventory Raw Materials Inventory

Debit 70,000

Entry c. WIP Inventory Wages Payable

Debit 20,000

Entry d. WIP Inventory MOH Control (Applied MOH)

Debit 10,000

Entry e. Finished Goods Inventory WIP Inventory

Debit 155,000

Entry f. Accounts Receivable Sales Revenue

Debit 310,000

Credit 70,000 Credit 20,000 Credit 10,000 Credit 155,000 Credit 310,000

Additional information: No indirect materials used during 2025. Boston consistently maintains a 40% gross margin percentage.

Required: a. Determine ending inventory amounts in Raw Materials, Work-In-Process and Finished Goods Inventories. b. Based upon the provided information, was Boston successful in lowering inventory levels in 2025? Explain. c. What was Boston's Cost of Goods Sold for 2025? d. Does Boston use Actual Costing or Normal Costing? Explain. e. Recently, during a routine audit, Boston Bean Counter's auditor expressed a concern that in the past, Boston's amount of overapplied or underapplied MOH was significant and recommended that if this situation continues, Boston should not eliminate this differential by closing the entire amount out to the Cost of Goods Sold account. If Boston is not able to significantly reduce the difference between applied MOH relative to actual MOH, what other method should Boston use to eliminate overapplied or underapplied MOH? Explain.

Answer: a. Ending Inventory balances - 2025 Raw Materials $10,000 Work-In-Process $ 5,000 Finished Goods $39,000 Raw Materials ending inventory: $10,000 (see optional T-account below) (RM beg. Inv., $50,000 + RM purchases, $30,000) - RM used, $70,000 = RM end. inv. $10,000 Work-In-Process ending inventory: $5,000 (see optional T-account below) (WIP beg. inv., $60,000 + DM, $70,000 + DL, $20,000 + MOH applied, $10,000) - Cost of Goods Manufactured, $155,000 = $5,000 Finished Goods ending inventory: $10,000 (see T-account below) (FG beg. Inv., $70,000 + Cost of Goods Manufactured, $155,000) - Cost of Goods Sold, $186,000 (see below) = $39,000 Cost of Goods Sold: $186,000 Since Boston has a gross margin percentage of 40% (given), then COGS must be 60% of Sales (100% - 40%). Thus, COGS = 60% × $310,000, Sales = $186,000 (OPTIONAL T-ACCOUNTs) Accounts Receivable (f) 310,000

Sales (f) 310,000

Bal. (a) Bal.

Raw Materials Inventory 50,000 30,000 (b) 70,000 10,000

Cost of Goods Sold 186,000

Bal. (b) (c) (d) Bal.

Work in Process Inventory 60,000 (e) 155,000 70,000 20,000 10,000 5,000

Manufacturing Overhead Control (c) (d) (d) 10,000 (e) (g) (h) Bal.

Bal. (e) Bal.

Finished Goods Inventory 70,000 186,000 155,000 39,000 Accounts Payable (a) (c) (e) (f) (h) Wages Payable (a)

30,000

20,000

b. Yes, based upon the information in solution "a", clearly, Boston was successful in lowering 2025 inventory levels. c. Cost of Goods Sold: $186,000 Since Boston has a gross margin percentage of 40% (given), then COGS must be 60% of Sales (100% - 40%) = 60% × $310,000, Sales = $186,000, COGS d. Boston must use normal costing as the company applies MOH. e. If Boston were to continue to experience large differentials between applied MOH and actual MOH, then it should eliminate this differential by using the prorated method. Diff: 3 LO: 1, 2, 3, 4 Bloom: AP AACSB: Analytic, Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Cost Management, Reporting.

135) In 2025, for the second time in two years, Costanza Corporation was the victim of a serious data breach. This time a foreign crime syndicate was able to break into Costanza's I.T. system and compromise its ledger system. The crime was perpetrated by sending a fraudulent email message to one of Costanza's accountants, who had posted his company email address along with personal information on a social media site. The email message contained a link to the site of a fictitious company that sells lines of clothing, promising to make accountants look cool. When the employee clicked on the phishing link, malware was immediately distributed throughout Costanza's corporate I.T. system, eliminating its general ledger. The hacker also included ransomware, demanding the payment of ten million dollars from Costanza in order to restore their ledger information. Costanza Corporation is determined not to pay the ransom and once again retained the services of famed forensic accountant, Pacioli Columbo, CPA to recreate their ledger. Ledger information from the 2024 ledger was not compromised and selected account ending balance information is provided below: Ending inventory balances - 2024 Raw Materials $140,000 Work-In-Process $150,000 Finished Goods $170,000 Additional information: No indirect materials used during 2025. Costanza maintains a gross profit percentage of 30%. Below are selected journal entries for activities occurring during the year 2025: Entry a. Raw Materials Inventory Accounts Payable

Debit 40,000

Entry b. WIP Inventory Raw Materials Inventory

Debit 60,000

Entry c. WIP Inventory Wages Payable

Debit 30,000

Entry d. WIP Inventory MOH Control (Applied MOH)

Debit 40,000

Entry e. Finished Goods Inventory WIP Inventory

Debit 200,000

Credit 40,000 Credit 60,000 Credit 30,000 Credit 40,000 Credit 200,000

Entry f. Accounts Receivable Sales Revenue

Debit 310,000

Credit 310,000

Required: a. Based upon the above provided information, determine the 2025 ending balances in Raw Materials, Work-In-Process, and Finished Goods Inventories. b. What was Costanza's Cost of Goods Sold for 2025?

Answer: a. Ending Inventory balances - 2025 Raw Materials $120,000 Work-In-Process $ 80,000 Finished Goods $277,000 Raw Materials ending inventory: $120,000 (see T-account below) (RM beg. Inv., $140,000 + RM purchases, $40,000) - RM used, $60,000 = RM end. inv., $120,000 Work-In-Process ending inventory: $80,000 (see T-account below) (WIP beg. inv., $150,000 + DM, $60,000 + DL, $30,000 + Applied MOH, $40,000) - Cost of Goods Manufactured, $200,000 = $80,000 Finished Goods ending inventory: $153,000 (see T-account below) (FG beg. Inv., $170,000 + Cost of Goods Manufactured, $200,000) - Cost of Goods Sold, $217,000 (see below) = $153,000 Cost of Goods Sold: $217,000 Since Boston has a gross margin percentage of 30% (given), then COGS must be 70% of Sales (100% - 30%) = 70% × $310,000, Sales = $217,000 Accounts Receivable 310,000

(f)

Sale Revenue (f) 310,000

Bal. (a) Bal.

Raw Materials Inventory 140,000 40,000 (b) 60,000 120,000

Cost of Goods Sold 217,000

Bal. (b) (c) (d) Bal.

Work in Process Inventory 150,000 (e) $200,000 60,000 30,000 40,000 80,000

Manufacturing Overhead Control (c) (d) 40,000 (d) (e) (g) (h)

Bal. (e) Bal.

Finished Goods Inventory 170,000 217,000 200,000 153,000 Accounts Payable (a) (c) (e) (f) (h) Wages Payable (c)

40,000

30,000

b. Cost of Goods Sold: $217,000 c. Since Costanza has a gross margin percentage of 30% (given), then COGS must be 70% of Sales (100% - 30%) = 70% × $310,000, Sales = $217,000 Diff: 3 LO: 1, 2, 3, 4 Bloom: AP AACSB: Analytic, Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Cost Management, Reporting.

136) Jurassic Manufacturing Inc., located in Flint, Michigan, produces custom stone tools. On the afternoon of April 20, 2024, a dog wondered onto Jurassic's factory floor and bit off the lower right-hand corner of the completed job cost sheet for Job #1302, an order of custom stone tools for the Bedrock Company. Because Jurassic still maintains a manual accounting system, using paper-bound journals, ledgers and paper job cost sheets, none of this information could be replicated from computer records. While Fred, the owner of Jurassic Manufacturing Inc., is considered to be "technologically challenged," he is nevertheless one of the first individuals in his industry to use a tablet (it was a hammer and chisel). As all other organizations now use computerized accounting systems, Fred could not find a CPA who understands how a manual accounting system operates. Fred was told by a colleague that you have excellent cost accounting and analytic skills and are attending a school with one of the best accounting programs in the region. He has asked you to replicate, lost information from the job cost sheet. As Jurassic Manufacturing uses cost-plus pricing to determine revenue on its custom orders, it is crucial that they can promptly recreate the information contained on the job cost sheet. Upon beginning the engagement, you requested job cost sheets from recent, previous jobs. Jurassic provided you with the completed job cost sheet from Job #1301, below:

The customer, Barney Company was billed $750 for the job. You were able to ascertain the following additional information: For the year 2024, budgeted annual MOH cost was $100,000, budgeted direct labor hour usage was 2,080 hours and budgeted direct labor cost was $200,000. Because Jurassic Manufacturing has no machines, it does not use machine hours to apply MOH. Fred was the only employee who worked on these jobs, #1301 and #1302. Jurassic uses cost-plus pricing and has a policy of maintaining a consistent markup percentage on all completed jobs. Below are the remains of job #1302's completed job cost sheet.

Required: a. Does Jurassic use an actual costing system or a normal costing system. How can this be determined? Why is the particular system chosen by Jurassic, important, given the nature of their business? b. What does Jurassic use as a cost driver to apply MOH cost? How can you determine this? What was Jurassic's budgeted MOH rate for the year. c. Assuming that both jobs were completed by one employee, Fred. What is Fred's hourly wage rate? How can this be ascertained? d. How much direct labor cost was charged to job #1302? e. How much MOH cost was applied to job #1302? f. What was the total cost of job #1302? g. What is Jurassic's markup percentage? How can this be ascertained? h. How much was the Bedrock Company billed for this job? i. What can Jurassic do to prevent this issue from recurring?

Answer: a. Jurassic must be using a normal costing system, since it recognized the cost of MOH in realtime as jobs are completed. As Jurassic produces custom items, normal costing allows them to determine the approximate MOH cost, immediately, allowing for price determination and prompt billing. b. Jurassic uses direct labor cost as its cost driver to determine applied MOH. c. Jurassic's MOH budgeted rate is determined by dividing budgeted MOH by the budgeted cost driver units. The problem states that machine hours are not used as a cost driver. $100,000 budgeted MOH/ $200,000 budgeted DL cost = 50% of DL cost MOH rate Based upon information presented in Job #1301's job cost sheet, it can be ascertained that direct labor cost must be the cost driver as $180 × 50% = MOH applied of $90. d. $20 per hour. e. Based upon information provided in Job #1301's cost sheet, direct labor cost of $180 divided by 9 hours = $20/hour. f. $200 g. $20/hour × 10 hours. h. $100 i. DL cost of $200 × MOH budgeted rate of 50% of DL$ j. $570 k. DM, $270 + DL, $200 (from e) + Applied MOH, $100 (from e) l. 50% m. Barney was billed $750 based on a total job cost (found on job #1301's job cost sheet) of $500. There are several acceptable ways of algebraically determining the markup percentage, including the following approach: Markup % = ((revenue - cost) / cost) (($750 - $500) / $500) = .50 or 50% n. $855 o. Cost of job, $570 (from f) × markup factor 1.50 p. Jurassic should implement a computerized accounting system to track costs. Data should be backed up regularly. Diff: 3 LO: 1, 2, 3, 4 Bloom: AP AACSB: Analytic, Communication AICPA: FC: Measurement, Analysis, and Interpretation; PC: Communication IMA: Cost Management, FSA, Reporting.

100

137) Companies that use normal costing, apply manufacturing overhead by using a cost driver. Typically, these cost drivers will either be machine hours, direct labor hours or direct labor cost. The selection of a particular cost driver should be based primarily on what consideration? Answer: There should be a strong correlation between the cost driver chosen and incurrence of overhead cost within that department. For example, capital-intensive departments that utilize machinery and robotics and have relatively few human employees, would most likely select "machine hours" as their chosen cost driver as there is a direct correlation between the incurrence of machine hours and overhead costs such as electricity to power the machinery. Alternatively, a labor-intensive department that has a lot of human workers and relatively few machines, would most likely opt to choose either direct labor hours or direct labor cost as its cost driver. An example of a labor-intensive department would be a hand-polishing department, with many workers polishing the products and very few machines present. Overhead costs would include rags, polishing compound etc. The more hours (or cost) of labor incurred, would normally result in more overhead cost for that department directly correlated to the hours worked by the laborers. Hence, there is a cause and effect relationship. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Economics. 138) "Normal Costing" and "Actual Costing" are two allowable costing systems in job costing. a. What is the primary difference between the two systems? b. Which approach is generally considered better for managerial decision-making and why? Answer: a. The primary difference between "Normal Costing" and "Actual Costing" is the treatment of overhead cost. Under both approaches, direct materials cost and direct labor costs will be the same and determined in real time. Under "Actual Costing," the manufacturing overhead cost component will not be determined until the end of the year, whereby, under "Normal Costing," manufacturing overhead will be applied throughout the year based upon estimates determined at the start of the year. b. Normal Costing" provides the following benefits over "Actual Costing": • Product and service costs can better be determined on a real-time basis during production as opposed to determining costs at the end of the year, under "Actual Costing." • Pricing and invoicing decisions are benefited by realizing product or service cost, immediately. • Allows for better control, enhancing managerial decision-making. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Economics, Cost Management. 101

139) There are three commonly used cost drivers to apply manufacturing overhead cost. A labor-intensive operation typically may use which two of these cost drivers? a. Name the two cost drivers that would be preferable for a labor-intensive operation. b. Briefly, explain why a labor-intensive operation would choose to select these cost drivers to apply manufacturing overhead cost? Answer: a. Typically, a labor-intensive operation would select either direct labor hours or direct labor cost as cost drivers to apply manufacturing overhead cost. b. There should be a correlation (cause-and-effect relationship) between the chosen cost driver and the incurrence of overhead cost. If an operation is labor-intensive, presumably the more labor that is used (measured in either hours or dollars) will correspondingly result in higher overhead cost incurred. Diff: 2 LO: 2 Bloom: C AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Economics, Cost Management. 140) Robotics is increasingly being implemented in both manufacturing and service operations. Of the three commonly used cost drivers to apply manufacturing overhead cost: a. Which one would be most appropriate in a highly automated manufacturing environment that employs very few human workers? b. Briefly, explain why this selection is the best choice? Answer: a. Machine hours b. Machine hours is the best choice as there is a correlation (cause-and-effect relationship) between machine hour usage and the incurrence of overhead cost. If an operation has few human workers, direct labor hours or direct labor cost would not be good choices for a cost driver as there is not a correlation between the incurrence of labor costs/hours and corresponding manufacturing overhead cost. Diff: 2 LO: 2 Bloom: C AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Economics, Cost Management.

102

141) Briefly explain why the account Manufacturing Overhead (MOH) Control, needs to be closed at the end of each period? Answer: The MOH Control account works the same way as a clearing account. It needs to be closed to zero at month-end/quarter-end/year-end, as this account itself doesn't appear on the financial statements. In moving overapplied MOH or underapplied MOH out of the Control account, we are "fixing" the amount of MOH costs in our products and undoing the effects of estimating/applying MOH in the first place. Diff: 2 LO: 3 Bloom: C AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Economics, Cost Management. 142) Briefly explain how and why a company such as Nike can use Data Analytics to improve its business operations? Answer: Nike is using RFID (radio-frequency identification) in almost all of its non-licensed apparel and footwear to improve its supply chain and gain visibility of its inventory, even after it has the inventory has left the warehouse or retail store. Being able to see which products have sold to consumers, gives the company a better idea of what's selling and what isn't selling, even in terms of style, color, and size. This is invaluable information for a manufacturer. With this view of its products, Nike can then make product-mix decisions that impact production priorities, in order to alter product supply, and best meet consumer demand. In the past, this data was sent periodically to Nike from retailers, so capturing it using RFI means saving valuable time. Diff: 2 LO: 4 Bloom: C AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation, Business Economics, Cost Management, Data Analytics. IMA: Business Application, Cost Management.

103

143) Chris is a supervisor at Crystal Clear Technologies, a manufacturer of custom LCD display panels. Chris's performance is tied to ensuring job profitability. As Job #4 nears completion, Chris notices that is has significant cost overruns. At the same time, Job #5 is on target to be profitable. Chris is therefore, considering moving costs from Job #4, which has cost overruns, to Job #5, so that both projects appear profitable. a. Briefly explain the implications if Chris does this? b. Why is this wrong? Answer: a. By inappropriately moving costs incurred by Job #4 to Job #5, Chris will obscure potential problems with pricing jobs, poor selection of clients, or worker inefficiencies, that may go unnoticed, only to happen again. b. While some students may state that this practice is a violation of Generally Accepted Accounting Principles (GAAP) related to costing, the most significant implication is a violation of ethical considerations. Diff: 2 LO: 4 Bloom: C AACSB: Communication, Ethics AICPA: FC: Measurement, Analysis, and Interpretation; PC: Ethical Conduct IMA: Business Application, Cost Management.

104

Cost Accounting, 1e (Farmer) Chapter 9 Activity-Based Costing 1) Some companies choose to have more detailed Manufacturing Overhead (MOH) allocations and then calculate a MOH rate for each of their departments. What is the correct formula to calculate a departmental rate? A) Total MOH costs in a department's cost pool × Total quantity of department's cost driver B) Total MOH costs in a department's cost pool/Total quantity of department's cost driver C) Total quantity of department's cost driver + Total MOH costs in a department's cost pool D) Total quantity of department's cost driver/Total MOH costs in a department's cost pool Answer: B Explanation: Choice B represents the correct formula used to calculate a departmental rate, making it the correct answer. Choices A, C, and D all contain the correct components but either have them in the wrong place or have multiplied or added the items when there should have been division. Diff: 1 LO: 1 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making 2) Both traditional and activity-based costing have certain features that may make them unique in comparison. Which of the following traits is most closely aligned with activity-based costing? A) It is used primarily for financial reporting for external users. B) It separates total MOH into smaller activity pools and uses related cost drivers. C) It uses a predetermined MOH rate along with one cost driver. D) Its purpose is to systematically allocate a company's Manufacturing Overhead (MOH) costs to each job. Answer: B Explanation: This question requires you to consider the differences between traditional job costing and activity-based costing. Choices A, C, and D all represent characteristics that could be attributed to traditional costing, and that makes them incorrect responses. Choice B represents a trait aligned with activity-based costing, and that makes it the correct selection. Diff: 1 LO: 1 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making

3) If a company uses traditional costing and only one cost driver, what would be the correct order with which costs are considered in calculating overall product cost? A) Manufacturing overhead applied with a cost driver + Direct Materials - Direct Labor B) Manufacturing overhead applied with a cost driver + Direct Materials + Direct Labor C) Total manufacturing overhead - Direct Materials - Direct Labor D) Total Manufacturing Overhead (MOH) + Direct Materials + Direct Labor Answer: B Explanation: This question requires you to consider the correct combination of costs to arrive at the overall cost of a product. In this question, it is specified that only one cost driver is used by the company. Choice B correctly notes that you must apply the cost driver to total MOH and then add both DM and DL to arrive at the correct total. Choice C and Choice D mistakenly use Total MOH without taking into account the application of a cost driver, and Choice C also subtracts DM and DL. Choice A is also incorrect as it subtracts DL despite accurately applying the cost driver to total MOH. Diff: 1 LO: 1 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making 4) In comparing a traditional costing systems with an activity-based costing system, which of the following would be considered a feature of a traditional cost system? A) Dividing a large cost pool into multiple and varied smaller cost pools B) Using a generic cost driver to allocate costs C) Using activities undertaken in the value chain to determine smaller cost pools D) Using relevant cost drivers to allocate costs Answer: B Explanation: This question requires you to consider the differences between traditional job costing system and activity-based costing system and to focus on the feature of a traditional costing system. Choices A, C, and D all represent advantages of using activity-based costing, so those responses are incorrect. Choice B represents a feature of using a traditional costing system and that makes it the correct selection. Diff: 1 LO: 1 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making

5) In a traditional simple costing system, a plant-wide cost pool accumulates factory-wide Manufacturing Overhead (MOH). What is the correct formula to calculate the plant-wide rate? A) Total MOH costs in a plant-wide cost pool × Total quantity of a single driver B) Total MOH costs in a plant-wide cost pool/Total quantity of a single driver C) Total quantity of a single driver + Total MOH costs in a plant-wide cost pool D) Total quantity of a single driver/Total MOH costs in a plant-wide cost pool Answer: B Explanation: Choice B represents the correct formula used to calculate the plant-wide rate, and that makes it the correct answer. Choices A, C, and D all contain the correct components but either have them in the wrong place or have multiplied or added items when there should have been division. Diff: 1 LO: 1 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making 6) Roger has just been hired as an accountant and is in the process of performing some cost accounting calculations. The factory where he works produces tennis balls and uses a plant-wide cost pool under their simple costing system. The factory's total Manufacturing Overhead (MOH) costs are budgeted for: rent for the factory, $72,000; factory utilities, $40,000; quality control salaries, $52,000; and janitorial salaries, $36,000 in addition to assembly line workers' wages of $246,000, tennis ball coating costs of $10,000, and tennis ball core costs of $5,000. What is the budgeted MOH rate using one plant-wide pool based on Direct Labor (DL) cost? A) $0.33 B) $0.81 C) $3.57 D) $4.35 Answer: B Explanation: This question requires you to calculate the budgeted MOH rate using the formula of total budgeted MOH costs divided by the total budgeted quantity of the one cost driver. The first step includes adding together all of the applicable MOH costs. This calculation is ($72,000 + $40,000 + $52,000 + $36,000)/$246,000 = $200,000/$246,000 = $0.81 (Choice B). Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

7) John is currently working on assembling some cost accounting numbers for the upcoming year for a client who produces disposable utensils. The factory has the following costs: Factory Insurance, $55,000; Factory Supervisor's Salary, $200,000; Direct Materials (Plastic), $30,000; Cardboard for Packaging, $12,000; Depreciation on Factory Equipment, $120,000; and Assembly Line Worker Wages, $36,000. The Direct Labor (DL) costs consisted of 10,000 DL hours and 4,000 machine hours. Management has decided to proceed using a simple costing system resulting in a plant-wide cost pool. What is the budgeted MOH rate using one plant-wide pool based on machine hours? A) $0.01 B) $10.42 C) $37.50 D) $93.75 Answer: D Explanation: This question requires you to calculate the budgeted MOH rate using the formula of total budgeted MOH costs divided by the total budgeted quantity of one cost driver. This company has chosen to use machine hours as their cost driver. This calculation is ($55,000 + $200,000 + $120,000)/4,000 machine hours = $375,000/4,000 machine hours = $93.75 (Choice D). Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making 8) Monarch Inc. is a company that creates and distributes butterfly-themed home décor. You are attempting to calculate total product costs for Monarch by using traditional costing. They have the following costs: Direct Materials (DM) of Resin, $12,000; DM of Metal Backing, $9,000; Paint, $6,000; DM of Adhesive, $10,000; Cardboard for Packaging, $3,000; Assembly Line Wages, $55,750; Marketing, $36,000; and Sales Commissions, $60,000. Their Manufacturing Overhead (MOH) will be 85% of their Direct Labor (DL) cost. What are their total product costs? A) $143,137.50 B) $151,500.00 C) $209,737.50 D) $320,737.50 Answer: A Explanation: This question requires you to calculate total product costs under traditional costing which entails ensuring that MOH uses the proper input. $143,137.50 (Choice A) correctly added together the DM of ($12,000 + $9,000 + $6,000 + $10,000 + $3,000) $40,000 plus the DL of $55,750 plus the MOH of $47,387.50 ($55,750 × 0.85). Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making 4

9) Shinebright, Inc., a company that produces sunscreen has asked John to calculate their total product costs. Shinebright currently uses traditional costing and has reported the following costs: Janitorial Wages, $32,300; Factory Workers' Wages, $60,000; Machine Operators' Salaries, $34,616; Chemical Compounds, $51,000; Plastic Containers, $11,000; and their Manufacturing Overhead (MOH) will be 84% of their Direct Labor (DL) costs. What are their total product costs? A) $218,616.00 B) $236,093.44 C) $295,525.44 D) $315,832.00 Answer: B Explanation: This question requires you to calculate total product costs under traditional costing which entails ensuring that MOH uses the proper input. $236,093.44 (Choice B) correctly added together the DM of $62,000 ($51,000 + $11,000) plus the DL of $94,616.00 (would not include janitorial wages) plus the MOH of $79,477.44 ($94,616.00 × 0.84). Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making 10) Artie, Inc. manufactures soy candles in the Southeast region of the United States. They have reported the following costs for their rose-scented line of candles: Glass Containers, $28,600; Cotton Wicks, $20,000; Candle Assembly Wages, $46,250; Shipping, $26,000; Package Assembly Wages, $6,000; and Candle Lids, $5,962. Their Manufacturing Overhead (MOH) will be 90% of their Direct Labor (DL) costs. You are reviewing the work of a fellow accountant and confirming calculations for their traditional costing numbers. What are the total product costs for the rose-scented line of candles? A) $132,812.00 B) $153,837.00 C) $181,917.80 D) $211,062.00 Answer: B Explanation: This question requires you to calculate total product costs under traditional costing which entails ensuring that MOH uses the proper input. $153,837.00 (Choice B) correctly added together the Direct Materials (DM) of ($28,600 + $20,000 + $5,962) $54,562.00 plus the DL of ($46,250 + $6,000) $52,250.00 plus the MOH of $47,025.00 ($52,250 × 0.90). Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

11) Your client, a factory that produces chips and salsa, uses traditional costing, and you are attempting to calculate total cost per unit. They have the following costs (same for each item): Direct Materials (DM), $56,280; Direct Labor (DL), $63,460; and their Manufacturing Overhead (MOH) will be 82% of their DL cost. They produced 33,470 units of glass salsa jars and 42,000 packets of chips during the period. What is their total cost per unit for salsa? A) $4.09 B) $4.36 C) $5.13 D) $5.47 Answer: C Explanation: This question requires you to calculate total cost per unit for salsa under traditional costing which entails first calculating total product costs correctly. $5.13 (Choice C) correctly added together the DM of $56,280, DL of $63,460, and MOH of $52,037.20 ($63,460 × 0.82) for a total product cost of $171,777.20. Then, this number is divided by the units of salsa (33,470) to arrive at the correct total cost per unit of salsa. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making 12) Susan is currently working on assembling some numbers for her client's cost accounting practices for the current year. The client is a factory that produces condiments including ketchup and mustard. They use traditional costing, and Susan would like to calculate total cost per unit. They have the following costs (same for both condiments): Direct Materials (DM), $87,444; Direct Labor (DL), $96,782; and their Manufacturing Overhead (MOH) will be 88% of their DL cost. They produced 42,760 units of ketchup and 53,990 units of mustard during the period. What is their total cost per unit for mustard? A) $4.99 B) $5.20 C) $6.30 D) $6.57 Answer: A Explanation: This question requires you to calculate total cost per unit for mustard under traditional costing which entails first calculating total product costs correctly. $4.99 (Choice A) correctly added together the DM of $87,444, DL of $96,782, and MOH of $85,168.16 ($96,782 × 0.88) for a total product cost of $269,394.16. Then, this number is divided by the total units of mustard (53,990) to arrive at the correct total cost per unit of mustard. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

13) Tasty Sauce, Inc. is currently comparing their current use of traditional costing with what results would look like if they had instead implemented Activity-Based Costing (ABC). This company creates two products: regular soy sauce and sodium-free soy sauce. They will be producing 125,000 bottles of regular soy sauce and 108,000 bottles of sodium-free soy sauce. Under traditional costing, Manufacturing Overhead (MOH) is allocated at $43,760.80 to regular soy sauce and $16,482.20 to sodium-free soy sauce. In ABC, MOH is allocated at $39,802.62 to regular soy sauce and $20,440.38 to sodium-free soy sauce. Which of the following is true? A) Unit cost will be higher for regular soy sauce under ABC than traditional costing. B) Unit cost will be higher for regular soy sauce under traditional costing than ABC. C) Unit cost will be higher for sodium-free soy sauce under traditional costing than ABC. D) Unit cost will be lower for sodium-free sauce under ABC than traditional costing. Answer: B Explanation: This question requires you to consider how allocated MOH will impact other items under both traditional costing and ABC. Choice B is correct because after calculating the per unit costs for all items, traditional costing per unit cost would be higher for regular soy sauce than under ABC. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making 14) A company is currently using traditional costing and has arrived at the following unit costs for their two products: Caramel, $0.88 per unit; and Hot Fudge, $0.77 per unit. If they had instead used Activity-Based Costing (ABC), then it would have resulted in the following unit costs: Caramel, $0.83 per unit; and Hot Fudge, $0.82 per unit. Which of the following statements is correct? A) The higher unit cost of caramel under traditional costing will lead to a higher profit compared to ABC. B) The lower unit cost of hot fudge under traditional costing will lead to a lower profit compared to ABC. C) The profit of caramel will be understated under traditional costing compared to ABC. D) The profit of hot fudge will be overstated under ABC compared to traditional costing. Answer: C Explanation: This question requires you to consider how per-unit cost will impact profit under each type of product costing. Choice C is accurate because traditional costing will lead to a higher unit cost for caramel and therefore lower or understated profit for caramel. Diff: 1 LO: 1 Bloom: C AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making

15) Sharon has decided to try and calculate her Manufacturing Overhead (MOH) allocation with a departmental rate rather than using a plant-wide rate. She works for Seashell, Inc., a factory that produces seashell-themed keychains. She is looking at the costs derived from the production department and the department's total budgeted costs include: Factory Utilities, $66,000; Factory Supervisor Salaries, $100,000; Assembly Line Worker Wages, $284,000; Maintenance Wages, $32,000; Seashells, $15,000; Metal for Keychains, $7,000; and Factory Depreciation, $54,000. What is the budgeted departmental MOH rate based on Direct Labor (DL) cost? A) $0.21 B) $0.89 C) $4.67 D) $11.45 Answer: B Explanation: This question requires that you calculate the budgeted MOH rate using the formula of total MOH costs in department's cost pool divided by the total quantity of department's cost driver. This calculation is ($66,000 + $100,000 + $32,000 + $54,000)/$284,000 = $252,000/$284,000 = $0.89 (Choice B). Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making 16) Rose, Inc., a factory that produces two different fragrances, rose and lilac, is considering switching their suppliers, and you are attempting to calculate total Manufacturing Overhead (MOH) to get an accurate picture of their budget. Under their traditional costing system, they had the following costs: Rose Fragrance: Glass Bottles, $78,000; Fragrance, $28,540; Bottler Wages, $76,000; and Assembly Line Wages, $26,578; and Lilac Fragrance: Glass Bottles, $118,648; Fragrance, $33,620; Bottler Wages, $84,350; and Assembly Line Wages, $33,668. The manufacturing overhead for each fragrance will be 86% of their Direct Labor (DL) costs. They produced 28,400 glass bottles of rose fragrance and 43,200 glass bottles of lilac fragrance during the period. What is their total allocated MOH for the lilac fragrance? A) $88,217.08 B) $101,495.48 C) $118,018.00 D) $130,950.48 Answer: B Explanation: This question requires you to calculate the allocated MOH for the lilac fragrance. Before solving for MOH, identify what costs would be attributed to Direct Labor. Further, ensure that only the costs of the lilac fragrance are taken into consideration. $101,495.48 (Choice B) correctly takes 86% of DL ($84,350 + $33,668) to calculate MOH ($118,018 × 0.86). Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making 8

17) During the current year, Mary is compiling figures for a cookie factory's cost accounting, which is currently utilizing traditional costing. The factory produces two kinds of cookies: chocolate chip and oatmeal raisin. Mary would like to calculate the total cost per unit and notes the following costs for chocolate chip: Direct Materials (DM), $68,300; and Direct Labor (DL), $82,450; and the following costs for oatmeal raisin: Direct Materials, $57,890; and Direct Labor, $71,708. The Manufacturing Overhead (MOH) for each cookie will be 85% of their direct labor cost. They created 126,756 units of chocolate chip and 104,222 units of oatmeal raisin during the period. What is the factory's total cost per unit for chocolate chip? A) $1.64 B) $1.74 C) $2.00 D) $2.10 Answer: B Explanation: First, calculate total product costs correctly as this question requires calculation of the total cost per unit under traditional costing. $1.74 (Choice B) correctly added together the DM of $68,300 plus the DL of $82,450 plus the MOH of $70,082.50 ($82,450 × 0.85) for a total product cost of $220,832.50. Then, divide this number by the units of chocolate chip cookies (126,756) to arrive at the correct total cost per unit of chocolate chip. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making 18) Bard Inc. is currently comparing a potential implementation of Activity-Based Costing (ABC) with their current use of traditional costing and comparing the results. Bard creates two products: Candy Bars, 60,000 units; and lollipops, 82,000 units. Under ABC, Manufacturing Overhead (MOH) is allocated at $43,877.44 to candy bars and $32,781.90 to lollipops. Under traditional costing, MOH is allocated at $46,707.87 to candy bars and $29,915.47 to lollipops. Which of the following statements is correct? A) Unit cost will be higher for lollipops under traditional costing than ABC. B) Unit cost will be lower for candy bars under ABC than traditional costing. C) Unit cost will be lower for candy bars under traditional costing than ABC. D) Unit cost will be lower for lollipops under ABC than traditional costing. Answer: B Explanation: This question requires consideration of how allocated MOH will impact other items under both traditional costing and ABC. Choice B is accurate because an understated unit cost would lead to a higher or overstated profit. Diff: 1 LO: 1 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making

19) An organization currently employs traditional costing for its cost accounting functions. They have computed the following unit costs for two of their current products: Salt, $0.33 per unit; and Pepper, $0.40 per unit. If they were instead using Activity-Based Costing (ABC), then it would have resulted in the following unit costs: Salt, $0.36 per unit; and Pepper, $0.37 per unit. Which of the following statements is correct? A) As compared to ABC, the profit of pepper will be overstated under traditional costing. B) As compared to ABC, the profit of salt will be overstated under traditional costing. C) As compared to traditional costing, the profit of pepper will be understated under ABC. D) As compared to traditional costing, the profit of salt will be overstated under ABC. Answer: B Explanation: This question requires you to consider how per-unit cost will impact profit under each type of product costing. Choice B is accurate because traditional costing will lead to a lower unit cost and therefore higher or overstated profit for salt. Diff: 1 LO: 1 Bloom: C AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making 20) Susan has gathered the following data about the tire factory she manages: the department's total costs are budgeted as follows: Quality Control- $122,000, Property Tax- $18,000, Direct Wages and Salaries, $506,300; Rubber, $87,482; Fabrics, $62,500; Factory Supervisor Salaries, $166,200; and Factory Depreciation, $102,000 all of which have been derived from the production department. Rather than using a plant-wide rate, she will be calculating the Manufacturing Overhead (MOH) allocation with a departmental rate. What is the budgeted MOH rate using a departmental rate based on DL cost? A) $0.26 B) $0.81 C) $3.84 D) $4.67 Answer: B Explanation: This question requires you to calculate the budgeted MOH rate using the formula for total MOH costs in department's cost pool divided by the total quantity of that department's cost driver. This calculation is ($122,000 + $18,000 + $166,200 + $102,000)/$506,300 = $408,200/$506,300 = $0.81 (Choice B). Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

21) Activity-Based Costing (ABC) requires that its users separate costs by the level and then by the type of activity. For a manufacturing business, this would entail separating activity costs into Manufacturing Overhead (MOH) and nonmanufacturing period costs. Which of the following would be considered MOH at the product/process-level? A) Design costs B) Factory utilities C) Marketing for a new product D) Research and development Answer: B Explanation: This question requires differentiation between nonmanufacturing period costs and MOH for a manufacturing business using ABC. Factory utilities (Choice B) is the correct choice as it is the only option given that would be considered MOH. Design costs (Choice A), marketing for a new product (Choice C), and research and development (Choice D) would all be considered nonmanufacturing period costs at the product/process-level. Diff: 1 LO: 2 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making 22) When using Activity-Based Costing (ABC) a manufacturing business will have to differentiate between Manufacturing Overhead (MOH) and nonmanufacturing period costs. Which of the following would be considered a nonmanufacturing period cost at the facilitylevel? A) Depreciation on factory assets B) Factory rent C) Factory utilities D) Management salaries Answer: D Explanation: This question requires differentiation between MOH and nonmanufacturing period costs. Management salaries (Choice D) is the only choice of the four given that would be considered a nonmanufacturing period cost. Factory rent (Choice B), factory utilities (Choice C), and depreciation on factory assets (Choice A) would all be classified as MOH. Diff: 1 LO: 2 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making

23) Two staff accountants, Michael and Anthony, are having a lively discussion about various costing procedures that are currently in place at the factory where they are employed. The production department has asked the accountants to determine the most effective way in which they can allocate their department costs. The production department has a total Manufacturing Overhead (MOH) cost of $3,660,500. Michael and Anthony have gathered the following cost driver information: Budgeted machine setups Budgeted pounds of indirect material

50,460 setups ($1,000,000) 124,800 pounds ($2,660,500)

A recent production run used 400 machine setups and 2,380 pounds of indirect material. How much of the department's MOH cost will be allocated for the most recent run for the batch-level activity? (If required, round calculations to two decimal places.) A) $7,928.00 B) $29,016.00 C) $1,000,000.00 D) $3,660,500.00 Answer: A Explanation: This question requires determination of an activity-based rate while also making sure that the batch-level cost driver is selected. In this case, machine setups represent a batchlevel cost, and the activity-based rate is calculated as follows: $1,000,000/50,460 budgeted setups = $19.82 per setup. To calculate the amount of costs allocated, multiply the activity-based rate against the number of setups used in this recent run: $19.82 per setup times 400 setups = $7,928.00 (Choice A). Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

24) Two staff accountants, Michael and Anthony, are having a lively discussion about various costing procedures that are currently in place at the factory where they are employed. The production department has asked the accountants to determine the most effective way in which they can allocate their department costs. The production department has a total Manufacturing Overhead (MOH) cost of $3,660,500. Michael and Anthony have gathered the following cost driver information: Budgeted machine setups Budgeted pounds of indirect material

50,460 setups ($1,000,000) 124,800 pounds ($2,660,500)

A recent production run used 400 machine setups and 2,380 pounds of indirect material. How much of the department's MOH cost will be allocated for the most recent run for the unit-level activity? (If required, round calculations to two decimal places.) A) $49,718.20 B) $50,741.60 C) $2,660,500.00 D) $3,660,500.00 Answer: B Explanation: This question requires the determination of an activity-based rate while also making sure that the unit-level cost driver is selected. In this case, indirect materials represent a unit-level cost, and the activity-based rate is calculated as follows: $2,660,500/124,800 budgeted pounds = $21.32 per pound. To calculate the amount of MOH costs allocated, multiply the activity-based rate against the number of pounds used in this recent run: $21.32 per pound times 2,380 pounds = $50,741.60 (Choice B). Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

25) Susan is the controller for Simply Devine Inc., a company that produces ice cream and specializes in dairy-free versions of the Cookie Dough and Rocky Road flavors. Susan has recommended that Simply Devine implement Activity-Based Costing (ABC) as they gear up to produce the following number of pints in the coming year: Cookie Dough, 98,700 pints; and Rocky Road, 88,430 pints. Susan believes that a traditional costing system has not been the most effective manner to allocate their Manufacturing Overhead (MOH) costs. She has compiled the following data about the usage of their company resources:

Item Cookie Dough Rocky Road

Pounds of Ingredients Moved 5,000 3,900

Cleaning/ Maintenance Hours # of Inspections 3,850 6,100 2,570 3,600

Supervisor Hours 2,005 2,335

Their MOH is comprised of the following costs: Moving and Sorting Ingredients Cleaning and Maintenance Quality Control Supervisor Wages

$76,500 (8,900 pounds) $48,200 (6,420 hours) $26,550 (9,700 inspections) $107,430 (4,340 hours)

What is the ABC-based total MOH cost allocated per unit for Cookie Dough ice cream? (If required, round calculations to two decimal places.) A) $0.74 B) $1.40 C) $1.41 D) $1.56 Answer: B Explanation: This question requires calculation of the activity rate for each of the MOH activities: Moving and Sorting Ingredients, $76,500/8,900 pounds = $8.60/pound; Cleaning/Maintenance Hours, $48,200/6,420 hours = $7.51/hour; Quality Control Inspections, $26,550/9,700 inspections = $2.74/inspection; and Supervisor Wages, $107,430/4,340 hours = $24.75 per hour. Next, calculate the total overall MOH cost for Cookie Dough ice cream pints: ($8.60 × 5,000 pounds) + ($7.51 × 3,850 hours) + ($2.74 × 6,100 inspections) + ($24.75 × 2,005 hours) = $43,000.00 + $28,913.50 + $16,714.00 + $49,623.75 = $138,251.25. Lastly, divide the total Cookie Dough MOH cost by the number of Cookie Dough pints to be produced: $138,251.25/98,700 = $1.40 per pint (Choice B). Diff: 3 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

26) Susan is the controller for Simply Devine Inc., a company that produces ice cream and specializes in dairy-free versions of the Cookie Dough and Rocky Road flavors. Susan has recommended that Simply implement Activity-Based Costing (ABC) as they gear up to produce the following number of pints in the coming year: Cookie Dough, 98,700 pints; and Rocky Road, 88,430 pints. Susan believes that a traditional costing system has not been the most effective manner to allocate their Manufacturing Overhead (MOH) costs. She has compiled the following data about the usage of their company resources:

Pounds of Item Ingredients Moved Cookie Dough 5,000 Rocky Road 3,900

Cleaning/ Maintenance # of Hours Inspections 3,850 6,100 2,570 3,600

Supervisor Hours 2,005 2,335

Their MOH is comprised of the following costs: Moving and Sorting Ingredients Cleaning and Maintenance Quality Control Supervisor Wages

$76,500 (8,900 pounds) $48,200 (6,420 hours) $26,550 (9,700 inspections) $107,430 (4,340 hours)

What is the ABC-based total MOH cost allocated per unit for Rocky Road ice cream? (If required, round calculations to two decimal places.) A) $0.64 B) $1.22 C) $1.36 D) $1.37 Answer: C Explanation: This question requires calculation of the activity rate for each of the MOH activities: Moving and Sorting Ingredients, $76,500/8,900 pounds = $8.60/pound; Cleaning/Maintenance Hours, $48,200/6,420 hours = $7.51/hour; Quality Control Inspections, $26,550/9,700 inspections = $2.74/inspection; and Supervisor Wages, $107,430/4,340 hours = $24.75 per hour. Next, calculate the total overall MOH cost for Rocky Road ice cream pints: ($8.60 × 3,900 pounds) + ($7.51 × 2,570 hours) + ($2.74 × 3,600 inspections) + ($24.75 × 2,335 hours) = $33,540.00 + $19,300.70 + $9,864.00 + $57,791.25 = $120,495.95. Lastly, divide the total Rocky Road MOH cost by the number of Rocky Road pints produced: $120,495.95/88,430 = $1.36 per pint (Choice C). Diff: 3 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

27) Fescue, Inc. is a company that produces grass seed that they sell to regional businesses. They are in the process of examining their facility-level costs. Which of the following lists is made up of costs that would be classified as facility-level? A) Insurance, Factory Depreciation, Office Manager's Salary B) Insurance, Rent, Supervisor Salary C) Rent, Plant Manager's Salary, Income Taxes D) Rent, Plant Manager's Salary, Property Taxes Answer: D Explanation: This question requires you to evaluate which costs would be considered facilitylevel. Costs in this category typically include: Factory Depreciation, Factory Rent, Plant Manager's Salary, Property Taxes, and Property Insurance. Choice D is the only choice of the four that only includes facility-level costs. Choices A, B, and C each have two facility-level costs, but supervisor salary, income taxes, and office manager's salary would not be included here. Diff: 1 LO: 2 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making 28) Daisy Company is a mid-sized organization that creates flower-themed home décor items that are sold to both large local and regional stores. They would like to become more organized and are dividing and segmenting their costs into different hierarchies. Which of the following would be considered something other than a product/process-level cost? A) The depreciation expense for their cutting machine that is used on the assembly-line B) The expense incurred to acquire personal protective equipment for employees C) The salary for John, the supervisor D) The salary for Susan, the plant manager Answer: D Explanation: This question requires you to evaluate which costs would be considered product/process-level. Costs in this category typically include: equipment depreciation, equipment maintenance, supervisor salary, and workers' personal protective equipment. Choice D is the only choice of the four that is not a product/process-level cost and would be assigned to a different part of the hierarchy. Choices A, B, and C each contain a cost that would be categorized as product/process-level. Diff: 1 LO: 2 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making

29) Alice is a new cost accountant working at a local factory in her hometown. She has been given the task of ensuring that costs for the company have been put into the correct cost hierarchies. She is currently evaluating a list and searching for batch-level costs. Which of the following is comprised of costs that would be included in her list of batch-level costs? A) Cleaning/Maintenance, Machine Set-up, Movement of Materials B) Indirect Materials, Supervisor Salary, Direct Labor C) Movement of Materials, Cleaning/Maintenance, Equipment Maintenance D) Property tax, Insurance, Machine Set-up Answer: A Explanation: This question requires you to evaluate which costs would be considered batchlevel. Costs in this category typically include: movement of materials, machine set-up, and cleaning/maintenance. Choice A is the only choice of the four that only includes batch-level costs. Choices B, C, and D each contain one or two batch-level costs, but property tax, insurance, supervisory salary, indirect materials, direct labor, and equipment maintenance would not be included here. Diff: 1 LO: 2 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making 30) John is evaluating costs incurred at the factory where he works and is thinking about which hierarchies would apply to certain costs. He has just started to think about unit-level costs. Which of the following is false as it pertains to unit-level costs? A) Direct Labor (DL) costs are an example of unit-level costs. B) Direct Materials (DM) costs are an example of unit-level costs. C) Most Manufacturing Overhead (MOH) costs are unit-level costs. D) Unit-level costs increase in total with each additional unit of a product made. Answer: C Explanation: Choices A, B, and D all present information that is true as it pertains to unit-level costs. Choice C is the correct answer because it indicates that most MOH costs are unit-level costs when it is actually true that most MOH costs are not unit-level costs. Diff: 1 LO: 2 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making

31) A cost hierarchy is used by businesses and is divided into four layers. Each layer has various costs assigned to it and is given a rationale for its use. Which of the following best represents the rationale for product/process-level costs? A) Costs enable an entire product line or individual type of service delivery B) Costs enable the overall manufacturing process/delivery of services effort C) Costs enable the production of each batch D) Costs enable the production of each unit Answer: A Explanation: Choice A represents the correct rationale for product/process-level costs, making it the correct answer. Choice B represents the rationale for facility-level costs, Choice C represents the rationale for batch-level costs, and Choice D represents the rationale for unit-level costs. Diff: 2 LO: 2 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making 32) Imagine that you are looking at the costs for a restaurant's activities. Which of the following activities would be classified as Direct Labor (DL)? A) Cleaning and maintenance B) Moving and sorting ingredients C) Paying a chef's salary D) Quality control Answer: C Explanation: This question requires differentiation between costs that could be considered Manufacturing Overhead (MOH), DL, or Direct Materials (DM). Choices A, B, and D are all costs that would be classified as MOH. Choice C is the only activity listed that would be classified as Direct Labor and not MOH, so that is the correct choice. Diff: 1 LO: 3 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making

33) Premium Pizza, Inc. is in the process of documenting all their costs using Activity-Based Costing (ABC). Premium specializes in unique sauces, and they have assigned the following Manufacturing Overhead (MOH) costs to their key activities: Moving and Sorting (150 pounds moved), $32,000; Quality Control (800 inspections completed), $22,400; and Cleaning/Maintenance (2,050 cleaning/maintenance hours) $16,820. Activity and Cost Driver Move and sort ingredients (# of pounds moved) Quality control (# of inspections) Cleaning and maintenance (# of hours)

Red Sauce

White Sauce

90 575 1,375

60 225 675

They bottled a total of 440 red sauce units and 336 white sauce units during the year. How much of the quality control MOH would be allocated to red sauce units? A) $10,917.50 B) $16,100.00 C) $19,199.70 D) $26,217.50 Answer: B Explanation: First, calculate an activity-based rate for the activity needed: quality control. Quality control: $22,400/800 inspections = $28.00 per inspection. Lastly, allocate the costs to the red sauce units based on that activity's level. Quality control: $28.00 × 575 inspections = $16,100.00 (Choice B). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

34) Premium Pizza, Inc. is in the process of documenting all their costs using Activity-Based Costing (ABC). Premium specializes in unique sauces, and they have assigned the following Manufacturing Overhead (MOH) costs to their key activities: Moving and sorting (150 pounds moved), $32,000; quality control (800 inspections completed), $22,400; and Cleaning and Maintenance (2,050 cleaning/maintenance hours), $16,820. Activity and Cost Driver Move and sort ingredients (# of pounds) Quality control (# of inspections) Cleaning and maintenance (# of hours)

Red Sauce 90 575 1,375

White Sauce 60 225 675

How much of the Cleaning and Maintenance MOH would be allocated to the white sauce units? (If required, round calculations to two decimal places.) A) $5,535.00 B) $6,300.00 C) $12,799.80 D) $26,217.25 Answer: A Explanation: First, calculate an activity-based rate for the activity needed: cleaning and maintenance. Cleaning and Maintenance: $16,820/2,050 hours = $8.20 per hour. Lastly, allocate the costs to the white sauce units based upon that activity's level. Cleaning and Maintenance: $8.20 × 675 hours = $5,535.00 (Choice A). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

35) Beacon Hill, Corp. manufactures balloons that it then packages and sells throughout the country. Beacon Hill would like to have a better understanding of their overall budgets, and they have decided to implement the use of Activity-Based Costing (ABC). They have decided upon four unique key activities that they would like to assign activity-based rates to the following Manufacturing Overhead (MOH) costs: quality Inspection, $32,400 (2,400 inspection hours); maintenance, $16,858 (2,000 maintenance hours); moving and sorting, $12,444 (662 pounds of materials); and factory supervisor wages, $58,784 (4,788 supervisor hours). Beacon Hill will be allocating MOH to two different products: red balloons and blue balloons. Each balloon used the following resources: Red balloons: 1,400 inspection hours, 1,450 maintenance hours, 412 pounds of materials, and 2,448 supervisor hours Blue balloons: 1,000 inspection hours, 550 maintenance hours, 250 pounds of materials, and 2,340 supervisor hours How much of the Quality Inspection MOH will be allocated to the red balloons? A) $23,142.86 B) $32,400.00 C) $13,500.00 D) $18,900.00 Answer: D Explanation: First, calculate an activity-based rate for the quality inspection activity. Divide the quality inspection cost of $32,400 by the total quantity of the activity's cost driver of 2,400 for an activity-based rate of $13.50 per hour. The red balloons will have $13.50 per hour times 1,400 inspection hours for a total allocated MOH of $18,900 (Choice D). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

36) Beacon Hill, Corp. manufactures balloons that it then packages and sells throughout the country. Beacon Hill would like to have a better understanding of their overall budgets, and they have decided to implement the use of Activity-Based Costing (ABC). They have decided upon four unique key activities which they would like to assign activity-based rates to the following Manufacturing Overhead (MOH) costs: quality inspection, $32,400 (2,400 inspection hours); maintenance, $16,858 (2,000 maintenance hours); moving and sorting, $12,444 (662 pounds of materials); and factory supervisor wages, $58,784 (4,788 supervisor hours). Beacon Hill will be allocating MOH to two different products: red balloons and blue balloons. Each balloon used the following resources: Red balloons: 1,400 inspection hours, 1,450 maintenance hours, 412 pounds of materials, and 2,448 supervisor hours Blue balloons: 1,000 inspection hours, 550 maintenance hours, 250 pounds of materials, 2,340 supervisor hours How much of the Moving and Sorting MOH will be allocated to the blue balloons? (Do not round intermediate calculation.) A) $12,440.00 B) $7,746.60 C) $4,699.40 D) $10,340.00 Answer: C Explanation: First, calculate an activity-based rate for the moving and sorting activity. Divide the moving and sorting cost of $12,444 by the total quantity of the activity's cost driver of 662 for an activity-based rate of $18.80 per pound. The blue balloons will have $18.80 per pound times 250 pounds of materials for a total allocated MOH of $4,699.40 (Choice C). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

37) Sarah is an accountant for Flowy, Inc., a small factory that manufactures disposable hospital gowns and slippers. Previously, Flowy had been utilizing a traditional costing system to account for their budgeted Manufacturing Overhead (MOH) costs. After a few years, Sarah recommended that they opt for Activity-Based Costing (ABC) as that would afford them the opportunity to better account for their costs. She has determined that Flowy had three key activities to use for MOH budgeted costs: Materials sorting, garment inspection, and materials management wages. She has collected the following data: Materials sorting: $37,888 (3,678 sorting hours) Garment inspection: $55,986 (4,770 inspection hours) Materials management wages: $18,900 (13,000 management hours) If gowns used 2,000 sorting hours, then what amount of material sorting MOH costs will be allocated to slippers? (Do not round intermediate calculation.) A) $13,328.32 B) $17,285.50 C) $20,600.00 D) $37,888.00 Answer: B Explanation: First, calculate an activity-based rate for the materials sorting activity. Then, divide the materials sorting cost of $37,888 by the total quantity of the activity's cost driver of 3,678 for an activity-based rate of $10.30 per hour. The slippers will have $10.30 per hour times 1,678 sorting hours (3,678 sorting hours minus 2,000 used by gowns) for a total allocated MOH of $17,285.50 (Choice B). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

38) Sarah is an accountant for Flowy, Inc., a small factory that manufactures disposable hospital gowns and slippers. Previously, Flowy had been utilizing a traditional costing system to account for their budgeted Manufacturing Overhead (MOH) costs. After a few years, Sarah recommended that they opt for Activity-Based Costing (ABC) as it would afford them the opportunity to better account for their costs. She determined that Flowy had three key activities to use for MOH budgeted costs: Material sorting, garment inspection, and materials management wages. She has collected the following data: Material sorting: $37,888 (3,678 sorting hours) Garment Inspection: $55,986 (4,770 inspection hours) Materials Management wages: $18,900 (13,000 management hours) If slippers used 2,862 inspection hours, what amount of the garment inspection MOH costs will be allocated to the gowns? (Do not round intermediate calculation.) A) $22,394.40 B) $29,043.31 C) $33,599.88 D) $55,986.00 Answer: A Explanation: First, calculate an activity-based rate for the garment inspection activity. Then, divide the garment inspection cost of $55,986 by the total quantity of the activity's cost driver of 4,770 for an activity-based rate of $11.74 per hour. The gowns will have $11.74 per hour times 1,908 hours (4,770 inspection hours minus 2,862 inspection hours used by slippers) for a total allocated MOH of $22,394.40 (Choice A). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

39) Stevie has been allocating Manufacturing Overhead (MOH) costs to her products using a single plant-wide rate of $14.00 per Direct Labor (DL) hour. A recent job required 347 DL hours, 42 production runs, 25 quality inspections, and 20 factory supervisor hours. Based on the increased activity, the accountants are suggesting a transition to Activity-Based Costing (ABC) and have suggested the following rates: Materials Handling: $9.75 per direct labor hour Production Setup: $18.50 per production run Quality Inspections: $6.00 per inspection Factory Supervisor: $12.30 per supervisor hour Assuming that Stevie makes the switch to ABC, what are the total MOH costs allocated to the most recent production run? A) $1,173.00 B) $1,388.00 C) $3,383.25 D) $4,556.25 Answer: D Explanation: Calculate MOH costs based on the ABC method: ($9.75 × 347 DL hours) + ($18.50 × 42 production runs) + ($6.00 × 25 inspections) + ($12.30 × 20 supervisor hours) = $3,383.25 + $777.00 + $150.00 + $246.00 = $4,556.25 (Choice D). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

40) Adopting Activity-Based Costing (ABC) involves four steps. Which of the following contains the four steps in the correct order? A) Calculate cost driver rates and assign Manufacturing Overhead (MOH) to products, identify direct costs, identify activities and cost drivers for MOH, and record MOH costs B) Identify activities and cost drivers for MOH, identify direct costs, calculate cost driver rates and assign MOH to products, and record MOH costs C) Identify direct costs, identify activities and cost drivers for MOH, calculate cost driver rates and assign MOH to products, and record MOH costs D) Record MOH costs, identify direct costs, identify activities and cost drivers for MOH, and calculate cost driver rates and assign MOH to products Answer: C Explanation: The correct order of the four steps is Step 1) Identify direct costs, 2) Identify activities and cost drivers for MOH, 3) Calculate cost driver rates and assign MOH to products, and 4) Record MOH costs. Choice C is the only choice out of the four lists that presents all the correct steps in the correct order. Diff: 1 LO: 3 Bloom: C AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making 41) The Manufacturing Overhead (MOH) T-account for companies using Activity-Based Costing (ABC) will typically include which of the following items on the credit side? A) Actual cost incurred for factory insurance B) Actual cost incurred for indirect labor C) Actual cost incurred for workers' safety equipment D) Budgeted MOH cost Answer: D Explanation: In the MOH T-account for a company using ABC, the debit side will include actual MOH incurred items that would include factory insurance (Choice A), indirect labor (Choice B), and safety equipment for workers (Choice C). Budgeted MOH cost (Choice D) will be located on the credit side of the T-account where applied MOH is located. Diff: 1 LO: 3 Bloom: C AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making

42) In calculating the activity-based rate (cost driver rate), which of the following formulas is correct? A) Total cost in activity cost pool × Total quantity of activity's cost driver B) Total cost in activity cost pool/Total quantity of activity's cost driver C) Total quantity of activity's cost driver × Total cost in activity cost pool D) Total quantity of activity's cost driver/Total cost in activity cost pool Answer: B Explanation: This question requires you to determine what formula combines the correct items and correct order of operations for this formula. The formula for activity-based rate = Total cost in activity cost pool/Total quantity of activity's cost driver. Choice B is the only choice that correctly identifies the formula. Choices, A, C, and D are all incorrect as they either multiply where they should divide, or swap the numerator and denominator. Diff: 1 LO: 3 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making 43) After a company has successfully determined their activity-based rate, what steps must be taken to allocate Manufacturing Overhead (MOH) for an activity? A) Divide the activity-based rate by the actual quantity of cost driver used B) Divide the activity-based rate by the budgeted quantity of cost driver used C) Multiply the activity-based rate by the actual quantity of cost driver used D) Multiply the activity-based rate by the budgeted quantity of cost driver used Answer: C Explanation: This question requires you to consider how a company would complete Step 3 of implementing activity-based costing. In order to allocate the MOH for activity, you must multiply the activity-based rate by the actual quantity of cost driver used (Choice C). Choice D is incorrect as it includes the budgeted quantity of cost driver used rather than actual. Choice A is incorrect as it divides rather than multiplies the two numbers. Choice B is incorrect as it incorporates division rather than multiplication, and it uses the budgeted rather than the actual quantity of the cost drivers. Diff: 2 LO: 3 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making

44) Denominator volume refers to the total occurrences of the cost driver within an activity. The availability of each activity's capacity can be expressed in several ways. Which of the following ways would be considered inappropriate? A) Absurd capacity B) Normal capacity C) Practical capacity D) Theoretical capacity Answer: A Explanation: Choices B, C, and D all represent real ways that the denominator value can be expressed. Choice B is the quantity needed to satisfy the average customer demand over a period of time. Choice C reduces theoretical capacity by considering unavoidable interruptions. Choice D assumes no downtime and is considered unrealistic. Choice A is not a choice found within this text and is therefore the correct response as it would be an inappropriate selection. Diff: 1 LO: 3 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making 45) Activity-based costing (ABC) will utilize cost drivers to allocate various costs. Which of the following would be an appropriate cost driver for an employee cafeteria? A) Employee head count by department B) Number of marketing campaigns C) Number of meals purchased from the cafeteria D) Square footage of facility Answer: C Explanation: Cost drivers can be subjective, and this question requires that you discern between the choices to determine which is most likely to be a cost driver used by an employee cafeteria. Employee head count by department (Choice A) is a cost driver that would most likely be used by information technology or first aid and wellness initiatives. Number of marketing campaigns (Choice B) would most likely be a cost driver used by marketing. Square footage of facility (Choice D) is a cost driver most likely used by grounds maintenance and security. Number of meals purchased from the cafeteria (Choice C) is the correct choice as it is the most sensible choice for an employee cafeteria since it is driven by food to be sold in the cafeteria. Diff: 1 LO: 3 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making

46) Sparrow, Inc. produces birdseed that it sells to regional markets. Susan, the accountant at Sparrow, is evaluating the impact of Activity-Based Costing (ABC) on several activities for the factory. Sparrow has the following budgeted costs: Direct Materials, $150,000; and Direct Labor, $98,000. Their budgeted Manufacturing Overhead (MOH) costs are comprised of the following: Setup, $75,000 (1,000 setup hours); Production, $376,000 (50,000 machine hours); and Maintenance, $63,400 (12,000 maintenance hours). Allocate MOH costs to Setup activity using the budgeted activity-based rate considering the actual usages of 262 setup hours, 13,409 machine hours, and 3,432 maintenance hours. A) $19,650 B) $25,676 C) $39,300 D) $75,000 Answer: A Explanation: This question requires the determination of the budgeted activity rate for Setup which would be $75,000/1,000 setup hours = $75.00 per setup hour. Sparrow used 262 hours so the MOH allocated to Setup would be $75.00 per setup hour × 262 setup hours = $19,650 (Choice A). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making 47) Sparrow, Inc. produces birdseed that it sells to regional markets. Susan, the accountant at Sparrow, is evaluating the impact of Activity-Based Costing (ABC) on several activities for the factory. Sparrow has the following budgeted costs: Direct Materials, $150,000; and Direct Labor, $98,000. Their budgeted Manufacturing Overhead (MOH) costs are comprised of the following: Setup, $75,000 (1,000 setup hours); Production, $376,000 (50,000 machine hours); and Maintenance, $63,400 (12,000 maintenance hours). Allocate MOH costs to production activity using the budgeted activity-based rate, considering the actual usages of 262 setup hours, 13,409 machine hours, and 3,432 maintenance hours. A) $25,808.64 B) $40,227.00 C) $90,240.00 D) $100,835.68 Answer: D Explanation: This question requires the determination of the budgeted activity rate for production which would be $376,000/50,000 machine hours = $7.52 per machine hour. Sparrow used 13,409 machine hours so the MOH allocated to Production would be $7.52 per machine hour × 13,409 machine hours = $100,835.68 (Choice D). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making 29

48) Tiny Corp. has provided the following information about its budgeted Manufacturing Overhead (MOH) costs. They also reported Direct Labor (DL) of $126,780 and Direct Materials (DM) of $78,699. They have broken the MOH costs into three activities: Activity Utilities Maintenance Machining Total

Budgeted Cost $30,000 54,000 99,000 $183,000

Budgeted Quantity of Cost Driver 30,000 square feet 9,000 maintenance hours 11,000 machine hours

What is Tiny's plant-wide MOH rate if allocations are based on machine hours? A) $7.15 B) $11.53 C) $16.64 D) $20.33 Answer: C Explanation: This question requires familiarity with the formula for calculating a plant-wide MOH rate while disregarding the individual cost drivers as well as the totals for DM and DL. To calculate the plant-wide MOH rate you would take the total MOH budgeted cost of $183,000 and divide by total budgeted quantity of the cost driver of 11,000 machine hours. $183,000/11,000 machine hours = $16.64 (Choice C). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

49) Tiny Corp. has provided the following information about its budgeted Manufacturing Overhead (MOH) costs. They also reported Direct Labor (DL) of $126,780 and Direct Materials (DM) of $78,699. They have broken the MOH costs into three activities: Activity Utilities Maintenance Machining Total

Budgeted Cost $30,000 54,000 99,000 $183,000

Budgeted Quantity of Cost Driver 30,000 square feet 9,000 maintenance hours 11,000 machine hours

What is Tiny's activity rate for each activity? A) Utilities, $1.00/square foot; Maintenance, $1.80/maintenance hour; and Machining, $3.30/machine hour B) Utilities, $1.00/square foot; Maintenance, $6.00/maintenance hour; and Machining, $9.00/machine hour C) Utilities, $1.00/square foot; Maintenance, $8.74/maintenance hour; and Machining, $9.00/machine hour D) Utilities, $6.10/square foot; Maintenance, $20.33/maintenance hour; and Machining, $16.64/machine hour Answer: B Explanation: This question requires that you calculate the activity rate for each of the key activities: Utilities, $30,000/30,000 square feet = $1.00 per square feet; Maintenance, $54,000/9,000 maintenance hours = $6.00 per maintenance hour; and Machining, $99,000/11,000 machine hours = $9.00 per machine hour (Choice B). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

50) Yogi Inc. is a small company that produces yoga mats and assorted accessories. They have recently transitioned to Activity-Based Costing (ABC) and are in the process of creating a budget. They have compiled the following budgeted Manufacturing Overhead (MOH) costs which are divided into three key activities: Activity Setup Production Quality Inspection Total

Budgeted Cost $125,000 333,450 106,200 $564,650

Budgeted Quantity of Cost Driver 10,000 setup hours 20,000 machine hours 8,000 inspection hours

During the year, Yogi used 4,000 setup hours; 12,600 machine hours; and 2,300 inspection hours. If Yogi wants to use an activity rate that is tailored to each activity, then what rate would they use for each? A) Setup, $12.50/setup hour; Production, $16.67/machine hour; and Quality Inspection, $13.28/inspection hour B) Setup, $31.25/setup hour; Production, $16.67/machine hour; and Quality Inspection, $13.28/inspection hour C) Setup, $31.25/setup hour; Production, $26.46/machine hour; and Quality Inspection, $46.17/inspection hour D) Setup, $56.47/setup hour; Production, $28.23/machine hour; and Quality Inspection, $70.58/inspection hour Answer: A Explanation: This question requires calculation of the budgeted activity rate for each of the key activities while disregarding the actual usage: Setup, $125,000/10,000 setup hours = $12.50 per setup hour; Production, $333,450/20,000 machine hours = $16.67 per machine hour; and Quality Inspection, $106,200/8,000 inspection hours = $13.28 per inspection hour (Choice A). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

51) Yogi Inc. is a small company that produces yoga mats and assorted accessories. They have recently transitioned to Activity-Based Costing (ABC) and are in the process of creating a budget. They have compiled the following budgeted Manufacturing Overhead (MOH) costs which are divided into three key activities: Activity Setup Production Quality Inspection Total

Budgeted Cost $125,000 333,450 106,200 $564,650

Budgeted Quantity of Cost Driver 10,000 setup hours 20,000 machine hours 8,000 inspection hours

During the year, Yogi used 4,000 setup hours; 12,600 machine hours; and 2,300 inspection hours. How much Production MOH will Yogi report for Product A, considering the actual usage of each of the three key activities? (Do not round the calculations.) A) $66,680.00 B) $210,073.50 C) $355,729.50 D) $529,285.71 Answer: B Explanation: This question requires calculation of the budgeted activity rate for Production which is $333,450/20,000 machine hours = $16.67 per machine hour. Then, multiply the activity rate against the actual usage of 12,600 machine hours for a total of $210,073.50 (Choice B). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

52) Melissa is the controller for Barker Inc., a factory that creates unique dog chew toys. Until now, Barker has been using a single plant-wide rate of $10.75 per direct labor hour to allocate Manufacturing Overhead (MOH) costs. Melissa has been debating a switch to activity-based costing and has derived the following activity-based rates: $18.00 per machine hour $11.00 per direct labor hour $6.00 per inspection hour A recent production run used 80 machine hours, 240 direct labor hours, and 10 inspection hours. How much MOH would be allocated using the newly derived activity-based rates? A) $2,000.00 B) $2,700.00 C) $4,080.00 D) $4,140.00 Answer: D Explanation: To calculate the allocated MOH, multiply the activity rates against their respective actual usages. Machine hours, $18.00 per machine hour times 80 machine hours ($1,440.00) plus Direct labor hours, $11.00 per direct labor hour times 240 direct labor hours ($2,640.00) plus Inspection hours, $6.00 per inspection hour times 10 inspection hours ($60.00). The total MOH for all activities is $4,140.00 (Choice D). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

53) Melissa is the controller for Barker Inc., a factory that creates unique dog chew toys. Until now, Barker has been using a single plant-wide rate of $10.75 per direct labor hour to allocate Manufacturing Overhead (MOH) costs. Melissa has been debating a switch to activity-based costing and has derived the following activity-based rates: $18.00 per machine hour $11.00 per direct labor hour $6.00 per inspection hour A recent production run used 65 machine hours, 186 direct labor hours, and 13 inspection hours. How much MOH would be allocated using the newly derived activity-based rates? A) $2,821.00 B) $3,216.00 C) $3,294.00 D) $4,596.00 Answer: C Explanation: To calculate the allocated MOH, multiply the activity rates against their respective actual usage. Machine hours, $18.00 per machine hour times 65 machine hours ($1,170.00) plus Direct labor hours, $11.00 per direct labor hour times 186 direct labor hours ($2,046.00) plus Inspection hours, $6.00 per inspection hour times 13 inspection hours ($78.00). The total MOH for all activities is $3,294.00 (Choice C). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

54) Trojan Corp. creates miniature wooden figurines that it sells to local stores around the state. Trojan is switching to Activity-Based Costing (ABC) and has arrived at the following activitybased rates for their Manufacturing Overhead (MOH) allocation: $22.00 per direct labor hour, $17.50 per packaging hour, and $8.60 per inspection hour. A recent job required the following: 600 direct labor hours 127 packaging hours 78 inspection hours What is the amount of MOH that would be allocated to this most recent job based upon the predetermined activity-based rates? A) $13,393.30 B) $15,422.50 C) $16,093.30 D) $16,664.80 Answer: C Explanation: This question requires calculation of the MOH allocation for each activity based upon rates determined by Trojan Corp.: direct labor hours = $22.00 per direct labor hour times 600 direct labor hours = $13,200; packaging hours = $17.50 per packaging hour times 127 packaging hours = $2,222.50; and inspection hours = $8.60 per inspection hour times 78 inspection hours = $670.80. The total of all allocated MOH will be the total of the three activities or $16,093.30 (Choice C). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

55) Trojan Corp. creates miniature wooden figurines that it sells to local stores around the state. Trojan is switching to Activity-Based Costing (ABC) and has arrived at the following activitybased rates for their Manufacturing Overhead (MOH) allocation: $22.00 per direct labor hour, $17.50 per packaging hour, and $8.60 per inspection hour. A recent job required the following: 780 direct labor hours 182 packaging hours 93 inspection hours What is the amount of MOH that would be allocated to this most recent job based upon the predetermined activity-based rates? A) $17,634.80 B) $20,345.00 C) $21,144.80 D) $21,963.80 Answer: C Explanation: This question requires that you calculate the MOH allocation for each activity based upon rates determined by Trojan Corp.: direct labor hours = $22.00 per direct labor times 780 direct labor hours = $17,160.00; packaging hours = $17.50 per packaging hour times 182 packaging hours = $3,185.00; inspection hours = $8.60 per inspection hour times 93 inspection hours = $799.80. The total of all allocated MOH will be the total of the three activities or $21,144.80 (Choice C). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

56) Robert has been evaluating all costing data after he realized how small his margin for dinner plates had become. These plates have become the focal point for the organization so Robert has a vested interest in increasing the margin per plate. He has spent time aligning with beneficial suppliers and reducing his material cost and streamlined labor usage in a successful effort to minimize labor costs as well. The remaining task in this journey to improve margin is to evaluate the allocation of Manufacturing Overhead (MOH) costs that are estimated to be $563,559.00 for the year. Three main cost drivers and their related information are as follows:

Activity Setups Fabrication Quality Inspection Total

Budgeted Cost $95,489 388,400 79,670 $563,559

Budgeted Quantity of Cost Driver 17,450 Setups 35,990 Direct Labor hours 13,600 Inspections

Actual Usage 7,750 14,570 5,432

How much of the MOH costs would be allocated to dinner plates if Robert chooses to continue using a single plant-wide rate based upon Direct Labor hours? (If required, round calculations to two decimal places.) A) $122,533.70 B) $157,210.30 C) $206,430.12 D) $228,166.20 Answer: D Explanation: First, calculate the single plant-wide MOH rate. This can be done as follows: Total MOH costs/Budgeted direct labor hours: $563,559/35,990 = $15.66 per direct labor hour. Then, multiply the $15.66 per direct labor hour by the number of direct labor hours used in production of dinner plates: $15.66 × 14,570 hours = $228,166.20 (Choice D). Diff: 2 LO: 1, 2, 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

57) Robert has been evaluating all costing data after he realized how small his margin for dinner plates had become. These plates have become the focal point for the organization so Robert has a vested interest in increasing the margin per plate. He has spent time aligning with beneficial suppliers and reducing his material cost and streamlined labor usage in a successful effort to minimize labor costs as well. The remaining task in this journey to improve margin is to evaluate the allocation of manufacturing overhead (MOH) costs that are estimated to be $563,559.00 for the year. Three main cost drivers and their related information are as follows:

Activity Setups Fabrication Quality Inspection Total

Budgeted Cost $95,489 388,400 79,670 $563,559

Budgeted Quantity of Cost Driver 17,450 Setups 35,990 Direct Labor hours 13,600 Inspections

Actual Usage 7,750 14,570 5,432

How much of the MOH costs would be allocated to dinner plates if Robert chooses to utilize an activity-based approach instead of a single plant-wide rate? (If required, round calculations to two decimal places.) A) $220,873.34 B) $228,166.20 C) $231,434.32 D) $563,559.00 Answer: C Explanation: First, calculate an activity-base rate for each key activity before allocating. Setups, $95,489.00/17,450 setups = $5.47 per setup; Fabrication, $388,400.00/35,990 direct labor hours = $10.79 per direct labor hour; and Quality Inspection, $79,670/13,600 inspections = $5.86 per inspection. Now, allocate based upon usage: $5.47 × 7,750 setups = $42,392.50 + $10.79 × 14,570 hours = $157,210.30 + $5.86 × 5,432 inspections = $31,831.52. Total MOH allocated to dinner plates based on ABC = $231,434.32 (Choice C). Diff: 2 LO: 1, 2, 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

58) Roland's company makes and sells scarves, and he has just completed his annual financial analysis for the most recent year-end. The company produces two varieties of scarves: Silk and Cotton. Roland used a single plant-wide rate based on Direct Labor (DL) hours this year just as he had for many years prior, but he is not positive that this is the best approach moving forward. Roland has become interested in Activity-Based Costing (ABC). Roland has determined that Manufacturing Overhead (MOH) key activities include: Folding, $19,420.00 (driven by DL hours); Cleaning/Maintenance, $10,330.00 (driven by cleaning/maintenance hours); and Quality inspections, $4,600.00 (driven by number of inspections). He has compiled the following financial data to assist with his evaluation of the costing systems:

Units Produced Sales Revenue Direct Materials Direct Labor Direct Labor Hours Cleaning/Maintenance Hours Quality Inspections

Silk Scarves 12,500 $165,400 $28,700 $21,500 6,250 1,200 600

Cotton Scarves 14,200 $208,970 $23,660 $25,650 7,100 1,500 800

What is the total amount of MOH allocated to the silk scarves using ABC? (Do not round the calculations.) A) $15,654.30 B) $18,695.70 C) $19,420.00 D) $21,500.00 Answer: A Explanation: This question requires several steps in order to determine the MOH allocated to either of the scarves. First, calculate an activity-based rate for each key activity based upon the total cost in activity cost pool divided by the total quantity of activity's cost driver from both scarves. Folding, $19,420.00/(6,250 + 7,100) = $1.45 per DL hour; Cleaning/Maintenance, $10,330.00/(1,200 + 1,500) = $3.83 per cleaning/maintenance hour; and Quality Inspections, $4,600.00/(600 + 800) = $3.29 per inspection. Now, allocate based upon the silk scarf activity: ($1.45 × 6,250) + ($3.83 × 1,200) + ($3.29 × 600) = $15,654.30 total MOH allocated to the silk scarves (Choice A). Diff: 2 LO: 1, 2, 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

59) Roland's company makes and sells scarves, and he has just completed his annual financial analysis for the most recent year-end. The company produces two varieties of scarves: Silk and Cotton. Roland used a single plant-wide rate based on Direct Labor (DL) hours this year, just as had for many years prior, but he is not positive that this is the best approach moving forward. Roland has become interested in Activity-Based Costing (ABC). Roland has determined that Manufacturing Overhead (MOH) key activities include: Folding, $19,420.00 (driven by DL hours); Cleaning/Maintenance, $10,330.00 (driven by cleaning/maintenance hours); and Quality Inspections, $4,600.00 (driven by number of inspections). He has compiled the following financial data to assist with his evaluation of the costing systems:

Units Produced Sales Revenue Direct Materials Direct Labor Direct Labor Hours Cleaning/Maintenance Hours Quality Inspections

Silk Scarves 12,500 $165,400 $28,700 $21,500 6,250 1,200 600

Cotton Scarves 14,200 $208,970 $23,660 $25,650 7,100 1,500 800

If Roland uses ABC, then what will the net operating income be for the cotton scarves? (Do not round the calculations.) A) $140,964.30 B) $159,660.00 C) $164,624.30 D) $208,970.00 Answer: D Explanation: This question requires several steps in order to determine the MOH allocated to either of the scarves. First, calculate an activity-based rate for each key activity based upon the total cost in activity cost pool divided by the total quantity of activity's cost driver from both scarves. Folding, $19,420.00/(6,250 + 7,100) = $1.45 per DL hour; Cleaning/Maintenance, $10,330.00/(1,200 + 1,500) = $3.83 per cleaning/maintenance hour; and Quality Inspections, $4,600.00/(600 + 800) = $3.29 per inspection. Now, allocate based upon the cotton scarf activity: ($1.45 × 7,100) + ($3.83 × 1,500) + ($3.29 × 800) = $18,695.70 total MOH allocated to the cotton scarves. Next, calculate net operating income: $208,970.00 - $23,660.00 - $25,650.00 $18,695.70 = $140,964.30 (Choice A). Diff: 2 LO: 1, 2, 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

60) Josephine has been investigating a potential switch to Activity-Based Costing (ABC) for the cookie company where she works. She has decided to focus on their biggest seller, vanilla cookies, before moving forward with this decision. She has gathered the following pertinent financial data:

Units Produced Sales Revenue Direct Materials Direct Labor Direct Labor Hours Trays washed Supervisor hours

Vanilla Cookies 75,600 $378,400 $98,330 $126,780 14,300 8,000 8,450

Josephine has determined that there are three key activities where Manufacturing Overhead (MOH) costs can be divided along with the total activity for the year: cutting, $34,500.00 (25,600 direct labor hours); washing cookie trays, $37,900.00 (15,780 trays washed); and wages for the supervisors, $24,600.00 (12,630 supervisor hours). Josephine would like to decide soon. If she uses ABC, then what will the net operating income per unit be for the vanilla cookies? (Do not round the calculations.) A) $0.73 B) $1.30 C) $1.86 D) $5.01 Answer: B Explanation: This question requires several steps in order to determine the MOH allocated to vanilla cookies and eventually the net operating income per vanilla cookie. First, calculate an activity-based rate for each key activity based upon the total cost in activity cost pool being divided by the total quantity of activity's cost driver for the year. Cutting, $34,500.00/25,600 DL hours = $1.35 per DL hour; washing trays, $37,900.00/15,780 tray washed = $2.40 per tray washed; and supervisor wages, $24,600.00/12,630 supervisor hours = $1.95 per supervisor hour. Now, allocate based upon the vanilla cookie activity: ($1.35 × 14,300) + ($2.40 × 8,000) + ($1.95 × 8,450) = $54,944.11 total MOH allocated to the vanilla cookies. Next, calculate net operating income: $378,400.00 - $98,330.00 - $126,780.00 - $54,944.11 = $98,345.89. Lastly, divide by the number of vanilla cookies produced: $98,345.89/75,600 = $1.30 net operating income per vanilla cookie (Choice B). Diff: 2 LO: 1, 2, 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

61) Josephine has been investigating a potential switch to Activity-Based Costing (ABC) for the cookie company where she works. She has decided to focus on their biggest seller, vanilla cookies, before moving forward with this decision. She has gathered the following pertinent financial data:

Units Produced Sales Revenue Direct Materials Direct Labor Direct Labor Hours Trays washed Supervisor hours

Vanilla Cookies 75,600 $378,400 $98,330 $126,780 14,300 8,000 8,450

Josephine determined that there are three key activities where Manufacturing Overhead (MOH) costs can be divided along with the total activity for the year: cutting, $34,500 (25,600 direct labor hours); washing cookie trays, $37,900 (15,780 trays washed); and wages for the supervisors, $24,600 (12,630 supervisor hours). Josephine would like to decide soon. What is the total amount of MOH allocated to the vanilla cookies using ABC? (Do not round the calculations.) A) $54,944.11 B) $55,087.50 C) $97,000.00 D) $98,330.00 Answer: A Explanation: This question requires several steps in order to determine the MOH allocated quantity of activity's cost driver to vanilla cookies. First, calculate an activity-based rate for each key activity based upon the total cost in activity cost pool being divided by the total activity for the year. Cutting, $34,500.00/25,600 DL hours = $1.35 per DL hour; washing trays, $37,900.00/15,780 tray washed = $2.40 per tray washed; and supervisor wages, $24,600.00/12,630 supervisor hours = $1.95 per supervisor hour. Now, allocate based upon the vanilla cookie activity: ($1.35 × 14,300) + ($2.40 × 8,000) + ($1.95 × 8,450) = $54,944.11 total MOH allocated to the vanilla cookies (Choice A). Diff: 2 LO: 1, 2, 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

62) Eagleton Inc. is a retail business that sells fedoras and other decorative hats. They are in the process of evaluating their costing systems and working towards an Activity-Based Costing (ABC) implementation. They have compiled the following data about their Manufacturing Overhead (MOH) costs:

Activity Insurance for factory Supervisor salary Indirect materials Total

Budgeted Cost $12,000 $33,400 $22,900 $68,300

Budgeted Quantity of Cost Driver 10,000 square feet 4,800 hours 2,300 pounds of material

The production department tallied the following amounts in a recent production run: 3,600 square feet; 2,009 supervisor hours; and 998 pounds of indirect materials. What is the total amount of facility-level MOH costs allocated to the production run? A) $0.00 B) $4,320.00 C) $7,928.40 D) $24,588.00 Answer: B Explanation: This question requires the identification of which, if any, of the activities listed are at the facility level. In this case, the insurance on the factory would be considered a facility-level cost. Next, calculate the per-unit cost: $12,000/10,000 square feet = $1.20 per square foot. Lastly, multiply this by the square footage used: $1.20 per square foot times 3,600 square feet equals $4,320.00 allocated to facility-level activities (Choice B). Diff: 2 LO: 2, 3 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

63) Eagleton Inc. is a retail business that sells fedoras and other decorative hats. They are in the process of evaluating their costing systems and working towards an Activity-Based Costing (ABC) implementation. They have compiled the following data about their Manufacturing Overhead (MOH) costs:

Activity Insurance for factory Supervisor salary Indirect materials Total

Budgeted Cost $12,000 $33,400 $22,900 $68,300

Budgeted Quantity of Cost Driver 10,000 square feet 4,800 hours 2,300 pounds of material

The production department tallied the following amounts in a recent production run: 3,600 square feet; 2,009 supervisor hours; and 998 pounds of material. What is the total amount of unit-level MOH costs allocated to the production run? (If required, round calculations to two decimal places.) A) $0.00 B) $3,986.16 C) $9,940.08 D) $29,636.26 Answer: C Explanation: This question requires the identification of which, if any, of the activities listed are at the unit level. In this case, the indirect materials would be considered a unit-level cost. Next, calculate the per unit cost: $22,900/2,300 pounds = $9.96 per pound. Lastly, multiply this by the pounds of materials used: $9.96 per pound times 998 pounds of materials equals $9,940.08 allocated to unit-level activities (Choice C). Diff: 2 LO: 2, 3 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

64) Samantha is the controller for Tasty Jerky, company that manufactures vegan jerky and currently has two flavors: Cajun and BBQ. Samantha believes that Tasty Jerky is in a great position to transition to Activity-Based Costing (ABC) from a traditional costing system. Tasty Jerky is planning to produce 77,670 bags of Cajun jerky and 81,400 bags of BBQ jerky. Management has asked Samantha to compile costing data using ABC. She has identified the following key activity information: Moving and Sorting Ingredients Quality Control

$98,444 (146,800 pounds) $264,306 (14,500 inspections)

Each product will require the following amount of each key activity:

Item Cajun BBQ

Pounds of Ingredients 87,350 59,450

# of Inspections 5,600 8,900

In addition, Cajun will need $99,430.00 of Direct Materials and $128,900.00 of Direct Labor while BBQ will need $103,220.00 of Direct Materials and $139,800.00 of Direct Labor. Determine the total production costs for Cajun jerky under the ABC system. (If required, round calculations to two decimal places.) A) $282,568.50 B) $385,788.50 C) $388,942.50 D) $396,688.50 Answer: C Explanation: This question requires calculation of the activity rate for each of the manufacturing overhead (MOH) activities: Moving and Sorting Ingredients- $98,444/146,800 pounds = $0.67/pound and Quality Control- $264,306/14,500 inspections = $18.23/inspection. Next, calculate the total overall MOH costs for bags of Cajun jerky: ($0.67 × 87,350 pounds) + ($18.23 × 5,600 inspections) = $58,524.50 + $102,088.00 = $160,612.50. Lastly, add the total Cajun jerky MOH costs to the direct materials and direct labor costs used by the Cajun jerky: $160,612.50 + $99,430.00 + $128,900.00 = $388,942.50 (Choice C). Diff: 2 LO: 2, 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

65) Samantha is the controller for Tasty Jerky., company that manufactures vegan jerky and currently has two flavors: Cajun and BBQ. Samantha believes that Tasty Jerky is in a great position to transition to Activity-Based Costing (ABC) from a traditional costing system. Tasty Jerky is planning to produce 77,670 bags of Cajun jerky and 81,400 bags of BBQ jerky. Management has asked Samantha to compile costing data using ABC. She has identified the following key activity information: Moving and Sorting Ingredients Quality Control

$98,444 (146,800 pounds) $264,306 (14,500 inspections)

Each product will require the following amount of each key activity:

Item Cajun BBQ

Pounds of Ingredients 87,350 59,450

# of Inspections 5,600 8,900

In addition, Cajun will need $99,430.00 of Direct Materials and $128,900.00 of Direct Labor while BBQ will need $103,220.00 of Direct Materials and $139,800.00 of Direct Labor. Determine the total production costs for BBQ jerky under the ABC system? (If required, round calculations to two decimal places.) A) $243,020.00 B) $385,788.50 C) $419,372.50 D) $445,098.50 Answer: D Explanation: This question requires the calculation of the activity rate for each of the Manufacturing Overhead (MOH) activities: Moving and Sorting Ingredients- $98,444/146,800 pounds = $0.67/pound and Quality Control- $264,306/14,500 inspections = $18.23/inspection. Next, calculate the total overall MOH cost for bags of BBQ jerky: ($0.67 × 59,450 pounds) + ($18.23 × 8,900 inspections) = $39,831.50 + $162,247.00 = $202,078.50. Lastly, add the total BBQ jerky MOH cost to the direct materials and direct labor costs used by the BBQ jerky: $202,078.50 + $103,220.00 + $139,800.00 = $445,098.50 (Choice D). Diff: 2 LO: 2, 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

66) If a business wants to use Time-Driven Activity-Based Costing (TDABC), then they will need to calculate the cost per transaction after determining their rate for supplying an activity. Which of the following represents the correct formula for calculating the cost per transaction? A) Cost per minute for supplying an activity (under TDABC) - Number of minutes per transaction B) Cost per minute for supplying an activity (under TDABC) / Number of minutes per transaction C) Cost per minute for supplying an activity (under TDABC) + Number of minutes per transaction D) Cost per minute for supplying an activity (under TDABC) × Number of minutes per transaction Answer: D Explanation: The formula to calculate cost per transaction is cost per minute for supplying an activity (under TDABC) × number of minutes per transaction. Choice D is the correct answer since that correctly multiplies the cost per minute for supplying an activity by the amount of time each transaction takes to get cost per transaction. Diff: 1 LO: 4 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making 67) Cost drivers are used in Activity-Based Costing (ABC) to allocate various costs. Which of the following would be an appropriate cost driver for an area such as Marketing? A) Number of invoices issued B) Number of purchase orders filled C) Number of reports requested D) Number of marketing campaigns run Answer: D Explanation: This question requires discernment between the choices to determine which is most likely to be a cost driver used by Marketing. Number of invoices issued (Choice A), and Number of reports requested (Choice C) would be appropriate cost drivers to use for Accounting. Number of purchase orders filled (Choice B) would be an appropriate cost driver for the Purchasing/Supply chain. Number of marketing campaigns run (Choice D) is the correct choice as it is more likely to be used as a cost driver for a marketing department. Diff: 1 LO: 4 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making

68) Peacock Inc. is a contracting business that creates one-of-a-kind murals for each individual client. They have been asked by a potential client to prepare an estimate for the creation of a floral mural for the client's office waiting room. Turner, the main artist for Peacock would like the company to consider updating its billing methods from a flat rate of $370.00 per painting hour to an activity-based costing method that would include a markup of 29%. After visiting the client's proposed site, Turner has put together the following estimate for the floral mural: Activity Design Wall Prep Painting

Cost Driver Art design hours Square footage Artist painting hours

Rate $150/hour $3.65/square foot $275/hour

Estimated Use for Job 3 hours 215 square feet 86 hours

What is the final bid price that Peacock will present to the client as per new estimated rates? A) $24,884.75 B) $31,820.00 C) $32,101.33 D) $41,047.80 Answer: C Explanation: Determine the total cost for each activity as follows: Design, $150/hour × 3 hours = $450.00; Wall Prep, $3.65/square foot × 215 square feet = $784.75; and Painting, $275/hour × 86 hours = $23,650.00. The total cost of all activities can be found by summing the individual totals: $450.00 + $784.75 + $23,650.00 = $24,884.75. Lastly, add the markup- $24,884.75 × 1.29 = $32,101.33 final bid price (Choice C). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

69) Peacock Inc. is a contracting business that creates one-of-a-kind murals for each individual client. They have been asked by a potential client to prepare an estimate for the creation of a floral mural for the client's office waiting room. Turner, the main artist for Peacock would like the company to consider updating its billing methods from a flat rate of $370.00 per painting hour to an Activity-Based Costing (ABC) method that would include a markup of 29%. After visiting the client's proposed site, Turner has put together the following estimate for the floral mural: Activity Design Wall Prep Painting

Cost Driver Art design hours Square footage Artist painting hours

Rate $150/hour $3.65/square foot $275/hour

Estimated Use for Job 3 hours 215 square feet 86 hours

What is the difference in profit for Peacock between the flat rate and the new ABC method proposed by Turner? A) $281.33 less profit under ABC B) $281.33 more profit under ABC C) $8,946.47 less profit under ABC D) $8,946.47 more profit under ABC Answer: B Explanation: Determine the total cost for each activity as follows: Design, $150/hour × 3 hours = $450.00; Wall Prep, $3.65/square foot × 215 square feet = $784.75; and Painting, $275/hour × 86 hours = $23,650.00. The total cost of all activities can be found by summing the individual totals: $450.00 + $784.75 + $23,650.00 = $24,884.75. Next, add the markup: $24,884.75 × 1.29 = $32,101.33 will be the final bid price. Lastly, compare the marked-up cost of $32,101.33 against the flat bill price of $370.00 × 86 hours, or $31,820.00. Once you compare there is, $32,101.33 - $31,820.00 = $281.33 more profit under the ABC method (Choice B). Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

70) Curtis owns Mayflower Construction, a company that specializes in the design and construction of what they have promoted as a backyard oasis. Curtis is putting together an informational packet to distribute to potential clients that will include examples of projects and suggested pricing. The first project in the packet will be backyard oasis consisting of a large pergola and seating. Curtis would like to upgrade Mayflower's costing to be in line with Activity-Based Costing (ABC) and has put together the following information about the first example project:

Activity Pergola Construction Design Furniture Construction

Cost Driver Wood installation Design hours Pieces assembled

Rate $125/linear foot $142/hour $90/piece

Estimated Use for Job 40 linear square feet 5 hours 8 pieces

Curtis would like to add a 19% markup to the total cost of the project. This would be a big transition from his current method of billing at a flat rate of $194 per linear square foot. Should Curtis switch to the new ABC method? A) No, Curtis will make $108.30 less using ABC B) No, Curtis will make $1,330.00 less using ABC C) Yes, Curtis will make $108.30 more using ABC D) Yes, Curtis will make $1,330.00 more using ABC Answer: A Explanation: Determine the total cost for each activity as follows: Pergola Construction, $125/linear foot × 40 linear feet = $5,000.00; Design, $142.00/hour × 5 hours = $710.00; Furniture Construction, $90/piece × 8 pieces = $720.00. The total cost of all activities can be found by summing the individual totals: $5,000.00 + $710.00 + $720.00 = $6,430.00. Next, add the markup: $6,430.00 × 1.19 = $7,651.70 is the final bid price. Lastly, compare the marked-up cost of $7,651.70 against the flat billed price of $194.00 × 40 linear square feet, or $7,760.00. This gives $7,651.70 - $7,760.00 = $108.30 less profit under the ABC method (Choice A). Hence, Curtis should not switch to the new ABC method. Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

71) Curtis owns Mayflower Construction, a company that specializes in the design and construction of what they have promoted as a backyard oasis. Curtis is putting together an informational packet to distribute to potential clients that will include examples of projects and suggested pricing. The first project in the packet will be backyard oasis consisting of a large pergola and seating. Curtis would like to upgrade Mayflower's costing to be in line with Activity-Based Costing (ABC) and has put together the following information about the first example project:

Activity Pergola Construction Design Furniture Construction

Cost Driver Wood installation Design hours Pieces assembled

Rate $125/linear foot $142/hour $90/piece

Estimated Use for Job 40 linear square feet 5 hours 8 pieces

Curtis would like to add a 21% markup to the total cost of the project. This would be a big transition from his current method of billing at a flat rate of $198 per linear square foot. How much is final price that Curtis will include in the packet? A) $6,430.00 B) $7,651.70 C) $7,780.30 D) $7,920.00 Answer: C Explanation: Determine the total cost for each activity as follows: Pergola Construction, $125/linear foot × 40 linear feet = $5,000.00; Design, $142.00/hour × 5 hours = $710.00; Furniture Construction, $90/piece × 8 pieces = $720.00. The total cost of all activities can be found by summing the individual totals: $5,000.00 + $710.00 + $720.00 = $6,430.00. Next, add the markup: $6,430.00 × 1.21 = $7,780.30, and this is the final bid price (Choice C). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

72) David owns a small boutique that sells products created by local vendors and artisans. He would very much like to update his store and will be hiring a contractor to complete the work. The contractor has informed him that the project will entail the following activities: Store design, 15 hours at $137 per hour; Carpet installation, 1,250 square feet at $10.80 per square foot; Fixture construction, $112 per piece with a total of 22 pieces; and SG&A expenses, 20 hours at $40.75 per hour. This estimate will also include a 26%additional markup based on the total of the estimated job costs for the entire project. A competing bid has been returned with a flat rate of $18.50 per square foot of carpet installation that would cover the whole project. Using ActivityBased Costing (ABC), what is the final bid price for the first bid? A) $18,824.00 B) $23,125.00 C) $23,730.84 D) $29,137.50 Answer: C Explanation: Before determining the final bid price, determine the total cost for each activity as follows: Store design, $137/hour × 15 hours = $2,055.00; Carpet installation, $10.80/square foot × 1,250 square feet = $13,500.00; Fixture construction, $112/piece × 22 pieces = $2,464.00; and SG&A expenses, = $40.75/hour × 20 hours = $815.00. The total cost of all activities can be found by summing the individual totals: $2,055.00 + $13,500.00 + $2,464.00 + $815.00 = $18,834.00. Next, add the additional markup$18,834.00 × 1.26 = $23,730.84, and that is the final bid price (Choice C). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

73) David owns a small boutique that sells products created by local vendors and artisans. He would very much like to update his store and will be hiring a contractor to complete the work. The contractor has informed him that the project will entail the following activities: Store design, 15 hours at $137 per hour; Carpet installation, 1,250 square feet at $10.80 per square foot; Fixture construction, $112 per piece with a total of 22 pieces; and SG&A expenses, 20 hours at $40.75 per hour. This estimate will also include a 26% additional markup based on the total of the estimated job costs for the entire project. A competing bid has been returned with a flat rate of $18.50 per square foot of carpet installation that would cover the whole project. Which estimate would save David the most money? A) ABC rate, since it will cost David $4,291.00 less than the flat-billed rate B) ABC rate, since it will cost David $605.84 less than the flat-billed rate C) Flat-billed rate, since it will cost David $4,291.00 less than the ABC rate D) Flat-billed rate, since it will cost David $605.84 less than the ABC rate Answer: D Explanation: Before determining the final bid price, determine the total cost for each activity under ABC as follows: Store design, $137/hour × 15 hours = $2,055.00; Carpet Installation, $10.80/square foot × 1,250 square feet = $13,500.00; Fixture Construction, $112/piece × 22 pieces = $2,464.00; and SG&A expenses, = $40.75/hour × 20 hours = $815.00. The total cost of all activities can be found by summing the individual totals: $2,055.00 + $13,500.00 + $2,464.00 + $815.00 = $18,834.00. Next, add the additional markup $18,834.00 × 1.26 = $23,730.84, and that is the final bid price. Lastly, compare the marked-up cost of $23,730.84 against the flatbilled price of $18.50 × 1,250 square feet of carpet installation, or $23,125.00. Comparison shows $23,730.84 - $23,125.00 = $605.84 of savings under the flat-billed method (Choice D). Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

74) Charles has been compiling year-end financial data for the painting business where he works. The company specializes in the painting of both residential and commercial properties. Charles would like to determine what division is more profitable for the company so that they can shift costs appropriately. Charles used activity-based costing based on support costs to allocate the Manufacturing Overhead (MOH) costs. He performed calculations and allocations and determined the following division information:

Sales Direct Cost of Services Facility Costs Management Support Administrative Support Misc. Expenses

Residential $175,000 $70,000 $10,000 $30,000 $22,000 $6,500

Commercial $257,000 $126,000 $22,000 $50,000 $32,400 $7,250

Based upon the information provided by Charles, use vertical analysis to determine which division is using support costs more effectively as a percentage of sales. A) The residential division, as it is using 0.97% less support cost than the commercial division. B) The residential division, as it is using 0.97% more support cost than the commercial division. C) The residential division, as it is using 2.35% less support cost than the commercial division. D) The residential division, as it is using 2.35% more support cost than the commercial division. Answer: C Explanation: Draw on analytics learned throughout the text. For each division, calculate total support costs, and divide by sales to arrive at the percentage of sales that is being used to cover those costs. Residential: ($30,000 + $22,000)/$175,000 = 0.2971 or 29.71%. Commercial: ($50,000 + $32,400)/$257,000 = 0.3206 or 32.06%. This means that the residential division is using 2.35% less of their sales to cover their support costs than the commercial division (Choice C). Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

75) Charles has been compiling year-end financial data for the painting business where he works. The company specializes in the painting of both residential and commercial properties. Charles would like to determine which division is more profitable for the company so that they can shift costs appropriately. Charles used activity-based costing based on support costs to allocate the Manufacturing Overhead (MOH) costs. He performed calculations and allocations and determined the following division information:

Sales Direct Cost of Services Facility Costs Management Support Administrative Support Misc. Expenses

Residential $175,000 $70,000 $10,000 $30,000 $22,000 $6,500

Commercial $257,000 $126,000 $22,000 $50,000 $32,400 $7,250

Based upon the information provided by Charles, use vertical analysis to determine the profitability of each division using percentage of sales as the indicator. A) Residential, 7.53%; Commercial, 20.86% B) Residential, 11.06%; Commercial, 14.20% C) Residential, 14.20%; Commercial, 11.06% D) Residential, 20.86%; Commercial, 7.53% Answer: D Explanation: Draw on analytics learned throughout the text. For each division, calculate net operating income, and divide by sales to arrive at the percentage of sales that is left over after all expenses have been covered. Residential: ($175,000 - $70,000 - $10,000 - $30,000 - $22,000 $6,500) = $36,500/$175,000 = 0.2086 or 20.86%. Commercial, ($257,000 - $126,000 - $22,000 $50,000 - $32,400 - $7,250) = $19,350/$257,000 = 0.0753 or 7.53%. This means that the residential division is more profitable than the commercial division (Choice D). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

76) Eugene is the manager for Levy Corp, an HVAC company, and he is debating the implementation of Time-Driven Activity-Based Costing (TDABC). After meeting with management, he realized that the company may not be fully utilizing their available capacity, and he believes this method will shed some light on their current state of affairs. Eugene will begin his analysis with the customer service center. This department stays very busy, and handled the following volume of activities: cold sales calls, 7,490 calls; repeat service calls, 5,806 calls; and customer concerns and complaints calls, 1,300 calls. They incurred $65,000.00 last year to operate these activities. Eugene has performed an analysis and determined the following:

Key Transactions Cold sales calls Repeat service calls Customer concerns/complaints calls

Rate per Minute for Supplying an Activity $0.89 $0.89

Estimated Time per Transaction 4.5 minutes 5.25 minutes

$0.89

8 minutes

How much total cost would be allocated to these key activities? (If required, round calculations to two decimal places.) A) $57,148.92 B) $65,000.00 C) $66,404.92 D) $69,325.80 Answer: C Explanation: This question has provided the rate for supplying an activity so the first step needed would be to calculate the cost per transaction. Cold sales calls would be $0.89 per minute times 4.5 minutes or $4.01 per call. Repeat service calls would be $0.89 per minute times 5.25 minutes or $4.67 per call. Customer concerns/complaints calls would be $0.89 per minute times 8 minutes or $7.12 per call. Next, multiply each per-call amount by the number of calls of that type completed throughout the year. $4.01 × 7,490 calls = $30,034.90; $4.67 × 5,806 calls = $27,114.02; and $7.12 × 1,300 calls = $9,256.00. The total cost allocated will be the sum of the values from the previous step = $30,034.90 + $27,114.02 + $9,256.00 = $66,404.92 (Choice C). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

77) Eugene is the manager for Levy Corp, an HVAC company, and he is debating the implementation of Time-Driven Activity-Based Costing (TDABC). After meeting with management, he has realized that the company may not be fully utilizing their available capacity, and he believes this method will better shed some light on their current state of affairs. Eugene will begin his analysis with the customer service center. This department stays very busy and handled the following volume of activities: cold sales calls, 7,490 calls; repeat service calls, 5,806 calls; and customer concerns and complaints calls, 1,300 calls. They spent $65,000.00 last year to operate these activities. Eugene has performed an analysis and determined the following:

Key Transactions Cold sales calls Repeat service calls Customer concerns/complaints calls

Rate per Minute for Supplying an Activity $0.89 $0.89

Estimated Time per Transaction 4.5 minutes 5.25 minutes

$0.89

8 minutes

When you compare actual costs incurred to operate the activities to the allocated costs, what is the difference, and is that amount therefore over- or underallocated? (If required, round calculations to two decimal places.) A) $1,404.92, overallocated B) $1,404.92, underallocated C) $4,325.80, overallocated D) $4,325.80, underallocated Answer: A Explanation: This question has provided the rate for supplying an activity so the first step needed would be to calculate the cost per transaction. Cold sales calls would equal $0.89 per minute times 4.5 minutes or $4.01 per call. Repeat service calls would be $0.89 per minute times 5.25 minutes or $4.67 per call. Customer concerns/complaints calls would be $0.89 per minute times 8 minutes or $7.12 per call. Next, multiply each per-call amount by the number of calls of that type completed throughout the year. $4.01 × 7,490 calls = $30,034.90; $4.67 × 5,806 calls = $27,114.02; and $7.12 × 1,300 calls = $9,256.00. The total cost allocated will be the sum of the values calculated in the previous step = $30,034.90 + $27,114.02 + $9,256.00 = $66,404.92. Lastly, subtract $65,000 from $66,404.92, so $1,404.92 was overallocated (Choice A). Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

78) As a company is determining which costing system they wish to implement, they will have a variety of methods from which to choose including Activity-Based Costing (ABC) and traditional costing. Which of the following would be considered a characteristic of a traditional costing system and not of ABC? A) Being able to calculate the total cost driver for each activity through estimation B) Being able to determine the departmental rate that the product or service passes through C) Being able to serve customers by organizing costs into key activities D) Being able to use each customer as a means to allocate customer service Answer: B Explanation: This question requires considering the implementation of traditional costing and how ABC could specifically affect service-based businesses upon its successful implementation. Choice B is correct as it indicates that they would be able to determine the Manufacturing Overhead (MOH) rate for each department that the product or service passes through, which is a characteristic of traditional costing system other than ABC. Diff: 1 LO: 4 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making

79) Stevie has been allocating Manufacturing Overhead (MOH) costs to her products using a single plant-wide rate of $14.00 per Direct Labor (DL) hour. A recent job required 347 DL hours, 42 production runs, 25 quality inspections, and 20 factory supervisor hours. Based on the increased activity, the accountants are suggesting a transition to Activity-Based Costing (ABC) and have suggested the following rates: Materials Handling: $9.75 per direct labor hour Production Setup: $18.50 per production run Quality Inspections: $6 per inspection Factory Supervisor Wages: $12.30 per supervisor hour Assuming that Stevie makes the switch to ABC, what is the difference in MOH costs that would be reported under the previous plant-wide rate compared to the ABC rates? A) $301.75 less costs allocated under ABC B) $301.75 more costs allocated under ABC C) $2,210.25 less costs allocated under ABC D) $2,210.25 more costs allocated under ABC Answer: A Explanation: This question first requires calculation of the MOH cost based on the single plantwide rate: ($14.00 × 347 DL hours) = $4,858.00. Now, calculate the MOH cost under suggested ABC rates: ($9.75 × 347 DL hours) + ($18.50 × 42 production runs) + ($6.00 × 25 inspections) + ($12.30 × 20 supervisor hours) = $3,383.25 + $777.00 + $150.00 + $246.00 = $4,556.25. Next, compare the two MOH cost: $4,858.00 - $4,556.25 = $301.75. The difference of $301.75 represents the underallocated costs under the ABC (Choice A). Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

80) In order to operate its customer support activity, Lucky's Amusement Park incurred $325,000 in annual costs (spread evenly amongst the four quarters of the year). Due to the large number of visitors to the park each year, Lucky has been debating whether or not they can afford to bring on additional customer support staff members. While having an annual capacity of 525,000 minutes, Lucky is going to be utilizing Time-Driven Activity-Based Costing (TDABC). They have identified the following as their key activities within the customer support function: ticket sales, park admittance, customers assistance (once they enter the park), and processing customer refunds. Management has compiled information pertaining to the first two quarters of the year:

Key Transactions Ticket Sales Park Admittance Customer In-Park Assistance Customer Refunds

Estimated Time per Activity 4 minutes 1 minute 3.5 minutes 6 minutes

Activity Handled in First Quarter 22,000 ticket sales 11,700 admittances 3,788 customers assisted 1,222 refunds

Key Transactions Ticket Sales Park Admittance Customer In-Park Assistance Customer Refunds

Estimated Time per Activity 4 minutes 1 minute 3.5 minutes 6 minutes

Activity Handled in Second Quarter 23,400 ticket sales 13,600 admittances 3,906 customers assisted 1,508 refunds

Using TDABC, what are the total costs allocated to the first quarter? Also, what was the over or underallocation of costs? (If required, round calculations to two decimal places.) A) $74,579.80 in total costs allocated; with $6,670.20 overallocated B) $74,579.80 in total costs allocated; with $6,670.20 underallocated C) $81,250.00 in total costs allocated; with $6,670.20 overallocated D) $81,250.00 in total costs allocated; with $6,670.20 underallocated

Answer: B Explanation: This question first requires calculation of the rate for supplying an activity and the cost per transaction. To calculate the rate for supplying an activity, divide the total cost of activity by the practical capacity available expressed in time: $325,000/525,000 minutes = $0.62/minute. Next, to calculate the cost per transaction, multiply the rate for supplying the activity by the number of minutes per transaction: Ticket Sales, $0.62 × 4 minutes = $2.48/ticket sale; Park Admittance, $0.62 × 1 minute = $0.62/admittance; Customer In-Park Assistance, $0.62 × 3.5 minutes = $2.17/customer assisted; and Customer Refunds, $0.62 × 6 minutes = $3.72/refund. To obtain the total costs, multiply the cost of each transaction by its respective activity and sum these values: ($2.48 × 22,000 ticket sales) + ($0.62 × 11,700 admittances) + ($2.17 × 3,788 customers assisted) + ($3.72 × 1,222 refunds) = $54,560.00 + $7,254.00 + $8,219.96 + $4,545.84 = $74,579.80. Lastly, to determine if it was over or underallocated, divide the $325,000.00 costs incurred by four to determine the allocation per quarter: $325,000.00/4 = $81,250.00 costs were incurred during the quarter. This means that the first quarter is underallocated by ($81,250.00 - $74,579.80) = $6,670.20 (Choice B). Diff: 3 LO: 4 Bloom: E AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

81) In order to operate its customer support activity, Lucky's Amusement Park incurred $325,000 in annual costs (spread evenly amongst the four quarters of the year). Due to the large number of visitors to the park each year, Lucky has been debating whether or not they can afford to bring on additional customer support staff members. While having an annual capacity of 525,000 minutes, Lucky is going to be utilizing Time-Driven Activity-Based Costing (TDABC). They have identified the following as their key activities within the customer support function: ticket sales, park admittance, assisting customers once they enter the park, and processing customer refunds. Management has compiled information pertaining to the first two quarters of the year:

Key Transactions Ticket Sales Park Admittance Customer In-Park Assistance Customer Refunds

Estimated Time per Activity 4 minutes 1 minute 3.5 minutes 6 minutes

Activity Handled in First Quarter 22,000 ticket sales 11,700 admittances 3,788 customers assisted 1,222 refunds

Key Transactions Ticket Sales Park Admittance Customer In-Park Assistance Customer Refunds

Estimated Time per Activity 4 minutes 1 minute 3.5 minutes 6 minutes

Activity Handled in Second Quarter 23,400 ticket sales 13,600 admittances 3,906 customers assisted 1,508 refunds

Using TDABC, what are the total costs allocated to quarter two? Also, what was the over- or underallocation of costs? (If required, round calculations to two decimal places.) A) $80,549.78 in total costs allocated; with $700.22 overallocated B) $80,549.78 in total costs allocated; with $700.22 underallocated C) $81,250.00 in total costs allocated; with $700.22 overallocated D) $81,250.00 in total costs allocated; with $700.22 underallocated

Answer: B Explanation: This question first requires calculation of the rate for supplying an activity and the cost per transaction. To calculate the rate for supplying an activity, divide the total cost of activity by the practical capacity available expressed in time: $325,000/525,000 minutes = $0.62/minute. Next, to calculate the cost per transaction, multiply the rate for supplying the activity by the number of minutes per transaction: Ticket Sales, $0.62 × 4 minutes = $2.48/ticket sale; Park Admittance, $0.62 × 1 minute = $0.62/admittance; Customer In-Park assistance, $0.62 × 3.5 minutes = $2.17/customer assisted; and Customer Refunds, $0.62 × 6 minutes = $3.72/refund. To obtain the total costs, multiply the cost of each transaction by its respective activity and sum the values: ($2.48 × 23,400 ticket sales) + ($0.62 × 13,600 admittances) + ($2.17 × 3,906 customers assisted) + ($3.72 × 1,508 refunds) = $58,032.00 + $8,432.00 + $8,476.02 + $5,609.76 = $80,549.78. Lastly, to determine if it was over- or underallocated, divide the $325,000.00 costs incurred by four to determine the allocation per quarter: $325,000.00/4 = $81,250.00 costs were incurred during the quarter. This means that quarter two is underallocated by ($81,250.00 - $80,549.78) = $700.22 (Choice B). Diff: 3 LO: 4 Bloom: E AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

82) Rosie Riveters is a home inspection company that specializes in pre-closing home inspections for single-family homes. Alexis, the owner, has tasked the accountant with addressing her budget concerns by finding an alternate way to cost aside from their current use of traditional costing. The accountant has determined that the advertising department may be first in line for analysis. The department handled the following volume during the year: responding to social media messages, 7,402 responses (1.5 minutes per response); responding to phone inquiries, 5,633 responses (3 minutes per response); and responding to mailed flyers, 1,340 responses (2 minutes per response). Rosie Riveters spent $167,900 to operate the advertising department, and these resources created a capacity of 35,000 minutes for Rosie Riveters. Using Time-Driven Activity-Based Costing (TDABC), how much cost will be allocated to responding to social media? (If required, round calculations to two decimal places.) A) $27,038.40 B) $53,294.40 C) $167,900.00 D) $168,000.00 Answer: B Explanation: This question requires multiple steps in order to be able to calculate the cost that will be allocated under TDABC. First, calculate the rate for supplying the activity by taking the total cost of the activity and dividing it by the practical capacity available expressed in time: $167,900/35,000 minutes = $4.80 per response. Next, multiply the per-minute rate by the number of minutes per response: $4.80 × 1.5 minutes = $7.20. Lastly, multiply the cost per response by the number of times activity was performed: $7.20 × 7,402 responses = $53,294.40 (Choice B). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

83) Rosie Riveters is a home inspection company that specializes in pre-closing home inspections for single-family homes. Alexis, the owner, has tasked the accountant with addressing her budget concerns by finding an alternate way to cost aside from their current use of traditional costing. The accountant has determined that the advertising department may be first in line for analysis. The department handled the following volume during the year: responding to social media messages, 7,402 responses (1.5 minutes per response); responding to phone inquiries, 5,633 responses (3 minutes per response); and responding to mailed flyers, 1,340 responses (2 minutes per response). Rosie Riveters spent $167,900 to operate the advertising department, and these resources created a capacity of 35,000 minutes for Rosie Riveters. Using Time-Driven Activity-Based Costing (TDABC), how much total cost will be allocated to key activities? (If required, round calculations to two decimal places.) A) $41,961.60 B) $62,568.00 C) $147,273.60 D) $167,900.00 Answer: C Explanation: This question requires multiple steps in order to calculate the cost that will be allocated under TDABC. First, calculate the rate for supplying an activity by taking the total cost of that activity and dividing it by the practical capacity available expressed in time: $167,900/35,000 minutes = $4.80 per response. Next, determine the cost per response by multiplying per-minute rate by the number of minutes per response for each activity: $4.80 × 1.5 minutes = $7.20; $4.80 × 3 minutes = $14.40; and $4.80 × 2 minutes = $9.60. Now, multiply the cost per response by the number of times each activity was performed: $7.20 × 7,402 social media responses = $53,294.40; $14.40 × 5,633 phone inquiry responses = $81,115.20; and $9.60 × 1,340 mailed flyer responses = $12,864.00. Lastly, combine all individual totals to arrive at the total cost allocated: $53,294.40 + $81,115.20 + $12,864.00 = $147,273.60 (Choice C). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

84) The Concrete Rose has been a staple of their community for several decades. As the owner retires and promotes his daughter Moira to CEO of this successful music venue, the management staff has prepared suggestions for improvements. At the top of their list is the implementation of Time-Driven Activity-Based Costing (TDABC) instead of their current traditional costing methods. With this new change, the management team believes they can optimize their earnings. They compiled the following data about their identified key activities: Key Transactions Ticket Sales Ticketed Admittance Customer Refunds

Estimated Time per Activity 4 minutes 1.5 minutes 8 minutes

Tickets handled this Year 84,620 tickets 77,844 tickets 4,670 tickets

The Concrete Rose spent $389,500 to operate the ticketing department, and these resources created a capacity of 495,000 minutes. If actual costs incurred to operate the activities are compared to the allocated costs, what is the difference, and is it over- or underallocated? (If required, round calculations to two decimal places.) A) $47.96 overallocated B) $47.96 underallocated C) $1,502.04 overallocated D) $1,502.04 underallocated Answer: A Explanation: This question requires the calculation of the rate for supplying an activity by taking the total cost of the activity and dividing it by the practical capacity available expressed in time: $389,500/495,000 minutes = $0.79 per minute. Next, multiply the per-minute rate by the time to complete each activity: $0.79 × 4 minutes per ticket sale = $3.16 per ticket sale; $0.79 × 1.50 minutes per ticket admittance = $1.19 per ticket admittance; and $0.79 × 8 minutes per ticket refund = $6.32 per ticket refund. Next, multiply each activity rate by the number of tickets handled per year, and sum those totals: ($3.16 × 84,620) + ($1.19 × 77,844) + ($6.32 × 4,670) = $267,399.20 + $92,634.36 + $29,514.40 = $389,547.96. Lastly, compare the total allocated costs to the actual costs, so the difference, $389,547.96 - $389,500 = $47.96, is overallocated (Choice A). Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

85) The Concrete Rose has been a staple of their community for several decades. As the owner retires and promotes his daughter Moira to CEO of this successful music venue, the management staff has prepared suggestions for improvements. At the top of their list is the implementation of Time-Driven Activity-Based Costing (TDABC) over their current traditional costing methods. With this new change, the management team believes they can optimize their earnings. They compiled the following data about their identified key activities: Key Transactions Ticket Sales Ticketed Admittance Customer Refunds

Estimated Time per Activity 4 minutes 1.5 minutes 8 minutes

Tickets handled this Year 84,620 tickets 77,844 tickets 4,670 tickets

The Concrete Rose spent $389,500 to operate the ticketing department, and these resources created a capacity of 495,000 minutes. How much total cost would be allocated to the key activities? (If required, round calculations to two decimal places.) A) $326,428.00 B) $389,500.00 C) $389,547.96 D) $391,050.00 Answer: C Explanation: This question requires the calculation of the rate for supplying an activity by taking the total cost of the activity and dividing it by the practical capacity available expressed in time: $389,500/495,000 minutes = $0.79 per minute. Next, multiply the per-minute rate by the time to complete each activity: $0.79 × 4 minutes per ticket sale = $3.16 per ticket sale; $0.79 × 1.5 minutes per ticket admittance = $1.19 per ticket admittance; and $0.79 × 8 minutes per ticket refund = $6.32 per ticket refund. Next, multiply each activity rate by the number of tickets handled per year, and then sum their totals: ($3.16 × 84,620) + ($1.19 × 77,844) + ($6.32 × 4,670) = $267,399.20 + $92,634.36 + $29,514.40 = $389,547.96 (Choice C). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

86) When considering implementing activity-based costing, management should consider all advantages and disadvantages. Which of the following would be considered a disadvantage? A) Better pricing decisions. B) Employee pushback C) More precise profit planning D) Sound make-or-buy decisions Answer: B Explanation: This question requires that you determine what would be considered advantages of activity-based costing. Advantages include better pricing decisions (Choice A), more precise profit planning (Choice C), and sound make-or-buy decisions (Choice D). Employee pushback (Choice B) is the correct choice as it is considered to be a disadvantage of activity-based costing. Diff: 2 LO: 4 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making 87) Activity-based costing (ABC) is often chosen in lieu of using a traditional costing system. While it does have many advantages, it also has some disadvantages. Of the following, which would be considered a disadvantage of ABC? A) Improved product-mix decisions B) Initial costs C) Manufacturing efficiency D) Sound make-or-buy decisions Answer: B Explanation: This question requires that you determine what would be considered disadvantages of activity-based costing. Disadvantages include initial costs (Choice B) in addition to its being time-consuming, employee pushback, and the need for two costing systems. Improved product-mix decisions (Choice A), Manufacturing efficiency (Choice C), and Sound make-or-buy decisions (Choice D) are all considered advantages of ABC, and that makes them incorrect selections. Diff: 2 LO: 4 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making

88) Time-Driven Activity-Based Costing (TDABC) requires its users to calculate the rate for supplying an activity. The correct formula for doing so would be A) add the total cost of activity to the practical capacity available expressed in time. B) divide the practical capacity available expressed in time by the total cost of activity. C) divide the total cost of activity by the practical capacity available expressed in time. D) multiply the total cost of activity by the practical capacity available expressed in time. Answer: C Explanation: This question requires you to recall the correct way to calculate the rate for supplying an activity. The formula is Total cost of activity/Practical capacity available expressed in time (Choice C). Choice A is incorrect as it adds the two numbers together. Choice B is incorrect as it swaps the numerator and denominator. Choice D is incorrect as it multiplies the two figures. Diff: 1 LO: 4 Bloom: C AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making 89) Fashion Express, Inc. is a clothing retail vendor that specializes in modern women's clothing. They incurred costs of $146,000 last year to facilitate their staff performing customer service and sales activities. These resources create a capacity of 210,000 minutes for Fashion Express within their customer service and sales activity per year. On average, servicing all customers requires the following transactions throughout the year: processing sales orders, 105,000 minutes; restocking merchandise, 44,500 minutes; cash register, 50,450 minutes; and issuing returns, 10,050 minutes. Using Time-Driven Activity-Based Costing (TDABC), how much cost will be allocated to the cash register transactions? (If required, round calculations to two decimal places.) A) $31,350.00 B) $35,315.00 C) $72,565.07 D) $73,500.00 Answer: B Explanation: This question requires multiple steps in order to be able to calculate the cost that will be allocated under TDABC. First, calculate the rate for supplying an activity by taking the total cost of the activity and dividing it by the practical capacity available expressed in time: $146,000/210,000 = $0.70 per minute. Next, multiply the per-unit rate by the activity: $0.70 × 50,450 minutes = $35,315.00 (Choice B). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

90) Fashion Express, Inc. is a clothing retail vendor that specializes in modern women's clothing. They incurred costs of $164,000 last year to facilitate their staff performing customer service and sales activities. These resources create a capacity of 222,000 minutes for Fashion Express within their customer service and sales activity per year. On average, servicing all customers requires the following transactions throughout the year: processing sales order, 117,000 minutes; restocking merchandise, 44,500 minutes; cash register, 50,450 minutes; and issuing returns, 10,050 minutes. Using Time-Driven Activity-Based Costing (TDABC), how much cost will be allocated to the restocking merchandise transactions? (If required, round calculations to two decimal places.) A) $32,930.00 B) $37,333.00 C) $60,237.80 D) $77,700.00 Answer: A Explanation: This question requires multiple steps in order to be able to calculate the cost that will be allocated under TDABC. First, calculate the rate for supplying an activity by taking the total cost of the activity and dividing it by the practical capacity available expressed in time: $164,000/222,000 = $0.74 per minute. Next, multiply the per unit rate by the activity: $0.74 × 44,500 minutes = $32,930.00 (Choice A). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

91) Stevens Services is a call center that specializes in several customer- and order-related activities. They are in the process of implementing Time-Driven Activity-Based Costing (TDABC) and have identified the following pertinent information:

Key Activities Initial Order Call Service Request Call Customer Complaint Call

Rate for Supplying an Activity $0.42 $0.42 $0.42

Estimated Time per Call 10 minutes 4 minutes 7 minutes

They incurred $155,000 last year to operate the aforementioned activities. Assume that employees handled the following number of calls during the year: Initial Orders, 23,400 calls; Service Requests, 11,480 calls; and Customer Complaints, 9,872 calls. How much total cost would be allocated to the key activities? A) $48,310.08 B) $117,566.40 C) $146,590.08 D) $155,000.00 Answer: C Explanation: This question provided the rate for supplying an activity, so the first step needed would be to calculate the cost per transaction. The initial order call costs would equal $0.42 times 10 minutes or $4.20 per call. Service request calls would be $0.42 times 4 minutes or $1.68 per call. Customer complaint calls would be $0.42 times 7 minutes or $2.94 per call. Next, multiply each per-call cost by the number of calls of that type completed for the year: $4.20 × 23,400 = $98,280; $1.68 × 11,480 = $19,286.40; and $2.94 × 9,872 = $29,023.68. The total cost allocated will be the sum of the previously calculated values = $98,280.00 + $19,286.40 + $29,023.68 = $146,590.08 (Choice C). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

92) Stevens Services is a call center that specializes in several customer- and order-related activities. They are in the process of implementing Time-Driven Activity-Based Costing (TDABC) and have identified the following pertinent information:

Key Activities Initial Order Call Service Request Call Customer Complaint Call

Rate for Supplying an Activity $0.42 $0.42 $0.42

Estimated Time per Call 10 minutes 4 minutes 7 minutes

They incurred $155,000 last year to operate the aforementioned activities. Assume that employees handled the following number of calls during the year: Initial Orders, 23,400 calls; Service Requests, 11,480 calls; and Customer Complaints, 9,872 calls. When comparing actual costs incurred to operate the activities to the allocated costs, what is the difference, and is it overallocated or underallocated? A) $8,409.32 overallocated B) $8,409.92 underallocated C) $27,696.32 overallocated D) $27,696.32 underallocated Answer: B Explanation: This question provided the rate for supplying an activity, so the first step needed would be to calculate the cost per transaction. Initial order calls would equal $0.42 times 10 minutes or $4.20 per call. Service request calls would be $0.42 times 4 minutes or $1.68 per call. Customer complaint calls would be $0.42 times 7 minutes or $2.94 per call. Next, multiply each per-call cost by the number of calls of that type completed for the year. $4.20 × 23,400 = $98,280; $1.68 × 11,480 = $19,286.40; and $2.94 × 9,872 = $29,023.68. The total cost allocated will be the sum of the previously calculated values = $98,280.00 + $19,286.40 + $29,023.68 = $146,590.08. Lastly, compare the total costs incurred ($155,000) to the total allocated costs ($146,590.08) and get the difference of $8,409.92 that represents the underallocated cost (Choice B). Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

93) Susan is an accountant for Spruce, Inc., a small lawn care business, and she is trying to determine whether or not they should implement Time-Driven Activity-Based Costing (TDABC). Spruce has several customer-centric activities including: Initial Phone Consultation, Appointment Setting, and Sales Follow-Up. Supporting these activities, Spruce has incurred costs of $198,800 last year, and Spruce has 605,800 minutes per year within their capacity. Susan has gathered the following information: Key Activities Initial Phone Consultation Appointment Setting Sales Follow-Up

Estimated Time per Call 6 minutes 7.5 minutes 8 minutes

Calls Handled this Year 33,600 calls 28,400 calls 23,900 calls

How much total cost would be allocated to Sales Follow-Up? (If required, round calculations to two decimal places.) A) $63,096.00 B) $66,528.50 C) $70,432.00 D) $200,056.00 Answer: A Explanation: First, this question requires that the calculation of the rate for supplying an activity: $198,800/605,800 minutes = $0.33 per minute. Next, calculate the cost per transaction for each sales follow-up call: $0.33 per minute times 8 minutes equals $2.64 per sales follow-up call. This leads to total sales follow-up costs of $63,096.00: Choice A (23,900 sales follow-up calls times $2.64 per call). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

94) Susan is an accountant for Spruce, Inc., a small lawn care business, and she is trying to determine whether or not they should implement Time-Driven Activity-Based Costing (TDABC). Spruce has several customer-centric activities including: Initial Phone Consultation, Appointment Setting, and Sales Follow-Up. Supporting these activities cost Spruce $198,800 last year, and Spruce has 605,800 minutes within their capacity. Susan has gathered the following information: Key Activities Initial Phone Consultation Appointment Setting Sales Follow-Up

Estimated Time per Call 6 minutes 7.5 minutes 8 minutes

Calls Handled this Year 33,600 calls 28,400 calls 23,900 calls

How much total cost would be allocated to the key activities? (Do not round calculations.) A) $118,624 B) $125,960 C) $193,600 D) $198,800 Answer: D Explanation: First, this question requires the calculation of the rate for supplying an activity: $198,800/605,800 minutes = $0.33 per minute. Next, calculate the cost per transaction for each type of call: initial phone consultation call, $0.33 per minute times 6 minutes equals $1.97 per call; appointment setting call, $0.33 per minute times 7.5 minutes equals $2.46 per call; and sales follow-up call, $0.33 per minute times 8 minutes equals $2.63 per call. Lastly, find the total cost for each call type, and add them for a total overall cost: ($1.97 × 33,600 calls) + ($2.46 × 28,400 calls) + ($2.63 × 23,900 calls) = $66,157.28+$69,898.32+ $62,744.40= $198,800.00 (Choice D). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

95) John is a carpenter who specializes in bathroom renovations for single-owner homes. He believes that he has been underbidding his projects and losing out on potential profit that could make all of the difference for his business's continued viability. He is putting together an estimate for a potential client and has determined the following activities:

Activity Demo of Existing Space Cabinet Installation Tile Installation

Cost Driver Square Footage Cabinets installed Pieces of tile laid

Rate $2.25/square foot $176/hour $0.78/tile

Estimated Use for Job 400 square feet 4 hours 1,218 tiles

Previously, John was billing at a flat rate of $6 per square foot with no additional markups. John would like to add a 25% markup to the cost to arrive at a final bid price that will be given to the customer. Using Activity-Based Costing (ABC), what is the final bid price that will be presented to the customer? A) $2,400.00 B) $2,554.04 C) $3,064.85 D) $3,192.55 Answer: D Explanation: To answer this question, first determine the estimated cost for each activity. Demo, $2.25 × 400 square feet = $900; Cabinets, $176 × 4 hours = $704; and Tile, $0.78 × 1,218 tiles = $950.04. Once they are totaled, the initial price is $2,554.04. The last step is to add the markup: $2,554.04 × 1.25 = $3,192.55 (Choice D). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

96) John is a carpenter who specializes in bathroom renovations for single-owner homes. He believes that he has been underbidding his projects and losing out on potential profit that could make all of the difference for his business's continued viability. He is putting together an estimate for a potential client and has determined the following activities:

Activity Demo of Existing Space Cabinet Installation Tile Installation

Cost Driver Square Footage Cabinets installed Pieces of tile laid

Rate $2.25/square foot $176/hour $0.78/tile

Estimated Use for Job 400 square feet 4 hours 1,218 tiles

Previously, John was billing at a flat rate of $6 per square foot with no additional markups. John would like to add a 25% markup to the cost to arrive at the final bid price that will be given to the customer. Using Activity-Based Costing (ABC), how much additional profit will John make from this prospective client? A) ($445.96) B) $154.04 C) $192.55 D) $792.55 Answer: D Explanation: To answer this question, first determine the estimated cost for each activity. Demo, $2.25 × 400 square feet = $900; Cabinets, $176 × 4 hours = $704; and Tile, $0.78 × 1,218 tiles = $950.04. Once they are totaled, the initial price is $2,554.04. Next, add the markup: $2,554.04 × 1.25 = $3,192.55. Lastly, subtract the amount John would have received under his previous method ($6 × 400 square feet) = $2,400. John will make an additional profit of $792.55 (Choice D). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

97) Sunflower, Inc. is a service-based business that provides landscaping architecture services to their clients. Management has been investigating whether a change to Activity-Based Costing (ABC) would benefit the company and help them achieve their goal of having the costs in their bids more closely mirror the actual costs while maximizing their profit. Currently, Sunflower bills at a flat rate of $9 per square foot of yard prep and had been adding a 15% markup to their bids. After analyzing their key tasks, they are going to use ABC for an upcoming customer bid:

Activity Design Yard Prep Planting SG&A

Cost Driver Designer hours Square footage Foliage planted Admin hours

Rate $100/hour $1.78/square foot $48.80/plant $75/hour

Estimated Use for Job 20 hours 600 square feet 38 plants 5 hours

Sunflower would like to increase their markup to 18% for all jobs using ABC. What would Sunflower's bid price be if they chose to utilize ABC? A) $5,297.40 B) $5,808.43 C) $6,092.01 D) $6,250.93 Answer: D Explanation: To answer this question, first determine the estimated cost for each activity. Design, $100 × 20 hours = $2,000; Yard Prep, $1.78 × 600 square feet = $1,068; Planting, $48.80 × 38 plants = $1,854.40; and SG&A, $75 × 5 hours = $375. Once they are totaled, the initial price is $5,297.40. The last step is to add the markup- $5,297.40 × 1.18 = $6,250.93 (Choice D). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

98) Sunflower, Inc. is a service-based business that provides landscaping architecture services to their clients. Management has been investigating whether a change to Activity-Based Costing (ABC) would benefit the company and help them achieve their goal of having the costs in their bids more closely mirror the actual costs while maximizing their profit. Currently, Sunflower bills at a flat rate of $9 per square foot of yard prep and had been adding a 15% markup to their bids. After analyzing their key tasks, they are going to use ABC for an upcoming customer bid:

Activity Design Yard Prep Planting SG&A

Cost Driver Designer hours Square footage Foliage planted Admin hours

Rate $100/hour $1.78/square foot $48.80/plant $75/hour

Estimated Use for Job 20 hours 600 square feet 38 plants 5 hours

Sunflower would like to increase their markup to 18% for all jobs using ABC. What would Sunflower's difference in bid price be if they chose to utilize ABC? A) ($117.99) B) $0.00 C) $40.93 D) $121.07 Answer: C Explanation: To answer this question, first determine the estimated cost for each activity. Design, $100 × 20 hours = $2,000; Yard Prep, $1.78 × 600 square feet = $1,068; Planting, $48.80 × 38 plants = $1,854.40; and SG&A, $75 × 5 hours = $375. Once they are totaled, the initial price is $5,297.40. Next, add the markup: $5,297.40 × 1.18 = $6,250.93 to arrive at the bid price for ABC. Then, calculate the cost that Sunflower would have billed at flat rate: ($9/square foot times 600 square feet) × 1.15 = $6,210.00. Lastly, subtract the older method bid price from the ABC method ($6,250.93 - $6,210.00) and you will see that Sunflower is able to bill an additional $40.93 (Choice C). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

99) Swanson Corp. manufactures and sells decorative bird feeders and birdhouses to local vendors. As a new business, they are trying to determine how to appropriately cost their items and have narrowed the choices to a traditional costing system and Activity-Based Costing (ABC). Their Direct Materials (DM) include (same for both products): Concrete, $12,500; and wood, $23,620. Their Direct Labor (DL) includes (same for both products): Wages (assembly line worker), $58,900; and Wages (painter), $42,850. Under a traditional costing system, their Manufacturing Overhead (MOH) would be 88% of their direct labor costs. If they decide to go with ABC, then they have identified the following key activities and costs: Property tax, $18,400 ($1.50 per square foot); Wages, supervisor, $56,800 ($7.10 per hour); and Cleaning, $24,700 ($3.81 per hour). Swanson intends to stick to the following production schedule: Bird feeders: 18,640 units; 8,100 square feet; 5,230 supervisor hours; and 3,900 cleaning hours. Birdhouses: 12,307 units; 4,150 square feet; 2,770 supervisor hours; and 2,580 cleaning hours. If Swanson chooses to use a traditional costing system instead of ABC, then what is the difference in total product costs for bird feeders? A) Traditional costing is $25,398.00 higher than ABC. B) Traditional costing is $25,398.00 lower than ABC. C) Traditional costing is $54,439.00 higher than ABC. D) Traditional costing is $54,439.00 lower than ABC. Answer: A Explanation: Under a traditional costing system, the total product costs would equal: DM [$12,500 + $23,620] + DL [$58,900 + $42,850] + MOH (($58,900 + $42,850) × 88%) = $36,120.00 + $101,750.00 + $89,540 = $227,410.00. Under ABC, DM and DL will be the same as under the traditional costing system, but the MOH must be calculated based on activity. Property tax: $1.50 × 8,100 square feet = $12,150.00; supervisor wages: $7.10 × 5,230 supervisor hours = $37,133.00; and cleaning: $3.81 × 3,900 cleaning hours = $14,859.00. MOH costs = $12,150.00 + $37,133.00 + $14,859.00 = $64,142.00. The total product costs will equal $36,120.00 + $101,750.00 + $64,142.00 = $202,012.00. The difference between the two costing systems is $227,410.00 - $202,012.00 = $25,398.00 higher under traditional costing (Choice A). Diff: 2 LO: 1, 3, 4 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

100) Swanson Corp. manufactures and sells decorative bird feeders and birdhouses to local vendors. As a new business, they are trying to determine how to appropriately cost their items and have narrowed the choices to a traditional costing system and Activity-Based Costing (ABC) system. Their Direct Materials (DM) include (same for both products): Concrete, $12,500 and wood, $23,620. Their Direct Labor (DL) includes (same for both products): Wages (assembly line worker), $58,900, and Wages (painter), $42,850. Under a traditional costing system, their Manufacturing Overhead (MOH) would be 88% of their direct labor costs. If they decide to go with ABC, then they have identified the following key activities and costs: property tax, $18,400 ($1.50 per square foot); wages (supervisor), $56,800 ($7.10 per hour); and cleaning, $24,700 ($3.81 per hour). Swanson intends to stick to the following production schedule: Bird feeders: 18,640 units; 8,100 square feet; 5,230 supervisor hours; and 3,900 cleaning hours. Birdhouses: 12,307 units; 4,150 square feet; 2,770 supervisor hours; and 2,580 cleaning hours. Under traditional costing, the total product cost for a birdhouse is $18.48. If Swanson chooses to use an ABC system instead of traditional costing system, then what is the difference in total cost per unit for the birdhouses? A) Total cost in Traditional costing is $1.38 higher than ABC. B) Total cost in Traditional costing is $1.38 lower than ABC. C) Total cost in Traditional costing is $4.37 higher than ABC. D) Total cost in Traditional costing is $4.37 lower than ABC. Answer: C Explanation: Under ABC, the total product costs would equal DM + DL + MOH. DM = $12,500 + $23,620 = $36,120.00; DL = $58,900 + $42,850 = $101,750.00; MOH = Property tax: $1.50 × 4,150 square feet = $6,225; Wages (supervisor) $7.10 × 2,770 hours = $19,667.00; Cleaning, $3.81 × 2,580 hours = $9,829.80. MOH costs = $6,225 + $19,667.00 + $9,829.80 = $35,721.80. The total product costs will equal $36,120.00 + $101,750.00 + $35,721.80 = $173,591.80. The total cost per unit will equal $173,591.80/12,307 units = $14.11 per birdhouse. The difference between the two costing systems is $18.48 - $14.11 = $4.37 higher under traditional costing (Choice C). Diff: 2 LO: 1, 3, 4 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

101) Lumins, Inc. is a manufacturer of fine quality lamps and currently offers two kinds: floor lamps and desk lamps. Each floor lamp needs 2 direct labor hours and 3 pounds of direct materials while each desk lamp needs 1.5 direct labor hours and 1.75 pounds of direct materials. They currently utilize a traditional costing system, but management has recently established an exploratory committee to investigate whether a switch to Activity-Based Costing (ABC) might be beneficial. Their key activities are as follows: Machining, $22.78 per machining hour; Factory Utilities, $3.77 per square foot; and Supervisor Wages, $13.42 per hour. Lumins has gathered the following information about production and related costs:

Number Produced Direct Materials Direct Labor Machining Hours Square Feet Supervisor Hours

Floor Lamp 12,338 $0.78 per pound $2.73 per hour 10,400 2,770 4,160

Desk Lamp 18,980 $0.78 per pound $2.73 per hour 8,780 1,890 3,786

Under a traditional costing system, Manufacturing Overhead (MOH) is estimated at 90% of the Direct Labor (DL) cost. What is the per-unit cost for floor lamps under a traditional costing system? What is the per-unit cost for floor lamps under ABC? (Do not round intermediate calculations.) A) Traditional, $4.91; ABC, $24.57 B) Traditional, $12.71; ABC, $32.37 C) Traditional, $24.57; ABC, $4.91 D) Traditional, $32.37; ABC, $12.71 Answer: B Explanation: This question requires several steps before arriving at a per-unit cost for both the traditional costing system and ABC. The Direct Materials and Direct Labor will be the same under both methods, so one calculation will satisfy this requirement for both costing systems. Direct Materials = $0.78 per pound × 3 pounds needed per lamp = $2.34. Direct Labor = $2.73 per hour × 2 hours needed per lamp = $5.46. For traditional costing, MOH will be calculated by multiplying the DL cost of $5.46 by 90% = $4.91. To arrive at the per-unit cost, combine DM, DL, and MOH = $12.71 total cost per floor lamp. Under ABC, calculate the cost per key activity: ($22.78 × 10,400 machining hours) + ($3.77 × 2,770 square feet) + ($13.42 × 4,160 hours) = $236,912.00 + $10,442.90 + $55,827.20 = $303,182.10 MOH. Next, calculate MOH per unit by dividing by the number of floor lamps produced = $303,182.10/12,338 = $24.57. To arrive at the total cost per floor lamp, combine DM, DL, and MOH = $2.34 + $5.46 + $24.57 = $32.37. This corresponds to Choice B. Diff: 3 LO: 1, 3, 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

102) Lumins, Inc. is a manufacturer of fine quality lamps and currently offers two kinds: floor lamps and desk lamps. Each floor lamp needs 2 direct labor hours and 3 pounds of direct materials while each desk lamp needs 1.5 direct labor hours and 1.75 pounds of direct materials. They currently utilize a traditional costing system, but management has recently established an exploratory committee to investigate whether a switch to Activity-Based Costing (ABC) might be beneficial. Their key activities are as follows: Machining, $22.78 per machining hour; Factory Utilities, $3.77 per square foot; and Supervisor Wages, $13.42 per hour. Lumins has gathered the following information about production and related costs:

Number Produced Direct Materials Direct Labor Machining Hours Square Feet Supervisor Hours

Floor Lamp 12,338 $0.78 per pound $2.73 per hour 10,400 2,770 4,160

Desk Lamp 18,980 $0.78 per pound $2.73 per hour 8,780 1,890 3,786

Under a traditional costing system, Manufacturing Overhead (MOH) is estimated at 90% of the direct labor costs. What is the per-unit cost for desk lamps under a traditional costing system? What is the per-unit cost for desk lamps under ABC? (Do not round intermediate calculations.) A) Traditional, $9.15; ABC, $19.05 B) Traditional, $13.59; ABC, $17.28 C) Traditional, $17.28; ABC, $13.59 D) Traditional, $19.05; ABC, $9.15 Answer: A Explanation: This question requires several steps before arriving at a per-unit cost for both the traditional costing system and ABC. The Direct Materials (DM) and Direct Labor (DL) costs will be the same under both methods, so one calculation will satisfy this requirement under both costing systems. Direct Materials = $0.78 per pound × 1.75 pounds needed per lamp = $1.37. Direct Labor = $2.73 per hour × 1.5 hours needed per lamp = $4.10. For traditional costing, MOH will be calculated by multiplying the DL of $4.10 by 90% = $3.69. To arrive at the perunit cost, combine DM, DL, and MOH = $9.15 total cost per desk lamp. Under ABC, calculate the cost per key activity: ($22.78 × 8,780 machining hours) + ($3.77 × 1,890 square feet) + ($13.42 × 3,786 hours) = $200,008.40 + $7,125.30 + $50,808.12 = $257,941.82 MOH. Next, calculate MOH per unit by dividing the number of desk lamps produced = $257,941.82/18,980 = $13.59. To arrive at the total cost per desk lamp, combine DM, DL, and MOH = $4.10 + $1.37 + $13.59 = $19.05. This corresponds to Choice A. Diff: 3 LO: 1, 3, 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

103) Pawnee Inc. is an outdoor sporting goods company that produces tents and sleeping bags that it sells online. Pawnee has implemented Activity-Based Costing (ABC) and is in the process of compiling a budget for the coming year. Their Manufacturing Overhead (MOH) is comprised of the following costs: Setups Quality inspections Assembly supervisor wages

$120,000 (28,000 setups) $98,000 (20,000 inspections) $160,000 (40,000 hours)

Pawnee anticipates the production of 10,000 tents and 14,000 sleeping bags. Each product is projected to use company resources in the following manner: Item Tents Sleeping Bags

Setups 11,500 16,500

Inspections 8,600 11,400

Supervisor Hours 16,700 23,300

What is the ABC-based total MOH cost allocated per unit for the tents? (If required, round calculations to two decimal places.) A) $6.59 B) $11.31 C) $15.75 D) $15.83 Answer: D Explanation: First, calculate the activity-based rate for each of the total MOH activities: Setups, $120,000/28,000 setups = $4.29/setup; quality inspections, $98,000/20,000 inspections = $4.90/inspection; and assembly supervisor wages, $160,000/40,000 hours = $4.00/hour. Next, calculate the total MOH cost for the tents: ($4.29 × 11,500 setups) ($4.90 × 8,600 inspections) + ($4.00 × 16,700 hours) = $49,335.00 + $42,140.00 + $66,800.00 = $158,275.00. Lastly, divide the total tent MOH cost by the number of tents produced: $158,275/10,000 tents = $15.83 per tent (Choice D). Diff: 2 LO: 3, 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

104) Pawnee Inc. is an outdoor sporting goods company that produces tents and sleeping bags that it sells online. Pawnee has implemented Activity-Based Costing (ABC) and is in the process of compiling a budget for the coming year. Their Manufacturing Overhead (MOH) is comprised of the following costs: Setups Quality inspections Assembly supervisor wages

$120,000 (28,000 setups) 98,000 (20,000 inspections) 160,000 (40,000 hours)

Pawnee anticipates the production of 10,000 tents and 14,000 sleeping bags. Each product is projected to use company resources in the following manner: Item Tents Sleeping Bags

Setups 11,500 16,500

Inspections 8,600 11,400

Supervisor Hours 16,700 23,300

What is the ABC-based total MOH cost allocated per unit for the sleeping bags? (If required, round calculations to two decimal places.) A) $9.16 B) $15.70 C) $15.75 D) $21.98 Answer: B Explanation: First, calculate the activity-based rate for each of the MOH activities: Setups, $120,000/28,000 setups = $4.29/setup; quality inspections, $98,000/20,000 inspections = $4.90/inspection; and assembly supervisor wages, $160,000/40,000 hours = $4.00/hour. Next, calculate the total MOH cost for the sleeping bags: ($4.29 × 16,500 setups) + ($4.90 × 11,400 inspections) + ($4.00 × 23,300 hours) = $70,785.00 + $55,860.00 + $93,200.00 = $219,845.00. Lastly, divide the total sleeping bag MOH cost by the number of sleeping bags to be produced: $219,845/14,000 sleeping bags = $15.70 per sleeping bag (Choice B). Diff: 2 LO: 3, 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

105) Leslie is the new controller for Toasties, a coffee bean roaster, and she has decided to introduce some changes that she believes will assist management in making more informed cost decisions. At her previous job, Leslie implemented activity-based costing, and the management was thrilled to be able to better allocate their Manufacturing Overhead (MOH) costs to their products. Leslie is optimistic that Toasties will benefit in the same manner and has identified the following key activities: Machining Cleaning/Maintenance Roaster supervisor wages

$48,400 (8,000 machine hours) $36,700 (6,850 cleaning/maintenance hours) $84,330 (16,800 supervisor hours)

Leslie anticipates that Toasties will roast 12,400 pounds of light beans and 18,990 pounds of dark beans. The light beans will use the following: Machining, 3,200 machine hours; Cleaning/Maintenance, 2,980 cleaning/maintenance hours; and 7,100 Roaster Supervisor Hours. The dark beans will use the following: Machining, 4,800 machine hours; Cleaning/Maintenance, 3,870 cleaning/maintenance hours, and 9,700 Roaster Supervisor Hours. What is the total amount of MOH costs that will be allocated to the light beans based upon ABC? (If required, round calculations to two decimal places.) A) $67,587.60 B) $70,974.80 C) $74,362.00 D) $181,404.80 Answer: B Explanation: Calculate the activity-based rate for each of the key MOH activities: Machining, $48,400/8,000 machine hours = $6.05/machine hour; Cleaning/Maintenance, $36,700/6,850 cleaning/maintenance hours = $5.36 per cleaning/maintenance hour; Roaster Supervisor Wages, $84,330/16,800 supervision hours = $5.02/supervision hour. Lastly, calculate the total overall MOH cost allocated to the light beans: ($6.05 × 3,200 machine hours) + ($5.36 × 2,980 cleaning/maintenance hours) + ($5.02 × 7,100 supervisor hours) = $19,360.00 + $15,972.80 + $35,642.00 = $70,974.80 (Choice B). Diff: 2 LO: 3, 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

106) Leslie is the new controller for Toasties, a coffee bean roaster, and she has decided to introduce some changes that she believes will assist management in making more informed cost decisions. At her previous job, Leslie implemented activity-based costing, and the management was thrilled to be able to better allocate their Manufacturing Overhead (MOH) costs to their products. Leslie is optimistic that Toasties will benefit in the same manner and has identified the following key activities: Machining Cleaning/Maintenance Roaster supervisor wages

$48,400 (8,000 machine hours) $36,700 (6,850 cleaning/maintenance hours) $84,330 (16,800 supervisor hours)

Leslie anticipates that Toasties will roast 12,400 pounds of light beans and 18,990 pounds of dark beans. The light beans will use the following: Machining, 3,200 machine hours; Cleaning/Maintenance, 2,980 cleaning/maintenance hours; and 7,100 Roaster Supervisor Hours. The dark beans will use the following: Machining, 4,800 machine hours; Cleaning/Maintenance, 3,870 cleaning/maintenance hours; and 9,700 Roaster Supervisor Hours. What is the total amount of MOH costs that will be allocated to the dark beans based upon ABC? (If required, round calculations to two decimal places.) A) $70,974.80 B) $78,823.20 C) $98,477.20 D) $106,774.00 Answer: C Explanation: Calculate the activity-based rate for each of the key MOH activities: Machining, $48,400/8,000 machine hours = $6.05/machine hour; Cleaning/Maintenance, $36,700/6,850 cleaning/maintenance hours = $5.36 per cleaning/maintenance hour; and Roaster Supervisor Wages, $84,330/16,800 supervision hours = $5.02/supervisor hour. Lastly, calculate the total overall MOH cost allocated to the dark beans: ($6.05 × 4,800 machine hours) + ($5.36 × 3,870 cleaning/maintenance hours) + ($5.02 × 9,700 supervisor hours) = $29,040.00 + $20,743.20 + $48,694.00 = $98,477.20 (Choice C). Diff: 2 LO: 3, 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

107) The management team at Diamondz, Inc., a manufacturer of fine jewelry, is gearing up for their new fiscal year. Part of their yearly process includes analyzing the past year's performance and seeking ways to improve upon existing processes. Diamondz specializes in two products: diamond rings and diamond necklaces. Management has decided that they would like to begin using Activity-Based Costing (ABC) for budgeting their Manufacturing Overhead (MOH) costs. They have narrowed their key activities to the following: Activity Setups Quality Inspection Machining Factory Utilities

Activity Cost $36,200 $49,820 $54,808 $32,490

Total Activity Cost Driver 10,000 setups 21,460 inspections 42,700 machine hours 20,000 square feet

Diamondz has determined that the 18,900 rings they produce will use the following: $130,000 of direct materials, $52,600 of direct labor, 6,200 setups, 12,400 inspections, 26,350 machine hours, and 12,444 square feet. The 15,680 necklaces they produce will use the following: $227,400 of direct materials, $86,700 of direct labor, 3,800 setups, 9,060 inspections, 16,350 machine hours, and 7,556 square feet. What is the total manufacturing cost for diamond rings? (If required, round calculations to two decimal places.) A) $105,099.28 B) $169,259.00 C) $179,199.28 D) $287,699.28 Answer: D Explanation: This question requires a number of steps to obtain the final answer of the total manufacturing cost. First, calculate the activity rate for each of the key MOH activities: Setups, $36,200/10,000 setups = $3.62/setup; Quality Inspection, $49,820/21,460 inspections = $2.32/inspection; Machining, $54,808/42,700 machine hours = $1.28/hour; and Factory Utilities, $32,490/20,000 square feet = $1.62/square foot. Next, calculate the total overall MOH cost allocated to diamond rings: ($3.62 × 6,200 setups) + ($2.32 × 12,400 inspections) + ($1.28 × 26,350 hours) + ($1.62 × 12,444 square feet) = $22,444.00 + $28,768.00 + $33,728.00 + $20,159.28 = $105,099.28. Lastly, add the direct materials and direct labor costs to the total allocated MOH costs: $105,099.28 + $130,000.00 + $52,600.00 = $287,699.28 (Choice D). Diff: 3 LO: 3, 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

108) The management team at Diamondz, Inc., a manufacturer of fine jewelry, is gearing up for their new fiscal year. Part of their yearly process includes analyzing the past year's performance and seeking ways to improve upon existing processes. Diamondz specializes in two products: diamond rings and diamond necklaces. Management has decided that they would like to begin using Activity-Based Costing (ABC) for budgeting their Manufacturing Overhead (MOH) costs. They have narrowed their key activities to the following: Activity Setups Quality Inspection Machining Factory Utilities

Activity Cost $36,200 $49,820 $54,808 $32,490

Total Activity Cost Driver 10,000 setups 21,460 inspections 42,700 machine hours 20,000 square feet

Diamondz has determined that the 18,900 rings they produce will use the following: $130,000 of direct materials, $52,600 of direct labor, 6,200 setups, 12,400 inspections, 26,350 machine hours, and 12,444 square feet. The 15,680 necklaces they produce will use the following: $227,400 of direct materials, $86,700 of direct labor, 3,800 setups, 9,060 inspections, 16,350 machine hours, and 7,556 square feet. What is the total per-unit cost for the diamond necklaces? (If required, round calculations to two decimal places.) A) $4.41 B) $7.58 C) $10.25 D) $24.37 Answer: D Explanation: This question requires a number of steps to obtain the final answer of the total product costs. First, calculate the activity rate for each of the key MOH activities: Setups, $36,200/10,000 setups = $3.62/setup; Quality Inspection, $49,820/21,460 inspections = $2.32/inspection; Machining, $54,808/42,700 machine hours = $1.28/hour; and Factory Utilities, $32,490/20,000 square feet = $1.62/square foot. Next, calculate the total overall MOH cost allocated to diamond necklaces: ($3.62 × 3,800 setups) + ($2.32 × 9,060 inspections) + ($1.28 × 16,350 hours) + ($1.62 × 7,556 square feet) = $13,756.00 + $21,019.20 + $20,928.00 + $12,240.72 = $67,943.92. Next, add the direct materials and direct labor costs to the total allocated MOH costs: $67,943.92 + $227,400.00 + $86,700.00 = $382,043.92. Lastly, divide the total manufacturing costs by the number of diamond necklaces they intend to manufacture: $382,043.92/15,680 = $24.37/necklace (Choice D). Diff: 3 LO: 3, 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

109) Pazzo's Pizza utilizes Activity-Based Costing (ABC) to account for its Manufacturing Overhead (MOH) costs, and they have determined that they have three key activities: Property tax ($88.77 per square foot), Floor supervisor wages ($18.00 per hour), and Cleaning ($8.98 per hour). Pazzo's Pizza anticipates that they will sell the following quantities of three different kinds of pizza: Cheese, 68,392 pizzas; Pepperoni, 49,708 pizzas; and Veggie, 26,909 pizzas. Each pizza will need to use the following resources:

Direct Materials Direct Labor Square Feet Supervisor Hours Cleaning Hours

Cheese $0.48 per pizza $1.28 per pizza 300 2,000 4,100

Pepperoni $0.62 per pizza $2.02 per pizza 275 1,643 2,432

Veggie $0.58 per pizza $1.57 per pizza 250 899 1,330

Assuming that their estimates are final, what is the total product cost for the cheese pizzas? (Do not round intermediate calculations.) A) $108,172.25 B) $182,697.31 C) $207,911.68 D) $219,818.92 Answer: D Explanation: This question will require multiple steps in order to arrive at the correct total cost for the cheese pizzas. First, calculate the total direct materials cost for cheese pizzas by taking $0.48 per pizza times 68,392 cheese pizzas to be produced: $0.48 × 68,392 = $32,828.16. Next, calculate the total direct labor cost for cheese pizzas by taking $1.28 per pizza times 68,392 cheese pizzas to be produced: $1.28 × 68,392 = $87,541.76. Then, calculate how much MOH will be allocated to cheese pizzas by multiplying the per-activity rate by the quantity of each activity: ($88.77 × 300 square feet) + ($18.00 × 2,000 supervisor hours) + ($8.98 × 4,100 cleaning hours) = $26,631.00 + $36,000.00 + $36,818.00 = $99,449.00. Lastly, combine direct materials cost, direct labor cost, and MOH cost. $32,828.16 + 87,541.76 + $99,449.00 = $219,818.92 (Choice D). Diff: 3 LO: 3, 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

110) Pazzo's Pizza utilizes Activity-Based Costing (ABC) to account for its Manufacturing Overhead (MOH) costs, and they have determined that they have three key activities: Property tax ($88.77 per square foot), Floor supervisor wages ($18.00 per hour), and Cleaning ($8.98 per hour). Pazzo's Pizza anticipates that it will sell the following quantities of three different kinds of pizza: Cheese, 68,392 pizzas; Pepperoni, 49,708 pizzas; and Veggie, 26,909 pizzas. Each pizza will need to use the following resources:

Direct Materials Direct Labor Square Feet Supervisor Hours Cleaning Hours

Cheese $0.48 per pizza $1.28 per pizza 300 2,000 4,100

Pepperoni $0.62 per pizza $2.02 per pizza 275 1,643 2,432

Veggie $0.58 per pizza $1.57 per pizza 250 899 1,330

Assuming that their estimates are final, what is the total cost per unit for the veggie pizzas? (Do not round intermediate calculations.) A) $2.18 B) $3.21 C) $3.68 D) $4.02 Answer: D Explanation: This question requires multiple steps in order to arrive at the correct total cost per unit for the veggie pizzas. First, calculate the total Direct Materials (DM) cost for veggie pizzas by taking $0.58 per pizza times 26,909 veggie pizzas to be produced: $0.58 × 26,909 = $15,607.22. Next, calculate the total Direct Labor (DL) cost for veggie pizzas by taking $1.57 per pizza times 26,909 veggie pizzas to be produced: $1.57 × 26,909 = $42,247.13. Then, calculate how much MOH will be allocated to the veggie pizzas by multiplying the per-activity rate by the quantity of each activity: ($88.77 × 250 square feet) + ($18.00 × 899 supervisor hours) + ($8.98 × 1,330 cleaning hours) = $22,192.50 + $16,182.00 + $11,943.40 = $50,317.90. Next, combine the DM, DL, and MOH costs. $15,607.22 + $42,247.13 + $50,317.90 = $108,172.25. Lastly, divide the total product cost by the number of veggie pizzas to be produced: $108,172.25/26,909 veggie pizzas = $4.02 per pizza (Choice D). Diff: 3 LO: 3, 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

111) What is the purpose of traditional job costing, and how is it used for reporting purposes? Why would management consider switching to Activity-Based Costing (ABC)? Answer: The purpose of traditional job costing is to systematically allocate a company's Manufacturing Overhead (MOH) costs to each job. This method of costing is used primarily for financial reporting purposes and is GAAP-approved. Traditional job costing uses a rational and systematic movement of product costs to its financial statements, making it a popular choice amongst management. A switch to ABC may be considered if management is seeking a way to better optimize pricing decisions and product-mix decisions as more products are added. Another reason could be that it will yield better product costs since it moves the costing away from averaging, and that is what traditional job costing employs. Diff: 2 LO: 1 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making 112) Briefly describe what a cost driver is, and name a few examples. What goals should management keep in mind as they decide upon what to use as a cost driver? Answer: A cost driver is a task, effort, or other usage of a resource that causes a particular cost with common examples including square footage occupied by a department, number of employees, number of times a task is completed, and/or the number of items produced (this answer could include additional items). Management should strive to ensure that a cost driver is easy to understand, directly related to the activity being performed, and useful for performance measurement purposes. Diff: 2 LO: 1 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making 113) What is the cost hierarchy, and what are the different layers? What is its function amongst the tools that management can use for budgeting? Answer: The cost hierarchy is a ranking of four layers of costs that may be incurred in a business. It includes the following layers: facility-level costs, such as property tax and insurance; product/process-level costs, such as supervisor salary and equipment depreciation; batch-level costs, such as machine set-up and movement of materials; and unit level costs, such as direct material and direct labor. Management can use cost drivers to best identify the best cause-andeffect relationships between activities and cost drivers by assigning them to these layers. Diff: 2 LO: 2 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making

114) How many steps are involved in implementing activity-based costing? Please discuss each in addition to describing what each step will entail. Answer: Implementing activity-based costing involves four steps: 1) identify direct costs, 2) identify activities and cost drivers for MOH, 3) calculate cost driver rates and assign MOH to products, and 4) record MOH costs. Step 1 involves identifying all direct costs that can be deemed as the best part of the entire process since direct costs are easily traced to the final product. Step 2 involves using techniques from cost behavior and cost estimation to create realistic cost drivers. Step 3 involves determining the denominator value for each activity and then calculating how much each product uses of that activity's available capacity. Step 4 involves applying overhead and recording the associated MOH costs. Diff: 2 LO: 3 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making 115) Please list some advantages of Activity-Based Costing (ABC). Does ABC have any disadvantages, and if so, what are they? Answer: ABC comes along with some advantages that could include more precise profit planning, better pricing decisions, improved product-mix decisions, sound make-or-buy decisions, and manufacturing efficiency decision points (keep vs. drop). ABC does have disadvantages that could potentially include initial costs to implement, time-consuming accounting nature, employee pushback, and the need for two costing systems. All advantages and disadvantages should be considered by management before implementing any changes. Diff: 2 LO: 4 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making

116) What industries are capable of utilizing activity-based costing, and in what manner would they do so? What are some additional non-manufacturing activity cost pools and associated cost drivers? Answer: Manufacturing firms, merchandising firms, service businesses, and nonprofit entities are all capable of using activity-based costing. All can use activity-based costing to help to better predict product costs and can use the system to allocate SG&A costs to sub-units based on cost drivers. Some additional non-manufacturing activity cost pools and their associated cost drivers include: Employee cafeteria, number of cafeteria customers and number of meals cooked; Accounting, number of invoices issued, percentage of sales or assets per division/department, and number of reports requested; Marketing, percentage of sales and number of marketing campaigns; Information Technology, employee head count by department; Purchasing/Supply Chain, number of purchase orders, dollar value of supplies purchased, and number of vendors; First Aid and Wellness Initiatives, employee head count by department; Grounds Maintenance and Security, square footage of facility or division or department; and Utilities, sum total amount of utilities usage, based on meters in different areas assigned to different functional areas. Diff: 2 LO: 4 Bloom: K AACSB: Communication AICPA: FC: Reporting IMA: Cost Management and Decision Making

117) Chocorageous Corp. is a factory that manufactures two varieties of candy bars: Milk Chocolate and Dark Chocolate. They are in the process of evaluating all of their budgeting needs for the year and will be utilizing a traditional costing system. The Milk Chocolate bars use the following resources: Milk Chocolate, $48,900; Wrapping Paper, $10,110; Assembly Line Wages, $84,600; and Machine operators Wages, $46,200. The Dark Chocolate bars use the following resources: Dark Chocolate, $37,400; Paper Wrappers, $8,222; Assembly Line Wages, $72,400; and Machine operators Wages, $33,600. Chocorageous assigns Manufacturing Overhead (MOH) costs based on 86% of Direct Labor (DL) costs. What is the total cost per unit for the Milk Chocolate bars if Chocorageous will produce 134,680 Milk Chocolate bars this year? (Round your answer to two decimal places.) Answer: $2.24 per Milk Chocolate bar The first step in solving for the total cost per unit will be to determine the total product costs for the Milk Chocolate bars. This will be comprised of direct materials plus direct labor plus MOH. It is calculated as follows: = ($48,900 + $10,110) + ($84,600 + $46,200) + (86% × ($84,600 + $46,200)) = $59,010 + $130,800 + $112,488 = $302,298 Lastly, divide the total product costs by the number of Milk Chocolate bars to be produced: $302,298/134,680 = $2.24 per Milk Chocolate bar Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

118) Fancy Bags, Inc. is a company that manufactures decorative gift bags, and they currently use a traditional costing system. Fancy has been focusing on its two main products: Metallic gift bags and Polka Dot gift bags. Fancy allocates Manufacturing Overhead (MOH) costs based on 90% of the Direct Labor (DL) costs for each product. The Metallic gift bags use the following resources: Assembly Line Wages, $133,600; Packaging Wages, $92,400; Metallic Paper, $246,700; and Plastic Handles, $97,450. The Polka Dot gift bags use the following resources: Assembly Line Wages, $125,400; Packaging Wages, $86,450; Special Paper, $222,800; and Plastic Handles, $83,706. Fancy anticipates production of 468,000 Metallic bags and 333,400 Polka Dot bags. What is the total cost per unit for each type of bag? (Round your answers to two decimal places.) Answer: $1.65 per Metallic bag and $2.13 per Polka Dot bag The first step in solving for the total cost per unit will be to determine the total product costs for the Metallic bags. This will be comprised of direct materials plus direct labor plus MOH. It is calculated as follows: = ($246,700 + $97,450) + ($133,600 + $92,400) + (90% × ($133,600 + $92,400)) = $344,150 + $226,000 + $203,400 = $773,550 Lastly, divide the total product costs by the number of Metallic bags to be produced: $773,550/468,000 = $1.65 per Metallic bag Now, calculate the per-unit cost for the Polka Dot bags: = ($222,800 + $83,706) + ($125,400 + $86,450) + (90% × ($125,400 + $86,450)) = $306,506 + $211,850 + $190,665 = $709,021 Lastly, divide the total product costs by the number of Polka Dot bags to be produced: $709,021/333,400 = $2.13 per Polka Dot bag Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

119) Rosebud Inc. is a retail company that specializes in the sale of wooden sleds. The accountants for the company are in the process of identifying appropriate cost drivers for the organization. Their current focus is upon ensuring that each activity and its related cost driver are placed at the appropriate level of the cost hierarchy.

Activity Utilities Supervisor Wages Quality Inspection Total

Budgeted Cost $88,400 103,890 72,304 $264,594

Budgeted Quantity of Cost Driver 10,000 square feet 4,300 hours 8,460 inspection hours

The most recent production run resulted in the creation of 450 wooden sleds and tallied the following totals: 3,000 square feet; 1,420 supervisor hours; and 1,997 inspection hours. How much facility-level cost should be allocated to the production department of Rosebud? Answer: $26,520.00 First, identify which of the costs incurred by Rosebud would be facility-level. In this case, it would be the utility costs incurred. Before allocating, calculate a per-unit rate based upon the identified cost driver: $88,400/10,000 square feet = $8.84 per square foot Next, use the per-unit rate and multiply it against the applicable amount of the overall square footage used by the production department: $8.84 per square foot × 3,000 square feet = $26,520.00 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

120) Fluffy Corp. is a factory that produces cloud-shaped home décor, and their most successful product to date has been a small cloud pillow. Fluffy is considering a switch to Activity-Based Costing (ABC) and has finally identified the key activities they would like to use to allocate their manufacturing overhead costs. Management would like some additional information about how this method would allocate a recent production run of cloud pillows.

Activity Property Taxes Machine Setups Indirect Materials Total

Budgeted Cost $15,700 92,300 44,750 $152,750

Budgeted Quantity of Cost Driver 8,500 square feet 8,400 machine setups 8,300 pounds of material

The production department had a recent run of cloud pillows that used the following: 1,300 square feet; 2,420 machine setups; and 1,997 pounds of material. How much unit-level cost should be allocated to the production department of Fluffy? (If required, round calculations to two decimal places.) Answer: $10,763.83 First, identify which of the costs incurred by Fluffy would be unit-level. In this case, it would be indirect material costs. Before allocating, calculate a per-unit rate based upon the identified cost driver: $44,750/8,300 pounds of material = $5.39 per pound of material Next, use the per-unit rate, and multiply it by the applicable amount of the pounds of material used by the production department: $5.39 per pound × 1,997 pounds of material = $10,763.83 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

121) Mallard, Corp. produces duck-friendly pellets that it sells to a local marina that fully stocks its vending machines for local tourists. Mark, the accountant at Mallard, would like to suggest the implementation of Activity-Based Costing (ABC) and has identified several activities for the factory. Mallard has the following budgeted costs: Direct Materials (DM), $322,600.00; and Direct Labor (DL), $167,980.00. Their budgeted Manufacturing Overhead (MOH) costs are comprised of the following: Setup, $89,550.00 (7,700 setup hours); Production, $498,020.00 (105,200 machine hours); and Maintenance, $52,804.00 (10,300 maintenance hours). How much of the MOH costs will be allocated during the year using activity-based rates considering the actual usage of 807 setup hours, 14,709 machine hours, and 2,600 maintenance hours. (If required, round calculations to two decimal places.) Answer: $92,296.98 First, determine the activity rates for the key activities: Setup, $89,550/7,700 = $11.63 per setup hour; Production, $498,020/105,200 = $4.73 per machine hour; and Maintenance, $52,804/10,300 = $5.13 per maintenance hour. Next, allocate all MOH costs using the ABC rates that were just calculated: ($11.63 × 807 setup hours) + ($4.73 × 14,709 machine hours) + ($5.13 × 2,600 maintenance hours) = $9,385.41 + $69,573.57 + $13,338.00 = $92,296.98 MOH applied. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

122) Tara is a contractor, and she owns a small home renovation company that specializes in kitchen renovations. Tara fears she has been underbidding her projects, and that translates into lost profits that could help sustain her through slow periods. She is putting together an estimate for a potential client and has determined the following activities: Activity Demo of Existing Space Cabinet Installation Countertop Installation

Cost Driver Square Footage # of Hours Square Footage

Rate Estimated Use for Job $3.15/square foot 500 square feet $203/hour 5 hours $12.37/square foot 262 square feet

Previously, Tara was billing at a flat rate of $13 per square foot of the demo space with no additional markup. Tara would like to add a 20% markup to the cost to arrive at the final bid price. Using Activity-Based Costing (ABC), what is the final bid price for her potential customer? (If required, round calculations to two decimal places.) Answer: $6,997.13 Final Bid Price To answer this question, you must first determine the estimated cost for each activity. Demo of existing space, $3.15 × 500 = $1,575.00; Cabinet installation, $203 × 5 = $1,015.00; and Countertop Installation, $12.37 × 262 = $3,240.94. Once they are totaled, the initial price is $1,575.00 + $1,015.00 + $3,240.94 = $5,830.94. The final step is to add the markup to arrive at the actual bid price: $5,830.94 × 1.20 = $6,997.13. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

100

123) Paul runs the call center for Igloo Corp., a company that specializes in handling customer calls for other businesses. Igloo is currently using a traditional costing system, but Paul feels that management would be better served by implementing Time-Driven Activity-Based Costing (TDABC) and has identified the following pertinent information:

Key Transactions Tech Issue Resolution Call Customer Product Return Call Customer Complaint Call

Per Minute Rate for Supplying an Activity $0.52 $0.52 $0.52

Estimated Time per Transaction 12 minutes 5.5 minutes 9 minutes

They incurred $198,000.00 last year to complete these key activities. Assume that employees handled the following number of calls during the year: Tech Issue Resolution, 19,700 calls; Customer Product Return, 7,650 calls; and Customer Complaints, 10,850 calls. When comparing actual costs incurred to operate the activities to the allocated costs, what is the difference and is it over- or underallocated? (If required, round calculations to two decimal places.) Answer: $2,415.00, underallocated This question has provided the rate for supplying an activity, so the first step needed would be to calculate the cost per transaction. A tech issue resolution call would be $0.52 times 12 minutes or $6.24 per call. A customer product return call would be $0.52 times 5.5 minutes or $2.86 per call. A customer complaint call would be $0.52 times 9 minutes or $4.68 per call. Next, multiply each per-call amount by the number of calls of that type completed during the year. $6.24 × 19,700 = $122,928.00, $2.86 × 7,650 = $21,879.00, $4.68 × 10,850 = $50,778.00. The total cost allocated will be the sum of the values from the previous step = $122,928.00 + $21,879.00 + $50,778.00 = $195,585.00 total allocated to key activities. Lastly, compare the total cost allocated to the total cost actually incurred: $198,000.00 - $195,585.00 = $2,415.00. This $2,415.00 difference represents the total underapplied cost. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

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124) Benjamin is the controller for the Dual Star call center, a small customer service company. Benjamin has been looking into their costing practices and questions whether traditional costing should continue to be used. He is trying to determine whether or not they should implement Time-Driven Activity-Based Costing (TDABC). Benjamin has several customer service activities including: service calls, job proposal follow-up, and "thank you" calls. Benjamin has compiled the following information:

Key Transactions Service Call Job Proposal Follow-Up Thank You Calls

Estimated Time per Call 6 minutes 5 minutes 3.5 minutes

Calls Handled this Year 1,540 calls 877 calls 1,602 calls

Supporting these activities cost Dual Star $99,700 last year, and they had 19,500 minutes within their capacity. How much total cost would be allocated to the key activities? (If required, round calculations to two decimal places.) Answer: $98,283.53 total cost allocated to the key activities This question requires calculation of the rate for supplying an activity: $99,700/19,500 = $5.11 per minute. Next, calculate the cost per transaction for each type of call: Service call, $5.11 per minute times 6 minutes equals $30.66 per call; Job Proposal Follow-Up call, $5.11 per minute times 5 minutes equals $25.55 per call; and "Thank You" call, $5.11 per minute times 3.5 minutes equals $17.89 per call. Lastly, find the total cost for each call type, and sum them for a total overall cost: ($30.66 × 1,540 calls) + ($25.55 × 877 calls) + ($17.89 × 1,602 calls) = $47,216.40 + $22,407.35 + $28,659.78 = $98,283.53. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

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125) Shawn is a general contractor who has decided to expand his offerings to include living room remodels. In his other projects, Shawn would estimate jobs using a flat rate of $12.50 per square foot of flooring to be replaced. He now believes that the flat rate of billing creates an opportunity to underbid. At the suggestion of his accountant, Shawn would like to explore the use of Activity-Based Costing (ABC). An upcoming bid for a client would include the following:

Activity Cost Driver Refinishing Floors Square Footage Bookshelf Installation # of Hours

Estimated Use for Job 650 square feet 7.25 hours

Drywall Installation

16 pieces

Rate $5.62/square foot $189.00/hour $98.00/piece of Pieces of Drywall Used drywall

Shawn would like to add a 25% markup to the initial cost to arrive at a final bid price. Using ABC, what is the difference in profit compared to keeping the flat billing rate? Answer: $114.06 additional profit with the markup included. To answer this question, first determine the estimated cost for each activity: Refinishing floors, $5.62 × 650 square feet = $3,653.00; Bookshelves installation, $189 × 7.25 hours = $1,370.25; and Drywall installation, $98 × 16 pieces = $1,568.00. Once they are totaled, the initial cost is $3,653.00 + $1,370.25 + $1,568.00 = $6,591.25. The next step is to add the markup- $6,591.25 × 1.25 = $8,239.06. Lastly, calculate what Shawn would have billed under his current system: $12.50 per square foot × 650 square feet = $8,125.00. Subtract this from the markup rate to solve for the increase or decrease in his profit- $8,239.06 - $8,125.00 = $114.06 additional profit. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

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126) Carol is the controller for Stormy Corp., a company that manufactures lightweight jackets. Their most popular product is currently a storm cloud patterned rain jacket. Carol would like management to consider implementing Activity-Based Costing (ABC) so that they can better account for the costs associated with this rain jacket. She has gathered the following information pertaining to the rain jacket:

Activity Supervisor Wages Production Cleaning/Maintenance Total

Budgeted Cost $90,400 256,808 42,604 $389,812

Budgeted Quantity of Cost Driver 3,442 hours 22,540 machine hours 6,342 cleaning hours

Allocate Manufacturing Overhead (MOH) costs to the storm cloud patterned rain jacket using the activity-based cost drivers above (If required, round calculations to two decimal places.) The actual usage of the drivers is as follows: 1,480 supervisor hours 13,600 machine hours 2,850 cleaning hours Answer: $212,920.80 MOH Allocated The first step for applying the MOH costs is calculation of the activity-based rate for each key activity: Supervisor Wages = $90,400/3,442 hours = $26.26 per supervisor hour Production = $256,808/22,540 machine hours = $11.39 per machine hour Cleaning/Maintenance = $42,604/6,342 cleaning hours = $6.72 per cleaning hour Now, allocate MOH to each key activity, and sum the total allocations: Supervisor Wages: 1,480 supervisor hours × $26.26 per supervisor hour = $38,864.80 Production: 13,600 machine hours × $11.39 per machine hour = $154,904.00 Cleaning/Maintenance: 2,850 inspection hours × $6.72 per cleaning hour = $19,152 Total MOH allocated: $38,864.80 + $154,904.00 + $19,152.00 = $212,920.80 Diff: 2 LO: 1, 3, 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

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127) Paisley Corp. is a clothing company that produces blouses and pencil skirts that it sells online. Paisley has implemented Activity-Based Costing (ABC) and is in the process of compiling a budget for the coming year. Their Manufacturing Overhead (MOH) is comprised of the following costs: Machining Quality Inspections Cleaning and Maintenance

$128,500 (12,300 setups) 102,369 (18,700 inspections) 87,600 (6,480 hours)

Paisley anticipates the production of 9,400 blouses and 12,250 pencil skirts. Each product is projected to use company resources in the following manner:

Item Blouses Pencil Skirts

Cleaning and Setups Quality Inspections Maintenance Hours 5,500 5,900 2,280 6,800 12,800 4,200

What is the ABC-based total MOH cost allocated per unit for the pencil skirts? (If required, round calculations to two decimal places.) Answer: $16.15 per pencil skirt First, calculate the activity rate for each of the MOH activities: Machining, $128,500/12,300 setups = $10.45/setup; Quality Inspections, $102,369/18,700 inspections = $5.47/inspection; Cleaning and Maintenance, $87,600/6,480 hours = $13.52/hour. Next, calculate the total overall MOH cost for the pencil skirts: ($10.45 × 6,800 setups) + ($5.47 × 12,800 inspections) + ($13.52 × 4,200 hours) = $71,060.00 + $70,016.00 + $56,784.00 = $197,860.00. Lastly, divide the total MOH cost by the number of pencil skirts to be produced: $197,860.00/12,250 = $16.15 per pencil skirt. Diff: 2 LO: 3, 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

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128) Flamingo Inc. is an organization that produces pool floats and other pool accessories. They are in the process of transitioning to Activity-Based Costing (ABC) and creating their budget. They have compiled the following budgeted Manufacturing Overhead (MOH) costs that are divided into three key activities:

Activity Setup Production Quality Inspection Total

Budgeted Cost $90,000 123,650 99,800 $313,450

Budgeted Quantity of Cost Driver 9,000 setup hours 18,000 machine hours 6,200 inspection hours

During the current year, Flamingo's pool floats used 4,250 setup hours, 9,600 machine hours, and 2,150 inspection hours. How much of the MOH costs will be allocated to the pool floats this year? (If required, round calculations to two decimal places.) Answer: $143,067.00 First, calculate the activity rate for each of the key activities: Setup, $90,000/9,000 setup hours = $10.00 per setup hour; Production, $123,650/18,000 machine hours = $6.87 per machine hour; and Quality Inspection, $99,800/6,200 inspection hours = $16.10 per inspection hour. Now, allocate the MOH based upon the actual usage: Setup, $10.00 per setup hour × 4,250 setup hours = $42,500.00; Production, $6.87 per machine hour × 9,600 machine hours = $65,952.00; and Quality Inspection, $16.10 × 2,150 inspection hours = $34,615.00. The total amount of MOH allocated will be the sum of these individual activities = $42,500.00 + $65,952.00 + $34,615.00 = $143,067.00. Diff: 2 LO: 3, 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

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129) Delightful Desserts manufactures gluten-free desserts, including their three most popular items: Cheesecake, Brownies, and Cherry Pie. Their controller, Jennifer, has been compiling data for their yearly budget planning strategy meeting and the recommendation will be to continue using a traditional costing system as they have since inception. Delightful Desserts assigns their Manufacturing Overhead (MOH) costs based on 89% of their Direct Labor (DL) costs. Jennifer has gathered the following cost information to assist budget makers with the appropriate cost allocations for each dessert type:

Baking Ingredients Tins for Desserts Baker Wages Assembly Line Wages Desserts Decorator Wages Units Produced

Cheesecake $69,820 $9,990 $46,500

Brownies $60,440 $12,360 $59,430

Cherry Pie $43,908 $6,320 $31,606

$23,005

$37,908

$16,550

$10,200 39,800 cakes

$18,909 67,425 brownie trays

$8,700 28,900 pies

(If required, round calculations to two decimal places.) a. What are the total product costs for each of the three desserts? b. What is the total cost per unit for each of the three desserts? c. Are there any additional recommendations that Jennifer could make to management about the evaluation of their manufacturing overhead cost allocations?

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Answer: a. Cheesecake, $230,452.45; Brownies, $292,506.83; and Cherry pie, $157,685.84. Total costs are comprised of direct materials plus direct labor plus MOH. It is calculated as follows for each dessert type. Cheesecake: = ($69,820 + $9,990) + ($46,500 + $23,005 + $10,200) + (89% × ($46,500 + $23,005 + $10,200)) = $79,810.00 + $79,705.00 + $70,937.45 = $230,452.45 Brownies: = ($60,440 + $12,360) + ($59,430 + $37,908 + $18,909) + (89% × ($59,430 + $37,908 + $18,909)) = $72,800.00 + $116,247.00 + $103,459.83 = $292,506.83 Cherry Pie: = ($43,908 + $6,320) + ($31,606 + $16,550 + $8,700) + (89% × ($31,606 + $16,550 + $8,700)) = $50,228.00 + $56,856.00 + $50,601.84 = $157,685.84 b. Cheesecake, $5.79 per cheesecake; Brownies, $4.34 per tray; and Cherry Pie, $5.46 per pie. Next, divide the total product costs by the number of units produced to calculate the total cost per unit for each of the three desserts. Cheesecakes: $230,452.45/39,800 = $5.79 per Cheesecake Brownies: $292,506.83/67,425 = $4.34 per Brownie Tray Cherry Pie: $157,685.84/28,900 = $5.46 per Cherry Pie c. Jennifer may also encourage management to consider using Activity-Based Costing (ABC). Rather than using a single cost driver, such as Direct Labor costs, ABC would identify key activities and assign a specific activity-based rate to each one. This would allow management to identify more specifically how manufacturing overhead costs are being used based on the usage by various pertinent activities. Diff: 2 LO: 1 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

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130) Candy is having a meeting with Sharon, a member of the management team at the retail company where they are both employed. They are currently discussing the way that the purchasing department's costs are being handled. Candy believes that these costs should be considered a unit-level cost and allocated based upon the number of units needed as that dictates what the department purchases. Sharon believes that the costs should be allocated on a batch level based on the number of purchase orders used for each area. Candy has compiled some data on both cost drivers and the total costs for the purchasing department. Budgeted number of units Budgeted number of purchase orders Department costs for purchasing

1,500,000 26,700 $19,450,500

Their one product line requires 62 purchase orders this year in order to purchase 27,400 units. (If required, round calculations to two decimal places.) a. How much of the purchasing cost would be allocated under Candy's unit-level assumption? b. How much of the purchasing cost would be allocated under Sharon's batch-level assumption? c. Which method would you recommend that Candy and Sharon use for this retail company?

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Answer: a. $355,378.00 The first step would be to calculate the unit-level rate: $19,450,500/1,500,000 budgeted units = $12.97 per unit For the unit-level calculation, use this per-unit rate, and allocate it based upon the number of units to be purchased for the year: $12.97 per unit × 27,400 units = $355,378.00 allocated b. $45,165.76 For the batch-level calculation, calculate the batch-level rate: $19,450,500/26,700 purchase orders = $728.48 per purchase order Next, use this per-batch rate, and allocate it based upon the number of purchase orders for the year: $728.48 per purchase orders × 62 purchase orders = $45,165.76 allocated c. While both methods allocate costs in a logical way, it will be important for Candy and Sharon to determine whether they feel that their chosen method best represents the way that the costs should be allocated. Unit-level costs are often very useful for factories needing to account for costs on a unit-by-unit basis while batch-level costs are useful for groupings of items. In this case, the unit-level may prove most helpful as it allocates based upon the actual units rather than the number of purchase orders. Candy and Sharon may also choose to discuss this with the rest of the management team before arriving at a final decision. Diff: 2 LO: 2 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

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131) Trivium Inc. is a retail business that produces energy drinks and assorted flavored waters. They are in the process of evaluating their costing systems and are working towards an ActivityBased Costing (ABC) implementation. One of the roadblocks up to this point has been a lack of consensus on what key activities make the most sense to track. Their accountant has compiled the following data about their Manufacturing Overhead (MOH) costs: Activity

Budgeted Cost

Property Taxes Factory Equipment Maintenance Machine Setups Total

$18,500

Budgeted Quantity of Cost Driver 9,000 square feet

128,990 8,400 maintenance hours 77,600 10,000 machine setups $225,090

The production department used the following amounts in a recent production run: 2,300 square feet, 2,909 maintenance hours, and 1,230 machine setups. (If required, round calculations to two decimal places.) a. What is the total amount of MOH cost allocated to facility-level activities? b. What is the total amount of MOH cost allocated to product/process-level activities? c. What is the total amount of MOH cost allocated to batch-level activities?

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Answer: a. $4,738.00 Prior to calculating the allocation, identify which of the costs are facility-level. In this case, property taxes are considered facility-level. Next, calculate the activity rate: $18,500/9,000 square feet = $2.06 per square foot Now, allocate this cost to the facility-level activity based on recent activities: $2.06 per square foot times 2,300 square feet = $4,738.00 b. $44,682.24 Prior to calculating the allocation, identify which of the costs are product/process-level. In this case, factory equipment maintenance is considered product/process-level. Next, calculate the activity rate: $128,990/8,400 maintenance hours = $15.36 per maintenance hour Now, allocate this cost to the product/process-level activity based on recent activities: $15.36 per maintenance hour times 2,909 maintenance hours = $44,682.24 c. $9,544.80 Prior to calculating the allocation, identify which of the costs are batch-level. In this case, machine setups are considered batch-level. Next, calculate the activity rate: $77,600/10,000 machine setups = $7.76 per machine setup Now, allocate this cost to the batch-level activity based on the recent activities: $7.76 per machine setup times 1,230 machine setups = $9,544.80 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

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132) Santana is a staff accountant for Tapestry, a factory that manufactures decorative wall hangings. Tapestry is gearing up to have their busiest year yet, and they anticipate the production of 147,800 units. Santana has been analyzing some cost data and is going to recommend to management that they switch from a traditional costing system to an Activity-Based Costing (ABC) system. Santana believes that management will benefit overall from having the costing allocated by activity rather than a single cost driver. Tapestry has the following budgeted costs: Direct Materials (DM), $283,706.00; and Direct Labor (DL), $186,540.00. Their budgeted Manufacturing Overhead (MOH) costs are comprised of the following: Materials Sorting: Setups: Supervisor Wages:

$88,700 (10,000 yards of fabric) $56,400 (7,600 setups) $103,540 (8,430 hours)

The actual usage of resources this year includes 9,680 yards of fabric, 7,400 setups, and 8,133 supervisor hours. (If required, round calculations to two decimal places.) a. How much MOH is allocated for the year based upon the ABC rates? b. How much is the total product cost for the wall hanging units produced this year? c. What is the total cost per unit for each wall hanging?

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Answer: 1. $240,642.84 a. Before being able to allocate the MOH, you will need to calculate an ABC rate for each of the key activities. This can be done as follows: Materials Sorting: $88,700/10,000 yards of fabric = $8.87 per yard Setups: $56,400/7,600 setups = $7.42 per setup Supervisor Wages: $103,540/8,430 hours = $12.28 per hour Now, allocate based on actual usage as follows: Materials sorting: $8.87 per yard × 9,680 yards used = $85,861.60 Setups: $7.42 per setup × 7,400 setups = $54,908.00 Supervisor Wages: $12.28 per hour × 8,133 hours worked by supervisors = $99,873.24 Total = $85,861.60 + $54,908.00 + $99,873.24 = $240,642.84 b. $710,888.84 To arrive at the total product costs, combine Direct Materials, Direct Labor, and MOH as follows: $283,706.00 + $186,540.00 + $240,642.84 = $710,888.84 c. $4.81 per wall hanging The total cost per unit involves taking the total product cost calculated in part (b) and dividing it by the number of units produced as follows: $710,888.84/147,800 units = $4.81 per wall hanging Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

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133) Bill owns Owens Construction, a small general contractor organization that specializes in high-end bathroom renovations. Currently Bill is billing at a flat rate of $30.00 per square foot of the space being demolished. Bill is concerned that his current method results in underbidding his projects and missing out on additional profit. He is putting together an estimate for Leslie, a potential bathroom remodel client, and has determined the following activities are needed to complete the job: Activity

Cost Driver

Rate

Demo of existing space Cabinet installation Tile installation Drywall installation

Square Footage # of hours Pieces of tile laid Pieces of drywall used

$4.80/square foot $204/hour $2.38/tile $98/piece of drywall

Estimated Use for Job 670 square feet 4.5 hours 3,806 pieces 25 pieces

Bill would like to add a 30% markup to the cost to arrive at the final bid price. Use ActivityBased Costing (ABC) to answer the following questions. a. What is the initial pre-markup price for all of the estimated work? b. What is the final bid price that Bill will present to the customer? c. How much profit will Bill make and/or lose if he chooses to use ABC rather than his current flat rate? Answer: a. $15,642.28 Subtotal for the estimated work To answer this question, determine the estimated cost for each activity. Demo of existing space, $4.80 × 670 square feet = $3,216.00; Cabinet installation, $204 × 4.5 hours = $918.00; Tile installation, $2.38 × 3,806 pieces = $9,058.28; and Drywall installation, $98 × 25 = $2,450.00. Once they are totaled, the initial pre-markup price is $15,642.28. a. $20,334.96 Final Bid Price To calculate the final bid price, add the markup as follows: $15,642.28 × 1.30 = $20,334.96. b. $234.96 of profit If Bill were to use his current flat billing rate of $30.00 per square foot, then his final bid price would be: $30.00 per square foot × 670 square feet = $20,100.00 Bill would generate an additional ($20,334.96 - $20,100.00) = $234.96 of profit under ABC. Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making 115

134) Aubrey is an accountant for Arbor Town, Inc., a tree preservation and removal company. They currently utilize a traditional costing system, and she is trying to determine whether or not they should implement Time-Driven Activity-Based Costing (TDABC). Arbor Town has several customer-centric activities including: initial phone consultation, appointment setting, follow-up, and service calls. Supporting these activities cost Arbor Town $126,500 last year, and Arbor Town has 75,000 minutes within their capacity. Aubrey has compiled the following data: Key Transactions

Estimated Time per Call

Initial phone consultation Appointment Setting Follow-up Service calls

8 minutes 5.5 minutes 10 minutes 4.5 minutes

Calls Handled this Year 2,678 calls 1,453 calls 1,444 calls 2,560 calls

Arbor Town is wondering whether they are utilizing their capacity to its fullest potential and are hopeful that TDABC will help shed some light on the best way they can proceed. (If required, round calculations to two decimal places.) a. What is the cost per transaction for each of the key activities? b. Using the TDABC rates, calculate the total cost of transactions. c. When you compare actual costs incurred to operate the activities to the allocated costs, what is the difference and is it over- or underallocated?

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Answer: a. Initial Consultation, $13.52 per call; Appointment Setting, $9.30 per call; Follow-Up, $16.90 per call; and Service Calls, $7.61 per call. This question requires multiple steps in order to be able to calculate the cost per transaction under TDABC. First, calculate the rate for supplying an activity by taking the total cost of the activity and dividing it by the practical capacity available expressed in time: $126,500/75,000 minutes = $1.69 per minute. Next, multiply the cost per minute by the amount of time it takes to complete each activity as follows: Initial Consultation, $1.69 × 8 minutes = $13.52 per call; Appointment Setting, $1.69 × 5.5 minutes = $9.30 per call; Follow-Up, $1.69 × 10 minutes = $16.90 per call; and Service Calls, $1.69 × 4.5 minutes = $7.61 per call. b. $93,604.66 total cost of transactions. Multiply each per-call amount calculated in part (a) by the number of calls of that type completed during the year. Initial Consultation, $13.52 × 2,678 calls = $36,206.56; Appointment Setting, $9.30 × 1,453 calls = $13,512.90; Follow-Up, $16.90 × 1,444 calls = $24,403.60; and Service Calls, $7.61 × 2,560 calls = $19,481.60. The total cost allocated will be the sum of the values from the previous step: $36,206.56 + $13,512.90 + $24,403.60 + $19,481.60 = $93,604.66 is the total cost of transactions. c. $32,895.34 underallocated To determine whether the costs have been under or overallocated, compare the total product costs calculated in part (b) to the actual cost. This is calculated as follows: $126,500 - $93,604.66 = $32,895.34 is the amount that is underallocated. Arbor Town allocated less to these activities than they actually spent, and that means they have some unused capacity. Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

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135) Tech Squad is a regional call center that handles customer service calls from people who are experiencing technical issues with their personal devices. Management feels as though they never have an accurate picture of how well they are utilizing their available resources. Their controller has suggested that they consider switching to Time-Driven Activity-Based Costing (TDABC). The controller has identified the following information about their identified key activities: Key Transactions Browser Issues Hardware Issues Software Issues

Estimated Time per Call 3.5 minutes 11 minutes 13 minutes

Calls Handled this Year 22,480 calls 11,606 calls 12,607 calls

Supporting these activities cost Tech Squad $266,800.00 last year, and they had 375,000 minutes within their capacity. (If required, round calculations to two decimal places.) a. Using TDABC, what is the rate for supplying an activity? b. Using the TDABC rates, what is the total amount allocated to the key activities? c. When you compare actual costs incurred to operate the activities to the allocated costs, what is the difference, and is it over- or underallocated? Answer: a. $0.71 per minute The rate for supplying an activity using TDABC is calculated by taking the total cost of the activity and dividing it by the practical capacity available expressed in time: $266,800.00/375,000 minutes = $0.71 per minute. b. $262,980.67 total cost of transactions First, multiply the cost per minute by the amount of time it takes to complete each activity as follows: Browser issues, $0.71 × 3.5 minutes = $2.49 per call; Hardware issues, $0.71 × 11 minutes = $7.81 per call; and Software issues, $0.71 × 13 minutes = $9.23 per call. Next, multiply each per-call amount calculated by the number of calls of that type completed for the year. Browser issues, $2.49 × 22,480 calls = $55,975.20; Hardware issues, $7.81 × 11,606 calls = $90,642.86; and Software issues, $9.23 × 12,607 calls = $116,362.61. The total cost allocated will be the sum of the values from the previous step: $55,975.20 + $90,642.86 + $116,362.61= $262,980.67 is the total cost of transactions. c. $3,819.33 underallocated To determine whether the costs have been under or overallocated, compare the total product costs calculated in part (b) to the actual cost. This is calculated as follows: $266,800 $262,980.67 = $3,819.33 is the amount that is underallocated. Tech Squad allocated less to these activities than they actually spent, and that means they have some unused capacity. Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making 118

136) Lilly Corp. manufactures office supplies that it specifically creates for recent college graduates. One of their most popular items in recent years is an annual planner that is accompanied by accessories such as stickers and highlighters. Lilly currently uses a single plantwide rate of $14 per Direct Labor (DL) hour to allocate their Manufacturing Overhead (MOH) costs. Sarah, the controller, would like to determine whether a switch to Activity-Based Costing (ABC) would prove to be a beneficial planning tool for Lilly Corp. moving forward. Sarah has identified three key activities that would be used for ABC: Production, Supervisor Wages, and Quality Inspections. Sarah has compiled the following budgeted MOH cost data for the annual planner: Activity Production Supervisor Wages Quality Inspection Total

Budgeted Budgeted Quantity of Cost Cost Driver $309,870 30,000 machine hours 98,946 4,668 hours 106,440 10,240 inspection hours $515,256

Budgeted Activity Rate $10.33 $21.20 $10.39

The actual usage of resources for manufacturing the annual planner includes $27,360 in DM costs; 37,000 DL hours; 28,500 machine hours; 4,500 supervisor hours; and 9,800 inspection hours. a. Allocate MOH costs to the production of the annual planner using the previous plant-wide rate. b. How will MOH costs be allocated to the production of the annual planner using ABC rates? c. What could account for the difference between these two different allocations? Which should Sarah advise Lilly Corp. to use moving forward?

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Answer: a. $518,000.00 To calculate Lilly's budgeted manufacturing overhead cost using one plant-wide rate, multiply the plant-wide rate by the specified cost driver: $14.00 × 37,000 DL hours = $518,000.00 b. $491,627.00 Calculate the activity-based rates as follows: Activity Production Supervisor Wages Quality Inspection Total

Activity-Based Cost

Calculation $10.33 per machine hour × 28,500 machine hours $21.20 per hour × 4,500 hours $10.39 per inspection hour × 9,800 inspection hours

$294,405.00 95,400.00 101,822.00 $491,627.00

c. The largest difference between the single plant-wide rate and using the more specific activity-based rates with ABC is that the single plant-wide rate assumes that everything should use the same cost driver. This can often paint a somewhat inaccurate picture as it can conceal where the spending is happening compared to where it was budgeted. Sarah should highly encourage Lilly to use ABC moving forward so that they can have a more transparent and accurate way in which to track their costs by specific tasks. Diff: 2 LO: 1, 3, 4 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

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137) Fly Ball Inc. is a sporting goods company that produces baseballs and baseball mitts that it sells online. Fly Ball has implemented Activity-Based Costing (ABC) and is in the process of compiling a budget for the coming year. Their Manufacturing Overhead (MOH) is comprised of the following costs: Setups Quality Inspections Factory Supervisor Wages

$98,500 (18,000 setups) $104,620 (29,300 inspections) $122,480 (8,600 hours)

Fly Ball anticipates the production of 15,482 baseballs and 9,877 baseball mitts. Each product is projected to use company resources in the following manner: Item Baseballs Baseball Mitts

Setups Quality Inspections 9,500 11,600 8,500 17,700

Supervisor Hours 3,400 5,200

(If required, round calculations to two decimal places.) a. What is the total MOH cost for the baseballs? b. What is the total amount of MOH allocated per unit to the baseballs? c. What is the total MOH cost for the baseball mitts? d. What is the total amount of MOH allocated per unit to the baseball mitts? e. Why should Fly Ball seriously consider implementing ABC instead of their current traditional costing system?

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Answer: a. $141,793.00 This question requires calculation of the activity rate for each of the activities: Setups, $98,500/18,000 setups = $5.47/setup; Quality Inspections, $104,620/29,300 inspections = $3.57/inspection; and Factory Supervisor Wages, $122,480/8,600 hours = $14.24/hour. Next, allocate the MOH based on the actual usage: Setups, $5.47 per setup × 9,500 setups = $51,965.00; Quality Inspections, $3.57 per inspection × 11,600 inspections = $41,412.00; Factory Supervisor Wages, $14.24 per hour × 3,400 hours = $48,416.00. The total amount of MOH allocated will be the sum of these individual activities = $51,965.00 + $41,412.00 + $48,416.00 = $141,793.00. b. $9.16 per baseball To calculate the per-unit amount of MOH allocated to baseballs, use the total amount calculated in part (a) and divide it by the number of baseballs that Fly Ball anticipates producing. This is calculated as follows: $141,793.00/15,482 baseballs = $9.16 per baseball c. $183,732.00 This question requires calculation of the activity rate for each of the MOH activities: Setups, $98,500/18,000 setups = $5.47/setup; Quality Inspections, $104,620/29,300 inspections = $3.57/inspection; and Factory Supervisor Wages, $122,480/8,600 hours = $14.24/hour. Next, allocate the MOH based on the actual usage: Setups, $5.47 per setup × 8,500 setups = $46,495.00; Quality Inspections, $3.57 per inspection × 17,700 inspections = $63,189.00; Factory Supervisor Wages, $14.24 per hour × 5,200 hours = $74,048.00. The total amount of MOH allocated will be the sum of these individual activities = $46,495.00 + $63,189.00 + $74,048.00 = $183,732.00. d. $18.60 per baseball mitt To calculate the per-unit amount of MOH allocated to baseball mitts, use the total amount calculated in part (c) and divide it by the number of baseball mitts that Fly Ball anticipates producing. This is calculated as follows: $183,732.00/9,877 baseball mitts = $18.60 per baseball mitt e. ABC is an effective way for a company to assign costs based on actual usage rather than a single cost driver. This can often lead to more informed decision-making and more accurate allocation of available resources. Fly Ball makes two products, so they would benefit from ABC as a means to better understand how each product uses available resources to be produced. Diff: 2 LO: 3, 4 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

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138) Garden Variety is an organization that manufactures lawn gnomes and other decorative yard items. David, the senior accountant, is creating a budget for the New Year while simultaneously implementing a transition into Activity-Based Costing (ABC). The lawn gnomes had Direct Labor (DL) costs of $147,890.00 and Direct Materials (DM) costs of $90,707.00. David has gathered the following budgeted Manufacturing Overhead (MOH) costs information and divided it into four key activities: Activity Machine Setup Quality Inspection Factory Supervisor Wages Cleaning/Maintenance Total

Budgeted Cost Budgeted Quantity of Cost Driver $77,650 12,400 machine setups 92,340 8,750 inspections 104,300 8,700 supervisor hours 56,806 6,800 cleaning/maintenance hours $331,096

During the current year, Garden Variety produced 19,480 lawn gnomes and used 6,230 setups, 3,440 inspections, 4,160 supervisor hours, and 1,880 cleaning/maintenance hours. a. What are the activity rates of each of the four key activities? (If required, round calculations to two decimal places.) b. What is the total amount of MOH allocated to the lawn gnomes? c. What is the total cost per lawn gnome?

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Answer: a. Machine Setup, $6.26 per setup; Quality Inspection, $10.55 per inspection; Supervisor Wages, $11.99 per supervisor hour; and Cleaning/Maintenance, $8.35 per cleaning/maintenance hour. To calculate the activity rate for each of the key activities, divide the budgeted cost by the budgeted cost driver: Machine Setup, $77,650/12,400 setups = $6.26 per setup; Quality Inspection, $92,340/8,750 inspections = $10.55 per inspection; Supervisor Wages, $104,300/8,700 supervisor hours = $11.99 per supervisor hour; and Cleaning/Maintenance, $56,806/6,800 cleaning/maintenance hours = $8.35 per cleaning/maintenance hour. b. $140,868.20 MOH allocated to the lawn gnomes Now, allocate the MOH based on the actual usage: Machine Setup, $6.26 per setup × 6,230 per setups = $38,999.80; Quality Inspection, $10.55 per inspection × 3,440 inspections = $36,292.00; Supervisor Wages, $11.99 per hour × 4,160 supervisor hours = $49,878.40; and Cleaning/Maintenance, $8.35 × 1,880 cleaning/maintenance hours = $15,698.00. The total amount of MOH allocated will be the sum of these individual activities = $38,999.80 + $36,292.00 + $49,878.40 + $15,698.00 = $140,868.20. c. $19.48 per lawn gnome To calculate the total cost per lawn gnome, combine the direct labor, direct materials, and MOH costs, and divide by the total number of lawn gnomes produced. $147,890.00 + $90,707.00 + $140,868.20 = $379,465.20 $379,465.20/19,480 lawn gnomes = $19.48 per lawn gnome Diff: 2 LO: 3, 4 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

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139) Magic Golf is a small putt putt golf attraction that services a seasonally busy tourist season each summer. Sarah, the Controller, feels that Magic Golf would benefit from adding additional staff to their customer service line. A chief complaint of patrons is that it often takes too long to be checked in upon arrival and to be checked out upon departure. The management of Magic Golf has come to Sarah and asked her to put together some data that will assist them in assessing their strengths and weaknesses. Their business is cyclical, so it is imperative that they are able to determine whether or not they are best using their available resources regardless of the time of year. Sarah has decided to use Time-Driven Activity-Based Costing (TDABC) to assist with any future hiring plans in this area. The costs of assets and personnel in their customer service-based activities are $62,000, and the company has 101,000 minutes of capacity during the most recent year. The key activities for their customer service department and related time per transaction are as follows: Key Transactions Ticket sales Club and ball distribution Customer greeter Customer complaints Customer refunds

Estimated Time per Transaction 6 minutes 4 minutes 1 minute 8 minutes 3.5 minutes

The cost incurred of assets and personnel of $62,000 is spread between the quarters in the following way: Quarter 1- 15%, Quarter 2- 35%, Quarter 3 - 45%, and Quarter 4- 5%. Sarah has compiled data and determined that Magic Golf had the following numbers of activities for each quarter: Key Transactions Ticket sales Club and ball distribution Customer greeter Customer complaints Customer refunds

Q1 906 1,023 1,109 11 25

Q2 2,980 1,965 1,752 52 101

Q3 3,642 2,276 2,004 65 147

Q4 802 976 935 7 13

Sarah is hopeful that she can complete her analysis in enough time for management to integrate her findings and suggestions into the next calendar year. Using TDABC, please answer the following questions. (If required, round calculations to two decimal places.)

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a. With costs assigned to each activity cost pool, calculate the cost per minute to supply an activity. b. Calculate the cost per transaction for each key transaction that Sarah will then use to calculate her cost allocations. Based upon this information, is there an activity that Sarah may want to devote extra attention to while performing her analysis? c. Using Sarah's compiled data, how much total cost was allocated to the customer service area during each quarter? How much was allocated to the customer service area for the year in total? d. Using the percentages noted in the problem (Q1: 15%, Q2: 35%, Q3: 45%, and Q4: 5%), compare the actual costs incurred to the allocation amount calculated in part (c) for each quarter. How do you explain the difference, and which quarter has done the most efficient job of managing its resources? e. Based on Sarah's estimate, do you believe that Magic Golf will need to hire another service employee? Are there any other suggestions or advice that Sarah could give?

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Answer: a. $0.61 per minute To calculate the cost per minute to supply an activity, use the following formula: Total Cost of Activity/Practical Capacity Available (expressed in time). $62,000/101,000 minutes = $0.61 per minute b. Using the rate calculated in part (a), apply this to the time it takes to complete each key transaction:

Key Transactions Ticket sales Club and ball distribution Customer greeter Customer complaints Customer refunds

Estimated Time per Activity × Cost per Minute 6 minutes × $0.61= 4 minutes × $0.61= 1 minute × $0.61= 8 minutes × $0.61= 3.5 minutes × $0.61=

Cost per Transaction $3.66 $2.44 $0.61 $4.88 $2.14

Ticket sales, $3.66 per minute; Club and ball distribution, $2.44 per minute; Customer greeting, $0.61 per minute; Customer complaints, $4.88 per minute; and Customer refunds, $2.14 per minute. Due to the high cost of handling customer complaints, Sarah may focus some of her attention and analysis here to determine if any actions could aid in improving this area leading to greater overall customer satisfaction.

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c. Multiply each cost per transaction by the amount of that key activity during each quarter: Key Transactions Ticket sales Club and ball distribution Customer greeter Customer complaints Customer refunds Total

Q1 $3.66 × 906 sales = $2.44 × 1,023 dist. = $0.61 × 1,109 greetings = $4.88 × 11 complaints = $2.14 × 25 refunds =

Q1 Total $3,315.96 2,496.12 676.49 53.68 53.50 $6,595.75

Key Transactions Ticket sales Club and ball distribution Customer greeter Customer complaints Customer refunds Total

Q2 $3.66 × 2,980 sales = $2.44 × 1,965 dist. = $0.61 × 1,752 greetings = $4.88 × 52 complaints = $2.14 × 101 refunds =

Q2 Total $10,906.80 4,794.60 1,068.72 253.76 216.14 $17,240.02

Key Transactions Ticket sales Club and ball distribution Customer greeter Customer complaints Customer refunds Total

Q3 $3.66 × 3,642 sales = $2.44 × 2,276 dist.= $0.61 × 2,004 greetings = $4.88 × 65 complaints = $2.14 × 147 refunds =

Q3 Total $13,329.72 5,553.44 1,222.44 317.20 314.58 $20,737.38

Key Transactions Ticket sales Club and ball distribution Customer greeter Customer complaints Customer refunds Total

Q4 $3.66 × 802 sales = $2.44 × 976 dist. = $0.61 × 935 greetings = $4.88 × 7 complaints = $2.14 × 13 refunds =

Q4 Total $2,935.32 2,381.44 570.35 34.16 27.82 $5,949.09

Total Costs by Quarter: Q1, $6,595.75; Q2, $17,240.02; Q3, $20,737.38; and Q4, $5,949.09. Total cost for all four quarters = $50,522.24 (sum of all four quarters).

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d. The first step in completing this comparison includes determining how much of the $62,000 of the costs incurred belong to each quarter: Q1 = $62,000 × 15% = $9,300.00 Q2 = $62,000 × 35% = $21,700.00 Q3 = $62,000 × 45% = $27,900.00 Q4 = $62,000 × 5% = $3,100.00 Now, compare the costs incurred to the allocated costs by quarter: Quarter 1 costs incurred for customer service line $9,300.00 Quarter 1 applied costs 6,595.75 Difference $2,704.25 Quarter 2 costs incurred for customer service line Quarter 2 allocated costs Difference

$21,700.00 17,240.02 $4,459.98

Quarter 3 costs incurred for customer service line Quarter 3 allocated costs Difference

$27,900.00 20,737.38 $7,162.62

Quarter 4 costs incurred for customer service line Quarter 4 allocated costs Difference

$3,100.00 5,949.09 ($2,849.09)

Due to the cyclical and seasonal nature of the business, it would be a sensible decision to allocate the majority of costs to Quarter 2 and Quarter 3. Quarter 4 is the only quarter that has an overallocated amount. This indicates that management would have initially suspected that more resources would be needed during this quarter than were actually used. At an initial look, Quarter 4 appears to be doing the best job of managing the resources that it does have.

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e. Total costs incurred for customer service line Total allocated costs Difference

$62,000.00 50,522.24 $11,477.76

The difference between the costs incurred and the allocated costs for the year is an underallocated cost and represents the cost of unused capacity or idle time. Management will want to look into these differences further. Based on Sarah’s data, it appears that the company has enough capacity in its current state without hiring another employee. Rather than bringing on additional employees, they will want to ensure that all available time is being fully utilized. Sarah would likely recommend that management consider a reallocation of available resources to ensure that the busier quarters have what they need in order to be successful. Diff: 2 LO: 4 Bloom: E AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

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140) Lately Twisty Noodles, a regional factory that manufactures various kinds of pasta, has been delighted to experience growth in what has been a challenging economic time for others. They have recently added penne pasta to their current offering of angel hair pasta. As part of their continued efforts to improve their internal processes, management has asked Tom, their accountant, to assist with some analysis. Currently Twisty Noodles utilizes a traditional costing system, but they would like to explore the use of Activity-Based Costing (ABC) since they have expanded their offerings. Tom has identified that they have the following key activities: Cost Drivers Machining Moving and Sorting Cleaning Wages Factory Utilities

Quantity 22,444 hours 18,428 hours 7,084 hours 14,479 square feet

Cost $40,710 $44,928 $18,228 $62,829

Pertinent cost information related to their pasta offerings are as follows: Angel Hair

Penne 33,806 $0.16 per pound, 1 pound per Wheat pasta $0.33 per pound, 0.50 pounds per box box Cardboard $0.10 per box $0.15 per box Assembly line $8.25 per hour, 0.15 hours per wages $8.25 per hour, 0.10 hours per box box Machine operators $7.75 per hour, 0.20 hours per wages $7.75 per hour, 0.15 hours per box box Machining hours 13,742 11,702 Moving and Sorting Hours 14,650 11,778 Cleaning hours 8,778 5,804 Factory utilities 10,266 square feet 8,213 square feet Boxes Produced

48,990

Under their traditional costing system, Manufacturing Overhead (MOH) is currently assigned to products based on 87% of direct labor costs. Management is very interested to learn whether a switch to ABC will produce more accurate results, and they would like to have some solid numbers to back up their decision. Tom would like to be able to present management with a solid recommendation in the very near future. With this in mind, please complete the following questions.

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(If required, round calculations to two decimal places.) a. What is the cost per unit for each of the identified key activities that would be used under the proposed ABC? How do these values compare to the current calculation using traditional costing? b. Calculate the total cost per unit for angel hair using both a traditional costing system and ABC. c. Calculate the total cost per unit for penne using both a traditional costing system and ABC. d. Why do the two costing systems produce such different results? If you were Tom, which costing system would you encourage Twisty to utilize, and why? e. The management of Twisty Noodles believes that they may see a 10% increase in production of their products next year. They would also like to consider bringing a new spaghetti pasta to market. How would these events impact the decision which Tom made in part (d)?

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Answer: a. ABC requires that MOH be allocated based upon a per-unit cost and quantity of each activity. To calculate the per unit cost, take the cost of each key activity/cost driver, and divide it by the amount of that activity/driver. These costs will be calculated as follows: Machining: $40,710/22,444 hours = $1.81 per hour Moving and Sorting: $44,928/18,428 hours = $2.44 per hour Cleaning wages: $18,228/7,084 hours = $2.57 per hour Factory utilities: $62,829/14,479 square feet = $4.34 per square foot Under traditional costing, the manufacturing overhead costs are divided by a single cost driver, such as direct labor hours or a percentage of direct labor costs. Both methods incur the same direct materials and direct labor costs, so it is the MOH allocation that varies. ABC costing is often considered when management believes that it will do a more efficient and transparent job of allocating costs based upon activity rather than assuming that overhead is incurred proportionally with volume.

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b. $3.98 per box of angel hair pasta under traditional, $4.86 per box of angel hair pasta under ABC Under both ABC and traditional costing, calculate the overall Direct Materials costs: Wheat Pasta 48,990 boxes × ($0.33 per pound × 0.50 pounds per box) = $8,083.35 Cardboard 48,990 boxes × $0.10 per box = $4,899.00 Total Direct Materials = $8,083.35 + $4,899.00 = $12,982.35 Next, calculate the Direct Labor cost: Assembly LineWages 48,990 boxes × ($8.25 per hour × 0.10 hours per box) = $40,416.75 MachineOperatorsWages 48,990 boxes × ($7.75 per hour × 0.15 hours per box) = $56,950.88 Total Direct Labor = $40,416.75 + $56,950.88 = $97,367.63 Next, calculate the MOH under traditional: $97,367.63 × 87% = $84,709.84 Now, combine the Direct Materials, Direct Labor, and the MOH to arrive at the total product costs for traditional costing. $12,982.35 + $97,367.63 + $84,709.84 = $195,059.82 Lastly, divide the total product costs by the total number of boxes produced to arrive at a total cost per unit: $195,059.82/48,990 boxes = $3.98 per box of angel hair pasta under traditional Next, calculate the MOH under ABC: ($1.81 × 13,742 machining hours) + ($2.44 × 14,650 moving and sorting hours) + ($2.57 × 8,778 cleaning hours) + ($4.34 × 10,266 square feet) = $24,873.02 + $35,746.00 + $22,559.46 + $44,554.44 = $127,732.92 Now, combine the Direct Materials, Direct Labor, and MOH to arrive at the total product costs using ABC. $12,982.35 + $97,367.63 + $127,732.92 = $238,082.90 Lastly, divide the total product costs by the total number of boxes produced to arrive at a total cost per unit: $238,082.90/48,990 boxes = $4.86 per box of angel hair pasta under ABC

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c. $5.52 per box of penne pasta under traditional, $6.07 per box of penne pasta under ABC Under both ABC and traditional costing, calculate the overall Direct Materials costs: Wheat Pasta 33,806 boxes × $0.16 per pound × 1 pounds per box = $5,408.96 Cardboard 33,806 boxes × $0.15 per box = $5,070.90 Total Direct Materials = $5,408.96 + $5,070.90 = $10,479.86 Next, calculate the Direct Labor costs: Assembly LineWages 33,806 boxes × ($8.25 per hour × 0.15 hours per box) = $41,834.93 MachineOperatorsWages 33,806 boxes × ($7.75 per hour × 0.20 hours per box) = $52,399.30 Total Direct Labor = $41,834.93 + $52,399.30 = $94,234.23 Next, calculate the MOH using traditional costing: $94,234.23 × 87% = $81,983.78 Now, combine the Direct Materials, Direct Labor, and the MOH to arrive at the total product costs for traditional costing. $10,479.86 + $94,234.23 + $81,983.78 = $186,697.87 Lastly, divide the total product costs by the total number of boxes produced to arrive at a total cost per unit: $186,697.87/33,806 boxes = $5.52 per box of penne pasta under traditional Next, calculate the MOH using ABC: ($1.81 × 11,702 machining hours) + ($2.44 × 11,778 moving and sorting hours) + ($2.57 × 5,804 cleaning hours) + ($4.34 × 8,213 square feet) = $21,180.62 + $28,738.32 + $14,916.28 + $35,644.42 = $100,479.64 Now, combine the Direct Materials, Direct Labor, and MOH to arrive at the total product costs using ABC. $10,479.86 + $94,234.23 + $100,479.64 = $205,193.73 Lastly, divide the total product costs by the total number of boxes produced to arrive at a total cost per unit: $205,193.73/33,806 boxes = $6.07 per box of penne pasta under ABC

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d. Traditional costing uses a single cost driver to allocate the manufacturing overhead costs of an organization. ABC uses multiple cost drivers as determined by the key activities identified by those in charge of making budgeting and financial decisions. Traditional costing assumes that all overhead costs are primarily driven by one cost driver, even if this does not accurately depict the way that the business operates. Tom will likely suggest the use of ABC as it does a more accurate job of assessing how costs are being used amongst the various activities employed by Twisty Noodles. e. If production were to increase by 10% in the following years, this would directly impact direct materials costs, direct labor costs, and MOH whether they use traditional costing or ABC. As the production of products increases, the overall costs will also increase. Tom could begin to conduct a more thorough analysis if he was able to determine the overall cost and quantity of each cost driver for the following year. In regards to the new product offering, Tom would need to gather information pertaining to costing involved in the direct materials and direct labor and then to determine this new product’s impact on MOH costs. Once this is completed, Tom could begin to allocate the MOH costs under ABC and compare them to what a traditional costing system would yield. It is likely that these changes would not provoke a different response than was arrived at in part (d). As more product lines are offered, ABC becomes a more appealing costing method. Diff: 3 LO: 1, 3, 4 Bloom: E AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

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141) Primrose Inc. manufactures high quality hair care products. Their most recent success has been a rose-scented conditioner for fine hair to accompany their best-selling rose-scented shampoo. This has been a great year for Primrose with sales of shampoo reaching 105,600 bottles and sales of their new conditioner reaching 86,420 bottles. Their controller, Jeff, has compiled the following information pertaining to their materials and labor usage for both the shampoo and conditioner: Cost Plastic Bottles Product Mixture Assembly Line Wages Packaging Wages

Shampoo Conditioner $41,444 $36,787 $53,560 $42,899 $62,300 $51,566 $43,450 $38,763

Primrose has chosen to allocate their Manufacturing Overhead (MOH) costs by using a single plant-wide MOH rate that is based upon Total Direct Labor (DL) costs. Primrose has been looking into ways that it can improve how it allocates and tracks costs. Jeff has suggested the use of Activity-Based Costing (ABC) and has identified the following common key activities, associated cost information, and quantity of each driver: Activity Set-Up Production Quality Inspection Factory Utilities Cleaning Total

Cost

Cost Driver Number of set-ups Number of orders fulfilled Number of inspections Number of square feet Number of cleaning hours

$6,800 6,950 9,678 5,788 3,704 $32,920 Shampoo

Number of set-ups Number of orders fulfilled Number of inspections Number of square feet Number of cleaning hours

423 2,987 1,348 1,100 788

Conditioner 263 2,012 881 949 457

Jeff would like to assist management by their next meeting. While keeping all of his data and compilations in mind, please provide some insight into the following questions. (If required, round calculations to two decimal places.)

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a. What is Primrose's budgeted manufacturing overhead rate in percentage form using one plant-wide pool? What are Primrose's activity-based rates using the identified key activities and respective cost drivers? (Round percentage figure to two decimal places.) b. Allocate manufacturing overhead costs to the rose-scented shampoo using the activity-based rates calculated in part (a), and present one total number, and do the same for the rose-scented conditioner. c. What are the total costs per unit for the rose-scented shampoo using both costing methods? d. What are the total costs per unit for the rose-scented conditioner using both costing methods? e. Why are the allocated MOH costs different between using a single plant-wide rate and using ABC? How might these differences impact Primrose's costing decisions in the future? Which method do you think Jeff will encourage Primrose to use?

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Answer: a. Traditional Costing: 16.79%; ABC rates: $9.91 per setup, $1.39 per order fulfilled, $4.34 per inspection hour, $2.82 per square foot of facility, and $2.98 per cleaning hour. The first step to calculating their single plant-wide pool is to determine how much the direct labor costs will be as this is the denominator needed for the equation. For the shampoo and conditioner, we would add assembly line wages and packaging wages for each product and then sum their totals as follows: ($62,300 + $43,450) + ($51,566 + $38,763) = $105,750 + $90,329 = $196,079 total DL costs To calculate Primrose's budgeted manufacturing overhead rate using one plant-wide pool, divide the total budgeted MOH costs by specified cost driver of DL costs: ($32,920/$196,079) × 100 = 16.79% Prior to being able to calculate the ABC rates, figure out the total cost driver for each activity. To do so, add the total amount of each driver for shampoo, and then add that to each driver for conditioner. Then, calculate the activity-based rates as follows: Activity Set-Ups Production Quality Inspection Factory Utilities Cleaning

Calculation $6,800/686 set-ups $6,950/4,999 Orders fulfilled

Activity-Based Rate $9.91 per set-up $1.39 per machine hour

$9,678/2,229 Inspections $4.34 per inspection $5,788/2,049 Square Feet $2.82 per square foot $3,704/1,245 Cleaning hours $2.98 per cleaning hour

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b. Shampoo- $19,644.42, Conditioner- $13,264.59 Calculate the activity-based MOH costs as follows:

Activity Setup Production Quality Inspection Factory Utilities Cleaning Total

Activity Set-up Production Quality Inspection Factory Utilities Cleaning Total

Calculation (Shampoo) $9.91 per set-ups × 423 setups $1.39 per order fulfilled × 2,987 orders $4.34 per inspection × 1,348 inspections $2.82 per square foot × 1,100 square feet $2.98 per cleaning hour × 788 hours

Calculation (Conditioner) $9.91 per set-ups × 263 setups $1.39 per order fulfilled × 2,012 orders $4.34 per inspection × 881 inspections $2.82 per square foot × 949 square feet $2.98 per cleaning hour × 457 hours

Activity-Based Rate $4,191.93 4,151.93 5,850.32 3,102.00 2,348.24 $19,644.42

Activity-Based Rate $2,606.33 2,796.68 3,823.54 2,676.18 1,361.86 $13,264.59

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c. Traditional- $2.07 per bottle, and ABC- $2.09 per bottle Before allocating any MOH to the shampoo products, calculate the Direct Materials and Direct Labor costs as these totals will be the same for both methods. Look at the list of product costs for Plastic Bottles, Product Mixture, Assembly Line Wages, and Packaging Wages, and determine what cost category applies. It will be the following: Direct Materials: Plastic Bottles and Product Mixture $41,444 + $53,560 = $95,004 Direct Labor: Assembly Line Wages and Packaging Wages $62,300 + $43,450 = $105,750 Traditional Now, calculate the MOH allocation using traditional costing by using the direct labor costs and plant-wide rate from Part a: $105,750 × $16.79% = $17,754.53 Now, determine the Total Product Cost using Direct Materials, Direct Labor, and Manufacturing Overhead: $95,004 + $105,750 + $17,754.53 = $218,508.53 Lastly, to arrive at the total cost per unit, divide the total product cost by the number of shampoo bottles produced: $218,509/105,600 bottles = $2.07 per bottle ABC Now, determine the Total Product Cost using Direct Materials, Direct Labor, and Manufacturing Overhead (costs allocated from part b): $95,004 + $105,750 + $19,644.42 = $220,398.42 Lastly, to arrive at the total cost per unit, divide the total product cost by the number of shampoo bottles produced: $220,398.42/105,600 bottles = $2.09 per bottle

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Traditional is $2.14 per bottle, and ABC is $2.12 per bottle

Before allocating any MOH to the conditioner products, calculate the Direct Materials and Direct Labor costs as these totals will be the same for both methods. Look at the list of product costs for Plastic Bottles, Product Mixture, Assembly Line Wages, and Packaging Wages, and determine what cost category applies. It will be the following: Direct Materials: Plastic Bottles and Product Mixture $36,787 + $42,899 = $79,686 Direct Labor: Assembly Line Wages and Packaging Wages $51,566 + $38,763 = $90,329 Traditional Now, calculate the MOH allocation using traditional costing by using the direct labor costs and plant-wide rate from Part a: $90,329 × 16.79% = $15,165.47 Now, determine the Total Product Cost using Direct Materials, Direct Labor, and Manufacturing Overhead: $79,686 + $90,329 + $15,165.47 = $185,180.47 Lastly, to arrive at the total cost per unit, divide the total product cost by the number of conditioner bottles produced: $185,180.47/86,420 bottles = $2.14 per bottle ABC Now, determine the Total Product Cost using Direct Materials, Direct Labor, and Manufacturing Overhead (costs allocated from part b): $79,686 + $90,329 + $13,264.59 = $183,279.59 Lastly, to arrive at the total cost per unit, you would divide the total product cost by the number of conditioner bottles produced: $183,279.59/86,420 bottles = $2.12 per bottle

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e. The largest difference between what is seen when applying a single plant-wide rate versus using ABC to derive unique activity-based rates is that each method uses different drivers and ultimately, different rates. Management may want to consider that ABC tends to provide a more transparent and timelier picture of how costs are being used by an organization. Assuming the key activities were not chosen at random and represent the most useful activities that drive costs, management will have a better understanding of how costs are spent using ABC versus the single rate. Jeff is likely to recommend ABC as it does a more accurate and transparent job of calculating costs based upon actual usage rather than a single, smoothed-out rate. This will become even more useful if the company decides to offer additional products in the future. Diff: 2 LO: 1, 3, 4 Bloom: AN AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management and Decision Making

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Cost Accounting, 1e (Farmer) Chapter 10 Variance Analysis and Standard Costing 1) Which of the following spotlights which factors contribute to differences between budgeted and actual outcomes? A) Breakeven analysis B) Cost behavior analysis C) Variance analysis D) Benchmarking analysis Answer: C Explanation: Variance analysis spotlights which factors contribute to differences between budgeted and actual outcomes. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 2) An organization uses a combination of budgeting and variance analysis as effective tools for A) planning and control. B) performance evaluation and troubleshooting. C) motivation and benchmarking. D) motivation and benchmarking, planning and control, and performance evaluation and control. Answer: D Explanation: An organization uses a combination of budgeting and variance analysis as effective tools for motivation and benchmarking, planning and control, and performance evaluation and troubleshooting. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

3) Once set, ________ numbers become the benchmark for comparison purposes. A) actual B) budgeted C) industry D) prior year Answer: B Explanation: Once set, budgeted numbers become the benchmark for comparison purposes. Diff: 1 LO: 1 Bloom: K AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 4) Long-range planning happens ________ the current year's budget is set. A) before B) after C) at the same time as D) every time that Answer: A Explanation: Long-range planning happens before the current year's budget is set. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 5) To ensure that operational plans are enacted, ________ are put into place to prevent deviations from budgeted numbers and to detect when spending goes off course. A) high standards B) benchmarking activities C) variance projections D) control activities Answer: D Explanation: To ensure that operational plans are enacted, control activities are put into place to prevent deviations from budgeted numbers and to detect when spending goes off course. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

6) Approved budgets become A) uncontrollable. B) standards. C) benchmarks. D) control activities. Answer: C Explanation: Approved budgets become benchmarks. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 7) The logical, systematic identification of the source of problems to fix them and avoid their recurrence is called A) benchmarking. B) targeting. C) troubleshooting. D) budgeting. Answer: C Explanation: The logical, systematic identification of the source of problems to fix them and avoid their recurrence.is called troubleshooting. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge, Strategy, Planning & Performance: Strategic Cost Management. 8) In budgeting, when realities change, old assumptions and their benchmarks A) are never adjusted, since the budget was created based on these assumptions. B) must be adjusted to reflect better information, so that actual performance is more on target. C) can be changed to reflect better information, but the changes are not required. D) may or may not be changed, based on the discretion of management. Answer: B Explanation: In budgeting, when realities change, old assumptions and their benchmarks must be adjusted to reflect better information, so that actual performance is more on target. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

9) When an employee overspends on a business expense where a specific guideline has been set, the spending above the guideline is called a(n) A) cost override. B) corrective-action activity. C) ethical violation. D) variance. Answer: D Explanation: When an employee overspends on a business expense where a specific guideline has been set, the spending above the guideline is called a variance. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 10) Which of the following depicts how organizations use budgets and variance analysis to attain their goals? A) Troubleshoot and Plan → Benchmark and Control → Evaluate Performance and Motivate B) Motivate and Benchmark → Plan and Control → Evaluate Performance and Troubleshoot C) Plan and Control → Evaluate Performance and Benchmark → Motivate and Troubleshoot D) Plan and Control → Evaluate Performance and Troubleshoot → Motivate and Benchmark Answer: B Explanation: The following depicts how organizations use budgets and variance analysis to attain their goals: Motivate and Benchmark → Plan and Control → Evaluate Performance and Troubleshoot. Diff: 2 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

11) When management sets expectations that are high, achievable, and clearly communicated A) unfavorable variances will always result. B) employees will normally work to reach the high standards if they feel the company is committed to their success. C) poor employee performance evaluations will happen, and workers miss out on expected incentives. D) flexibility and creativity for employees is stifled. Answer: B Explanation: When management sets expectations that are high, achievable, and clearly communicated, employees will normally work to reach the high standards if they feel the company is committed to their success. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 12) Which of the following statements is true regarding budgets? A) Actual numbers should never be compared to budgets, since budgets are simply estimates. B) Variances resulting from comparison of actual and budgeted amounts will always require management to take corrective action. C) Management should set expectations high and unattainable so that employees will be motivated to reach the goals set. D) Managers use variance analysis to compare actual outcomes to the budget to evaluate performance and solve issues that caused the variances. Answer: D Explanation: The statement which is true is that "Managers use variance analysis to compare actual outcomes to the budget to evaluate performance and solve issues that caused the variances." Diff: 2 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge.

13) How does a company track its progress toward reaching its goals as created in a budget? A) Sensitivity analysis B) Variance analysis C) Regression analysis D) Breakeven analysis Answer: B Explanation: A company tracks it progress towards reaching its goals as created in a budget by using variance analysis. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge, Strategy, Planning & Performance: Strategic Cost Management. 14) Which of the following is performed once the current budget is created? A) Variance analysis B) Troubleshooting C) Operational plans D) Performance evaluation Answer: C Explanation: Once the current budget is created, operational plans are begun. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 15) In order to achieve its goals, a company should A) set its goals at the highest level in order to motivate employees to reach the goals B) enact its budgeted plan and set regular evaluations of actual versus budgeted numbers to track its progress towards these goals. C) evaluate only the accuracy of the budget assumptions used to create the budget. D) constantly change assumptions used in creating the budget when actual events occur contrary to the budget assumptions. Answer: B Explanation: In order to achieve its goals, a company should enact a budgeted plan and set regular evaluations of actual versus budgeted numbers to track its progress towards these goals. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Operations: Operational Knowledge. 6

16) A comprehensive, organization-wide budget that requires inputs from many sources throughout the company is a(n) A) cash budget. B) operational budget. C) master budget. D) financial budget. Answer: C Explanation: A comprehensive, organization-wide budget that requires inputs from many sources throughout the company is a master budget. Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 17) Which of the following is used to coordinate a company's plans and to allocate resources accordingly? A) Master budget B) Variance analysis C) Operational plans D) Troubleshooting Answer: A Explanation: A master budget is used to coordinate a company's plans and to allocate resources accordingly. Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 18) The correct equation for a Master Budget Variance is A) (Budgeted volume × Actual price) - (Actual volume × Budgeted price). B) (Budgeted volume × Actual price) + (Actual volume × Budgeted price). C) (Budgeted volume × Budgeted price) - (Actual volume × Actual price). D) (Budgeted volume × Budgeted price) + (Actual volume × Actual price). Answer: C Explanation: The correct equation for a Master Budget Variance is (Budgeted volume × Budgeted price) - (Actual volume × Actual price). Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 7

19) Corner Cupcakes has the following budgeted amounts for the current month: budgeted sales in units of 3,500 at a budgeted unit selling price of $5. Actual amounts for the month were as follows: 4,000 units at a unit selling price of $4.80. What is the sales activity variance for Corner Cupcakes for the current month? A) $2,400 unfavorable B) $2,400 favorable C) $2,500 unfavorable D) $2,500 favorable Answer: D Explanation: Sales Activity Variance = (Budgeted volume × Budgeted price) - (Actual volume × Budgeted price) = (3,500 × $5) - (4,000 × $5) = $2,500 favorable Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 20) When should a flexible budget be used instead of the master budget? A) When actual sales volume equals the master budget sales volume B) When actual sales volume approximates the master budget sales volume C) When actual sales volume differs from the master budget sales volume D) When the actual sales revenue differs from the master budget sales revenue Answer: C Explanation: A flexible budget should be used instead of the master budget when the actual sales volume differs from the master budget sales volume. Diff: 2 LO: 2 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 21) When computing variances related to a flexible budget, a favorable (F) variance causes a(n) A) decrease in operating income compared to the master budget. B) increase in operating income compared to the master budget. C) decrease in sales revenue compared to the master budget. D) increase in sales revenue compared to the master budget. Answer: B Explanation: When computing variances related to a flexible budget, a favorable (F) variance causes an increase in operating income compared to the master budget. Diff: 2 LO: 2 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 8

22) The variance that highlights the difference between actual sales volume and the master budget sales volume is the A) MOH volume variance. B) master budget variance. C) flexible budget variance. D) sales activity variance. Answer: D Explanation: The variance that highlights the difference between actual sales volume and the master budget sales volume is the sales activity variance. Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 23) Which of the following costs will transfer from the master budget to the flexible budget unchanged assuming an operating capacity within the relevant range? A) Fixed costs B) Direct labor C) Direct materials D) Variable manufacturing overhead (MOH) Answer: A Explanation: Fixed costs will transfer from the master budget to the flexible budget unchanged assuming an operating capacity within the relevant range. Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

24) Fern's Florist has a Flexible Budget Variance of $15, favorable and a Sales Activity Variance of $25, unfavorable. What is Fern's Florist's Master Budget Variance? A) $10 favorable B) $10 unfavorable C) $40 unfavorable D) Cannot be determined; not enough information given. Answer: B Explanation: Master Budget Variance = Flexible Budget Variance, $15, favorable - Sales Activity Variance, $25, unfavorable = $10 unfavorable. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 25) Which of the following variances holds the volume constant between actual and flexible budget, and highlights the price difference between actual and budget? A) Flexible budget variance B) Master budget variance C) Sales activity variance D) Manufacturing overhead (MOH) efficiency variance Answer: A Explanation: The Flexible Budget Variance holds the volume constant between actual and flexible budget and highlights the price difference between actual and budget. Diff: 2 LO: 2 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

26) Cubana Candles produces and sells custom candles. Last month it had the following product sales volume and pricing data:

Actual Budgeted

Unit selling price $10 $9

Sales volume 20 15

What is the flexible budget variance for Cubana Candles? A) $10 favorable B) $10 unfavorable C) $20 favorable D) $20 unfavorable Answer: C Explanation: Flexible budget variance = (Actual volume × Budgeted price) - (Actual volume × Actual price) = (20 × $9) - (20 × $10) = $20 favorable. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 27) Cubana Candles produces and sells custom candles. Last month it had the following product sales volume and pricing data:

Actual Budgeted

Unit selling price $10 $9

Sales volume 20 15

What is the master budget variance for Cubana Candles? A) $30 favorable B) $30 unfavorable C) $65 favorable D) $65 unfavorable Answer: C Explanation: Master budget variance = (Budgeted volume × Budgeted price) - (Actual volume × Actual price) = (15 × $9) - (20 × $10) = $65 favorable. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

28) Cubana Candles produces and sells custom candles. Last month it had the following product sales volume and pricing data:

Actual Budgeted

Unit selling price $10 $9

Sales volume 20 15

What is the sales activity variance for Cubana Candles? A) $45 favorable B) $45 unfavorable C) $60 favorable D) $60 unfavorable Answer: A Explanation: Sales activity variance = (Budgeted volume × Budgeted price) - (Actual volume × Budgeted price) = (15 × $9) - (20 × $9) = $45 favorable. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 29) Texas Tad's T-shirt Warehouse has a Flexible Budget Variance of $175, favorable and a Sales Activity Variance of $75, favorable. What is Texas Tad's Master Budget Variance? A) $100 favorable B) $250 favorable C) $250 unfavorable D) Cannot be determined; not enough information given. Answer: B Explanation: Master Budget Variance = Flexible Budget Variance, $150, favorable + Sales Activity Variance, $75, favorable = $250 favorable. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

30) Cosmo Cookie Creations had the following variable cost data for the past month: Actual Flexible Budget Master Budget

$4,600 5,200 5,500

What is Cosmo Cookie's Flexible Budget Variance and Sales Activity Variance? A) $600, unfavorable and $300, favorable B) $600, unfavorable and $300, unfavorable C) $600, favorable and $300, favorable D) $600, favorable and $300, unfavorable Answer: C Explanation: Flexible Budget Variance = Actual - Flexible Budget = $4,600 - $5,200 = $600, favorable and Sales Activity Variance = Flexible Budget - Master Budget = $5,200 - $5,500 = $300, favorable. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 31) Standard costing uses ________ costs set at the ________ level as product costs in the general ledger. A) actual; unit B) budgeted; unit C) actual; total D) budgeted; total Answer: B Explanation: Standard costing uses budgeted costs set at the unit level as product costs in the general ledger. Diff: 1 LO: 3 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Knowledge: Operational Knowledge.

32) Companies using standard costing have ________ controls over production costs. A) tight B) flexible C) weak D) variable Answer: A Explanation: Companies using standard costing have tight controls over production costs. Diff: 1 LO: 3 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Knowledge: Operational Knowledge. 33) Which of the following shows the required quantities and current prices of manufacturing costs for each input: direct materials, direct labor, variable manufacturing overhead and fixed manufacturing overhead? A) Bill of materials B) Standard cost card C) Variance analysis D) Job cost sheet Answer: B Explanation: A standard cost card shows the required quantities and current prices of manufacturing costs for each input: direct materials, direct labor, variable manufacturing overhead and fixed manufacturing overhead. Diff: 1 LO: 3 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Knowledge: Operational Knowledge. 34) Which of the following standards are firm, yet attainable unit benchmarks that allow for the realities of life? A) Ideal B) Theoretical C) Practical D) Idyllic Answer: C Explanation: Practical standards are firm, yet attainable unit benchmarks that allow for the realities of life. Diff: 1 LO: 3 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Business Acumen & Knowledge: Operational Knowledge. 14

35) Roja Winery has the standard cost data for the production of each bottle of red wine below.

Input Direct Materials Grapes (Red or Black) Distilled Water Sugar Baker's Yeast Glass Bottle Corks Direct Labor Variable MOH Fixed MOH

Standard Quantity of Input Standard Input Price Per Unit per Bottle (SQ) of Input (SP)

.42 kg .21 liters .21 kg .04 of packet 1 1 .25 hours .25 hours .25 hours

$6 per kg $40 per liter $.44 per kg $2 per packet .25 per bottle .05 per bottle $9 per hour $4 per hour $3 per hour

What is the standard cost per unit for one bottle of red wind for Roja Winery? A) $11.39 B) $13.64 C) $14.64 D) $15.39 Answer: D Explanation: (Direct Materials + Direct Labor + Variable MOH + Fixed MOH = Standard Cost per Unit) = [(.42 kg × $6.00) = (21 ltr × $40) + (.21 kg × $.44) + (.04 kg × $2) + (1 × $.25) + (1 × $.05) + (.25 × $9) + (.25 × $4) + (.25 × $3)] = $15.39 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

36) When assigning costs for direct materials, direct labor, and manufacturing overhead to production, the costs should be recorded as A) actual costs incurred. B) standard costs. C) estimated costs. D) total budgeted costs. Answer: B Explanation: When assigning costs for direct materials, direct labor, and manufacturing overhead to production, the costs should be recorded as standard costs. Diff: 2 LO: 3 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 37) When a unit of product is completed, the correct accounting entry to record this is to A) debit Work In Process (WIP) Inventory and credit Finished Goods (FG) Inventory. B) debit Finished Goods (FG) Inventory and credit Work In Process (WIP) Inventory. C) debit Work In Process (WIP) Inventory and credit Raw Materials Inventory. D) debit Finished Goods (FG) Inventory and credit Raw Materials Inventory. Answer: B Explanation: When a unit of good is completed, the correct accounting entry to record this is to debit Finished Goods (FG) Inventory and credit Work In Process (WIP) Inventory. Diff: 2 LO: 3 Bloom: C AACSB: Knowledge AICPA: CC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 38) Which of the following would NOT appear as a debit entry in the Work In Process (WIP) Inventory account when manufacturing a unit of product? A) Cost of goods manufactured (COGM) B) Direct materials (DM) used C) Direct labor (DL) used D) Variable manufacturing overhead (MOH) assigned Answer: A Explanation: The only item that will not appear as a debit entry in the Work In Process (WIP) Inventory account is the Cost of Goods Manufactured (COGM). Diff: 2 LO: 3 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 16

39) Which of the following standards have no tolerance for machine breakdowns or employee breaks? A) Practical standards B) Realistic standards C) Ideal standards D) Firm, yet attainable standards Answer: C Explanation: Ideal standards have no tolerance for machine breakdowns or employee breaks. Diff: 1 LO: 3 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 40) Which of the following standards would be best suited to a futuristic production facility comprised of robots and drones, but lacking people? A) Firm, yet attainable standards B) Ideal standards C) Realistic standards D) Practical standards Answer: B Explanation: Ideal standards would be best suited to a futuristic production facility comprised of robots and drones, but lacking people. Diff: 1 LO: 3 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 41) Standards should be reviewed and updated A) throughout the year, every time conditions and assumptions change. B) only if variances are significant and indicate a change is required. C) at the end of each period, once variances are known. D) at the beginning of each year, in anticipation of what the variances will be for the year. Answer: C Explanation: Standards should be reviewed and updated at the end of each period, once variances are known. Diff: 1 LO: 3 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

42) Which of the following statements regarding standard costing is NOT correct? A) Establishing and maintaining standard costs and the efficient process to sustain cost stability requires great attention to detail. B) A key benefit of standard costing is that using variance analysis one year helps inform planning and budgeting for the next year. C) At the beginning of the period, before variances are known, management reviews standards that are in place for that period and considers updating them. D) Setting standards for direct materials, direct labor and manufacturing overhead is an iterative process. Answer: C Explanation: The statement that is not correct is, "At the beginning of the period, before variances are known, management reviews standards that are in place for that period and considers updating them." Diff: 2 LO: 3 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 43) When goods are completed and transferred from Work In Process Inventory (WIP) to Finished Goods (FG) Inventory, the costs in the transfer accounting entry are A) incurred costs. B) standard costs. C) assigned costs. D) actual costs. Answer: B Explanation: When goods are completed and transferred from Work In Process (WIP) Inventory to Finished Goods (FG) Inventory, the costs in the transfer accounting entry are standard costs. Diff: 1 LO: 3 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

44) Which of the following factors would NOT be considered when setting a direct labor standard? A) Mix of skilled and unskilled workers B) Observation of production workers in action C) Setting up approved suppliers D) Timing of production workers to manufacture a unit of product Answer: C Explanation: All of the responses given are factors considered when setting a direct labor standard except setting up approved suppliers. Diff: 1 LO: 3 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 45) Cost accountants work with which of the following to determine the types and quantities of direct materials inputs that will work best when setting the direct materials standard? A) Only engineers B) Only purchasing managers C) Only manufacturing experts D) Engineers, purchasing managers, and manufacturing experts. Answer: D Explanation: Cost accountants work with engineers, purchasing managers, and manufacturing experts to determine the types and the quantities of direct materials inputs that will work best when setting the direct materials standard. Diff: 1 LO: 3 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

46) Given that standard costs are like budgets or benchmarks at the unit-level, it is imperative to A) follow up with variance analysis to plan for unit costs only. B) control the unit costs only. C) evaluate performance once the units are produced and troubleshoot why variances occurred only. D) follow up with variance analysis to plan for unit costs, control them, and evaluate performance once the units are produced, and then, troubleshoot why variances occurred. Answer: D Explanation: Given that standard costs are like budgets or benchmarks at the unit-level, it is imperative to follow up with variance analysis to plan for unit costs, control them, and evaluate performance once the units are produced, and then, troubleshoot why variance occurred. Diff: 1 LO: 4 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 47) A price variance compares the A) actual cost incurred for the input (DM, DL, or variable-MOH) to the standard cost allowed for the actual input quantity. B) actual cost incurred for the input (DM, DL, or variable-MOH) to the standard cost allowed for the standard input quantity. C) actual quantity used of each input (DM, DL, or variable-MOH) to the standard quantity allowed for each input, at its standard cost. D) actual quantity used of each input (DM, DL, or variable MOH) to the standard quantity allowed for each input, at its actual cost. Answer: A Explanation: Price variances compare the actual cost incurred for the input (DM, DL, or variable MOH) to the standard cost allowed for the actual input quantity. Diff: 2 LO: 4 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

48) An efficiency variance compares the A) actual quantity used of each input (DM, DL, or variable MOH) to the standard quantity allowed for each input, at its actual cost. B) actual cost incurred for the input (DM, DL, or variable-MOH) to the standard cost allowed for the actual input quantity. C) actual quantity used of each input (DM, DL, or variable-MOH) to the standard quantity allowed for each input, at its standard cost. D) actual cost incurred for the input (DM, DL, or variable-MOH) to the standard cost allowed for the standard input quantity. Answer: C Explanation: An efficiency variance compares the actual quantity used of each input (DM, DL, or variable-MOH) to the standard quantity allowed for each input, at its standard cost. Diff: 2 LO: 4 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 49) Which variance helps management address what quantity of direct material (DM) inputs should have been used in making the actual volume of units? A) Direct material (DM) price variance B) Direct material (DM) efficiency variance C) Direct labor (DL) price variance D) Direct labor (DL) efficiency variance Answer: B Explanation: The direct material (DM) efficiency variance helps management address what quantity of direct material (DM) inputs should have been used in making the actual volume of units. Diff: 1 LO: 4 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

50) The direct labor (DL) price variance for Vellux Manufacturers is $15,600 unfavorable. The standard number of hours worked was 10,000 and the standard rate per hour for direct labor was $14. If the actual direct labor hours were 12,000, what was the actual rate per direct labor hour? A) $7.80 B) $12.70 C) $15.30 D) $17.50 Answer: C Explanation: DM Price Variance, $15,600 U = (AQ × AP) - (AQ × SP) = (12,000 × AP) (12,000 × $14); AP = $15.30 Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 51) Venda Company purchased and used 40,000 pound of materials in production. It paid $6.00 per pound for these materials. If the direct materials (DM) price variance was $50,000 favorable, what was the standard price per pound? A) $4.25 B) $5.75 C) $7.25 D) $9.30 Answer: C Explanation: Direct Materials (DM) Price Variance, $50,000 F = (AQ × AP) - (AQ × SP) = (40,000 × $6) - (40,000 × SP); SP = $7.25 Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

52) Kidzlane has direct materials (DL) standards of 2 pounds per unit at $4 per pound for its most popular toy. Last month, 5,600 pounds of direct materials that actually cost $28,000 were used to produce 3,000 toy units. The direct materials (DM) efficiency variance for last month was A) $1,600 unfavorable. B) $1,600 favorable. C) $5,600 unfavorable. D) $5,600 favorable. Answer: B Explanation: DM Efficiency Variance = (AQ × SP) - (SQ × SP) = (5,600 × $4) - [(3,000 × 2) × $4] = $1,600 Favorable Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 53) Kingston Company produces a hover board, which has standard requirements of two hours per board at a direct labor rate per hour of $18. In the last quarter, 2,000 hover boards were produced using 4,200 direct labor hours at rate of $19.00 per hour. The direct labor (DL) efficiency variance for last quarter was A) $7,200 unfavorable. B) $7,200 favorable. C) $3,600 unfavorable. D) $3,600 favorable. Answer: A Explanation: Direct Labor (DL) Efficiency Variance = (AQ × SP) - (SQ × SP); SP = (2 hrs. × $18) = $36 and SQ = 2,000 × 2 hrs. = 4,000 hrs.; DL Efficiency Variance = (4,200 × $36) (4,000 × $36) = $7,200 Unfavorable Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

54) In a standard costing system, direct material (DM) price variances are recorded when goods are A) purchased. B) placed into production. C) completed and transferred to finished goods inventory. D) sold. Answer: A Explanation: Direct materials (DM) price variances are recorded in a standard costing system when goods are purchased. Diff: 1 LO: 4 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Reporting and Control: Cost Accounting. 55) For standard costing journal entries, A) standard cost is used to record the method of payment and the actual amount is used to record the DM inventory, WIP Inventory, and FG Inventory, with the difference recognized in the variance accounts. B) standard cost is recorded in both DM Inventory, WIP Inventory, FG Inventory, and the Cash or Accounts Receivable depending on the method of payment. C) standard cost is recorded in both DM Inventory, WIP Inventory, FG Inventory, and the Cash or Accounts Payable depending on the method of payment. D) standard cost is used to record the DM inventory, WIP Inventory, and FG Inventory, actual cost is used to record the method of payment, Cash or Accounts Receivable, and the difference is recognized in the variance accounts. Answer: D Explanation: For standard costing journal entries, standard cost is used to record the DM inventory, WIP Inventory, and FG Inventory, actual cost is used to record the method of payment, Cash or Accounts Receivable, and the difference is recognized in the variance accounts. Diff: 2 LO: 4 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting and Control: Cost Accounting.

56) Direct materials (DM) efficiency variances are recorded A) when materials are purchased. B) during production. C) when units are sold. D) at the same time as direct materials (DM) price variances. Answer: B Explanation: Direct materials (DM) efficiency variances are recorded during production. Diff: 1 LO: 4 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Reporting and Control: Cost Accounting. 57) The direct labor (DL) price variance reflects the difference between the A) standard direct labor cost for the actual direct labor hours used and the direct labor hours that were expected to use for the actual production. B) actual direct labor rate and the standard direct labor rate for all of the direct labor hours used. C) actual direct labor rate applied to the actual labor hours and the standard direct labor rate applied to the standard direct labor hours. D) standard direct labor rate applied to the actual labor hours and the actual direct labor rate applied to the standard direct labor hours. Answer: B Explanation: The direct labor (DL) price variance reflects the difference between the actual direct labor rate and the standard direct labor rate for all of the direct labor hours used. Diff: 2 LO: 3 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 58) A company's direct labor (DL) efficiency variance is computed as A) (AQ × SP) + (SQ × SP). B) (AQ × AP) - (SQ × SP). C) (AQ × AP) - (AQ × SP). D) (AQ × SP) - (SQ × SP). Answer: D Explanation: A company's direct labor (DL) variance is computed as (AQ × SP) - (SQ - SP). Diff: 2 LO: 4 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

59) The formula for the direct labor (DL) price variance is A) (AQ × AP) - (AQ × SP). B) (AQ × AP) + (AQ × SP). C) (AQ × SP) - (SQ × SP). D) (AQ × AP) - (SQ × SP). Answer: A Explanation: The formula for the direct labor (DL) price variance is (AQ × AP) - (AQ - SP). Diff: 2 LO: 4 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Cost Management and Decision Analysis. 60) The formula for the direct materials (DM) price variance is A) (AQpurch × AP) - (AQpurch × SP). B) (SQpurch × AP) - (SQpurch × SP). C) (AQpurch × AP) + (AQpurch × SP). D) (AQpurch × AP) - (SQpurch × SP). Answer: A Explanation: The formula for the direct materials (DM) price variance is (AQpurch × AP) (AQpurch × SP). Diff: 2 LO: 4 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 61) The formula for the direct materials (DM) efficiency variance is A) (AQused × AP) - (SQ × SP). B) (AQused × SP) - (SQ × SP). C) (AQused × SP) + (SQ × SP). D) (AQused × AP) - (AQused × SP). Answer: B Explanation: The formula for the direct materials (DM) efficiency variance is (AQused × SP) (SQ × SP). Diff: 1 LO: 4 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

62) The standard price (SP) in the variable-MOH price variance is computed by total A) actual variable-MOH divided by the actual use of the cost driver. B) actual variable-MOH divided by the budgeted use of the cost driver. C) budgeted variable-MOH divided by the budgeted use of the cost driver. D) budgeted variable-MOH divided by the actual use of the cost driver. Answer: C Explanation: The standard price (SP) in the variable-MOH price variance is computed by total budgeted variable-MOH divided by the budgeted use of the cost driver. Diff: 2 LO: 5 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 63) The correct equation for the variable-MOH price variance is A) actual variable-MOH incurred - (SQ × SP). B) budgeted variable-MOH - (SQ × AP). C) budgeted variable-MOH - (AQ × SP). D) actual variable-MOH incurred - (AQ × SP). Answer: D Explanation: The correct equation for the variable-MOH price variance is actual variable-MOH incurred - (AQ × SP). Diff: 2 LO: 3 Bloom: K AACSB: Knowledge AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

64) Which of the following would NOT be a key transaction-related standard costing journal entry for variable-MOH costs? A) Actual Variable-MOH costs are recorded as debits to Variable-MOH Control account. B) As units are completed, the applied cost is debited to WIP Inventory account and credited to Variable-MOH Control account. C) As units are completed, the applied cost is credited to the WIP Inventory account and debited to the Variable-MOH Control account. D) Specific variable-MOH price variances and/or efficiency variances are recognized as the Variable-MOH Control account is closed out. Answer: C Explanation: The entry which is not a transaction-related standard costing journal entry for variable-MOH costs is, "As units are completed the applied cost is credited to WIP Inventory account and debited to the Variable-MOH Control account." Diff: 2 LO: 5 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 65) Which variance captures the difference in the standard variable-MOH cost for the actual quantity of the cost driver used, compared to the cost driver quantity expected for actual units produced? A) Variable-MOH Efficiency Variance B) Fixed-MOH Price Variance C) Variable-MOH Price Variance D) Fixed-MOH Volume Variance Answer: A Explanation: The Variable-MOH Efficiency Variance captures the difference in the standard variable-MOH cost for the actual quantity of the cost driver used, compared to the cost driver quantity expected for the actual units produced. Diff: 2 LO: 5 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

66) A favorable Variable-MOH Price Variance means that A) less was paid than expected for variable-MOH resources. B) more was paid than expected for variable-MOH resources. C) less of the cost driver related to the variable-MOH resources was used than expected. D) more of the cost driver related to the variable-MOH resources was used than expected. Answer: A Explanation: A favorable Variable-MOH Price Variance means that less was paid than expected for variable-MOH resources. Diff: 2 LO: 5 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 67) Variances with overall favorable effects will carry A) debit balances which increase operating income. B) credit balances which decrease operating income. C) credit balances which increase operating income. D) debit balances which decrease operating income. Answer: C Explanation: Variances with overall favorable effects will carry credit balances which increase operating income. Diff: 2 LO: 5 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 68) General ledger accounts for variances are classified as A) permanent accounts. B) temporary accounts. C) real accounts. D) retained earnings. Answer: B Explanation: General ledger accounts for variances are classified as temporary accounts. Diff: 1 LO: 5 Bloom: K AACSB: Knowledge AICPA: BB: Industry/Sector Perspective; FN: Measurement; PC: Problem Solving IMA: Strategy, Planning & Performance: Strategic Cost Management, Business Acumen & Operations: Operational Knowledge.

69) Because variance accounts are A) temporary accounts, they must be closed at year-end. B) temporary accounts, their balances will carry over from one period to the next. C) permanent accounts, they must be closed at year-end. D) permanent accounts, their balances will carry over from one period to the next. Answer: A Explanation: Because variance accounts are temporary accounts, they must be closed at yearend. Diff: 2 LO: 5 Bloom: K AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 70) Variance accounts are closed or written off to A) Retained Earnings. B) Cost of Goods Sold. C) Finished Goods (FG) Inventory. D) Work In Process Inventory. Answer: B Explanation: Variance accounts are closed or written off to Cost of Goods Sold. Diff: 1 LO: 5 Bloom: K AACSB: Knowledge AICPA: BB: Industry/Sector Perspective; FN: Measurement; PC: Problem Solving IMA: Strategy, Planning & Performance: Strategic Cost Management. 71) Which of the following account balances will reflect the actual cost of production at year-end in a standard costing system? A) Work In Process Inventory B) Raw Materials Inventory C) Finished Goods Inventory D) Cost of Goods Sold Answer: D Explanation: The Cost of Goods Sold account balance will reflect the actual cost of production at year-end in a standard costing system. Diff: 2 LO: 5 Bloom: K AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

72) Bonaventura Boots had the following variances at year-end: Variances Unfavorable DM Price Variance Unfavorable DM Efficiency Variance Favorable DL Efficiency Variance

Amount $250 U $125 U $340 F

What is the effect of closing these variances on the Cost of Goods Sold account at year-end? A) Increase by $35 B) Decrease by $35 C) Increase by $715 D) Decrease by $715 Answer: A Explanation: Unfavorable DM Price Variance + Unfavorable DM Efficiency Variance) Favorable DL Efficiency Variance = Change to Cost of Goods Sold; ($250 U + $125 U) - $340 F = $35 increase (debit) to Cost of Goods Sold. Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

73) Bonaventura Boots had the following variances at year-end: Variances Unfavorable DM Price Variance Unfavorable DM Efficiency Variance Favorable DL Efficiency Variance

Amount $250 U $125 U $340 F

What is the journal entry to close these variances? A) DM Price Variance.....……………….. 250 DM Efficiency Variance……………… 125 DL Efficiency Variance………. 340 COGS………………….…….. 35 B) COGS………………………………….. 35 DL Efficiency Variance………………... 340 DM Price Variance…………..... 250 DM Efficiency Variance……..... 125 C) COGS………………………………….. 215 DM Price Variance……..…………….... 250 DL Efficiency Variance……....... 340 DM Efficiency Variance……...... 125 D) COGS………………………………….. 465 DM Efficiency Variance……………….. 125 DM Price Variance………….. 250 DM Efficiency Variance…….. 340 Answer: B Explanation: The journal entry to close the variances for Bonaventura Boots is as follows: COGS………………………………….. 35 DL Efficiency Variance………………... 340 DM Price Variance…………..... 250 DM Efficiency Variance……..... 125 Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

74) Dairy Delites had the following projected and incurred the following production and cost data shown below: Actual Variable MOH Incurred Actual Quantity of the Cost Driver (AQ) Standard Quantity of the Cost Driver (SQ) Standard Price per usage of cost driver (SP)

$2,328 850 hours 780 hours $2.30/hr.

What is the Variable-MOH Price Variance? A) $161 unfavorable B) $161 favorable C) $373 unfavorable D) $373 favorable Answer: C Explanation: Actual Cost (AQ × AP) - (AQ × SP) = $2,328 - (850 hrs. × $2.30 hr.) = $2,328 $1,955 = $373 unfavorable. Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 75) Dairy Delites had the following projected and incurred the following production and cost data shown below: Actual Variable MOH Incurred Actual Quantity of the Cost Driver (AQ) Standard Quantity of the Cost Driver (SQ) Standard Price per usage of cost driver (SP)

$2,328 850 hours 780 hours $2.30/hr.

What is the Variable-MOH Efficiency Variance? A) $161 unfavorable B) $161 favorable C) $373 unfavorable D) $373 favorable Answer: A Explanation: Variable-MOH Efficiency Variance = (AQ × SP) - (SQ × SP) = (850 × $2.30) (780 × $2.30) = $161 unfavorable. Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

76) Dairy Delites had the following projected and incurred the following production and cost data shown below: Actual Fixed-MOH Incurred Actual Quantity of the Cost Driver (AQ) Master Budget Quantity of the Cost Driver (MBQ) Standard Price per usage of cost driver (SP)

$2,572 750 hours 820 hours $3.40/hr.

What is the Fixed-MOH Price Variance? A) $136 favorable B) $136 unfavorable C) $216 favorable D) $216 unfavorable Answer: C Explanation: Actual Fixed-MOH Incurred - Master Budget Fixed-MOH = $2,572 - (MBQ × SP) = $2,572 - (820 hrs. × $3.40/hr.) = $2,572 - $2,788 = $216 favorable. Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

77) Dairy Delites had the following projected and incurred the following production and cost data shown below: Actual Fixed-MOH Incurred Actual Quantity of the Cost Driver (AQ) Master Budget Quantity of the Cost Driver (MBQ) Standard Quantity of the Cost Driver (SQ) Standard Price per usage of cost driver (SP)

$2,572 750 hours 820 hours 780 hours $3.40/hr.

What is the Fixed-MOH Volume Variance? A) $136 favorable B) $136 unfavorable C) $216 favorable D) $216 unfavorable Answer: B Explanation: Fixed-MOH Volume Variance = Master Budget Fixed-MOH Cost - Fixed-MOH Applied = (MBQ × SP) - (SQ × SP) = (820 hrs. × $3.40/hr.) - (780 hrs. × $3.40/hr.) = $2,788 $2,652 = $136 unfavorable. Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 78) Which variance isolates and quantifies the change in sales prices? A) Simplified Sales Activity Variance B) Master Budget Sales Variance C) Sales Price Variance D) Sales Mix Variance Answer: C Explanation: The Sales Price Variance isolates and quantifies the change in sales prices. Diff: 2 LO: 6 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

79) Which of the following spotlights the change in volume between the flexible budget sales level and the master budget sales level? A) Sales Mix Variance B) Sales Price Variance C) Master Budget Sales Variance D) Simplified Sales Activity Variance Answer: D Explanation: The simplified sales activity variance spotlights the change in volume between the flexible budget sales and the master budget sales level. Diff: 2 LO: 6 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 80) The master budget sales variance captures A) only the difference between actual results and master budget values for sales price. B) only the difference between actual results and master budget values for sales volume. C) the difference between actual results and master budget values for both sales price and volume. D) the difference between actual results and the flexible budget for sales. Answer: C Explanation: The master budget sales variance captures the difference between actual results and master budget values for both sales price and volume. Diff: 2 LO: 6 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 81) The total sales variance is also known as the A) sales price variance. B) simplified sales activity variance C) sales mix variance. D) master budget sales variance. Answer: D Explanation: The total sales variance is also known as the master budget sales variance. Diff: 2 LO: 6 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

82) The sales price variance is computed as the A) (Actual sales price per unit - Budgeted sales price per unit) × Actual volume sold. B) (Actual volume - Budgeted volume) × Budgeted sales price. C) (Actual sales price per unit - Budgeted sales price per unit) × Budgeted volume sold. D) (Actual volume - Budgeted volume) × Actual sales price. Answer: A Explanation: The sales price variance is computed as the (Actual sales price per unit - Budgeted sales price per unit) × Actual volume sold. Diff: 2 LO: 6 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 83) The equation for the simplified sales activity variance is A) (Actual volume - Budgeted volume) × Actual sales price. B) (Actual volume - Budgeted volume) × Budgeted sales price. C) (Actual sales price per unit - Budgeted sales price per unit) × Actual volume sold. D) (Actual sales price per unit - Budgeted sales price per unit) × Budgeted volume sold. Answer: B Explanation: The equation for the simplified sales activity variance is (Actual volume Budgeted volume) × Budgeted sales price. Diff: 2 LO: 6 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

84) Quest Electronics has the following sales data for the last quarter:

Actual Budgeted

Sales Volume in Units 2,000 1,800

Unit Sales Price $13 $15

What is the Master Budget Variance for Quest Electronics for the quarter? A) $1,000 favorable B) $1,000 unfavorable C) $6,600 favorable D) $6,600 unfavorable Answer: B Explanation: Master Budget Variance = Total Actual Sales - Total Budgeted Sales = (Actual Volume × Actual Price) - (Budgeted Volume × Budgeted Price) = (2,000 × $13) - (1,800 × $15) = $26,000, Actual Sales - $27,000, Budgeted Sales = $1,000 unfavorable. Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 85) Quest Electronics has the following sales data for the last quarter:

Actual Budgeted

Sales Volume in Units 2,000 1,800

Unit Sales Price $13 $15

What is the Sales Price Variance for Quest Electronics for the quarter? A) $3,600 favorable B) $3,600 unfavorable C) $4,000 favorable D) $4,000 unfavorable Answer: D Explanation: The Sales Price Variance = (Actual sales price per unit - Budgeted sales price per unit) × Actual volume sold = ($13 - $15) × 2,000 = $4,000 unfavorable. Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

86) Quest Electronics has the following sales data for the last quarter:

Actual Budgeted

Sales Volume in Units 2,000 1,800

Unit Sales Price $13 $15

What is the Simplified Sales Activity Variance for Quest Electronics for the quarter? A) $3,000 favorable B) $3,000 unfavorable C) $4,000 favorable D) $4,000 unfavorable Answer: A Explanation: Simplified Sales Activity Variance = (Actual volume - Budgeted volume) × Budgeted sales price = (2,000 - 1,800) × $15 = $3,000 favorable. Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

87) Santini Shoe Company had the following data for its Women's shoes and Men's shoes for the last quarter:

Volume in units Unit Sales Price (SP) Unit Variable Costs (VC) Unit Contribution Margin (CM)

Actual Results Women's Men's 1,800 1,400 $90 $110 $50 $50 $40 $60

Master Budget Women's Men's 1,500 1,200 $80 $120 $50 $50 $30 $70

What is the Total Sales Mix Variance for Santini Shoe Company for last quarter? A) $884 favorable B) $884 unfavorable C) $2,208 favorable D) $2,208 unfavorable Answer: B Explanation: Total Sales Mix Variance = Sales Mix Variance of Women's Shoes + Sales Mix Variance of Men's Shoes = [(Actual Sales Mix of Women's Shoes - Budgeted Sales Mix of Women's Shoes) × Actual Volume of all products sold × Budgeted Unit CM Women's] + [(Actual Sales Mix of Men's Shoes - Budgeted Sales Mix of Men's Shoes) × Actual Volume of all products sold × Budgeted Unit CM Men's]; [{1,800/ (1,800 + 1,400) - 1,500 / (1,500 + 1,200)} × 3,200 × $30] + [{1,400/ (1,800 + 1,400) - 1,200 / (1,500 + 1,200)} × 3,200 × $70] = [(.5625 - .5556) × 3,200 × $30] + [(.4375 - .4444) × 3,200 × $70] = $662 + (-1,546) = $884 unfavorable Diff: 3 LO: 6 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

88) Santini Shoe Company had the following data for its Women's shoes and Men's shoes for the last quarter:

Volume in units Unit Sales Price (SP) Unit Variable Costs (VC) Unit Contribution Margin (CM)

Actual Results Master Budget Women's Men's Women's Men's 1,800 1,400 1,500 1,200 $90 $110 $80 $120 $50 $50 $50 $50 $40 $60 $30 $70

What is the Total Sales Quantity Variance for Santini Shoe Company for last quarter? A) $884 favorable B) $884 unfavorable C) $23,888 favorable D) $23,888 unfavorable Answer: C Explanation: Total Sales Quantity Variance = Sales Quantity Variance of Women's Shoes + Sales Quantity Variance of Men's Shoes = [(Actual volume of all products sold - Budgeted volume of all products sold) × Budgeted sales mix of Women's shoes × Budgeted Unit CM Women's] + [(Actual volume of all products sold - Budgeted volume of all products sold) × Budgeted sales mix of Men's shoes × Budgeted Unit CM Men's]; [{(1,800 + 1,400) - (1,500 + 1,200)} × {1,500/ (1,500 + 1,200)} × $30] + [{(1,800 + 1,400) - (1,500 + 1,200)} × {1,200/ (1,500 + 1,200)} × $70] = $8,334 + $15,554 = $23,888 favorable Diff: 3 LO: 6 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

89) Century Company has the following information for the past month:

Sales Variable Costs

Actual Results $51,000 23,000

Flexible Budget $54,000 23,000

Master Budget $50,000 21,000

Century's Comprehensive Sales Activity Variance is A) $2,000 favorable. B) $2,000 unfavorable. C) $1,000 favorable. D) $1,000 unfavorable. Answer: A Explanation: Comprehensive Sales Activity Variance = Flexible Budget Contribution Margin Master Budget Contribution Margin = [($54,000 - $23,000) - ($50,000 - $21,000)] = $31,000 $29,000 = 2,000, favorable Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 90) Which of the following variances would NOT be inspected when determining the cause for the comprehensive sales activity variance? A) Sales mix variance B) Sales quantity variance C) Market size variance D) Sales price variance Answer: D Explanation: The sales price variance would not be inspected when determining the cause for the comprehensive sales activity variance. Diff: 2 LO: 6 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

91) Which of the following variances focuses on using the contribution margin as the basis for measuring the full impact of sales activity changes? A) Sales price variance B) Market share variance C) Comprehensive sales activity variance D) Market size variance Answer: C Explanation: The comprehensive sales activity variance focuses on using the contribution margin as the basis for measuring the full impact of sales activity changes. Diff: 2 LO: 6 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 92) Which variance explains whether actual sales meant a larger or smaller portion of the total market than the plan? A) Market size variance B) Market share variance C) Sales quantity variance D) Sales mix variance Answer: B Explanation: The market share variance explains whether actual sales meant a larger or smaller portion of the total market than the plan. Diff: 2 LO: 6 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 93) A company's sales quantity variance is further broken into the A) market size variance and sales price variance. B) market size variance and market share variance. C) sales price variance and market share variance. D) sales price variance and sales mix variance. Answer: B Explanation: A company's sales quantity variance is further broken into the market size variance and market share variance. Diff: 2 LO: 6 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 43

94) A sales mix variance for a given product is computed as A) (actual sales mix of the product - budgeted sales mix of the product) × actual volume of all products sold × budgeted unit contribution margin of the product. B) (actual sales mix of the product - budgeted sales mix of the product) × budgeted volume of all products sold × budgeted unit contribution margin of the product. C) (actual sales mix of the product - budgeted sales mix of the product) × actual volume of all products sold × actual unit contribution margin of the product. D) (actual sales mix of the product - budgeted sales mix of the product) × budgeted volume of all products sold × actual unit contribution margin of the product. Answer: A Explanation: A sales mix variance for a given product is computed as (actual sales mix of the product - budgeted sales mix of the product) × actual volume of all products sold × budgeted unit contribution margin of the product Diff: 2 LO: 6 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 95) A sales quantity variance for a given product is computed as A) (actual volume of all products sold - budgeted volume of all products sold) × actual sales mix of the product × budgeted unit contribution margin of the product. B) (actual volume of all products sold - budgeted volume of all products sold) × budgeted sales mix of the product × actual unit contribution margin of the product. C) (actual volume of all products sold - budgeted volume of all products sold) × actual sales mix of the product × actual unit contribution margin of the product. D) (actual volume of all products sold - budgeted volume of all products sold) × budgeted sales mix of the product × budgeted unit contribution margin of the product. Answer: D Explanation: A sales quantity variance for a given product is computed as (actual volume of all products sold - budgeted volume of all products sold) × budgeted sales mix of the product × budgeted unit contribution margin of the product. Diff: 2 LO: 6 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

96) Place the following activities related to budgets and variance analysis that help organizations to attain their goals in order from 1 to 7. a. ________ Control b. ________ Benchmark c. ________ Evaluate Performance d. ________ Motivate e. ________ Variance Analysis f. ________ Benchmark g. ________ Plan Answer: a. 5 Control b. 3 Benchmark c. 6 Evaluate Performance d. 2 Motivate e. 1 Variance Analysis f. 7 Troubleshoot g. 4 Plan Diff: 2 LO: 1 Bloom: C AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

97) Match the following term with its appropriate definition by including the correct letter in the blank next to the term. 1. ________ 2. ________ 3. ________ 4. ________ 5. ________ 6. ________ 7. ________

Control Benchmark Evaluate Performance Motivate Variance Analysis Troubleshoot Plan

a. schedule for production, labor purchases and manufacturing overhead b. differences between actual and budgeted outcomes c. approved budgeted numbers d. logical, systematic identification of sources of problems to fix them and avoid recurrence e. assess work effort to achieve benchmarks f. activities to prevent deviations from budget g. inspire employees to unleash their potential

Answer: 1. f Control 2. c Benchmark 3. e Evaluate Performance 4. g Motivate 5. b Variance Analysis 6. d Troubleshoot 7. a Plan Diff: 2 LO: 1 Bloom: C AACSB: Analytic AICPA: BB: Industry/Sector Perspective; FN: Measurement; PC: Problem Solving IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 98) The manager of Power Industries reviewed the financial information for the year just completed. Sales volume came in lower than expected at 5,000 units, while it budgeted for sales of 5,500 units. Power's variable cost per unit (comprised of DM, DL, and variable-MOH) was $20, the unit sales price expected was $45, and fixed-MOH costs totaled $110,000. Prepare a flexible budget to determine Power's budgeted operating profit. Answer: Flexible Budget Sales (5,000 units × $45) $225,000 Variable Costs (5,000 units × $20) 100,000 Contribution Margin 125,000 Fixed Costs 110,000 Operating Profit $15,000 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 46

99) Treasured Trinkets Company has the following information:

Sales Volume Sales Variable Costs Contribution Margin Fixed Costs Operating Income

Sales Flexible Activity Budget Variances F/U 3,000 $15,000

Master Budget 3,200 $16,000

10,500

10,290

10,976

4,350 3,400

4,710 3,700

5,024 3,700

$950

$1,010

$1,324

Actual 3,000 $14,850

Flexible Budget Variances F/U

Complete the table by computing the Flexible Budget Variances and Sales Activity Variances, indicating whether the variance is either favorable (F) or unfavorable (U). Answer: Flexible Sales Budget Flexible Activity Master Actual Variances F/U Budget Variances F/U Budget Sales Volume 3,000 3,000 3,200 Sales $14,850 150 U $15,000 1,000 U $16,000 Variable Costs 10,500 Contribution Margin 4,350 Fixed Costs 3,400 Operating Income $950

210

10,290

686

10,976

360 300

U F

4,710 3,700

314 0

U NA

5,024 3,700

$60

$1,010

$314

$1,324

Diff: 3 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

100) Ember Industries incurs an actual unit sales price of $6 and a budgeted unit sales price of $5 for a butane fireplace lighter. Last week, the company actually sold 45 lighters when it budgeted to sell 50 lighters. Compute Ember's Master Budget Variance, Flexible Budget Variance, and Sales Activity Variance. Show all computations. Answer: Actual Flexible Budget Master Budget (Actual volume × Actual (Actual volume × Budgeted (Budgeted volume × price) price) Budgeted price) Sales (45 × $6) = $270 (45 × $5) = $225 (50 × $5) = $250 Master Budget Variance = $270 - $250 = $20 F Sales Activity Flexible Budget Variance Variance $270 - $225 = $45 F $250 - $225 = $25 U Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 101) Compute the indicated amount in each of the following independent scenarios: a. Flameco, Inc. has a Master Budget Variance of $100, unfavorable and a Flexible Budget Variance of $150, favorable. What is the Sales Activity Variance for Flameco, Inc.? b. Genero Company has a Master Budget Variance of $200, favorable and a Sales Activity Variance of $130, favorable. What is the Flexible Budget Variance for Genero Company? c. Tenet Industries has a Flexible Budget Variance of $450, favorable and a Sales Activity Variance of $250, unfavorable. What is the Master Budget Variance for Tenet Industries? Answer: a. Sales Activity Variance = Master Budget Variance +/- Flexible Budget Variance = $100, unfavorable + $150, favorable = $250, unfavorable b. Flexible Budget Variance = Master Budget Variance +/- Sales Activity Variance = $200, favorable - $130, favorable = $70, favorable c. Master Budget Variance = Flexible Budget Variance +/- Sales Activity Variance = $450, favorable - $250, unfavorable = $200, favorable Diff: 3 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

102) Tiny Tots Toys has the following actual and master budget information for the past month:

Sales Volume Sales Variable Costs Contribution Margin Fixed Costs Operating Income

Actual Flexible Budget 2,800 ? 19,600 ? 14,000 ? 5,600 ? 3,000 ? 2,600 ?

Master Budget 3,000 $18,000 12,000 6,000 3,200 $2,800

Compute the Flexible Budget Amounts to complete the table. Answer: Actual Flexible Budget Master Budget (Actual Volume × (Actual Volume × (Budgeted Volume × Actual Price) Budgeted Price) Budgeted Price) Sales Volume 2,800 3,000 a Sales 19,600 16,800 $18,000 b Variable Costs 14,000 11,200 12,000 Contribution Margin 5,600 5,600 6,000 Fixed Costs 3,000 3,200 3,200 Operating Income $2,600 $2,400 $2,800 a2,800 × ($18,000/3,000) b2,800 × ($12,000/3,000) Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

103) Pancho's Taco Stand has the following costs related to the production of each taco.

Direct Materials Direct Labor Variable-MOH Fixed-MOH

Standard Cost Card for Taco Standard quantity of input per taco .25 lbs. .10 hrs. .10 hrs. .10 hrs.

Standard input price per taco $3.00 $10.00 $3.00 $4.00

Compute the standard cost to make one taco. Answer: Standard Cost Card for Taco Standard quantity of Standard input price Standard Cost input per taco per taco per taco Direct Materials .25 lbs. $3.00 $0.75 Direct Labor .10 hrs. $10.00 $1.00 Variable-MOH .10 hrs. $3.00 $0.30 Fixed-MOH .10 hrs. $4.00 $0.40 Total Production Cost $2.45 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

104) Philly Rug Company produces designer rugs for clients. The standard size rug will require 3 yards of direct materials (DM), 1 hours of direct labor (DL) time, and 2 hours of machine time. MOH costs are applied based on machine hours. DM is expected to cost $8.00 per yard, DL is budgeted at $12 per hour, and cost of machine time is estimated at $3/machine hour for variableMOH and $2/machine hour for fixed-MOH. Create a standard cost card for a standard size rug for Philly Rug Company to compute the standard cost for one unit of product. Answer: Standard Cost Card for Philly Rug Standard quantity of Standard input price Standard Cost input per rug per rug per rug Direct Materials 3 yds. $8.00 $24.00 Direct Labor 1 hrs. $12.00 $12.00 Variable-MOH 2 hrs. $3.00 $6.00 Fixed-MOH 2 hrs. $2.00 $4.00 Total Production Cost $46.00 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

105) Philly Rug Company produces designer rugs for clients. The standard size rug will require 3 yards of direct materials (DM), 1 hour of direct labor (DL) time, and 2 hours of machine time. MOH costs are applied based on machine hours. DM is expected to cost $8.00 per yard, DL is budgeted at $12 per hour, and cost of machine time is estimated at $3/machine hour for variableMOH and $2/machine hour for fixed-MOH. The company purchased 30 yards of materials on account for $255. Production was started on 5 rugs, using 15 yards of direct materials, 6 direct labor hours at a total cost of $66, and 10 machine hours. Prepare the journal entries for the purchase of the materials and the costs incurred in production of the 5 rugs assuming Philly Rug Company uses standard costing. (Credit MOH costs to Accounts Payable) Answer: Debit Credit Raw Materials Inventory 240 Accounts Payable 240 To record the purchase of raw materials cost at standard (30 yds. × $8/yd.) Debit Work In Process Inventory (5 rugs × $46) 230 Raw materials Inventory (5 rugs × $24) Salaries and Wages Payable (5 rugs × $12) Accounts Payable (5 rugs × {$6 + $4}) To record production costs for 5 rugs using standard costing.

Credit 120 60 50

Standard Cost Card for Philly Rug Standard quantity of Standard input price Standard Cost input per rug per rug per rug Direct Materials 3 yds. $8.00 $24.00 Direct Labor 1 hrs. $12.00 $12.00 Variable-MOH 2 hrs. $3.00 $6.00 Fixed-MOH 2 hrs. $2.00 $4.00 Total Production Cost $46.00 Diff: 3 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

106) Aurora Sports Company is a leading helmet manufacturer. It produces a variety of different helmet styles, but its standard bike helmet requires 1.5 lb. of direct materials (DM), .5 hours of direct labor (DL) time, and 2.5 hours of machine time. MOH costs are applied based on machine hours. DM is expected to cost $14.00 per pound, DL is budgeted at $10 per hour, and cost of machine time is estimated at $2/machine hour for variable-MOH and $4/machine hour for fixedMOH. Create a standard cost card for a standard bike helmet for Aurora Sports Company to compute the standard cost for one unit of product. Answer: Standard Cost Card for Aurora Sports Bike Helmet Standard quantity of Standard input price Standard Cost input per rug per rug per rug Direct Materials 1.5 lbs. $14.00 $21.00 Direct Labor .5 hrs. $10.00 $5.00 Variable-MOH 2.5 hrs. $2.00 $5.00 Fixed-MOH 2.5 hrs. $4.00 $10.00 Total Production Cost $41.00 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

107) Aurora Sports Company is a leading helmet manufacturer. It produces a variety of different helmet styles, but its standard bike helmet requires 1.5 lb. of direct materials (DM), .5 hours of direct labor (DL) time, and 2.5 hours of machine time. MOH costs are applied based on machine hours. DM is expected to cost $14.00 per pound, DL is budgeted at $10 per hour, and cost of machine time is estimated at $2/machine hour for variable-MOH and $4/machine hour for fixedMOH. The company purchased 30 pounds of materials on account for $450. Production was started on 15 helmets, using 24 pounds of direct materials, 9 direct labor hours at a total cost of $99, and 38 machine hours. Prepare the journal entries for the purchase of the materials and the costs incurred in production of the 15 bike helmets assuming Aurora Sports Company uses standard costing. (Credit MOH costs to Accounts Payable) Answer: Debit Credit Raw Materials Inventory 420 Accounts Payable 420 To record the purchase of raw materials cost at standard (30 lbs. × $14/yd.) Debit 615

Work In Process Inventory (15 helmets × $41) Raw materials Inventory (15 helmets × $21) Salaries and Wages Payable (15 helmets × $5) Accounts Payable (15 helmets × {$5 + $10}) To record production costs for 15 helmets using standard costing.

Credit 315 75 225

Standard Cost Card for Aurora Sports Bike Helmet Standard quantity of Standard input price Standard Cost input per rug per rug per rug Direct Materials 1.5 lbs. $14.00 $21.00 Direct Labor .5 hrs. $10.00 $5.00 Variable-MOH 2.5 hrs. $2.00 $5.00 Fixed-MOH 2.5 hrs. $4.00 $10.00 Total Production Cost $41.00 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

108) Memorable Moments manufactures a product that uses 2.5 standard labor hours per unit at a standard hourly rate of $12.00 per hour. If 3,000 units required 7,400 actual hours at an hourly rate of $12.40 per hour, what is the Direct Labor (DL) Price Variance and (DL) Efficiency Variance? Answer: Direct Labor (DL) Price Variance = (AQ × AP) - (AQ × SP) = (7,400 hrs. × $12.40) - (7,400 hrs. × $12.00) = $91,760 - $88,800 = $2,960, unfavorable Direct Labor (DL) Efficiency Variance = (AQ × SP) - (SQ × SP) = (7,400 hrs. × $12.00) - (3,000 units × 2.5 hrs./unit × $12.00) = $88,800 - $90,000 = $1,200, favorable Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 109) Azure Company makes a product that requires a standard six yards of materials per unit. The standard price per yard is $4.50. If 3,000 units required 18,500 yards of materials for production, and were purchased at a cost of $4.30 per yard, what is the Direct Materials (DM) Price Variance and (DM) Efficiency Variance? Answer: Direct Materials (DM) Price Variance = (AQ × AP) - (AQ × SP) = (18,500 yds. × $4.30) - (18,500 yds. × $4.50) = $79,550 - $83,250 = $3,700 favorable Direct Materials (DM) Efficiency Variance = (AQ × SP) - (SQ × SP) = (18,500 yds. × $4.50) - (3,000 units × 6 yds./unit × $4.50) = $83,250 - $81,000 = $2,250 unfavorable Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

110) Mejor Medical Machines manufactures hospital equipment. The company recently purchased materials for production, and was able to secure a bulk purchase discount with an additional prompt payment cash discount. As a result, the original purchase on account with all of the discounts was $3,900, which resulted in a Direct Materials (DM) Price Variance of $900, favorable. Record the journal entry to recognize this raw materials purchase for Mejor Medical assuming that the variance is recognized at the time of purchase. Answer: Debit Credit DM Inventory ($3,900 + $900) 4,800 Accounts Payable 3,900 DM Price Variance 900 To record the purchase of raw materials with a favorable DM Price Variance. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 111) Mejor Medical Machines manufactures hospital equipment. The company was recently able to purchase materials for production and secure a bulk purchase discount with an additional prompt payment cash discount. However, as the materials were transferred into production of $3,900 from DM Inventory, due to the lower quality of materials, additional calibrations were needed to achieve the original quality in the production of the equipment, and an unfavorable Direct Materials (DM) Efficiency Variance of $500 resulted. Record the journal entry to recognize this use of the direct materials into production for Mejor Medical assuming that this unfavorable variance is recognized when materials are placed into production. Answer: Debit 3,400 500

Credit

WIP Inventory ($3,900 - $500) DM Efficiency Variance DM Inventory 3,900 To record the purchase of raw materials with a favorable DM Efficiency Variance. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

112) Bear Mountain Sporting Goods has the following actual and standard costs for producing a specified quantity of camping kits: Actual: Standard:

51,000 pounds at $5.05 = 50,000 pounds at $5.00 =

$257,550 $250,000

Determine the Direct Materials (DM) Price Variance and DM Efficiency Variance for the camping kits for Bear Mountain Sporting Goods. Answer: Direct Materials (DM) Price Variance = (AQ × AP) - (AQ × SP) = (51,000 lbs. × $5.05) - (51,000 lbs. × $5.00) = $257,550 - $255,000 = $2,550 unfavorable Direct Materials (DM) Efficiency Variance = (AQ × SP) - (SQ × SP) = (51,000 lbs. × $5.00) - (50,000 lbs. × $5.00) = $255,000 - $250,000 = $5,000 unfavorable Diff: 3 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 113) Midland Mountain Sporting Goods has the following actual and standard variable-MOH costs for producing a specified quantity of camping kits: Actual Variable-MOH: Standard:

2,000 units 2,100 units at .8 hr./unit

$5,700 $3.80/hr.

Determine the Variable-MOH Price Variance and Variable-MOH Efficiency Variance for the camping kits for Midland Mountain Sporting Goods. Answer: Variable-MOH Price Variance = Actual Variable-MOH Incurred - (AQ × SP) = $5,700 - (2,000 units × $3.80/hr. × .8 hr./unit) = $5,700 - $6,080 = $380 favorable Variable-MOH Efficiency Variance = (AQ × SP) - (SQ × SP) = (2,000 units × $3.80/hr. × .8 hr./unit) (2,100 units × $3.80/hr. × .8 hr./unit) = $6,080 - $6,384 = $304 unfavorable Diff: 3 LO: 5 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

114) Synergix Technologies has been working on the company's year-end variance analysis. Budgeted fixed-MOH costs were $153,000 for the planned 12,000 tablets to be produced. Per the standard cost sheets, fixed-MOH was applied based on DL hours and every unit required 3 DL hours. Actual fixed-MOH costs totaled $158,000 for the year corresponding to 12,400 tablets being produced. Calculate the Fixed-MOH Price Variance and Fixed-MOH Volume Variance for Synergix Technologies. Answer: Fixed-MOH Price Variance = Actual Fixed-MOH incurred - Master Budget (AQ × SP) = $158,000 - $153,000 = $5,000 unfavorable Fixed MOH Volume Variance = Master Budget - Fixed-MOH Applied (SQ × SP) = $153,000 - (12,400 units × 3 DL hrs./unit × $4.25*/ DL hr.) = $153,000 - $158,100 = $5,100 favorable *$153,000 ÷ 12,000 tables = $12.75 ÷ 3 DL hrs. = $4.25 per DL hr. Diff: 3 LO: 5 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 115) Rockhill Designs has computed the following variances at year-end: Variable-MOH Price Variance: Variable-MOH Efficiency Variance: Fixed-MOH Price Variance: Fixed MOH Volume Variance:

$280 Unfavorable $120 Unfavorable $150 Favorable $170 Unfavorable

Prepare the journal entry to close the Variable-MOH and Fixed-MOH Variances. Answer: Debit Credit Cost of Goods Sold ($280 + $120 + $170 - $150) 420 Fixed-MOH Price Variance 150 Variable-MOH Price Variance 280 Variable-MOH Efficiency Variance 120 Fixed MOH Volume Variance 170 To close the Variable-MOH and Fixed-MOH Variances to Cost of Goods Sold. Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

116) Bear Mountain Sporting Goods has the following variances at year-end: Direct Materials (DM) Price Variance: $350 Favorable Direct Materials (DM) Efficiency Variance: $420 Unfavorable Direct Labor (DL) Price Variance: $150 Favorable Direct Labor (DL) Efficiency Variance: $280 Unfavorable Prepare the journal entry to close the Direct Materials (DM) and Direct Labor (DL) Variances at year-end. Answer: Debit Credit Cost of Goods Sold ( $420 + $280 - $350 - $150) 200 Direct Materials (DM) Price Variance 350 Direct Labor (DL) Price Variance 150 Direct Materials (DM) Efficiency Variance 420 Direct Labor (DL) Efficiency Variance 280 To close the DM and DL Variances to Cost of Goods Sold. Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

117) Bear Mountain Sporting Goods has the following information from producing a specified quantity of camping kits: Actual fixed-MOH costs incurred on account Master Budget fixed-MOH costs Applied fixed-MOH costs Fixed-MOH Price Variance Fixed-MOH Volume Variance

$2,400 $2,500 $2,400 $100 Favorable $100 Unfavorable

Prepare the journal entries to record the actual fixed-MOH costs incurred, application of fixedMOH to production, and to recognize the Fixed-MOH Variances. Answer: Debit Credit Fixed-MOH Control 2,400 Accounts Payable 2,400 To record actual fixed-MOH costs incurred. Debit 2,400

WIP Inventory Fixed-MOH Control To apply fixed-MOH costs to production.

Credit 2,400

Debit 100

Credit

Fixed-MOH Volume Variance Fixed-MOH Price Variance 100 To record fixed-MOH variances. Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

118) Aztec Company has actual sales of $53,000, flexible budget sales of $52,800, and master budget sales of $51,000. Compute the Sales Price Variance and Sales Activity Variance (simplified) for Aztec Company. Answer: Sales Price Variance = Actual Sales - Flexible Budget Sales = $53,000 - $52,800 = $200 favorable Sales Activity Variance = Flexible Budget Sales - Master Budget Sales = $52,800 - $51,000 = $1,800 favorable Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 119) Maya Industries has the following actual and master budget information for its two product lines: Actual Results Master Budget Gadgets Gizmos Gadgets Gizmos Volume in Units 1,100 1,900 1,300 1,800 Unit Contribution Margin (CM) $5 $8 $4 $9 Compute the Sales Mix Variances for the Gadgets, Gizmos, and in Total. Answer: Sales Mix VarianceGadgets = (Actual Sales MixGadgets - Budgeted Sales MixGadgets) × Actual Volume of All Units Sold × Budgeted Unit CMGadgets = (1,100/3,000 - 1,300/3,100) × 3,000 × $4 = (.3667 - .4194) × 3,000 × $4 = $632 Unfavorable Sales Mix VarianceGizmos = (Actual Sales MixGizmos - Budgeted Sales MixGizmos) × Actual Volume of Units Sold × Budgeted Unit CMGizmos = (1,900/3,000 - 1,800/3,100) × 3,000 × $9 = (.6333 - .5806) × 3,000 × $9 = $1,423 favorable Total Sales Mix Variance = Sales Mix VarianceGadgets +/- Sales Mix VarianceGizmos $791 favorable = $632, Unfavorable $1,432, favorable Diff: 3 LO: 6 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

120) Maya Industries has the following actual and master budget information for its two product lines: Actual Results Master Budget Gadgets Gizmos Gadgets Gizmos Volume in Units 1,100 1,900 1,300 1,800 Unit Contribution Margin $5 $8 $4 $9 Compute the Sales Quantity Variances for the Gadgets, Gizmos, and in Total. Answer: Sales Quantity VarianceGadgets = (Actual Volume of all Products Sold - Budgeted Volume of all Products Sold) × Budgeted Sales MixGadgets × Budgeted Unit CMGadgets = (3,000 - 3,100) × (1,300/3,100) × $4 = 100 × .4194 × $4 = $168 Unfavorable Sales Quantity VarianceGizmos = ((Actual Volume of all Products Sold - Budgeted Volume of all Products Sold) × Budgeted Sales MixGadgets × Budgeted Unit CMGizmos = (3,000 - 3,100) × (1,800/3,100) × $9 = 100 × .5806 × $9 = $523 unfavorable Total Sales Quantity Variance = Sales Mix VarianceGadgets +/- Sales Mix VarianceGizmos $691 unfavorable = $168, unfavorable + $523, unfavorable Diff: 3 LO: 6 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 121) Minza, Inc. has a favorable Total Sale Mix Variance of $1,245 and a favorable Total Sales Quantity Variance of $915. What is Minza's Sales Activity Variance? If the Total Sales Quantity Variance of $915 was unfavorable, instead of favorable, what would the Sales Activity Variance be? Answer: Sales Activity Variance = Total Sales Mix Variance +/- Total Sales Quantity Variance $2,160 favorable = $1,245, favorable + $915, favorable Sales Activity Variance = Total Sales Mix Variance +/- Total Sales Quantity Variance $330 favorable = $1,245, favorable $915, unfavorable Diff: 3 LO: 6 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

122) Great Plains Company has provided its financial manager the following information for the past year:

Sales Variable Costs Contribution Margin (CM)

Actual Results $58,000 20,750 $37,250

Flexible Budget $58,500 20,600 37,900

Master Budget $58,250 20,750 37,500

Determine the Simplified Sales Activity Variance and the Comprehensive Sales Activity Variance for Great Plains Company. Answer: Simplified Sales Activity Variance = Flexible Budget Sales - Master Budget Sales $250, favorable = $58,500 -$58,250 Comprehensive Sales Activity Variance = Flexible Budget CM - Master Budget CM $400, favorable = $37,900 -- $37,500 Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

123) Vintendo was at year-end and was disappointed based on its preliminary results. Management expected sales volume to be 25,000 handheld video gaming units instead of the actual sales of 23,000 units. The company's budgeted information was as shown below: Unit selling price Unit DM cost Unit DL cost Unit Variable-MOH cost Fixed-MOH costs Fixed SG&A costs

$100 $25 $10 $5 $360,000 $280,000

a. Prepare a master budget and a flexible budget for Vintendo. b. Compare the flexible budget to the master budget, determining the sales activity variances for all budgeted income statement accounts, specifying amount, and whether the variance is favorable (F) or unfavorable (U). c. When Vintendo finalizes its final results, which of the budgets, master or flexible, should it use to compare actual results to in order to determine variances?

Answer: a. Master Budget Sales ($100 × 25,000) Variable Costs ($25 + $10 + $5) × 25,000 Contribution Margin Fixed Costs ($360,000 + $280,000) Operating Income

$2,500,000 1,000,000 1,500,000 640,000 $860,000

Flexible Budget Sales ($100 × 23,000) Variable Costs ($25 + $10 + $5) × 23,000 Contribution Margin Fixed Costs ($360,000 + $280,000) Operating Income

$2,300,000 920,000 1,380,000 640,000 $740,000

b. Variance Analysis

Sales Variable Costs Contribution Margin Fixed Costs Operating Income

Flexible Budget Master Budget $2,300,000 $2,500,000 920,000 1,000,000 1,380,000 1,500,000 640,000 640,000 $740,000 $860,000

Sales Activity Variances $200,000 U $80,000 F $120,000 U $0 $120,000 U

c. Vintendo should use the flexible budget for comparison with actual results to determine variances. Diff: 3 LO: 1, 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

124) Zapple Manufacturing has the following information on its standard cost card for one of its current products based on expected activity of 17,000 hours: Direct Materials (6 ft. × $5/ft) Direct Labor (1.5 hrs. × $10/hr.) Variable-MOH (1.5 hrs. × $4/hr.) Fixed-MOH (1.5 hrs. × $2/hr.) Standard cost per unit

$30 15 6 3 $54

In the past year, the following actual results were recorded: Actual Fixed-MOH incurred…………………………………... Actual Variable-MOH incurred……………………………….. Actual Direct Materials (DM) Cost and used - 71,750 ft…....... Actual Direct Labor Cost and hours incurred - 17,900 hrs........ Actual Units Produced…………………………………………

$35,000 $70,000 $365,925 184,370 12,000

Compute the following variances for Zapple Manufacturing for the past year: a. DM price and efficiency variances. b. DL price and efficiency variances. c. Variable-MOH price and efficiency variances. d. Fixed-MOH price and volume variances Answer: a. DM Price Variance = (AQ × AP) - (AQ × SP) = (71,750 ft. × $5.10*) - (71,750 ft. × $5) = $7,175, unfavorable *($365,925 ÷ 71,750 ft.) DM Efficiency Variance = (AQ × SP) - (SQ × SP) = (71,750 ft. × $5.00) - (12,000 units × 6 ft./unit × $5.00) = $1,250, favorable b. DL Price Variance = (AQ × AP) - (AQ × SP) = (17,900 hrs. × $10.30/hr.**) - (17,900 hrs. × $10/hr.) = $5,370, unfavorable **($184,370 ÷ 17,900 hrs.) DL Efficiency Variance = (AQ × SP) - (SQ × SP) = (17,900 hrs. × $10/hr.) - (12,000 × 1.5 hr./unit × $10/hr.) = $1,000, favorable c. Variable-MOH Price Variance = Actual Variable-MOH Costs incurred - (AQ × SP) = $70,000 - (17,900 hrs. × $4/hr.) = $1,600, favorable Variable-MOH Efficiency Variance = (AQ × SP) - (SQ × SP) = (17,900 hrs. × $4/hr.) - (12,000 units × 1.5 hrs. × $4) = $400, favorable d. Fixed-MOH Price Variance = Actual Fixed-MOH incurred - Master Budget at 17,000 hrs. = $35,000 - (17,000 hrs. × $2/hr.) = $1,000, unfavorable Fixed-MOH Volume Variance = Master Budget at 17,000 hrs. - Fixed-MOH Applied (SQ × SP) = (17,000 × $2/hr.) - (12,000 units × 1.5 hr./unit × $2) = $2,000, favorable Diff: 3 LO: 4, 5 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 66

125) Penn Maid Dairy Company provided the following information for the past quarter: Variable-MOH rate Actual Variable-MOH costs Actual DLH worked Gallons of milk produced Hours allowed for actual production (Use for both Variable- and Fixed-MOH) Applied Variable-MOH

$12/DLH $16,380 1,300 DLHs 120,000 1,200 DLHs (.01 DLH per gallon × 120,000 gallons) $14,400 ($12 × 1,200 DLH)

Budgeted Fixed-MOH Actual Fixed-MOH costs Expected Production in gallons of milk Expected Activity for production — Master Budget Standard Fixed-MOH rate

$40,000 $45,500 100,000 1,000 DLHs (.01 DLH per gallon × 100,000 gallons) $40/DLH ($40,000 ÷ 1,000 DHL)

a. b. c. d.

Compute the Variable-MOH price and efficiency variances. Compute the Fixed-MOH price and volume variances. Prepare the journal entries to record the Variable-MOH and Fixed-MOH variances. Prepare the journal entries to close the Variable-MOH and Fixed-MOH variances

Answer: a. Variable-MOH Price Variance = Actual Variable-MOH Costs incurred - (AQ × SP) = $16,380 - (1,300 hrs. × $12/hr.) = $780, unfavorable Variable-MOH Efficiency Variance = (AQ × SP) - (SQ × SP) = (1,300 hrs. × $12/hr.) - (1,200 × $12) = $1,200, unfavorable b. Fixed-MOH Price Variance = Actual Fixed-MOH incurred - Master Budget at 1,000 DLHs = $45,500 - (1,000 DLHs × $40/DLH) = $5,500, unfavorable Fixed-MOH Volume Variance = Master Budget at 1,000 DLHs - Fixed-MOH Applied (SQ × SP) = (1,000 DLHs × $40/DLH) - (1,200 DLHs × $40) = $8,000, favorable c. Debit Credit Variable-MOH Price Variance 780 Variable-MOH Efficiency Variance 1,200 Variable-MOH Control 1,980 Fixed-MOH Price Variance Fixed-MOH Control Fixed-MOH Volume Variance To record Variable and Fixed-MOH variances. d.

5,500 2,500 8,000

Debit Credit Fixed-MOH Volume Variance 8,000 Cost of Goods Sold 520 Variable-MOH Price Variance 780 Variable-MOH Efficiency Variance 1,200 Fixed-MOH Price Variance 5,500 To close Variable and Fixed-MOH variances. Diff: 3 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

126) How do organizations use budgets to attain goals? Answer: Organizations use the combination of budgeting and variance analysis as effective tools for motivation and benchmarking, planning and control, and performance evaluation and troubleshooting. Variance analysis is used to identify and calculate the differences between actual and budgeted outcomes, which spotlights the factors which contribute to the variances, and then lead to corrective action being taken. Diff: 2 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge. 127) What is troubleshooting? Answer: Troubleshooting involves the logical, systematic identification of the source of problems to fix them and avoid their recurrence. For variances, managers use variance analysis to identify problems, and then troubleshooting to solve the issues that caused the variances. Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge. 128) How do managers use benchmarking to plan and control in order to achieve company objectives? Answer: Once set, budgeted numbers - whether sales, expenses or balance sheet items - become the benchmark, and actual performance will be compared to the benchmark. Once the budget is created, then detailed operational plans begin, which include planning and scheduling of production, labor, purchases, manufacturing overhead expenditures, and selling and administrative expenditures. To ensure that the operational plans are enacted, control activities are put in place to prevent deviations from the budgeted numbers and to detect overspending. Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge.

129) What is a master budget, its purpose, and its three outputs? Answer: The master budget is a comprehensive, organization-wide budget that requires inputs from many sources in the company. It is used to coordinate a company's plans and to allocate resources accordingly. The three outputs of the master budget are the budgeted income statement, balance sheet and statement of cash flows. Diff: 2 LO: 2 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge. 130) What is a flexible budget, and which variance relates to the flexible budget? Answer: The flexible budget adapts the master budget data for a change in sales volume (actual vs. budgeted). It answers the question, "if actual sales volume differs from the master budget sales volume, what would the new costs and budgeted operating income look like?" The two variances that relate to the use of a flexible budget are the sales activity variance and the flexible budget variance. Diff: 2 LO: 2 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge. 131) Explain why a change in sales volume warrants the use of a flexible budget. Answer: Whenever actual sales volume differs from the master budget sales volume, it's not productive to compare actual results to the master budget. Since the master budget process is started with the sales forecast, once the sales volume changes from the original budgeted amount, it will cause a cascading effect not only on the revenues, but also on all variable costs. Diff: 2 LO: 2 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge.

132) What is the key benefit of standard costing? Answer: The key benefit of standard costing is that using variance analysis one year helps inform planning and budgeting for the next. Since management control is a process, evaluating performance and tweaking future plans keeps the cycle moving forward. Diff: 2 LO: 3 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge. 133) Companies establish standards and control them with different levels of rigor. Identify the two levels of standards and differentiate them. Answer: The two levels of standards are ideal standards and practical standards. Ideal standards are those that do not allow for machine breakdowns or employee breaks. Ideal standards are typically best suited for a futuristic production facility with only robots and drones with no human labor. Practical standards involve firm, yet attainable benchmarks that allow for realistic situations such as machine breakdowns, worker mistakes, and downtime. Practical standards are generally more motivating since they are attainable. Diff: 2 LO: 3 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge. 134) Describe how and when standard costs should be updated. Answer: At the end of each period, once variance analysis has been performed and variances are known, management reviews the standards in place for the duration of that period. It is then discussed whether the same resource quantities and prices are appropriate standards to use for the next period, or if adjustments are needed. Variance analysis points management in the direction of the cause of the variances, and after identifying the causes, management looks for workable solutions using trouble shooting. Diff: 2 LO: 3 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge.

135) Describe production variances and identify three specific production variances. Answer: Production variances entirely revolve around costs incurred in production. It is imperative that management follow up with variance analysis to plan for unit costs, control them, and then evaluate performance once units have been produced and troubleshoot why variances occurred. Production variances include (1) DM Price Variance, (2) DM Efficiency Variance, (3) DL Price Variance, (4) DL Efficiency Variance, (5) Variable-MOH Price Variance, (6) VariableMOH Efficiency Variance, (7) Fixed-MOH Price Variance, and (8) Fixed-MOH Production Volume Variance. Diff: 2 LO: 4 Bloom: K AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge. 136) Identify what the DM Price Variance and DM Efficiency Variance reflect and what questions each should address. Answer: The DM Price Variance reflects the difference in the actual price and the standard price of the DM quantity purchased, and helps to answer the question, "What should we have paid for DM inputs according to standard prices, when making the actual volume of units?" The DM efficiency variance reflects the difference in the actual volume and standard volume given the standard price. It helps to answer the question, "What quantity of DM inputs should we have used in making the actual volume of units?" Diff: 2 LO: 4 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge. 137) Describe what the DL Price Variance and DL Efficiency Variance reflect and what questions each should address. Answer: The DL Price Variance reflects the difference between the actual DL rate and the standard labor rate for all DL hours used, and helps to answer the question, "What should have been paid for the DL cost to make the actual volume of units?" The DL Efficiency Variance captures the difference in the standard DL cost for the actual DL hours used and the DL hours that were expected to be used for actual production and helps to answer the question, "How much DL time should have been used in making the actual volume of units?" Diff: 2 LO: 4 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge. 72

138) Describe the three standard costing journal entries for variable-MOH costs. Answer: a. Actual Variable-MOH costs are recorded as debits to Variable-MOH Control, and the sources of these costs are credited (payables) b. As units are completed, the applied cost is debited to WIP Inventory and credited to Variable-MOH Control. c. The specific Variable-MOH price variance and/or efficiency variances are recognized as the Variable-MOH Control account is closed. Diff: 2 LO: 5 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge. 139) Identify at least two causes of variable-MOH variances. Answer: Some of the causes of Variable-MOH variances are (1) change quality of DM input, (2) change suppliers, (3) substitute a comparable DM for the standard, (4) alter product formula, and (5) using more/less experienced workers than planned. Diff: 2 LO: 5 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge. 140) Identify at least two causes for fixed-MOH variances. Answer: Some of the causes for fixed-MOH variances are (1) rent or buy a larger facility and/or factory equipment, (2) increase or decrease in actual production compared to plan, and (3) adjustment in actual fixed-MOH costs such as factory insurance premiums, property taxes, and fixed portion of utility costs. Diff: 2 LO: 5 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge.

141) Explain how standard costs and variances are reported. Answer: The general ledger accounts DM Inventory, WIP Inventory, FG Inventory and Cost of Goods Sold are recorded with standard costs throughout the year. Each variance calculated is also recorded in the general ledger with its own temporary general ledger account, tracking differences between standard and actual costs. Because the variances are temporary accounts, they must be closed at year-end. Diff: 2 LO: 5 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge. 142) Describe the Master Budget Sales Variance and what factors affect this variance. Answer: Revenues are always the product of two factors: Sales price and volume (or sales activity, and either element can cause a variance from the master budget. The Master Budget Sales Variance captures the entire difference between actual results and master budget values, which includes both sales price and volume variations between actual sales and master budget sales. It is calculated as follows: Total actual sales - Total budgeted sales. Diff: 2 LO: 6 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge. 143) What is the difference between the Sales Price Variance and the Sales Activity Variance? Answer: The Sales Price Variance isolates and quantifies the result of changes in the sales price ({Actual sales price per unit - Budgeted sales price per unit} × Actual volume sold) whereas, the Sales Activity Variance reflects the difference between the actual volume and the budgeted volume at the budgeted sales price ({Actual volume - Budgeted volume} × Budgeted sales price). Diff: 2 LO: 6 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge.

144) What four variances must be inspected to determine the causes for a Comprehensive Sales Activity Variance? Answer: The four variances to be inspected are: a. Sales Mix Variance b. Sales Quantity Variance c. Market Share Variance d. Market Size Variance Diff: 2 LO: 6 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations: Operational Knowledge.

Cost Accounting, 1e (Farmer) Chapter 11 Process Costing 1) The details of Tom & Harry Inc. for a particular process are shown below: The cost of units in beginning Work-in-Progress (WIP) Inventory is $78,000, and in the ending WIP Inventory is $60,000. During the current period, the incurred costs of Direct Materials (DM), Direct Labor (DL), and Manufacturing Overheads (MOH) were $200,000, $80,000, and $40,000 respectively. Considering the given data, what will the Cost of Goods Manufactured (COGM) be? A) $302,000 B) $338,000 C) $350,000 D) $404,000 Answer: B Explanation: Cost of Goods Manufactured = Cost of Beginning WIP Inventory + Costs Incurred During the Process in the Current Period - Costs of Ending WIP Inventory = ($78,000 + ($200,000 + $80,000 + $40,000) - $60,000) = $338,000. Diff: 1 LO: 1 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

2) Syrup Sensations produces various syrups used by cafés as additives for their various caffeinated offerings. Syrup Sensations is working on compiling their costing data for the most recent year for their two best-selling syrups: Vanilla and Mint. Their accountant has gathered the following information: Vanilla $26,744 $17,880 $10,876 $ 3,290 $33,401 $ 3,903 $ 4,404 175,000

Wages (Mixing) Wages (Bottling) Sugar and Syrup Materials Flavor Additives Manufacturing Overhead (MOH) Beginning Work-in-Progress (WIP) Inventory Ending WIP Inventory Bottles Produced

Mint $24,567 $14,322 $ 9,993 $ 3,375 $30,903 $ 3,260 $ 3,942 162,500

Based upon the information above, what is the unit cost for each bottle of Vanilla syrup? (Round answer to nearest cent.) A) $0.51 B) $0.52 C) $0.55 D) $0.57 Answer: B Explanation: This question requires use of the formula to calculate the Cost of Goods Manufactured (COGM). Then, divide that total by the number of vanilla bottles produced. Calculate Direct Materials (DM) used by adding together Sugar and Syrup Materials and Flavor Additives: $10,876 + $3,290 = $14,166. To calculate the Direct Labor (DL), add the Mixing and Bottling Wages: $26,744 + $17,880 = $44,624.

Beginning WIP Inventory + DM Used + DL + MOH - Ending WIP Inventory COGM

$ 3,903 14,166 44,624 33,401 4,404 $91,690

Lastly, use the COGM calculated to compute the unit costs: Unit Costs = COGM/Number of Units Manufactured Unit Costs = $91,690/175,000 units Unit Costs = $0.52 Diff: 1 LO: 1 Bloom: K AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 2

3) Syrup Sensations produces various syrups used by cafés as additives for their various caffeinated offerings. Syrup Sensations is working on compiling their costing data for the most recent year for their two best-selling syrups: Vanilla and Mint. Their accountant has gathered the following information: Vanilla $26,744 $17,880 $10,876 $ 3,290 $33,401 $ 3,903 $ 4,404 175,000

Wages (Mixing) Wages (Bottling) Sugar and Syrup Materials Flavor Additives Manufacturing Overhead (MOH) Beginning Work-in-Progress (WIP) Inventory Ending WIP Inventory Bottles Produced

Mint $24,567 $14,322 $ 9,993 $ 3,375 $30,903 $ 3,260 $ 3,942 162,500

Based upon the information above, what is the unit cost for each bottle of Mint syrup? (Round answer to nearest cent.) A) $0.47 B) $0.51 C) $0.53 D) $0.56

Answer: B Explanation: This question requires use of the formula to calculate the Cost of Goods Manufactured (COGM). Then, divide that total by the number of mint bottles produced. Calculate Direct Materials (DM) used by adding together Sugar and Syrup Materials and Flavor Additives: $9,993 + $3,375 = $13,368. To calculate the Direct Labor (DL), add the Mixing and Bottling Wages: $24,567 + $14,322 = $38,889.

Beginning WIP Inventory + DM Used + DL + MOH - Ending WIP Inventory COGM

$ 3,260 13,368 38,889 30,903 3,942 $82,478

Lastly, use the COGM calculated to compute the unit costs: Unit Costs = COGM/Number of Units Manufactured Unit Costs = $82,478/162,500 Unit Costs = $0.51 Diff: 1 LO: 1 Bloom: K AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

4) Yum Yum Cookies bakes, packages, and distributes a variety of delicious cookies, including their best-selling chocolate chip and oatmeal raisin cookies. John, the head accountant, is finishing his accounting recap for the year and has gathered some data about each of these treats. Chocolate Chip: Beginning WIP Inventory: Ending WIP Inventory: Oatmeal Raisin: Beginning WIP Inventory: Ending WIP Inventory:

$12,347 $9,877 $8,442 $3,200

John would like to take a closer look at the unit cost for each cookie to assist management in making better decisions for the upcoming year. John has compiled the following costing information:

Wages (Stirring) Wages (Baking) Wages (Packaging) Cookie Materials Manufacturing Overhead (MOH)

Chocolate Chip $26,744 $17,880 $10,876 $18,290 $33,401

Oatmeal Raisin $24,567 $14,322 $ 9,993 $16,375 $30,903

Yum Yum has determined the unit cost of Chocolate Chip to be $2.56 and the unit cost of Oatmeal Raisin to be $2.54. How many Chocolate Chip cookies did they manufacture during the year? (Round units to whole number.) A) 39,922 units B) 42,836 units C) 46,620 units D) 50,472 units

Answer: B Explanation: This question requires familiarity with the calculation for the Cost of Goods Manufactured (COGM). Normally, the next step would be to divide that total by the number of units produced. In this question, the unit cost is given, so the process needs to be worked backwards to solve for the units produced. To calculate the Direct Labor (DL), add the Stirring, Baking, and Packaging Wages: $26,744 + $17,880 + $10,876 = $55,500. Direct Materials (DM) costs are equal to the cost of the cookie materials: $18,290. $ 12,347 18,290 55,500 33,401

Beginning Work-in-Progress (WIP) Inventory + DM Used + DL + MOH - Ending WIP Inventory COGM

9,877 $109,661

Now, use the COGM calculated to arrive at the number of cookies produced: Unit Costs = COGM/Number of Units Manufactured $2.56 = $109,661/Number of Units Manufactured Number of Units Manufactured = $109,661/$2.56 Number of Units Manufactured = 42,836 units Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

5) Yum Yum Cookies bakes, packages, and distributes a variety of delicious cookies, including their best-selling chocolate chip and oatmeal raisin cookies. John, the head accountant, is finishing his accounting recap for the year and has gathered some data about each of these popular treats. Chocolate Chip: Beginning WIP Inventory: $12,347 Ending WIP Inventory: $ 9,877 Oatmeal Raisin: Beginning WIP Inventory: $8,442 Ending WIP Inventory: $3,200 John would like to take a closer look at the unit cost for each cookie to assist management in making better decisions for the upcoming year. John has compiled the following costing information:

Wages (Stirring) Wages (Baking) Wages (Packaging) Cookie Materials Manufacturing Overhead (MOH)

Chocolate Chip $26,744 $17,880 $10,876 $18,290 $33,401

Oatmeal Raisin $24,567 $14,322 $ 9,993 $16,375 $30,903

Yum Yum has determined the unit cost of Chocolate Chip to be $1.39 and the unit cost of Oatmeal Raisin to be $1.79. How many Oatmeal Raisin cookies did they manufacture during the year? (Round units to whole number.) A) 52,058 units B) 56,649 units C) 58,577 units D) 60,369 units

Answer: B Explanation: This question requires familiarity with the calculation of the Cost of Goods Manufactured (COGM). Normally, that total would then be divided by the number of units produced. In this question, the unit cost is given, so the process will have to be worked backwards to solve for the units produced. To calculate the Direct Labor (DL), add the Stirring, Baking, and Packaging Wages: $24,567 + $14,322 + $9,993 = $48,882. Direct Materials (DM) is equal to the cost of the Cookie Materials: $16,375. $ Beginning Work-in-Progress (WIP) Inventory + DM Used + DL + MOH - Ending WIP Inventory COGM

8,442 16,375 48,882 30,903 3,200 $101,402

Now, use the COGM calculated to arrive at the number of cookies produced: Unit Costs = COGM/Number of Units Manufactured $1.79 = $101,402/Number of Units Manufactured Number of Units Manufactured = $101,402/$1.79 Number of Units Manufactured = 56,649 units Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

6) Sharon is the head cost accountant for Blindz, Inc., a factory that produces contemporary window blinds for personal residences. She is reviewing the work of Tara, a new accountant at the company. Tara has been finalizing the process costing numbers and has arrived at an ending inventory balance of $49,677. After closer review, Sharon realizes that this number included a sale in the amount of $2,400 with a cost of $989. The sale was Free on Board (FOB) shipping point and had been loaded onto the carrier by the close of the year but had not yet reached the buyer. If Sharon had not caught Tara's error, then how would this have impacted the income statement (ignoring income taxes)? A) Net Income would be overstated by $989. B) Net Income would be overstated by $2,400. C) Net Income would be understated by $989. D) Net Income would still be correctly stated. Answer: A Explanation: The sale that was overlooked was FOB shipping point and had reached the carrier which meant that it should have been removed from the ending inventory balance and included in Cost of Goods Sold (COGS). This led to an overstatement of the inventory balance and an understatement of Cost of Goods Sold. The cost that should have been subtracted should be the $989 rather than the sale amount of $2,400. This error would have led to an understatement by $989 in Cost of Goods Sold and an overstatement of Net income by $989. Diff: 1 LO: 1 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

7) Sharon is the head cost accountant for Blindz, Inc., a factory that produces contemporary window blinds for personal residences. She is reviewing the work of Tara, a new accountant at the company. Tara has been finalizing the process costing numbers and has arrived at an ending inventory balance of $49,677. After closer review, Sharon realizes that this number excluded a sale in the amount of $2,400 with a cost of $989. The sale was Free on Board (FOB) destination and had been loaded onto the carrier by the close of the year but had not yet reached the buyer. If Sharon had not caught Tara's error, then how would this have impacted the income statement (ignoring income taxes)? A) Net Income would be overstated by $989. B) Net Income would be understated by $989. C) Net Income would be overstated by $2,400. D) Net Income would be understated by $2,400. Answer: B Explanation: The sale that was overlooked was FOB destination and had not reached the buyer which meant that it should have been included in the ending inventory balance and not Cost of Goods Sold (COGS). This has led to an understatement of the inventory balance and an overstatement of Cost of Goods Sold. The cost of $989 should not have been subtracted from inventory or added to COGS. This error would have led to an overstatement by $989 in Cost of Goods Sold and an understatement of Net income by $989. Diff: 1 LO: 1 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

8) From the following data, determine the total Cost of Goods Manufactured (COGM): Costs of units in beginning Work-in-Progress (WIP) Inventory Costs added to units in beginning WIP Inventory this period Costs of units started and completed Cost of units started and incomplete Cost of units in ending WIP inventory

$ 78,000.00 $ 16,040.40 $ 157,050.50 $ 59,309.10 $ 59,309.10

A) $251,090.90 B) $270,840.40 C) $279,000.00 D) $310,400.00 Answer: A Explanation: COGM is the same as total cost of units completed and transferred out from WIP inventory. Total cost of units completed and transferred out from WIP inventory = Cost of units in beginning WIP inventory + Costs added to units in beginning WIP inventory this period + Costs of units started and completed + Cost of units started and incomplete - Cost of units in ending WIP inventory, $78,000 + $16,040.40 + $157,050.50 + $59,309.10 - $59,309.10 = $251,090.90. Diff: 1 LO: 1 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

9) Alex Enterprises manufactures baseball equipment. During the last quarter of 2020, the company produced 50,000 baseball bats. The company's accounting records reveal the following information about the last quarter's production: Cost of beginning Work-in-Process (WIP) Inventory Cost of ending Work-in-Process Inventory Cost of Direct Materials (DM) added during the quarter Cost of Direct Labor (DL) added during the quarter Cost of Manufacturing Overhead (MOH) added during the quarter

$104,000 $ 86,000 $227,000 $109,000 $162,000

Based on the given information, determine the company's Cost of Goods Manufactured (COGM) for the last quarter of 2020. A) $156,000 B) $480,000 C) $516,000 D) $688,000 Answer: C Explanation: COGM = Beginning WIP Inventory + DM + DL + MOH - Ending WIP Inventory: $104,000 + $227,000 + $109,000 + $162,000 - $86,000 = $516,000. Diff: 1 LO: 1 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

10) Alex Enterprises manufactures baseball equipment. During the last quarter of 2020, the company produced 50,000 baseball bats. The company's accounting records reveal the following information about the last quarter's production: Cost of beginning Work-in-Process (WIP) Inventory Cost of ending Work-in-Process Inventory Cost of Direct Materials (DM) added during the quarter Cost of Direct Labor (DL) added during the quarter Cost of Manufacturing Overhead (MOH) added during the quarter

$104,000 $ 86,000 $227,000 $109,000 $162,000

In the given scenario, how much per unit cost company has incurred in producing the baseball bat? A) $3.12 per bat B) $9.60 per bat C) $10.32 per bat D) $13.76 per bat Answer: C Explanation: First, determine the Cost of Goods Manufactured using the following formula: Beginning WIP Inventory + DM + DL + MOH - Ending WIP Inventory = Cost of Goods Manufactured, $104,000 + $227,000 + $109,000 + $162,000 - $86,000 = $516,000. Now, calculate the cost per unit by dividing the Cost of Goods Manufactured by the number of units produced as, $516,000/50,000 = $10.32 per bat. Diff: 1 LO: 1 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 11) Kevin is the accountant for Alex Enterprises, a manufacturer of baseball bats. Kevin made an error in the accounting process. Work-In-Process (WIP) was overstated by $25,000 for the month. What impact would this error have on both the cost of goods sold (COGS) and net income? A) COGS would be overstated by $25,000; net income would be overstated by $25,000. B) COGS would be overstated by $25,000; net income would be understated by $25,000. C) COGS would be understated by $25,000; net income would be overstated by $25,000. D) COGS would be understated by $25,000; net income would be understated by $25,000. Answer: C Explanation: Improperly overstating ending WIP would result in COGS being understated, and that would consequently result in net income being overstated. Diff: 1 LO: 1 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 13

12) Kevin, the accountant for Alex Enterprises, made an error in the accounting process for their manufacture of baseball bats. The inventory balances were understated by $10,000. What impact would this error have on both the cost of goods sold (COGS) and net income? A) COGS would be overstated by $10,000; net income would be overstated by $10,000. B) COGS would be overstated by $10,000; net income would be understated by $10,000. C) COGS would be understated by $10,000; net income would be overstated by $10,000. D) COGS would be understated by $10,000; net income would be understated by $10,000. Answer: B Explanation: Improperly understating inventory balances would result in COGS being overstated, and that would consequently result in net income being understated. Diff: 1 LO: 1 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

13) Harry Chemicals Ltd is using the First-In, First-Out (FIFO) method for inventory costing and reported the following details for the month of September: Equivalent Units Physical Units Direct Materials (DM) Conversion Cost % Added Equivalent % Added Equivalent This period Units This period Units Units in beginning Workin-Progress (WIP) Inventory completed this period Units started and completed this period Units in ending WIP Inventory Total units accounted for

1,500

25%

375

2,000

100%

2,000

100%

2,000

500 4,000

100%

500

25%

125

Total equivalent units of work done this period

2,500

Cost details related to the above inventories are as follows: Total cost in beginning WIP inventory is $2,200 (DM, $1,230; and Conversion, $970). Costs added to WIP inventory in the given period are $4,545 (DM, $1,515; and Conversion, $3,030). Based on the given information, calculate the cost per equivalent unit for DM and Conversion. A) Cost per equivalent unit for DM is $0.61, and for Conversion is $1.21. B) Cost per equivalent unit for DM is $0.71, and for Conversion is $1.31. C) Cost per equivalent unit for DM is $0.85, and for Conversion is $1.91. D) Cost per equivalent unit for DM is $1.10, and for Conversion is $1.60. Answer: A Explanation: Using the FIFO method, the cost per equivalent unit can be calculated as: costs added to WIP Inventory this period/total equivalent units of work done this period. For DM, this cost is equal to ($1,515/2,500 units) $0.61 per unit. For Conversion, this cost is equal to ($3,030/2,500 units) $1.21 per unit. Diff: 2 LO: 1 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

14) TradeMark Inc. began the year with a beginning inventory of $3,820 in their Sewing department. Using the Weighted-Average method, they calculated their equivalent units of production for this calendar year to be: Direct Materials (DM) Units completed this period Units in ending Work-in-Progress (WIP) Inventory

Conversion Costs (CC) 865 150

865 79

TradeMark calculated their cost per equivalent unit as follows: Direct Material, $84; and Conversion Costs, $43. How much cost should TradeMark assign to the units remaining in ending inventory for the current calendar year? A) $3,397 B) $12,600 C) $15,997 D) $19,817 Answer: C Explanation: This question requires assignment of costs only to the units in ending WIP inventory during the current year. Direct Materials are 150 × $84 = $12,600, and Conversion costs are 79 × $43 = $3,397. So, Total Costs = $12,600 + $3,397 = $15,997. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

15) Sew Lovely is a company that manufactures high-end silk scarves. These scarves are offered in several uniquely designed patterns that change seasonally. The head accountant is looking at the numbers for the month of August and is focused on the movement between the dying and sewing departments. He has compiled the following information about the dying department: August 1 Work-in-Progress (WIP) Inventory (Dying): $703 Cost of Silk Added: $6,404 Conversion Costs (CC) Added: $8,200 August 31 WIP Inventory (Dying): $4,302 According to this information, what is the cost of units completed and transferred out from the WIP Inventory (Dying) account? A) $11,005 B) $14,604 C) $15,307 D) $19,609 Answer: A Explanation: In order to solve for this, envision a T-Account. All of the numbers provided should be debits to the WIP Inventory (Dying) account. Solve for a credit. This question requires use of the following formula:

+ + =

Beginning Balance Direct Materials (DM) Costs Added Conversion Costs Added Cost of Units Completed Ending Balance

$703 + $6,404 + $8,200 - X = $4,302 X = $11,005 Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

16) Sew Lovely is a company that manufactures high-end silk scarves. These scarves are offered in several uniquely designed patterns that change seasonally. The head accountant is looking at the numbers for the month of August and is focused on the movement between the dying and sewing departments. He has compiled the following information about the dying department: August 1 Work-in-Progress (WIP) Inventory (Dying): $703 Added Silk: $6,404 Conversion Costs (CC): $8,200 August 31 WIP Inventory (Dying): $4,302 According to this information, what journal entry would Sew Lovely use to recognize the transfer of costs from the Dying to the Sewing department? A) WIP Inventory–Dying 11,005 WIP Inventory–Sewing 11,005 B) WIP Inventory–Sewing 11,005 WIP Inventory–Dying 11,005 C) WIP Inventory–Dying 15,307 WIP Inventory–Sewing 15,307 D) WIP Inventory–Sewing 15,307 WIP Inventory–Dying 15,307 Answer: B Explanation: In order to solve for this, envision a T-Account. All of the numbers provided should be debits to the WIP Inventory–Dying account. Solve for a credit. This question requires use of the following formula:

+ + =

Beginning Balance Direct Materials (DM) Costs Added Conversion Costs Added Cost of Units Completed Ending Balance

$703 + $6,404 + $8,200 - X = $4,302 X = $11,005 This will involve a debit to WIP Inventory–Sewing and a credit to WIP Inventory–Dying, both in the amount of $11,005. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 18

17) A manufacturer of fruit-flavored toaster pastries had a very busy month. After the accountant has looked over all of the production activity, they have determined that the following costs have been incurred: Direct Materials (DM) Dough, $8,400 Icing, $9,560 Strawberry, $1,308 Blueberry, $1,503 Raspberry, $1,018 Direct Labor (DL) Salaries and Wages, $13,407 Manufacturing Overhead (MOH) MOH Control, $12,706 All of the given costs were incurred within the baking department. Once units are completed, they move on to a finishing department before reaching their final destination at packaging where they packaged for sales. The baking department had a beginning balance of $1,307 and units completed and transferred of $48,469. Which of the following represents a correct portion of a journal entry to account for these costs? A) A credit to DM Inventory–Dough to account for the use of the $8,400 of dough B) A credit to Work-in-Progress (WIP) Inventory–Baking to account for DL and MOH. C) A debit to DM Inventory–Strawberry to account for the use of the $1,308 of strawberries D) A debit to MOH Control to account for the $12,706 of MOH Answer: A Explanation: This question requires familiarity with the journal entries to record the transfer of costs from Direct Materials inventory into WIP inventory and the incurrence of Conversion Costs (CC). Choice A is correct as it correctly identifies that there needs to be a credit to the DM Inventory- Dough account in order to account for their use of dough. Diff: 2 LO: 1 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Strategic Cost Management.

18) A manufacturer of fruit-flavored toaster pastries had a very busy month. After the accountant has looked over all of the production activity, they have determined that the following costs have been incurred: Direct Materials (DM) Dough, $8,400 Icing, $9,560 Strawberry, $1,308 Blueberry, $1,503 Raspberry, $1,018 Direct Labor (DL) Salaries and Wages, $13,407 Manufacturing Overhead (MOH) MOH Control, $12,706 All of the given costs were incurred within the baking department. Once units are completed, they move on to a finishing department before reaching their final destination at packaging where they are packaged for sales. The baking department had a beginning balance of $1,307 and units completed and transferred of $48,469. What is the amount of ending inventory in the Work-in-Progress (WIP) Inventory – Baking account? A) $740 credit balance B) $740 debit balance C) $21,789 credit balance D) $21,789 debit balance Answer: B Explanation: This question requires familiarity with how the T-account for WIP Inventory– Baking would be affected by the above costs. Solve for a debit. This question requires use of the following formula:

+ + + =

Beginning Balance DM Costs Added DL Costs added MOH Costs Added Cost of Units Completed Ending Balance

DM: $8,400 + $9,560 + $1,308 + $1,503 + $1,018 = $21,789 $1,307 + $21,789 + $13,407 + $12,706 - $48,469 = X X = $740 Ending Debit Balance Diff: 2 LO: 1 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 20

19) Sticky Fingers Corp is a manufacturer of gluten-free cinnamon rolls that are packaged and sold in quantities of six rolls. Sticky has chosen to implement a process costing system to account for their production costs at the recommendation of the head cost accountant, Trevor. He examined their records for the most current year and compiled the following information: Beginning Work-in-Progress (WIP) Inventory: 256 units that are 100% completed for Direct Materials (DM) and 68% completed for Conversion Costs (CC) Units Started During the Period: 18,540 Units Completed by the End of the Period: 16,400 Ending WIP Inventory: X units that are 100% completed for Direct Materials and 60% completed for Conversion Costs Their beginning inventory includes the following costs: Direct Materials, $343; and Conversion Costs, $652. During the most recent year, Sticky added the following costs: Direct Materials, $48,900; and Conversion Costs, $58,777. Using the First-In, First-Out (FIFO) method, how much total cost should be assigned to units completed this period? (Round units to nearest whole number and costs to two decimal places.) A) $96,339.97 B) $97,580.00 C) $97,647.74 D) $108,716.12

Answer: C Explanation: (Total cost calculated in steps 3 and 5 of process costing may vary due to rounding.) This question requires the use of all five of the process costing steps. Before the first step, determine how many units to account for which will also produces the unknown ending inventory units, X. Begin by calculating physical units in the period and their degree of completion. Units in beginning WIP inventory plus units started this period = 256 + 18,540 = 18,796 total units to account for. Now, determine the ending inventory by deducting the units completed from the total units to account for: 18,796 - 16,400 = 2,396 units. Next, calculate the units that were started and completed using the following formula: New units started - Units in ending WIP inventory = 18,540 - 2,396 = 16,144 units. For step two, account for equivalent units. Under FIFO, there will be a separate assessment of beginning inventory. Direct Materials: (256 × 0%) + (16,144 × 100%) + (2,396 × 100%) = 18,540 equivalent units. Conversion Costs: (256 × 32%) + (16,144 × 100%) + (2,396 × 60%) = 82 + 16,144 + 1,438 = 17,664 equivalent units. In step three, account for costs added to WIP inventory this period: Direct Materials: $48,900, and Conversion Costs: $58,777. For step four, calculate the cost per equivalent unit: Direct Materials, $48,900/18,540 = $2.64; and Conversion Costs, $58,777/17,664 = $3.33. Finally, step five requires allocation of costs based on the equivalent units calculated. The end result should appear as follows:

Cost of Units in Beg. WIP Inv. Costs Added to Units in Beg. WIP Inv. This Period Cost of Units Started and Completed Total Cost of Units Completed and Removed from WIP Inv.

Total Costs DM $ 995.00 $ 343.00 $

CC 652.00

273.06

0.00

273.06

96,379.68

42,620.16

53,759.52

$ 97,647.74 $42,963.16 $54,684.58

Diff: 3 LO: 1 Bloom: E AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

20) Lucky Charm is a factory that molds and assembles silver charms that are offered in a variety of themes including hearts, letters, and animals for use on charm bracelets. During the year, additional silver of $52,237 and Conversion Costs of $71,490 were added to the Molding department. During the year, the total cost of units completed by the Molding department and then transferred to Assembly amounted to $131,500. As of January 1, the beginning WIP Inventory (Molding) had a balance of $9,805. What is the ending balance of WIP Inventory (Molding)? A) $2,032 credit balance B) $2,032 debit balance C) $7,773 credit balance D) $133,532 debit balance Answer: B Explanation: This question requires use of the following formula:

+ + =

Beginning Balance Direct Materials (DM) Costs Added Conversion Costs Added Cost of Units Completed Ending Balance

$9,805 52,237 debit 71,490 debit 131,500 credit $2,032 debit balance

Diff: 1 LO: 1 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

21) Companies often find that they have partially completed units in beginning and/or ending inventory. Rather than disregarding these partially completed units or including the entirety of their costs, companies will assess the degree of completion for both Direct Materials (DM) and Conversion Costs (CC) at the reporting date. This will eventually lead to the calculation of equivalent units that have been completed. Which of the following would be considered the most relevant source for management to draw upon to create their assessments? A) Hypothetical forecasts drawn from a manager's experience at a different factory B) Input received from sales staff personnel C) Quotes received from suppliers for potential purchases D) Results supported by purchase orders and invoices, materials requisitions, and corresponding costs already applied to WIP inventory Answer: D Explanation: In this instance, answer the question from the perspective of a manager. Of the choices provided, the actual results would be the most reliable source on which management could rely. This answer is the only choice that is based upon factual information and/or from parties directly involved in the production process. Diff: 2 LO: 2 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Strategic Cost Management. 22) An organization finds that it has no beginning or ending Work-in-Progress (WIP) Inventory due to the way that it has set up its production operations. A company like this would not have to be concerned with assessing or calculating equivalent units of production. Which of the following is true for a company with no beginning or ending WIP Inventory in the production process? A) No beginning WIP Inventory means that final units were moved to ending WIP inventory. B) No beginning WIP Inventory means each unit worked on during the period was residual from the previous period. C) No ending WIP Inventory means that all production costs were moved to Finished Goods. D) No ending WIP Inventory means there could be a large number of unfinished units to count. Answer: C Explanation: This question requires understanding the implications of having no beginning or ending WIP Inventory in the production process. Choice C is the only answer listed that correctly summarizes what having no ending WIP Inventory would mean in the event that the units have been sold. Diff: 2 LO: 2 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Strategic Cost Management.

23) As a company decides between using the First-In, First-Out (FIFO) or Weighted-Average method for their process costing, a number of factors must be considered. Management should always ensure that they have taken the proper time to consider all factors as companies are urged to apply the same method from year to year and switching between methods later on will not likely be possible. Which of the following is a rationale for selecting the Weighted-Average rather than the FIFO method? A) The Weighted-Average method is costlier than the FIFO method. B) The Weighted-Average method is the best fit when individual units are easy to identify separately. C) The Weighted-Average method is the best fit when individual units are impossible to identify separately. D) The Weighted-Average method is the more accurate method but also takes more time. Answer: C Explanation: This question requires familiarity with the differences between the features of the FIFO and Weighted-Average methods. Choice C is the correct choice as it is the only choice to accurately identify an appropriate and accurate rationale for selecting Weighted-Average over FIFO. When the units are too difficult to identify separately, Weighted-Average would be the best choice. Diff: 2 LO: 2 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Strategic Cost Management. 24) As a company decides between using the First-In, First-Out (FIFO) or Weighted-Average method for their process costing, a number of factors must be considered. Management should always ensure that they have taken the proper time to consider all factors as companies are urged to apply the same method from year to year and switching between methods later on will not likely be possible. Which of the following is a rationale for selecting the FIFO rather than the Weighted-Average method? A) A company produces a bleach chemical, so FIFO will be their best option. B) FIFO is considered a simpler system to implement. C) FIFO is less time-consuming and less expensive than the Weighted-Average method. D) FIFO is more accurate than the Weighted-Average method. Answer: D Explanation: This question requires that familiarity with the differences between the features of the FIFO and Weighted-Average methods. Choice D is the correct choice as it is the only choice to accurately identify an appropriate and accurate rationale for selecting the FIFO method over the Weighted-Average method. FIFO is considered more accurate and this results in it also being more time-consuming and more expensive. Diff: 1 LO: 2 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Strategic Cost Management. 25

25) At the end of their first month of operations, a cookie factory has some unfinished inventory in Work-in-Progress (WIP) (Packaging). Tara, the manager of the Packaging department wants to assess the unfinished inventory's degree of completion to finalize the costing information. All Direct Materials (DM) in the process are added at the beginning of the process, and Conversion Costs (CC) are incurred evenly throughout the packaging process. If it takes two hours to complete the process and only 46 minutes elapsed, then the degree of completion for CC is which of the following? A) 26.08% B) 38.33% C) 46.00% D) 76.67% Answer: B Explanation: Out of 120 minutes for the total process, 46 minutes have been completed, so conversions are 46 minutes/120 minutes = 38.33% complete. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 26) Which of the following is a reason that managers might select the First-In, First-Out (FIFO) method over the Weighted-Average method? A) Individual units can be separately identified. B) The FIFO method allows costs from the previous period and the current period to be blended, and the Weighted-Average method does not. C) The FIFO method is the simpler of the two methods. D) The FIFO method results in more stable margins as compared to the Weighted-Average method if selling price cannot be changed. Answer: A Explanation: FIFO is more appropriate when individual units can be separately identified. The other three choices are characteristics of the Weighted-Average method. Diff: 1 LO: 2 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Strategic Cost Management.

27) A freshly started company has given the following details for a particular process: There was no beginning Work-in-Progress (WIP) Inventory. A new batch of 1,000 units was introduced for processing at the beginning of the day. The company works 8 hours on a daily basis and a batch takes 6 hours of processing no matter how many units are introduced. In the first 6 hours, the entire 1,000 units were completed and removed from WIP Inventory to Finished Goods (FG) Inventory. 750 additional units were introduced upon completion. Conversion Costs (CC) evenly throughout the process. Find out the equivalent units for conversion costs in the ending WIP Inventory. A) 250 units B) 750 units C) 1,000 units D) 5,000 units Answer: A Explanation: It required 6 hours to start and complete the processing of the first 1,000 units. With 2 hours left in the day, 750 new units were introduced for processing. That means 2 hours out of 6 hours of work, so there was enough time left in the day to complete 1/3 of the process work. Equivalent units for conversion are therefore 750 units × one-third = 250 units. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

28) Totally Tasty Tortillas is about to begin their third year of operations. They planned on completing their last batch for the current year but due to inclement weather, the factory had to unexpectedly shut down which left the batch incomplete. They have compiled the following production information for the current year: Tortillas started: 37,000 units Already in process at the beginning of the year: 1,246 units Complete at year-end: 35,009 units Conversion: 73% complete at year end Totally Tasty uses the Weighted-Average method and adds all of its Direct Materials (DM) at the beginning of the process. How many units will Totally Tasty have in their ending inventory? A) 1,991 units B) 2,363 units C) 3,237 units D) 12,689 units Answer: C Explanation: This question requires determining how which units will be included in the total number of units that remain in ending inventory. In order to calculate this, determine how many units Totally Tasty had over the whole period, and then remove the completed units. To calculate that, take the number of units started plus those already in process and subtract those units completed at year-end: 37,000 + 1,246 - 35,009 = 3,237 units. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

29) Which of the following is true for how the method described would impact the cost of ending Work-in-Progress (WIP) Inventory in the production process? A) The First-In, First-Out (FIFO) method will strive to focus on all costs in the process regardless of the period in which they occurred. B) The Weighted-Average method will strive to only focus on costs added during the current period. C) Using the FIFO method, the cost of ending inventory will consist of the first costs added in the process only. D) Using the Weighted-Average method, the costs remaining in ending inventory will be a blend of previous period's and the current period's costs. Answer: D Explanation: Reflect on the differences between how the FIFO and the Weighted-Average methods would impact the costs of ending inventory for the period. Choice D is the only answer listed that correctly identifies the way that the chosen method would impact the costs of inventory balance. Diff: 2 LO: 2 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Strategic Cost Management.

30) Devine Desserts specializes in the production of sweet plant-based bakery items. Their top seller for the past few years has been their cherry cheesecake made with a flourless crust and organic fruit topping. Devine is currently considered a boutique operation, but they are looking to increase production and to expand their offerings and customer base. In an effort to refine their spending efforts and advertising costs, they will be compiling some costing data on their cherry cheesecake. The following costing information applies to the current year: Cherry Conversion Costs Crust Toppings (CC) Beginning Work-in-Progress (WIP) Inventory $ 1,950 $ 1,560 $ 2,678 Costs added during the period $58,799 $27,940 $72,340 The following production summary has also been compiled for this year's operations: Physical Units Beginning Inventory Units Started this Year Ending Inventory

755 64,789 1,130

Crust 100%

Cherry Toppings 100%

100%

96%

Conversion Costs 32% 92%

If management decides to use the Weighted-Average method, then how much cost will be reflected in the Crust (C), Cherry Toppings (CT), and Conversion (CN) with respect to the units completed and removed from WIP inventory? (Do not round intermediate calculations.) A) C, $54,179.86; CT, $54,179.86; and CN, $54,179.86 B) C, $59,701.67; CT, $29,011.42; and CN, $73,826.49 C) C, $59,723.47; CT, $29,031.86; and CN, $73,867.16 D) C, $60,749.00; CT, $29,500.00; and CN, $75,018.00

Answer: B Explanation: This question requires the ability to walk through all five of the process costing steps using the Weighted-Average method. First, determine how many units to account for and realize that both beginning and ending inventories have to be derived from the given information. The ending inventory of the previous year becomes the beginning inventory of the current year. The beginning balance of the following year was the ending balance of the current year. The first step is to verify physical units in the period and their degree of completion. Units in beginning WIP inventory plus units started this period, 755 + 64,789 = 65,544 total units to account for. Now, determine the units completed this period with the help of total units accounted for (calculated above) and the given ending inventory balance, 65,544 - 1,130 = 64,414 units. In step two, account for equivalent units. Using the Weighted-Average method, there will not be a separate assessment of beginning inventory. Crust: (64,414 × 100%) + (1,130 × 100%) = 65,544 equivalent units. Cherry Toppings: (64,414 × 100%) + (1,130 × 96%) = 65,498.8 equivalent units. Conversion Costs: (64,414 × 100%) + (1,130 × 92%) = 65,453.6 equivalent units. In step three, account for costs: Crust, $1,950 + $58,799 = $60,749; Cherry Toppings, $1,560 + $27,940 = $29,500; and Conversion Costs, $2,678 + $72,340 = $75,018. In step four, calculate the cost per equivalent unit: Crust, $60,749/65,544 = $0.9268; Cherry Toppings, $29,500/65,498.8 = $0.4504; and Conversion Costs, $75,018/65,453.6 = $1.1461. In step five, allocate costs based upon the equivalent units completed and removed from WIP inventory. Crust = (64,414 × $0.9268) = $59,701.67, Cherry Toppings = (64,414 × $0.4504) = $29,011.42, and Conversion Costs = (64,414 × $1.1461) = $73,826.49. Diff: 3 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

31) Maple Leaf Coffee Company has a beginning Work-in-Progress (WIP) Inventory of 4,000 units, and its degree of completion was 100% for Direct Materials (DM) and 80% for Conversion Costs (CC). During the period, Maple started 16,000 units and a total of 18,000 units were completed and removed from WIP Inventory. The ending Inventory of WIP was 2,000 units with a degree of completion as 100% of Direct Materials. The company uses the First-In, First-Out (FIFO) method, and the total equivalent units of Conversion Costs for the period was 16,000 units. Find the degree of completion for Conversion Costs of ending WIP Inventory. A) 30% B) 40% C) 60% D) 70% Answer: C Explanation: Under the FIFO Method, Total Equivalent Units of Conversion Cost = (Units in Beginning WIP Inventory × Percentage of Resource Added this Period) + (Units Started and Completed this Period × Percentage of Resource Added this Period) + (Units in Ending WIP Inventory × Percentage of Resource Added this Period). Therefore, 16,000 units = (4,000 units × 20%) + (14,000 units × 100%) + (2,000 units × X%) (2,000 × X%) = 16,000 units - 800 units - 14,000 units X = 60% Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

32) As of June 1, Jelly and Telly Company had 2,000 units that were 100% complete with respect to Direct Materials (DM) and 80% complete with respect to Conversion Costs (CC). During the month of June, Jelly and Telly started 8,000 units and a total of 9,000 units were completed and removed from Work-in-Progress (WIP) Inventory. On June 30, they had 1,000 units remaining in inventory that were 100% complete with respect to Direct Materials and 40% complete with respect to Conversion Costs. Find the total equivalent units of Conversion Costs for the month of June if the company follows the First-In, First-Out (FIFO) method. A) 6,800 units B) 7,800 units C) 8,000 units D) 8,800 units Answer: B Explanation: Under the FIFO Method, the Total Equivalent Units of Conversion Costs = (Units in Beginning WIP Inventory × Percentage of Resource Added this Period) + (Units Started and Completed this Period × Percentage of Resource Added this Period) + (Units in Ending WIP Inventory × Percentage of Resource Added this Period). Therefore, (2,000 units × 20%) + (7,000 units × 100%) + (1,000 units × 40%) = 400 units + 7,000 units + 400 units = 7,800 units Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

33) In the second quarter of its operation, Ding Dong Company has a beginning Work-inProgress (WIP) Inventory of 700 units that were 100% complete for Direct Materials (DM) and 40% complete for Conversion Costs (CC). During the period, the company started 3,300 new units and a total of 3,000 units were completed and removed from WIP Inventory. At the end of the period, they had 1,000 units in ending inventory that were 100% complete with respect to Direct Materials and 60% complete with respect to Conversion Costs. If the company follows the Weighted-Average method of costing, then find the total equivalent units of Conversion Costs for the second quarter. A) 2,600 units B) 3,000 units C) 3,600 units D) 4,400 units Answer: C Explanation: Total Equivalent Units of Conversion Costs, according to Weighted-Average = (Units Completed and Removed from WIP Inventory × Percentage of Resource Added to Date) + (Units in Ending WIP Inventory × Percentage of Resource Added to Date). Therefore, (3,000 units × 100%) + (1,000 units × 60%) = 3,000 units + 600 units = 3,600 units. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

34) Tiny Tots Inc. started the period with an opening Work-in-Progress (WIP) Inventory of 1,400 units that were 100% complete with regard to Direct Materials (DM) and 40% complete with regard to Conversion Costs (CC). During the period, they started 6,600 new units, and they had completed and removed 6,000 units from WIP inventory. 2,000 units in ending inventory were 100% complete with respect to Direct Materials and 60% complete with respect to Conversion Costs. What will the total equivalent units of Direct Materials be if the First-In, FirstOut (FIFO) method is used, and what would be the answer if the Weighted-Average method is used? A) 6,000 for FIFO and 8,000 for Weighted-Average B) 6,600 for FIFO and 8,000 for Weighted-Average C) 8,000 for FIFO and 6,000 for Weighted-Average D) 8,000 for FIFO and 6,600 for Weighted-Average Answer: B Explanation: According to FIFO, Total Equivalent Units of Direct Materials = (Units in Beginning WIP Inventory × Percentage of Resource Added this Period) + (Units Started and Completed this Period × Percentage of Resource Added this Period) + (Units in Ending WIP Inventory × Percentage of Resource Added this Period) = (1,400 units × 0%) + (4,600 units × 100%) + (2,000 units × 100%) = 0 + 4,600 units + 2,000 units = 6,600 units According to Weighted-Average method, Total Equivalent Units of Direct Materials = (Units Completed and Removed from WIP Inventory × Percentage of Resource Added to Date) + (Units in Ending WIP Inventory × Percentage of Resource Added to Date) = (6,000 units × 100%) + (2,000 units × 100%) = 6,000 units + 2,000 units = 8,000 units Diff: 3 LO: 3 Bloom: E AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

35) Quality Tea manufacturing company has given the following details for a particular process: During the month of June, 1,600 units were already in process, and another 10,000 units were started. At the end of the period, 8,600 units were completed. All of the Direct Materials (DM) are added at the beginning of the process; however, Conversion Costs (CC) are added evenly throughout the process. Quality follows the Weighted-Average method of inventory valuation. Ending Work-in-Progress (WIP) Inventory was two-thirds complete with respect to Conversion Costs. Find equivalent units in the ending WIP Inventory with respect to Conversion Costs. (Round units to whole number.) A) 1,000 units B) 2,000 units C) 3,000 units D) 8,600 units Answer: B Explanation: Units in Ending WIP Inventory = Units Already in Process at the Beginning + Units Started During the Period - Units Completed in the Period Therefore, Ending WIP Inventory Units = 1,600 units + 10,000 units - 8,600 units = 3,000 units Equivalent Units in Ending WIP Inventory with Respect to Conversion Costs = Units in Ending WIP Inventory × Percentage Completed During the Period = 3,000 units × 66.67% (two-thirds) = 2,000.10 or 2,000 units Diff: 1 LO: 3 Bloom: C AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

36) An organization follows the Weighted-Average method for inventory valuation. For a particular period, 1,000 units were already under process at the beginning of the period, and 9,000 units were started during the period. At the end of the period, 7,000 units were completed. The nature of the process was set up such that Direct Material (DM) and Conversion Costs (CC) accrue evenly throughout the process. The Ending Work-in-Progress (WIP) Inventory of the process was one-third complete with respect to both DM and Conversion Costs. Find the equivalent units of DM to be completed in the next period. (Round units to whole number.) A) 1,000 units B) 2,000 units C) 3,000 units D) 7,000 units Answer: B Explanation: Units in Ending WIP Inventory = Units Already in Process at the Beginning of the Period + New Units Started During the Period - Units Completed in the Period = 1,000 units + 9,000 units - 7,000 units = 3,000 units DM in ending WIP Inventory is 33.33% (one-third) completed during the period, and therefore 66.67% (two-thirds) has to be completed in the next period. Therefore, 3,000 units × 66.67% of DM are to be completed during the next period. So, 3,000 units × 66.67% = 2,000 units are to be completed next period. Diff: 2 LO: 3 Bloom: C AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

37) Companies often find that they have partially completed units in their beginning and/or ending inventories. Rather than completely disregarding their existence or including the entirety of cost in their accounting, companies will sometimes assess the degree of completion for both Direct Materials (DM) and Conversion Costs (CC) as of the reporting date. This will eventually lead to the calculation of equivalent units that have been completed. Of the following choices, who would be the person or party most likely to provide reliable input for this process to management? A) A new manager that insists upon using industry trends rather than historical company data B) An operations team member who has been observing the production operation during factory hours on a regular basis C) The top-selling sales staff member in the company D) Third parties, such as vendors who are in the process of bidding for a contract with the organization Answer: B Explanation: Answer the question from the perspective of a manager. Of the choices provided, an operations team member would be the most reliable party to speak with. Of the choices provided, it is the only one that draws from someone of something directly involved in the costing process. Diff: 2 LO: 3 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Strategic Cost Management.

38) Tarte Inc. started the year with 6,500 individual apple sauce containers in their Work-inProgress (WIP) Inventory with 25% being complete overall. Tarte adds both Conversion Costs (CC) and Direct Material (DM) resources evenly throughout the process. During the year, Tarte started 105,000 more containers and had completed 90,000 in total by the end of the year. Their ending WIP Inventory units are 74% complete overall. Using the First-In, First-Out (FIFO) method of process costing, what are the equivalent units of production for the year? A) 90,000 units B) 104,285 units C) 105,910 units D) 111,500 units Answer: B Explanation: This question requires calculation of equivalent units of production using the FIFO method which means that the beginning inventory must be included in the calculation. First, determine how many units to account for. Using the FIFO method, this includes adding the beginning inventory of 6,500 to the units started during the period of 105,000 for a total of 111,500. Next, subtract the number of units completed and removed, 90,000, to arrive at an ending inventory of 21,500 units. The equivalent units under the FIFO method will be equal to the beginning units times the percentage of completion (6,500 × 75%) plus units started and completed times their percentage of completion ((105,000 - 21,500) × 100%) plus the units in ending WIP inventory times their percentage completion (21,500 × 74%). 4,875 + 83,500 + 15,910 = 104,285 units. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

39) Tarte Inc. started the year with 6,500 individual apple sauce containers in their Work-inProgress (WIP) Inventory with 25% being complete overall. Tarte adds both Conversion Costs (CC) and Direct Material (DM) resources evenly throughout the process. During the year, Tarte started 105,000 more containers and had completed 90,000 in total by the end of the year. Their ending WIP Inventory units are 74% complete overall. Using the Weighted-Average method of process costing, what are the equivalent units of production for the year? A) 90,000 units B) 104,285 units C) 105,910 units D) 111,500 units Answer: C Explanation: This question requires the calculation of equivalent units of production using the Weighted-Average method. Using the Weighted-Average method, omit the beginning inventory from the calculation. First, determine how many units to account for which includes adding the 90,000 completed units in this period to the 21,500 units in ending WIP inventory for a total of 111,500. The equivalent units under the Weighted-Average method will be equal to units completed times their percentage of completion (90,000 × 100%) plus the units in ending WIP inventory times their percentage of completion (21,500 × 74%), 90,000 + 15,910 = 105,910 units. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

40) Jordan is a cost accountant at Barkley Inc, a factory that manufactures modern black candlesticks. Jordan is in the process of updating all of their records and has gathered the following process costing information for their Conversion Costs (CC): Beginning Work-in-Progress (WIP) Inventory: 950 units, 23% completed Units Started During the Period: 32,000 Units Completed by the End of the Period: 26,400 Ending WIP Inventory: 88% completed Barkley adds both Conversion Costs and Direct Material (DM) resources evenly throughout the process. What are the equivalent units of production if Barkley employs the Weighted-Average method? A) 31,214 units B) 31,907 units C) 32,164 units D) 32,950 units Answer: C Explanation: This question requires the calculation of equivalent units of production using the Weighted-Average method. Using the Weighted-Average method, omit the beginning inventory from the calculation. First, determine how many units to account for which includes adding the beginning WIP inventory of 950 to the units started during the period of 32,000 for a total of 32,950. Next, subtract the number of units completed and removed, 26,400, to arrive at an ending inventory of 6,550 units. The equivalent units under the Weighted-Average method will be equal to units completed times their percentage of completion (26,400 × 100%) plus the units in ending WIP inventory times their percentage of completion (6,550 × 88%), 26,400 + 5,764 = 32,164 units. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

41) Jordan is a cost accountant at Barkley Inc, a factory that manufactures modern black candlesticks. Jordan is in the process of updating all of their records and has gathered the following process costing information for their Conversion Costs (CC): Beginning Work-in-Progress (WIP) Inventory: 950 units, 23% completed Units Started During the Period: 32,000 Units Completed by the End of the Period: 26,400 Ending WIP Inventory: 88% completed Barkley adds both Conversion Costs and Direct Material (DM) resources evenly throughout the process. What are the equivalent units of production if Barkley employs the First-In, First-Out (FIFO) method? (Round your final answer to the nearest whole unit.) A) 26,443 units B) 26,929 units C) 31,421 units D) 31,946 units Answer: D Explanation: This question requires the calculation of equivalent units of production using the FIFO method, and that means including beginning inventory in the calculation. First, determine how many units to account for which includes adding the beginning WIP inventory of 950 to the units started during the period of 32,000 for a total of 32,950. Next, subtract the number of units completed and removed, 26,400, to arrive at an ending WIP inventory of 6,550 units. The equivalent units under the FIFO method will be equal to the beginning units times their percentage of completion (950 × 77%) plus units started and completed times their percentage of completion ((32,000 - 6,550) × 100%) plus the units in ending inventory times their percentage of completion (6,550 × 88%). 732 + 25,450 + 5,764 = 31,946 units. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

42) The management for Zero Corp. has asked their cost accountant Alec to compile some data about their process costing. Zero Corp. is a regional factory that manufactures peach-scented soy candles that are sold in glass mason jars. During their most recent year, Zero started 49,600 candles and completed a total of 37,450 by the end of the year. They began the year with 3,480 candles in their Work-in-Progress (WIP) Inventory, about 28% incomplete, and their ending WIP Inventory units are 19% incomplete overall. Zero adds both Conversion Costs (CC) and Direct Material (DM) resources evenly throughout the process. Alec has decided to use First-In, FirstOut (FIFO) for their process costing and has determined their equivalent units to be which of the following? (Round your final answer to the nearest whole unit.) A) 37,914 units B) 47,605 units C) 49,136 units D) 50,110 units Answer: B Explanation: This question requires the determination of equivalent units using the FIFO method. It should be noted that the question presents units for beginning and ending units in terms of what is incomplete versus what has been completed, so this will need to be factored in as well. First, determine how many units to account for, and that includes adding the beginning WIP inventory of 3,480 to the units started during the period of 49,600 for a total of 53,080. Next, subtract the number of units completed and removed, 37,450, to arrive at an ending inventory of 15,630 units. The equivalent units under the FIFO method will be equal to the beginning units times their percentage of completion (3,480 × 28%) plus units started and completed times their percentage of completion ((49,600 - 15,630) × 100%) plus the units in ending inventory times their percentage of completion (15,630 × 81%). 974.40 + 33,970 + 12,660.30 = 47,605 units. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

43) The management for Zero Corp. has asked their cost accountant Alec to compile some data about their process costing. Zero Corp. is a regional factory that manufactures peach-scented soy candles that are sold in glass mason jars. During their most recent year, Zero started 49,600 candles and completed a total of 37,450 by the end of the year. They began the year with 3,480 candles in their Work-in-Progress (WIP) Inventory with 28% being incomplete, and their ending WIP Inventory units are 19% incomplete overall. Zero adds both Conversion Costs (CC) and Direct Material (DM) resources evenly throughout the process. Alec has decided to use the Weighted-Average method for their process costing and has determined their equivalent units to be which of the following? (Round your final answer to the nearest whole unit.) A) 47,605 units B) 49,600 units C) 50,110 units D) 53,080 units Answer: C Explanation: This question requires the determination of equivalent units using the WeightedAverage method, so you will need to omit beginning inventory from the calculation. It should be noted that the question presents units for beginning and ending units in terms of what is incomplete versus what has been completed, so this will need to be factored in as well. First, determine how many units to account for, so that includes adding the beginning inventory of 3,480 to the units started during the period of 49,600 for a total of 53,080. Next, subtract the number of units completed and removed, 37,450, to arrive at an ending inventory of 15,630 units. The equivalent units using the Weighted-Average method will be equal to the units completed times their percentage of completion (37,450 × 100%) plus the units in ending inventory times their percentage of completion (15,630 × 81%), 37,450 + 12,660.30 = 50,110 units. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

44) Humbert Inc., a factory that manufactures plastic ice cube trays, has opened a new department as of May 1 of this year. As of June 1, Humbert had 4,200 units that were 100% complete with respect to Direct Materials (DM) and 64% complete with respect to Conversion Costs (CC). During the year, Humbert started and completed 76,420 units. On June 30, they had 9,870 units remaining in inventory that were 100% complete with respect to Direct Materials and 42% complete with respect to Conversion Costs. What are the equivalent units of production for Direct Materials and Conversion Costs using the First-In, First-Out (FIFO) method? (Round to the nearest unit.) A) DM, 82,077 units; and CC, 90,490 units B) DM, 86,290 units; and CC, 82,077 units C) DM, 87,802 units; and CC, 83,253 units D) DM, 90,490 units; and CC, 90,490 units Answer: B Explanation: This question requires familiarity with calculating equivalent units for two different costs while also taking FIFO into account, so that means that beginning inventory will need to factor in. For the Direct Materials, add the following: (4,200 × 0%) + 76,420 + (9,870 × 100%) = 86,290 units. For Conversion Costs, add the following: (4,200 × 36%) + 76,420 + (9,870 × 42%) = 1,512 + 76,420 + 4,145 = 82,077 units. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

45) Humbert Inc., a factory that manufactures plastic ice cube trays, has opened a new department as of May 1 of this year. As of June 1, Humbert had 4,200 units that were 100% complete with respect to Direct Materials (DM) and 64% complete with respect to Conversion Costs (CC). During the year, Humbert started and completed 76,420 units. On June 30, they had 9,870 units remaining in inventory that were 100% complete with respect to Direct Materials and 42% complete with respect to Conversion Costs. What are the equivalent units of production for Direct Materials and Conversion Costs using the Weighted-Average method? (Round answer to the nearest unit.) A) DM, 90,490 units; and CC, 84,765 units B) DM, 90,490 units; and CC, 90,490 units C) DM, 94,635 units; and CC, 90,490 units D) DM, 94,635 units; and CC, 96,215 units Answer: A Explanation: This question requires familiarity with calculating equivalent units for two different costs while also taking Weighted-Average into account, so that means that beginning inventory will not be factored in. For the Direct Materials, add the following: ((4,200 + 76,420) × 100%) + (9,870 × 100%) = 90,490 units. For Conversion Costs, add the following: ((4,200 + 76,420) × 100%) + (9,870 × 42%) = 80,620 + 4,145.40 = 84,765.4 = 84,765 units. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

46) Tina is a cost accountant for Fey Industries, a factory that produces lemon-scented alcohol wipes that it distributes by the container. With cold and flu season right around the corner, Fey would like to make sure they have all of their process cost accounting information configured as soon as possible. Tina has gathered the following information about their inventory:

Physical Units Beginning Inventory Units Started this Period Units Completed this Period Ending Inventory

1,346 43,750 38,622

Percent Complete Direct Conversion Material (DM) Cost (CC) 100% 60%

100%

33%

Using the Weighted-Average method of process costing, what are the equivalent units of production for the year for both Conversion Costs and Direct Materials? (Round to the nearest unit.) A) CC, 40,758 units; and DM, 45,096 units B) CC, 41,297 units; and DM, 42,104 units C) CC, 46,442 units; and DM, 42,104 units D) CC, 46,442 units; and DM, 46,442 units Answer: A Explanation: This question requires familiarity with calculating equivalent units for two different costs while also taking Weighted-Average into account, so that means that beginning inventory will not be factored in. To calculate the number of units left in ending inventory, determine how many units to account for which includes adding the beginning inventory of 1,346 to the units started during the period of 43,750 for a total of 45,096. Next, subtract the number of units completed and removed, 38,622, to arrive at an ending inventory of 6,474 units. For the Direct Materials, add the following: (38,622 × 100%) + (6,474 × 100%) = 45,096 units. For Conversion Costs, add the following: (38,622 × 100%) + (6,474 × 33%) = 38,622 + 2,136.42 = 40,758 units. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

47) Tina is a cost accountant for Fey Industries, a factory that produces lemon-scented alcohol wipes that it distributes by the container. With cold and flu season right around the corner, Fey would like to make sure they have all of their process cost accounting information configured as soon as possible. Tina has gathered the following information about their inventory:

Physical Units Beginning Inventory Units Started this Period Units Completed this Period Ending Inventory

1,346 43,750 38,622

Percent Complete Direct Conversion Material (DM) Cost (CC) 100% 60%

100%

33%

Using the First-In, First-Out (FIFO) method of process costing, what are the equivalent units of production for the year for both Conversion Costs and Direct Materials? (Round final answer to the nearest unit.) A) CC, 39,951 units; and DM, 43,750 units B) CC, 41,566 units; and DM, 42,104 units C) CC, 41,566 units; and DM, 46,442 units D) CC, 46,442 units; and DM, 42,104 units Answer: A Explanation: This question requires familiarity with calculating equivalent units for two different costs while also taking FIFO into account, so that means that beginning inventory will be factored in separately. To calculate the number of units left in ending inventory, determine how many units to account for which includes adding the beginning inventory of 1,346 to the units started during the period of 43,750 for a total of 45,096. Next, subtract the number of units completed and removed, 38,622, to arrive at an ending inventory of 6,474 units. For the Direct Materials, add the following: (1,346 × 0%) + (37,276 × 100%) + (6,474 × 100%) = 43,750 units. For Conversion Costs, add the following: (1,346 × 40%) + (37,276 × 100%) + (6,474 × 33%) = 538.40 + 37,276 + 2,136.42 = 39,951 units. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

48) Tater Company produces tater tots that it packages in one pound bags and sells to vendors around the region. Management is compiling its cost information after August, its second month of operation. July ended with 8,600 packages in inventory that are 35% complete overall. They started 116,800 packages and completed 84,338 units during the month. Their ending Work-inProgress (WIP) packages are 79% complete overall for August. What are the equivalent units of production if Tater uses the First-In, First-Out (FIFO) method? (Round to the nearest unit.) A) 113,767 units B) 125,377 units C) 130,990 units D) 134,000 units Answer: A Explanation: This question requires familiarity with the calculation of equivalent units while using FIFO, and that means that beginning inventory will be factored in separately. In addition, it requires the solution of both units in their beginning and ending inventories. To calculate the beginning inventory, along with the percentage of completion, look at what was remaining at the end of the previous month since this will become the beginning balance for August. July ended with 8,600 packages with 35% completion, so use these numbers for the beginning inventory for August. To solve for ending inventory, determine how many units to account for which uses the following formula: Beginning inventory plus units started minus units completed. 8,600 + 116,800 - 84,338 = 41,062 ending inventory packages. For the equivalent units, add the following: (8,600 × 65%) + (75,738 × 100%) + (41,062 × 79%) = 5,590 + 75,738 + 32,438.98 = 113,767 units. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

49) Tater Company produces tater tots that it packages in one pound bags and sells to vendors around the region. Management is compiling its cost information after August, its second month of operation. July ended with 8,600 packages in inventory that are 35% complete overall. They have started 116,800 packages and completed 84,338 units during the month. Their ending Work-in-Progress (WIP) packages are 79% complete overall for August. What are the equivalent units of production if Tater uses the Weighted-Average method? (Round answer to the nearest unit.) A) 92,938 units B) 116,777 units C) 119,787 units D) 125,376 units Answer: B Explanation: This question requires familiarity with the calculation of equivalent units while using the Weighted-Average method, so that means that beginning inventory will not be factored in separately. To solve for ending inventory, determine how many units to account for which uses the following formula: Beginning inventory plus units started minus units completed. 8,600 + 116,800 - 84,338 = 41,062 ending inventory packages. For the equivalent units, add the following: (84,338 × 100%) + (41,062 × 79%) = 84,338 + 32,438.98 = 116,776.98 = 116,777 units Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

50) The following are the details of Star Beer Co. for the month of July: The cost per equivalent unit for Direct Materials (DM) is $5.00. The total equivalent units of DM are 28,400. The total costs to account for DM during the period are $148,000. Find out the cost of DM in beginning Work-in-Progress (WIP) Inventory assuming company follows the First-In, First-Out (FIFO) method for inventories. A) $6,000 B) $8,000 C) $9,000 D) $16,000 Answer: A Explanation: As the company is following FIFO, Direct Materials costs added to WIP Inventory during July = Cost per equivalent unit of Direct Materials × Total equivalent units of Direct Materials = $5.00 × 28,400 = $142,000 Cost of Direct Materials in beginning WIP Inventory = Total Costs to account for DM during July - Direct Material costs added to WIP Inventory during July = $148,000 - $142,000 = $6,000 Diff: 3 LO: 4 Bloom: C AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

51) The following are the details of Jennifer Corp. with respect to Inventories and Conversion Costs (CC):

Units in Beginning Work-in-Progress (WIP) Inventory Beginning WIP Inventory Degree of Completion of Conversion Costs Conversion Costs in Beginning WIP Inventory New Units Started Costs Added to WIP Inventory During the Period, i.e., Conversion Costs Units Completed Units in Ending WIP Inventory Ending WIP Degree of Completion of Conversion Costs

1,600 70% $ 5,000 28,200 $200,000 27,800 2,000 30%

If the Jennifer Corp. follows the First-In, First-Out (FIFO) method, then find the total equivalent cost per unit for Conversion Costs. A) $7.33 B) $8.15 C) $8.50 D) $9.67 Answer: A Explanation: According to FIFO, the Total Equivalent Units for Conversion Costs = (Units in Beginning WIP Inventory × Percentage of Resource Added this Period) + (Units Started and Completed During the Period × Percentage of Resource Added this Period) + (Units in Ending WIP Inventory × Percentage of Resource Added this Period) = (1,600 units × 30%) + (26,200 units × 100%) + (2,000 units × 30%) = 480 units + 26,200 units + 600 units = 27,280 units. Equivalent Cost per Unit of Conversion Costs = Conversion Cost Added to WIP Inventory this Period/Total Equivalent Units for Conversion Costs = $200,000/ 27,280 units = $7.33 Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

52) The cost per equivalent unit of Direct Materials (DM) of a company for a particular process for June is $0.49. DM costs in beginning Work-in-Progress (WIP) Inventory is $260, and DM costs added to WIP Inventory during the period is $6,600. Assuming the company follows the Weighted-Average method of process costing, find the total equivalent units of DM for the above process. A) 12,000 units B) 14,000 units C) 16,000 units D) 18,500 units Answer: B Explanation: Total Costs to Account For = Direct Materials Costs in Beginning WIP Inventory + Direct Materials Costs Added to WIP Inventory during the Period Therefore, Total Cost to Account For = $260 + $6,600 = $6,860 Total Equivalent Units of Direct Material = Total Costs to Account for/Cost per Equivalent Unit of DM = $6,860/$0.49 = 14,000 units Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

53) A company that follows the Weighted-Average method for inventory valuation has determined the Direct Materials (DM) cost per equivalent unit of $5.00 for a particular period. For the same period, the company has reported 15,000 equivalent units of DM. If the DM costs added to Work-in-Progress (WIP) Inventory during the period is twice the DM costs in the beginning WIP Inventory, then find the DM costs added to WIP Inventory during the period. A) $25,000 B) $35,000 C) $50,000 D) $65,000 Answer: C Explanation: Total Costs to Account for Direct Materials = Direct Materials Costs per Equivalent Unit × Total Equivalent Units of Direct Materials Therefore, Total Costs to Account For = $5.00 × 15,000 units = $75,000 Also, Total Costs to Account For = Direct Materials Costs in Beginning WIP Inventory + Direct Materials Costs Added to WIP Inventory during the Period Therefore, $75,000 = X + 2X; $75,000 = 3X; X = $25,000 Hence, Direct Material Costs Added to WIP during the Period = 2X = $50,000. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

54) An organization in which Mr. Smith is in charge of the manufacturing department follows the First-In, First-Out (FIFO) method of inventory valuation. The following are the estimates for the next processing department: Units in Beginning Work-in-Progress (WIP) Inventory Completed: 3,000 units Total Estimated Costs of Units Completed and Removed from WIP Inventory: $18,806 Per Unit Estimated Cost: $1.71 In order to make the actuals meet the estimates, what should be Mr. Smith's target, to the nearest thousand, for units started and completed in the process be? A) 2,000 units B) 4,000 units C) 8,000 units D) 16,000 units Answer: C Explanation: Under the FIFO method, Unit Cost = Total Cost of Units Completed and Removed from WIP Inventory/(Units in Beginning WIP Inventory Completed + Units Started and Completed) $1.71 = $18,806/(3,000 units + X units) $1.71 × (3,000 units + X units) = $18,806 $5,130 + $1.71X = $18,806 $1.71X = $18,806 - $5,130 $1.71X = $13,676 X = $13,676/$1.71 X = 7,997.66 units X = 8,000 units Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

55) A company is engaged in manufacturing a product that passes through two Work-in-Progress (WIP) processes or departments. The nature of the product is such that Direct Materials (DM) and Conversion Costs (CC) accrue evenly throughout the process. The company uses imported DM in its product, but now import is altogether banned, and this company has 5 kg left in raw materials inventory with no further procurement possible. On June 30, there were 12 units that were incomplete and had consumed 9 kg of raw materials. The degree of completion of WIP Inventory as of June 30 was 75%. In the given scenario, how many units could be started and completed on July 1? A) 1 unit B) 2 units C) 3 units D) 12 units Answer: B Explanation: As of the 30th of June, 12 units were 75% complete and had consumed 9 kg. So, to complete these 12 units of the remaining 25%, an additional 3 kg will be consumed (if 75% used 9 kg, then 25% would use how many kgs?). The company has 5 kg in RM inventory, of which 3 kg will be consumed to finish the opening WIP inventory, so on July 1, the balance of 2 kg will be used for an additional 2 new units. Diff: 1 LO: 4 Bloom: C AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 56) Some companies create products whose completion may be in various stages at the end of a given time period which then leaves those same unit as incomplete at the beginning of the next period. Companies that find themselves having incomplete products in both their beginning and ending inventory will have to decide between using the First-In, First-Out (FIFO) and WeightedAverage methods to track both the physical units and their associated costs. Which of the following would be added to determine the finished goods inventory costs if using the FIFO method? A) Costs added to units in beginning Work-in-Progress (WIP) Inventory B) Costs added to units in beginning WIP Inventory - Costs of units in beginning WIP Inventory C) Costs of units in ending WIP Inventory D) Costs of units started but not yet completed Answer: A Explanation: This question requires familiarity with the way that finished goods inventory costs will be calculated under the FIFO method. Choice A is the correct choice as it is the only choice to correctly identify costs that would be added. Diff: 1 LO: 4 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Strategic Cost Management. 56

57) Some companies create products whose completion may be in various stages at the end of a given time period and that leaves those same units as incomplete at the beginning of the next period. Companies that find themselves having incomplete products in both their beginning and their ending inventories have to decide between using the First-In, First-Out (FIFO) method and Weighted-Average method to track both the physical units and their costs. Which of the following would be added to finished goods inventory costs while using the Weighted-Average method? A) Costs of units completed and removed B) Costs of units completed and removed from Work-in-Progress (WIP) Inventory + costs of units in ending WIP Inventory C) Only costs added during the current period D) Only costs assigned to beginning inventory Answer: A Explanation: This question requires familiarity with the way that finished goods inventory costs will be calculated under the Weighted-Average method. Choice A is the correct choice as it is the only choice that correctly identifies costs that would be added. Diff: 1 LO: 4 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Strategic Cost Management.

58) Devine Desserts specializes in the production of sweet plant-based bakery items. Their top seller for the past few years has been their cherry cheesecake made with a flourless crust and organic fruit toppings. Devine is currently considered a boutique operation, but they are looking to increase production and to expand their offerings and customer base. In an effort to refine their spending efforts and advertising costs, they will be compiling some costing data on their cherry cheesecake. The following costing information applies to the current year: Cherry Toppings

Crust Beginning Work-in-Progress (WIP) Inventory Costs Added During the Period

$ 1,950 $58,799

Conversion Costs (CC)

$ 1,560 $ 27,940

$ 2,678 $72,340

The following production summary has also been compiled for this year's operations: Physical Units Beginning Inventory Units Started this Year Ending Inventory

Crust 755 100% 64,789 1,130 100%

Cherry Toppings 100%

Conversion Costs 32%

96%

92%

If management decides to use the First-In, First-Out (FIFO) method, then how much cost will be assigned to the units completed and transferred out of the manufacturing process? (Do not round intermediate calculations.) A) $155,862.58 B) $162,539.57 C) $162,620.10 D) $165,267.00

Answer: C Explanation: This question requires the ability to walk through all five of the process costing steps. First, determine how many units to account for while realizing that both beginning and ending inventories have to be derived from the information given. The ending inventory of the previous year becomes the beginning inventory of the current year. The beginning balance of the following year was the ending balance of the current year. The first step is to verify physical units in the period and their degree of completion. Units in beginning WIP inventory plus units started this period, 755 + 64,789 = 65,544 total units to account for. Now, determine the units completed this period with the help of total units accounted for (calculated above) and the given ending inventory balance, 65,544 - 1,130 = 64,414 units. Next, calculate the units that were both started and completed as: New units started - Ending WIP inventory, 64,789 - 1,130 = 63,659 units. In step two, account for equivalent units. Under FIFO, there will be a separate assessment of beginning inventory. Crust: (755 × 0%) + (63,659 × 100%) + (1,130 × 100%) = 64,789 equivalent units. Cherry Toppings: (755 × 0%) + (63,659 × 100%) + (1,130 × 96%) = 64,743.80 equivalent units. Conversion Costs: (755 × 68%) + (63,659 × 100%) + (1,130 × 92%) = 65,212.00 equivalent units. In step three, account for costs: Crust, $58,799; Cherry Toppings, $27,940; and Conversion Costs, $72,340. For step four, calculate the cost per equivalent unit: Crust, $58,799/64,789 = $0.9075; Cherry Toppings, $27,940/64,743.80 = $0.4315; and Conversion Costs, $72,340/65,212 = $1.1093. In step five, allocate costs based upon the equivalent units calculated. Crust = $1,950 + (63,659 × $0.9075) = $59,723.47. Cherry Toppings = $1,560 + (63,659 × $0.4315) = $29,031.86. Conversion Costs = $2,678 + (513.4 × $1.1093) + (63,659 × $1.1093) = $73,864.77. The total cost of units completed and transferred out of the manufacturing process = $59,723.47 + $29,031.86 + $73,864.77 = $162,620.10. Diff: 3 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

59) Devine Desserts specializes in the production of sweet plant-based bakery items. Their top seller for the past few years has been their cherry cheesecake made with a flourless crust and organic fruit topping. Devine is currently considered a boutique operation, but they are looking to increase production and to expand their offerings and customer base. In an effort to refine their spending efforts and advertising costs, they will be compiling some costing data on their cherry cheesecake. The following costing information applies to the current year: Cherry Toppings

Crust Beginning Work-in-Progress (WIP) Inventory Costs added during the period

$ 1,950 $58,799

Conversion Costs (CC)

$ 1,560 $ 27,940

$ 2,678 $72,340

The following production summary has also been compiled for this year's operations: Physical Units Beginning Inventory Units Started this Year Ending Inventory

Crust

755 64,789 1,130

Cherry Toppings 100%

100% 100%

Conversion Costs 32%

96%

92%

If management decides to use the First-In, First-Out (FIFO) method, then how much cost will be assigned to the ending inventory in Crust (C), Cherry Toppings (CT), and Conversion (CN)? (Do not round intermediate calculations.) A) C, $921.36; CT, $884.51; and CN, $847.65 B) C, $1,025.53, CT, $468.14; and CN, $1,153.23 C) C, $1,025.53, CT, $487.65; and CN, $1,250.91 D) C, $1,950.00, CT, $1,560.00; CN, and $2,678.00

Answer: B Explanation: This question requires the ability to walk through all five of the process costing steps. First, determine how many units to account for and realize that both beginning and ending inventory have to be derived from the given information. The ending inventory of the previous year becomes the beginning inventory of the current year. The beginning balance of the following year was the ending balance of the current year. The first step is to verify physical units in the period and their degree of completion. Units in beginning WIP inventory plus units started this period: 755 + 64,789 = 65,544 total units to account for. Now, determine the units completed this period with the help of total units accounted for (calculated previously) and the given ending inventory balance, 65,544 - 1,130 = 64,414 units. Next, calculate the units that were both started and completed as: New units started - Ending WIP inventory, 64,789 - 1,130 = 63,659 units. In step two, account for equivalent units. Under FIFO, there will be a separate assessment of beginning inventory. Crust: (755 × 0%) + (63,659 × 100%) + (1,130 × 100%) = 64,789 equivalent units. Cherry Toppings: (755 × 0%) + (63,659 × 100%) + (1,130 × 96%) = 64,743.80 equivalent units. Conversion Costs: (755 × 68%) + (63,659 × 100%) + (1,130 × 92%) = 65,212.00 equivalent units. In step three, account for costs: Crust, $58,799; Cherry Toppings, $27,940; and Conversion Costs, $72,340. In step four, calculate the cost per equivalent unit: Crust, $58,799/64,789 = $0.9075; Cherry Toppings, $27,940/64,743.80 = $0.4315; and Conversion Costs, $72,340/65,212 = $1.1093. In step five, allocate costs based on the ending equivalent units calculated in step two. Crust = 1,130 × $0.9075 = $1,025.53. Cherry Toppings = 1,084.8 × $0.4315 = $468.14. Conversion Costs = 1,039.6 × $1.1093 = $1,153.23. Diff: 3 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

60) Java Express is a coffee bean roaster who specializes in dark roasting beans grown in California. During the month, Java added the following costs: Conversion Costs (CC), $5,350; and Direct Materials (DM), $4,800. Their Beginning Work-in-Progress (WIP) Inventory includes the following costs: CC, $950; and DM, $760. Their accountant calculated the following equivalent units for CC to be 6,787, and the equivalent units completed for this month for DM were 7,400. Using the First-In, First-Out (FIFO) method, how much total cost will be included in the calculation for cost per equivalent unit for both Conversion Costs and Direct Materials? A) CC, $950; and DM, $760 B) CC, $5,350; and DM, $4,800 C) CC, $5,350; and DM, $5,560 D) CC, $6,300; and DM, $5,560 Answer: B Explanation: This question requires an understanding of how the use of FIFO impacts the amount of costs that will be included in the calculation of cost per equivalent unit versus what costs must be accounted for. FIFO does not include the costs of beginning inventory for either the Conversion Cost per equivalent unit or Direct Material cost per equivalent unit. FIFO is only concerned with costs added during this period. Also, disregard percentages of completion even if they are presented. Conversion Costs would be $5,350 and Direct Materials would be $4,800. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

61) Java Express is a coffee bean roaster who specializes in dark roasting beans grown in California. During the month, Java added the following costs: Conversion Costs (CC), $5,350; and Direct Materials (DM), $4,800. Their Beginning Work-in-Progress (WIP) Inventory includes the following costs: CC, $950; and DM, $760. Their accountant calculated the following equivalent units for CC to be 6,787, and the equivalent units completed for this month for DM were 7,400. Using the Weighted-Average method, how much total cost will be included in the calculation for cost per equivalent unit for both Conversion Costs and Direct Materials? A) CC, $950; and DM, $760 B) CC, $5,350; and DM, $4,800 C) CC, $5,350; and DM, $5,560 D) CC, $6,300; and DM, $5,560 Answer: D Explanation: This question requires an understanding of how the use of the Weighted-Average method impacts the amount of costs that will be included in the calculation of cost per equivalent unit versus what costs must be accounted for. The Weighted-Average method does include the costs of beginning inventory for Conversion Costs or Direct Materials. The Weighted-Average method is concerned with costs accumulated up to this point. Also, disregard any percentages of completion should they be present. Conversion Costs would be $5,350 + $950 = $6,300 and Direct Material costs would be $4,800 + $760 = $5,560. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

62) Jennifer is the head cost accountant for Pure Inc., a factory that produces hand sanitizer. Pure has recently experienced an uptick in sales and has been refining their accounting policies. Jennifer has been tasked with gathering data pertaining to their costs for the most recent month, June. She has gathered the following information: Costs in Beginning Work-in-Progress (WIP) Inventory: Antimicrobial Solution: $5,677 Conversion Costs (CC): $8,232 Costs Added to WIP Inventory in June Antimicrobial Solution: $19,678 CC: $24,389 What amount of the cost of Antimicrobial Solution will be included in the calculation of equivalent cost per unit under First-In, First-Out (FIFO) and Weighted-Average (WA), respectively? A) FIFO, $19,678; and WA, $19,678 B) FIFO, $19,678; and WA, $25,355 C) FIFO, $25,355; and WA, $5,677 D) FIFO, $25,355; and WA, $19,678 Answer: B Explanation: This question requires a grasp on how to calculate the Direct Materials cost that will ultimately be included in the calculation of equivalent cost per unit. Also, know that the Antimicrobial Solution is the Direct Material, even though it is not labeled as such. Using FIFO, this calculation will not include the beginning inventory, but using the Weighted-Average method will include all accumulated costs. For FIFO, the amount added during June will be $19,678. Using the Weighted-Average method, the combined total of what was present at the beginning and what was added during June will be used: $5,677 + $19,678 = $25,355. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

63) Jennifer is the head cost accountant for Pure Inc., a factory that produces hand sanitizer. Pure has recently experienced an uptick in sales and has been refining their accounting policies. Jennifer has been tasked with gathering data pertaining to their costs for the most recent month, June. She has gathered the following information: Costs in Beginning Work-in-Progress (WIP) Inventory Antimicrobial Solution: $5,677 Conversion Costs (CC): $8,232 Costs Added to WIP Inventory in June Antimicrobial Solution: $19,678 CC: $24,389 What amount of the cost of Conversion Costs will be included in the calculation of equivalent cost per unit using First-In, First-Out (FIFO) and the Weighted-Average (WA) method, respectively? A) FIFO, $19,678; and WA, $25,355 B) FIFO, $24,389; and WA, $8,232 C) FIFO, $24,389; and WA, $32,621 D) FIFO, $32,621; and WA, $24,389 Answer: C Explanation: This question requires a grasp on how to calculate the Conversion Cost that will ultimately be included in the calculation of equivalent cost per unit. Under FIFO, this calculation will not include the beginning inventory, but using the Weighted-Average method will include all accumulated costs. For FIFO, it will be amount added during June of $24,389. Using the Weighted-Average method, the calculation will be the combined total of what was present at the beginning and what was added during June: $8,232 + $24,389 = $32,621. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

64) The management for Funfetti Corp. has decided to analyze their first two years of operations. Funfetti specializes in the creation of organic sprinkles that it sells to specialty bakeries. Tom, the chief financial officer (CFO), is very interested in obtaining more insight into how their costs compare year-to-year. Tom has gathered the following information about last year. Beginning Work-in-Progress (WIP) Inventory: Direct Materials (DM), $1,600; and Conversion Costs (CC), $2,340. Costs Added Last Year: DM, $11,258; and CC, $15,609. Tom also gathered the following data pertaining to the current year. Beginning WIP Inventory: DM, $1,765; and CC, $2,220. Costs Added This Year: DM, $13,467; and CC, $18,996. Using horizontal analysis, how have total equivalent costs of DM changed using the First-In, First-Out (FIFO) method? A) 16.40% decrease B) 16.40% increase C) 19.62% decrease D) 19.62% increase Answer: D Explanation: This question requires understanding for both the calculation of total equivalent unit costs under FIFO and horizontal analysis. First, calculate the total equivalent unit costs of the DM under FIFO for last year, and then calculate the same figure for the current year. FIFO will not include the beginning inventory costs in its calculation. Last year: $11,258, Current year: $13,467. To complete the analysis, find the difference between this year and last year and divide by the value last year. ($13,467 - $11,258)/$11,258 = $2,209/$11,258 = 0.1962 or 19.62% increase. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

65) The management for Funfetti Corp. has decided to analyze their first two years of operations. Funfetti specializes in the creation of organic sprinkles that it sells to specialty bakeries. Tom, the CFO, is very interested in obtaining more insight into how their costs compare year-to-year. Tom has gathered the following information about last year. Beginning Work-in-Progress (WIP) Inventory: Direct Materials (DM), $1,600; and Conversion Costs (CC), $2,340. Costs Added Last Year: DM, $11,258; and CC, $15,609. Tom also gathered the following data pertaining to this year. Beginning WIP Inventory: DM, $1,765; and CC, $2,220. Costs Added This Year: DM, $13,467; and CC, $18,996. Using horizontal analysis, how have total equivalent costs of the Conversion Costs changed using the Weighted-Average method? A) 15.40% decrease B) 15.40% increase C) 18.20% decrease D) 18.20 % increase Answer: D Explanation: This question requires understanding for both the calculation of total equivalent unit costs using the Weighted-Average method and horizontal analysis. First, calculate the total equivalent unit costs for the Conversion Costs using the Weighted-Average method for last year, and then calculate the same figure for this year. The Weighted-Average method will include the beginning inventory costs in its calculation. Last year: $2,340 + $15,609 = $17,949. Current year: $2,220 + $18,996 = $21,216. To complete the analysis, find the difference between this year and last year and divide that by the value last year. ($21,216 - $17,949)/$17,949 = $3,267/$17,949 = 0.1820 or 18.20% increase. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

66) Frosty Corp. produces gluten-free vanilla cake icing that it sells in small containers. Their accountant is performing some process costing calculations and has gathered the following information for the current month of October:

Icing Costs in Beginning Work-in-Progress (WIP) Inventory Costs Added to WIP Inventory this Period Equivalent Units First-In, First-Out (FIFO) Equivalent Units Weighted-Average

$600 $4,473 6,890 7,356

Conversion Costs (CC) $986 $6,930 6,002 6,765

The accountant must decide whether they will use the FIFO or Weighted-Average method for their costing. In order to facilitate this process, they have collected data from both perspectives. What is the cost per equivalent unit for icing using the FIFO method? A) $0.61 B) $0.65 C) $0.74 D) $1.00 Answer: B Explanation: This question requires several steps before being able to calculate the cost per equivalent unit. First, calculate what costs are included using the FIFO method, so that will ignore any beginning WIP Inventory costs. So, use the Icing cost added during the period of $4,473. Now, divide $4,473 by Equivalent Units (FIFO): $4,473/6,890 = $0.65 per unit. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

67) Frosty Corp. produces gluten-free vanilla cake icing which it sells in small containers. Their accountant is performing some process costing calculations and has gathered the following information for the current month of October:

Icing Costs in Beginning Work-in-Progress (WIP) Inventory Costs Added to WIP Inventory this Period Equivalent Units First-In, First-Out (FIFO) Equivalent Units Weighted-Average

$ 600 $4,473 6,890 7,356

Conversion Costs (CC) $ 986 $6,930 6,002 6,765

The accountant must decide whether they will select the FIFO or Weighted-Average method. In order to facilitate this process, they have collected data from both perspectives. What is the cost per equivalent unit for Conversion Costs using the Weighted-Average method? A) $1.02 B) $1.15 C) $1.17 D) $1.32 Answer: C Explanation: This question requires several steps before being able to calculate the cost per equivalent unit. First, calculate what costs are included when using the Weighted-Average method, so that will include beginning WIP Inventory costs. Use the beginning WIP Inventory of $986 plus the Conversion Cost added during the period of $6,930 for a total of $7,916. Now, divide by Equivalent Units (Weighted-Average): $7,916/6,765 = $1.17 per unit. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

68) Fuji Corp. manufactures and sells apple pie filling that it sells to its vendors in aluminum containers. Fuji just completed their first month of operations, and they are excited to be planning for their second month. Fuji believes that reviewing their process costing results for their first month will be a crucial piece in preparing for their second month. Fuji would like to utilize the Weighted-Average method as they are producing homogeneous items that are difficult to distinguish from one another. Their costing information for their first month is as follows:

Equivalent Units Costs in Beginning Work-inProgress (WIP) Inventory Costs Added This Period

Aluminum 13,422 containers

Pie Filling 11,323 grams

$ 1,879 $42,900

$ 1,132 $33,306

Conversion Costs (CC) 12,004

$ 2,387 $66,785

Based upon the information given, what is the cost per equivalent unit for the Direct Material(s)? A) Aluminum, $3.20; and Pie Filling, $2.94 B) Aluminum, $3.34 C) Aluminum, $3.34; and Pie Filling, $3.04 D) Pie Filling, $2.94 Answer: C Explanation: This question requires identification of the fact that Fuji has two Direct Materials: aluminum and pie filling. This question uses Weighted-Average, so include the beginning WIP inventory in the calculation of costs to be included. Start with aluminum: ($1,879 + $42,900)/13,422 containers = $3.34 per container. Next, move on to pie filling: ($1,132 + $33,306)/11,323 grams = $3.04 per gram. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

69) Fuji Corp. manufactures and sells apple pie filling that it sells to its vendors in aluminum containers. Fuji just completed their first month of operations, and they are excited to be planning for their second month. Fuji believes that reviewing their process costing results for their first month will be a crucial piece in preparing for their second month. Fuji would like to utilize the First-In, First-Out (FIFO) method as they believe it will produce the most accurate results. Their costing information for their first month is as follows:

Equivalent Units Costs in Beginning Work-inProgress (WIP) Inventory Costs Added During The Period

Aluminum 13,422 containers

Pie Filling 11,323 grams

$ 1,879 $42,900

$ 1,132 $33,306

Conversion Costs 12,004 $ 2,387 $66,785

Based upon the information given, what is the cost per equivalent unit for the Direct Material(s) using the FIFO method? A) Aluminum, $3.20; and Pie Filling, $2.94 B) Aluminum, $3.34; and Pie Filling, $3.04 C) Aluminum, $3.89 D) Pie Filling, $5.56 Answer: A Explanation: This question requires identification of the fact that Fuji has two Direct Materials: aluminum and pie filling. This question is using FIFO, so do not include the beginning WIP inventory in the calculation of costs to be included. Start with aluminum: $42,900/13,422 containers = $3.20 per container. Next, move on to pie filling: $33,306/11,323 grams = $2.94 per gram. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

70) Yummy Gummies, Co. is a company that produces organic gluten-free gummy vitamins and sells them in packs. Their management has decided that would like to expand operations from a few local grocery stores to include all health food stores in the state. They know that they will need to have a firm handle on all of their costs, including their actual product costs. Their accountant Savannah has already implemented process costing and will be completing a year-toyear comparison for management. Aside from expansion, management would like to identify any increases in costs that they find concerning and address them as soon as possible. The process costing information for last year:

Equivalent Units (Weighted-Average) Beginning Work-in-Progress (WIP) Inventory Costs Added During the Period

Direct Materials Conversion Costs (DM) (CC) 22,456 packs 27,890 packs $ 2,348 $36,707

$ 4,660 $41,555

Direct Materials (DM) 28,996 packs $ 2,886 $39,003

Conversion Costs 34,565 packs $ 5,002 $43,789

Process costing information for the current year:

Equivalent Units (Weighted-Average) Beginning WIP Inventory Costs Added During the Period

What would Savannah note as the change in cost per equivalent units for the Direct Materials using horizontal analysis? (Round intermediate calculation to two decimal places.) A) 17.24% decrease B) 17.24% increase C) 20.83% decrease D) 20.83% increase Answer: A Explanation: This question requires calculation of the cost per equivalent unit for the Direct Materials (Gummy Vitamins) for each year using the Weighted-Average method (as indicated by the data given). This means the Beginning WIP Inventory must be included. Last year: ($2,348 + $36,707)/22,456 = $1.74 per unit. This year: ($2,886 + $39,003)/28,996 = $1.44 per unit. For the horizontal analysis, use the following formula: (Current Year - Previous Year)/Previous Year = ($1.44 - $1.74)/$1.74 = (0.1724) or 17.24% decrease. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

71) Yummy Gummies, Co. is a company that produces organic gluten-free gummy vitamins and sells them in packs. Their management has decided that would like to expand operations from a few local grocery stores to include all health food stores in the state. They know that they will need to have a firm handle on all of their costs, including the actual product costs. Their accountant Savannah has already implemented process costing and will be completing a year-toyear comparison for management. Aside from expansion, management would like to identify any increases in costs that they find concerning and address them as soon as possible. The process costing information for last year:

Equivalent Units Weighted-Average Beginning Work-in-Progress (WIP) Inventory Costs Added During the Period

Direct Materials Conversion Costs (DM) (CC) 22,456 packs 27,890 packs $ 2,348 $36,707

$ 4,660 $41,555

Process costing information for the current year:

Equivalent Units (Weighted-Average) Beginning WIP Inventory Costs Added During the Period

Direct Materials (DM) 28,996 packs $ 2,886 $39,003

Conversion Costs 34,565 packs $ 5,002 $43,789

What would Savannah note as the change in cost per equivalent unit for the conversion using horizontal analysis? (Round intermediate calculation to two decimal places.) A) 15.06% decrease B) 15.06% increase C) 17.73% decrease D) 17.73% increase Answer: A Explanation: This question requires calculation of the cost per equivalent unit for conversion for each year using the Weighted-Average method (as indicated by the data given). This means that the Beginning WIP Inventory must be included. Last year: ($4,660 + $41,555)/27,890 = $1.66 per unit. This year: ($5,002 + $43,789)/34,565 = $1.41 per unit. For the horizontal analysis, use the following formula: (Current Year - Previous Year)/Previous Year = ($1.41 $1.66)/$1.66 = (0.1506) or 15.06% decrease. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

72) Scrappy Company is preparing their costing data for their most recent year which is their fourth year of operations. Scrappy creates booklets of metallic scrapbook paper that it sells via an online platform to customers all around the world. They started the year with 980 units with Direct Materials (DM) 100% completed and Conversion Costs (CC) 37% completed. During the year, Scrappy started 56,780 units and completed 56,526 units, and at year-end they had 1,234 units with DM 100% completed and CC 78% completed. Their equivalent costs for DM are $27,890, and their equivalent costs for CC are $33,568. Scrappy has chosen the First-In, FirstOut (FIFO) method for its process costing. What is the equivalent cost per unit for Direct Materials? (Round units to whole number and cost to the nearest cent.) A) $0.49 B) $0.64 C) $0.65 D) $1.44 Answer: A Explanation: This question requires familiarity with the calculations for equivalent units and equivalent cost per unit. Using the FIFO method, the focus is on what costs and units have been added during the current period. The equivalent units are calculated as follows: (980 × 0%) + (55,546 × 100%) + (1,234 × 100%) = 0 + 55,546 + 1,234 = 56,780 equivalent units. Now, calculate the equivalent cost per unit by dividing the equivalent Direct Material cost by the number of equivalent units that were just calculated. $27,890/56,780 = $0.49 cost per equivalent unit. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

73) Scrappy Company is preparing their costing data for their most recent year which is the fourth year of operations. Scrappy creates booklets of metallic scrapbook paper that it sells via an online platform to customers all around the world. They started the year with 980 units with Direct Materials (DM) 100% completed and Conversion Costs (CC) 37% completed. During the year, Scrappy started 56,780 units and completed 56,526 units, and at year-end they had 1,234 units with DM 100% completed and CC 78% completed. Their equivalent costs for DM are $27,890, and their equivalent costs for CC are $33,568. Scrappy has chosen the First-In, FirstOut (FIFO) method for its process costing. What is the equivalent cost per unit for Conversion Costs? (Round units to whole number and cost to two decimal places.) A) $0.58 B) $0.59 C) $0.77 D) $0.79 Answer: B Explanation: This question requires familiarity with the calculations for equivalent units and equivalent cost per unit. Using the FIFO method, the focus is on what costs and units have been added during the current period. The equivalent units are calculated as follows: (980 × 63%) + (55,546 × 100%) + (1,234 × 78%) = 617 + 55,546 + 963 = 57,126 equivalent units. Now, calculate the equivalent cost per unit by dividing the equivalent Direct Material cost by the number of equivalent units that were just calculated. $33,568/57,126 = $0.59 cost per equivalent unit. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

74) Almondz Co. has equivalent costs for Direct Materials (DM) of $77,626 and equivalent costs for Conversion Costs (CC) of $86,777 for the month of July. They reported the following information for July:

Ending Inventory, June Units Started in July Units Completed in July Ending Inventory, July

Physical Units 15,000 55,600 60,740 9,860

DM 100%

100%

CC 44%

89%

Almondz uses the Weighted-Average method for their process costing. What is the equivalent cost per unit for Conversion Costs? (Round units to whole number and cost to two decimal places.) A) $1.21 B) $1.25 C) $1.40 D) $1.53 Answer: B Explanation: This question requires calculation of the equivalent units for Almondz using the Weighted-Average method. This method does not account for beginning Work-in-Progress (WIP) Inventory separately. The units are calculated as follows: (60,740 × 100%) + (9,860 × 89%) = 60,740 + 8,775 = 69,515 units. To calculate the equivalent cost per unit, divide the equivalent costs by the number of units just calculated. $86,777/69,515 = $1.25. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

75) Almondz Co. has equivalent costs for Direct Materials (DM) of $77,626 and equivalent costs for Conversion Costs (CC) of $86,777 for the month of July. They reported the following information for July:

Ending Inventory, June Units Started in July Units Completed in July Ending Inventory, July

Physical Units 15,000 55,600 60,740 9,860

DM 100%

100%

CC 44%

89%

Almondz uses the Weighted-Average method for their process costing. What is the equivalent cost per unit for Direct Materials? (Round units to whole number and cost two decimal places.) A) $1.10 B) $1.12 C) $1.25 D) $1.37 Answer: A Explanation: This question requires calculation of the equivalent units for Almondz using the Weighted-Average method. This method does not account for beginning WIP Inventory separately. The units are calculated as follows: (60,740 × 100%) + (9,860 × 100%) = 60,740 + 9,860 = 70,600 units. To calculate the equivalent cost per unit, divide the equivalent costs by the number of units just calculated. $77,626 /70,600 = $1.10 per unit. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

76) Pete's Gold Co. is a factory that produces gold plastic coins that are sold at party stores around the country. They are attempting to determine whether they would prefer to use the FirstIn, First-Out (FIFO) or Weighted-Average method for their process costing. Their unit production information for the most recent year is as follows: Physical Units Beginning Work-in-Progress (WIP) Inventory Units Started This Period Units Completed This Period Ending WIP Inventory

Plastic

3,600 30,909 31,721 2,788

Conversion Costs (CC)

100%

52%

100%

73%

The units above produced the following costs:

Costs in Beginning WIP Inventory Costs Added During the Period

Plastic $ 400 $13,435

Conversion Costs $ 522 $16,904

If Pete's chooses to use the FIFO method, then what is their equivalent cost per unit for Conversion Costs? (Round units to whole number and cost to two decimal places.) A) $0.51 B) $0.52 C) $0.53 D) $0.57 Answer: C Explanation: This question requires calculation of both the equivalent units and equivalent costs for Conversion Costs using FIFO before calculating the equivalent cost per unit. For the equivalent units, account for the beginning inventory separately before combining. (3,600 × 48%) + (28,121 × 100%) + (2,788 × 73%) = 1,728 + 28,121 + 2,035 = 31,884 units. To calculate the equivalent costs, only use the costs added during the period of $16,904. Now, divide the cost by the number of equivalent units that were calculated. $16,904/31,884 = $0.53 per unit. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

77) Pete's Gold Co. is a factory that produces gold plastic coins that are sold at party stores around the country. They are attempting to determine whether they would prefer to use the FirstIn, First-Out (FIFO) or Weighted-Average method for their process costing. Their unit production information for the most recent year is as follows:

Physical Units Beginning Work-in-Progress (WIP) Inventory Units Started This Period Units Completed This Period Ending WIP Inventory

Plastic

3,600 30,909 31,721 2,788

Conversion Costs (CC)

100%

52%

100%

73%

The units above produced the following costs:

Costs in Beginning WIP Inventory Costs Added During the Period

Plastic $ 400 $13,435

Conversion Costs $ 522 $16,904

If Pete's chooses the Weighted-Average method, then what is their equivalent cost per unit for Direct Materials? (Round units to whole number and cost to two decimal places.) A) $0.40 B) $0.41 C) $0.44 D) $0.45 Answer: A Explanation: This question requires calculation of both the equivalent units and equivalent costs for Direct Materials using the Weighted-Average method before calculating the equivalent cost per unit. This method does not account for Beginning WIP Inventory separately. (31,721 × 100%) + (2,788 × 100%) = 31,721 + 2,788 = 34,509 units. To calculate the equivalent costs, use the beginning costs and the costs added during the period. $400 + $13,435 = $13,835. Now, divide the cost by the equivalent units that were calculated. $13,835/34,509 = $0.40 per unit. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

78) The sewing process used by TradeMark Inc. began the year with an inventory of $3,820 (Direct Materials were 100% complete). Using First-In, First-Out (FIFO), they calculated their equivalent units of production for this year to be: Direct Materials (DM) Units in Beginning Work-in-Progress (WIP) Inventory Completed This Period Units Started and Completed This Period Units in Ending WIP Inventory

0 800 150

Conversion Costs (CC) 32 800 79

TradeMark has calculated their cost per equivalent unit as follows: Direct Material (DM) $84 and Conversion Costs (CC) $43. How much cost should TradeMark assign to the units completed and removed from WIP Inventory in the current year? A) $101,600 B) $105,420 C) $106,796 D) $107,176 Answer: C Explanation: This question requires assignment of costs only to the units completed and removed from WIP inventory during the current year which means that ending WIP inventory will not be factored in. Direct Materials: 800 × $84 = $67,200. Conversion Costs: (32 × $43) + (800 × $43) = $1,376 + $34,400 = $35,776. Total Costs: $3,820 + $67,200 + $35,776 = $106,796. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

79) The sewing process used by TradeMark Inc. began the year with an inventory of $3,820 (Direct Materials were 100% complete). Using First-In, First-Out (FIFO), they calculated their equivalent units of production for this calendar year to be: Direct Materials (DM) Units Added to Beginning Work-in-Progress (WIP) Inventory Completed This Period Units Started and Completed This Period Units in Ending WIP Inventory

0 800 150

Conversion Costs (CC) 32 800 79

TradeMark has calculated their cost per equivalent unit as follows: Direct Material $84 and Conversion Costs $43. How much cost should TradeMark assign to ending WIP inventory for the current year? A) $3,820 B) $15,997 C) $101,600 D) $117,597 Answer: B Explanation: This question requires assignment of costs only to the units left in WIP inventory at the end of the current year. Direct Materials: 150 × $84 = $12,600; Conversion Costs: 79 × $43 = $3,397; so Total Costs: $12,600 + $3,397 = $15,997. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

80) The sewing process used by TradeMark Inc. began the year with an inventory of $3,820. Using the Weighted-Average method, they calculated their equivalent units of production for this calendar year to be: Direct Materials Conversion Costs (DM) (CC) 865 865

Units Completed This Period Units in Ending Work-in-Progress (WIP) Inventory

150

TradeMark has calculated their cost per equivalent unit as follows: Direct Material $84 and Conversion Costs $43. How much cost should TradeMark assign to the units completed and removed from WIP inventory in the current year using the Weighted-Average method? A) $89,080 B) $109,855 C) $113,675 D) $125,852 Answer: B Explanation: This question requires that assignment of costs only to the units completed and removed from WIP inventory during the current year, so that means beginning and ending WIP inventory will not be factored in. Direct Materials, 865 × $84 = $72,660; Conversion Costs, 865 × $43 = $37,195; so Total Costs = $72,660 + $37,195 = $109,855. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

81) At John & Mary Corp., 1,000 units were in beginning Work-in-Progress (WIP)-Grinding this period, and their status was 100% complete for Direct Materials (DM) and 30% complete for Conversion Costs (CC). A total of 4,000 more units were started and 4,500 total units were completed and transferred to WIP-Fermenting, leaving 500 units in ending inventory. The status of ending inventory was 100% complete for DM and 20% complete for CC. The company has reported the equivalent costs per unit for DM and CC as $0.50 and $0.70 respectively. Determine the total cost of units in ending WIP Inventory following the Weighted-Average method of costing. A) $320 B) $340 C) $460 D) $540 Answer: A Explanation: Equivalent Units in Ending WIP Inventory: For Direct Materials, 500 units × 100% = 500 units For Conversion Costs, 500 units × 20% = 100 units Therefore, Direct Materials Cost of Units in Ending WIP Inventory = 500 units × 0.50 = $250; and Conversion Costs of Units in Ending WIP Inventory = 100 units × 0.70 = $70 Total Cost of Units in Ending WIP Inventory is $250 + $70 = $320 Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

82) Tom & Joy Company follows the Weighted-Average method for inventory valuation and started the period with Work-in-Progress (WIP) Inventory of 1,000 units. Direct Materials (DM) costs and Conversion Costs (CC) in the beginning WIP Inventory are $580 and $740 respectively. During the period, an additional 4,000 units having $1,920 of DM costs and $2,480 of CC were added to the WIP Inventory. Total equivalent units of work done for DM and CC were 5,000 units and 4,600 units in that order. At the end of the period, they had 500 units in ending inventory that were 100% complete with respect to DM and 20% complete with respect to CC. Find out the total cost of units completed and moved out of the WIP Inventory. A) $5,200 B) $5,300 C) $5,400 D) $5,800 Answer: C Explanation: Total costs to be accounted for Direct Materials = $580 + $1,920 = $2,500; Total Direct Materials costs per equivalent unit = $2,500/5,000 units = $0.50; Therefore, total Direct Materials costs of units completed and moved from WIP Inventory is 4,500 (1,000 + 4,000 - 500) units × $0.50 = $2,250. Total costs to be accounted for Conversion Costs = $740 + $2,480 = $3,220; Total Conversion Costs per equivalent unit = $3,220/4,600 units = $0.70; Therefore, total Conversion Costs of units completed and moved from WIP Inventory is 4,500 (1,000 + 4,000 - 500) units × $0.70 = $3,150. Total cost of units completed and moved out of the WIP Inventory is $5,400 ($2,250 + $3,150). Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

83) Nancy & Kary Corp., follow the Weighted-Average method of inventory valuation. The total cost of units completed and removed from Work-in-Progress (WIP) Inventory is $10,800, and the total cost of units in ending WIP Inventory is $640. What will be the Journal Entry for recording the costs of units completed and moved out of the WIP Inventory if the data pertains to the grinding process and the next process is the fermenting process? A) Finished Good (FG) Inventory-Grinding 640 FG Inventory-Fermenting 640 B) FG Inventory-Fermenting 11,440 FG Inventory-Grinding 11,440 C) WIP Inventory-Fermenting 10,800 WIP Inventory-Grinding 10,800 D) WIP Inventory-Grinding 11,440 WIP Inventory-Fermenting 11,440 Answer: C Explanation: The total cost of units completed and moved to WIP Inventory-Fermenting is $10,800. Diff: 1 LO: 5 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

84) In an intermediate process named Polishing, the costs added to Work-in-Progress (WIP) Inventory-Polishing, during this period are $675 for Direct Material (DM), $525 for salaries and wages payable, and $475 for Manufacturing Overhead (MOH). What will the journal entry to record the incurrence of Conversion Costs (CC) be? A) DM Inventory 675 Salaries and Wages Payable 525 Manufacturing Overhead 475 WIP Inventory-Polishing 1,675 B) Manufacturing Overhead 475 Salaries and Wages Payable 525 WIP Inventory-Polishing 1,000 C) WIP Inventory-Polishing 1,000 Salaries and Wages Payable 525 Manufacturing Overhead 475 D) WIP Inventory-Polishing 1,675 DM Inventory 675 Salaries and Wages Payable 525 Manufacturing Overhead 475 Answer: C Explanation: To record the incurrence of Conversion Costs, Direct Labor and Manufacturing Overhead should be recorded individually. Therefore, WIP Inventory-Polishing should be debited with a total of $1,000, and Salaries and Wages Payable and Manufacturing Overhead will be credited individually for $525 and $475 respectively. Diff: 2 LO: 5 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

85) A factory is entering its second year of operations and has the following cost information for the stirring department: costs added to complete beginning inventory, $780; costs already in beginning inventory, $320; costs for new batches started, $5,677; and costs of incomplete inventory at the end of the period, $443. If this factory uses the First-In, First-Out (FIFO) method, then what is the total cost that they will include in their journal entry as it moves to the next department? A) $5,891 B) $6,014 C) $6,334 D) $6,777 Answer: C Explanation: This question asks which costs will be included in the amount that is completed and removed in order to move to the next department using the FIFO method. Both costs in the beginning inventory should be included: $780 + $320 = $1,100. To determine the amount that was both completed and removed, determine how much was completed (Units Started - Units in Ending Inventory): $5,677 - $443 = $5,234. To calculate the amount that will be moved to the next department, combine costs of beginning inventory plus costs of units started and completed, ending inventory will not be factored in again: $1,100 + $5,234 = $6,334 Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

86) Annie, the accountant for a local cookie factory, has been finalizing costing information for the month so that the books can be updated and closed. After finishing the journal entries for the mixing department, she is now focusing on the baking department. The baking department began with Work-in-Progress (WIP) Inventory of $967, Transferred-In (TI) units of $6,708, and added $1,340 of cookie materials, $3,566 of Direct Labor, and $3,028 of Manufacturing Overhead in the beginning Work-in-Progress (WIP) Inventory. This department also had $347 of ending inventory in WIP. What journal entry must be made to transfer the cookies completed to the finished goods inventory? A) Finished Goods Inventory 15,609 WIP Inventory- Mixing 15,609 B) Finished Goods Inventory 15,262 WIP Inventory- Mixing 15,262 C) Finished Goods Inventory 15,262 WIP Inventory-Baking 15,262 D) WIP Inventory- Baking 15,609 Finished Goods Inventory 15,609 Answer: C Explanation: The first step to complete this involves determining the total cost of units completed and transferred out of the Baking Department. In order to do so, determine what amounts would have been debited to the WIP Inventory-Baking. This would include $967 costs of units in beginning inventory, $6,708 costs of units Transferred-In, $1,340 costs of cookie materials, $3,566 of Direct Labor, and $3,028 of Manufacturing Overhead added in beginning WIP Inventory this period. This will result in total of $967 + $6,708 + $1,340 + $3,566 + $3,028 = $15,609. Now, determine the costs of units completed & removed from WIP (Baking). Costs of units completed & removed: $15,609 - $347 = $15,262. The journal entry to transfer the cookies completed to the finished goods inventory will be: debit the Finished Goods Inventory and credit the WIP Inventory-Baking account, both in the amount of $15,262. Diff: 2 LO: 5 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

87) Sticky Fingers Corp is a manufacturer of gluten-free cinnamon rolls that are packaged and sold in quantities of six rolls. Sticky has chosen to implement a process costing system to account for their production costs at the recommendation of the head cost accountant, Trevor. He examined their records for the most current year and compiled the following information: Beginning Work-in-Progress (WIP) Inventory: 256 units that are 100% completed for Direct Materials (DM) and 68% completed for Conversion Costs (CC) Units Started During the Period: 18,540 Units Completed by the End of the Period: 16,400 Ending WIP Inventory: x units that are 100% completed for DM and 60% completed for CC Their beginning inventory includes the following costs: DM, $343; and CC, $652. During the most recent year, Sticky added the following costs: DM, $48,900; and CC, $58,777. Using the Weighted-Average method, how much total cost should be assigned to the units completed this period? (Do not round intermediate calculations.) A) $97,580.00 B) $97,608.03 C) $107,677.00 D) $108,646.06

Answer: A Explanation: (Total cost calculated in steps 3 and 5 of process costing may vary due to rounding.) This question requires walking through all five of the process costing steps. To begin, first determine how many units to account for, and that will also inform you of the ending inventory. The first step is to verify physical units in the period and their degree of completion. Units in beginning WIP inventory plus units started this period- 256 + 18,540 = 18,796 total units to account for. Now, determine the ending inventory by deducting the units completed from the total units to account for: 18,796 - 16,400 = 2,396 units. In step two, account for equivalent units. Using the Weighted-Average method, there will not be a separate assessment of beginning inventory. Direct Materials: (16,400 × 100%) + (2,396 × 100%) = 18,796 equivalent units. Conversion Costs: (16,400 × 100%) + (2,396 × 60%) = 16,400 + 1,437.6 = 17,837.6 equivalent units. In step three, account for costs: Direct Materials, $48,900 + $343 = $49,243; and Conversion Costs, $58,777 + $652 = $59,429. During step four, calculate the cost per equivalent unit: Direct Materials, 49,243/18,796 = $2.6199; and Conversion Costs, $59,429/17,837.6 = $3.3317. Finally, step five requires allocation of costs based on the equivalent units calculated. The end result should appear as follows: Total Costs Total Cost of Units Completed and Removed Costs of Units in Ending Inventory Total Costs Accounted For

$97,605.19 $42,965.80

$54,639.39

11,066.81 6,277.20 $108,672.00 $49,243.00

4,789.61 $59,429.00

Diff: 3 LO: 5 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

88) Lucky Charm is a factory that molds and assembles silver charms that are offered in a variety of themes including hearts, letters, and animals for use on charm bracelets. During the year, additional silver of $52,237 and Conversion Costs of $71,490 were added to the Molding department. During the year, the total cost of units completed by the Molding department and then transferred to Assembly amounted to $131,500. As of January 1, the beginning Work-inProgress (WIP) Inventory (Molding) had a balance of $9,805. What journal entry would Lucky use to recognize the transfer of costs from the Molding to the Assembly department? A) WIP Inventory–Assembly 123,727 WIP Inventory–Molding 123,727 B) WIP Inventory–Molding 123,727 WIP Inventory–Assembly 123,727 C) WIP Inventory–Assembly 131,500 WIP Inventory–Molding 131,500 D) WIP Inventory–Molding 131,500 WIP Inventory–Assembly 131,500 Answer: C Explanation: This question requires knowledge about which of the costs are needed for a journal entry that will transfer the cost of completed units from Molding to Assembly. To decrease an asset, which the WIP Inventory accounts are, you must credit them. To increase an asset, you would debit the appropriate account. The appropriate figure to use for both is the cost transferred between departments of $131,500. Diff: 2 LO: 5 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

89) For a particular period, Jack, who is the production manager of an organization that follows the Weighted-Average method of inventory valuation has been given the task to perform at a gross margin percentage of 32.00%. He has been informed by the marketing department that given the current scenario, the unit sales price of the product is frozen at $5.00, and it has been agreed that 5,500 units will be completed and removed from Work-in-Progress (WIP) Inventory into Finished Goods Inventory. He has been asked by the top management to run the entire process: procure the Direct Materials (DM), engage the labor, and apply the Manufacturing Overheads (MOH) in a way that fulfills management's desire of a gross margin percentage of 32.00%. In the given scenario, what should the maximum total costs of units completed and removed from the WIP Inventory be? A) $4,675 B) $9,350 C) $18,700 D) $37,400 Answer: C Explanation: Gross Margin per Unit = Sales Price per Unit × Gross Margin % = $5.00 × 32% = $1.6 Unit Costs = Sales Price per Unit - Gross Margin per Unit = $5.00 - $1.6 = $3.4 Unit Costs = Total Costs of Units Completed and Removed from WIP Inventory/Units Completed this Period; Assume that Total Costs of Units Completed and Removed from WIP Inventory is X. $3.4 = X/5,500 units X = $3.4 × 5,500 units X = $18,700 Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

90) The Cost Accountant of an organization, Jimmy, has been tasked with suggesting the inventory valuation method such that the gross margin percentage of an organization is higher than it currently is. He has the following estimated information on hand: Units in Beginning Work-in-Progress (WIP) Inventory Completed Units Started and Completed Total Cost of Units Completed and Removed from WIP Inventory: Using First-In, First-Out (FIFO) Using Weighted-Average

1,500 4,000

$28,209 $28,050

The selling price of a unit is estimated at $7.50. What would the gross margin percentage Jimmy will arrive at be, using both FIFO and Weighted-Average respectively? (Round cost per unit to nearest cent.) A) 31.60% for FIFO and 32.00% for Weighted-Average B) 32.50% for FIFO and 31.80% for Weighted-Average C) 40.00% for FIFO and 50.00% for Weighted-Average D) 41.30% for FIFO and 42.70% for Weighted-Average Answer: A Explanation: Under FIFO the method, the Cost per Unit = Total Costs of Units Completed and Removed from WIP Inventory/(Units in Beginning WIP Inventory Completed + Units Started and Completed) = $28,209/(1,500 units + 4,000 units) = $5.13 Under Weighted-Average method, Cost per Unit = Total Costs of Units Completed and Removed from WIP Inventory/Units Completed this Period = $28,050/5,500 units = $5.10

Selling price Cost Gross margin Gross margin %

FIFO Weighted-Average $7.50 $7.50 $5.13 - $5.10 $2.37 31.60%

$2.40 32.00%

Diff: 3 LO: 6 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

91) An organization follows the Weighted-Average method of inventory valuation. You are appointed as a cost accountant of the organization and a task has been assigned to fix the selling price of a product such that the gross margin percentage is set at its target of 40%. The estimated total cost of units completed and removed from Work-in-Progress (WIP) Inventory is $60,000. The estimated number of units to be completed is 5,000. What selling price should you fix? A) $10 B) $15 C) $20 D) $25 Answer: C Explanation: Under the Weighted-Average method, the Cost per Unit = Total Cost of Units Completed and Removed from WIP Inventory/ Units Completed this Period = $60,000/ 5,000 Units = $12.00 per Unit In % 100% Selling price - Cost Gross margin %

60% 40%

In $

$X $12.00

X = Selling Price per Unit = $12 per Unit × (100%/60%) = $20.00 Diff: 1 LO: 6 Bloom: C AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

92) Carmine Inc. creates all of its parts in the cutting department before they are passed on to the finishing department. Carmine adds the packaging material at the beginning of the finishing process. The finishing department had a beginning Work-in-Progress (WIP) Inventory of 450 units in April that were 74% complete with respect to Conversion Costs (CC). During April, the finishing department had 3,678 units Transferred-In (TI) from the cutting department and had completed 3,002 units by the end of the month. This left 1,126 units in ending inventory that were 50% complete with respect to CC. What are the equivalent units of production for April for TI, Direct Materials (DM), and CC under the First-In, First-Out (FIFO) method? (Round units to nearest whole number.) A) TI, 3,678 units; DM, 3,678 units; and CC, 3,232 units B) TI, 3,682 units; DM, 3,682 units; and CC, 3,682 units C) TI, 4,128 units; DM, 4,128 units; and CC, 4,128 units D) TI, 4,578 units; DM, 4,578 units; and CC, 3,682 units Answer: A Explanation: This question requires calculation of equivalent units for three different cost categories using the FIFO method. With FIFO, you should be focused on only units and costs added during the period, so beginning inventory will have to be evaluated separately. For Transferred-In and Direct Materials, this will be equal to (Units in Beginning WIP Inventory × Percentage of Costs Added) + (Units Transferred-In and Completed × Percentage of Costs Added) + (Units in Ending WIP Inventory × Percentage of Costs Added) = (450 units × 0%) + (2,552 units × 100%) + (1,126 units × 100%) = 0 + 2,552 units + 1,126 units = 3,678 units. For Conversion Costs, this will be equal to (Units in Beginning WIP Inventory × Percentage of Costs Added) + (Units Transferred-In and Completed × Percentage of Costs Added) + (Units in Ending WIP Inventory × Percentage of Costs Added) = (450 units × 26%) + (2,552 units × 100%) + (1,126 units × 50%) = 117 units + 2,552 units + 563 units = 3,232 units. Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

93) Carmine Inc. creates all of its parts in the cutting department before they are passed on to the finishing department. Carmine adds packaging material at the beginning of the finishing process. The finishing department had a beginning Work-in-Progress (WIP) Inventory of 450 units in April that were 74% complete with respect to Conversion Costs (CC). During April, the finishing department had 3,678 units Transferred-In (TI) from the cutting department and had completed 3,002 units by the end of the month. This left 1,126 units in ending inventory that are 45% complete with respect to CC. What are the equivalent units of production for April for TI, Direct Materials (DM), and CC under the Weighted-Average method? (Round units to nearest whole number.) A) TI, 4,128 units; DM, 4,128 units; and CC, 3,509 units B) TI, 4,128 units; DM, 4,128 units; and CC, 4,015 units C) TI, 4,578 units; DM, 4,578 units; and CC, 3,565 units D) TI, 4,578 units; DM, 4,578 units; and CC, 4,578 units Answer: A Explanation: This question requires you to calculate equivalent units for three different cost categories using the Weighted-Average method. With the Weighted-Average method, the focus is on all units and costs completed this period, so beginning inventory will not have to be evaluated separately. For Transferred-In and Direct Materials, this will be equal to (Units Completed this Period × Percentage of Costs Added) + (Units in Ending WIP Inventory × Percentage of Costs Added) = (3,002 units × 100%) + (1,126 units × 100%) = 3,002 units + 1,126 units = 4,128 units. For Conversion Costs, this will be equal to (Units Completed this Period × Percentage of Costs Added) + (Units in Ending WIP Inventory × Percentage of Costs Added) = (3,002 units × 100%) + (1,126 units × 45%) = 3,002 units + 507 units = 3,509 units. Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

94) Stryker Industries produces stethoscopes made from steel and rubber that begin in the molding department before being transferred to the assembly department. After the products have been assembled, they are packaged and shipped to customers across the country. The following production information has been gathered for the month of June:

Beginning Inventory Units Transferred-In and Completed Ending Inventory

Physical TransferredDirect Conversion Units In (TI) Materials (DM) Costs (CC) 993 100% 100% 48% 6,456 1,004

100%

32%

Using the Weighted-Average method, calculate the equivalent units of production for Transferred-In (TI), Direct Materials (DM), and Conversion Costs (CC) during the month of June. (Round units to nearest whole number.) A) TI, 8,433 units; DM, 8,453 units; and CC, 7,294 units B) TI, 8,443 units; DM, 8,443 units; and CC, 7,770 units C) TI, 8,453 units; DM, 8,433 units; and CC, 7,770 units D) TI, 8,453 units; DM, 8,453 units; and CC, 7,770 units Answer: D Explanation: In this question, the equivalent units of production will need to be calculated for three different cost categories using the Weighted-Average method. For Transferred-In and Direct Materials costs, this will be equal to (Units Completed this Period × Percentage of Costs Added) + (Units in Ending WIP Inventory × Percentage of Costs Added) = ((993 units + 6,456 units) × 100%) + (1,004 units × 100%) = 7,449 units + 1,004 units = 8,453 units. For Conversion Costs, this will be equal to (Units Completed this Period × Percentage of Costs Added) + (Units in Ending WIP Inventory × Percentage of Costs Added) = (7,449 units × 100%) + (1,004 × 32%) = 7,449 units + 321 units = 7,770 units. Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

95) Stryker Industries produces stethoscopes made from steel and rubber that begin in the molding department before being to the assembly department. After the products have been assembled, they are packaged and shipped to customers across the country. The following production information has been gathered for the month of June:

Beginning Inventory Units Transferred-In and Completed Ending Inventory

Physical TransferredDirect Conversion Units In (TI) Materials (DM) Costs (CC) 993 100% 100% 48% 6,456 1,004

100%

32%

Using the First-In, First-Out (FIFO) method, calculate the equivalent units of production for Transferred-In (TI), Direct Materials (DM), and Conversion Costs (CC) during the month of June. (Round units to nearest whole number.) A) TI, 7,440 units; DM, 7,440 units; and CC, 7,294 units B) TI, 7,440 units; DM, 7,440 units; and CC, 7,449 units C) TI, 7,460 units; DM, 7,460 units; and CC, 7,293 units D) TI, 7,460 units; DM, 7,460 units; and CC, 7,294 units Answer: C Explanation: In this question, the equivalent units of production will need to be calculated for three different cost categories using the FIFO method. In this method, the beginning inventory will need a separate evaluation unlike with the Weighted-Average method. For Direct Materials and Transferred-In costs, this will be equal to (Units in Beginning Work-in-Progress (WIP) Inventory Completed this Period × Percentage of Costs Added) + (Units Transferred-In and Completed this Period × Percentage of Costs Added) + (Units in Ending WIP Inventory × Percentage of Costs Added) = (993 units × 0%) + (6,456 units × 100%) + (1,004 units × 100%) = 0 + 6,456 units + 1,004 units = 7,460 units. For Conversion Costs, this will be equal to (Units in Beginning WIP Inventory Completed this Period × Percentage of Costs Added) + (Units Transferred-In and Completed this Period × Percentage of Costs Added) + (Units in Ending WIP Inventory × Percentage of Costs Added) = (993 units × 52%) + (6,456 units × 100%) + (1,004 units × 32%) = 516 units + 6,456 units + 321 units = 7,293 units. Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

96) Artemis Inc. manufactures organic cotton dishcloths that it sells in an online store. Their products begin in the cutting department before moving to the sewing department where they are completed. Their accounting department has gathered the following costing information for the month of September: Transferred-In (TI) Beginning Work-in-Progress (WIP) Inventory Costs added to WIP Inventory this Month

Direct Materials (DM)

Conversion Costs (CC)

$ 1,800

$ 1,950

$ 2,300

$11,700

$13,008

$16,772

The following represents the equivalent units of production for the month of September:

First-In, First-Out (FIFO) Weighted-Average

Transferred-In Direct Materials Conversion Costs 5,391 5,391 5,411 5,917 5,917 5,774

Using the FIFO method, calculate the equivalent cost per unit for Transferred-In (TI), Direct Materials (DM), and Conversion Costs (CC) during the month of September. (Round answers to the two decimal places.) A) TI, $2.17 per unit; DM, $2.41 per unit; and CC, $3.10 per unit B) TI, $2.17 per unit; DM, $2.41 per unit; and CC, $3.52 per unit C) TI, $2.41 per unit; DM, $2.17 per unit; and CC, $3.10 per unit D) TI, $2.50 per unit; DM, $2.77 per unit; and CC, $3.52 per unit Answer: A Explanation: First, determine the total equivalent costs for each cost category. For TransferredIn, Direct Materials, and Conversion Costs, only use the costs added during the period and disregard the beginning WIP Inventory costs. To calculate the equivalent cost per unit, divide the costs added to WIP Inventory by the total equivalent units of production. Transferred-In: $11,700/ 5,391 units = $2.17 per unit, Direct Materials: $13,008/5,391 units = $2.41 per unit, and Conversion Costs: $16,772/ 5,411 units = $3.10 per unit. Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

97) Artemis Inc. manufactures organic cotton dishcloths that it sells in an online store. Their products begin in the cutting department before moving to the sewing department where they are completed. Their accounting department has gathered the following costing information for the month of September: Transferred-In (TI) Beginning Work-in-Progress (WIP) Inventory Costs added to WIP Inventory this Month

Direct Materials (DM)

Conversion Costs (CC)

$ 1,800

$ 1,950

$ 2,300

$11,700

$13,008

$16,772

The following represents the equivalent units of production for the month of September:

First-In, First-Out (FIFO) Weighted-Average

Transferred-In Direct Materials Conversion Costs 5,391 5,391 5,411 5,917 5,917 5,774

Using the Weighted-Average method, calculate the equivalent cost per unit for Transferred-In (TI), Direct Materials (DM), and Conversion Costs (CC) during the month of September. (Round answers to the two decimal places.) A) TI, $1.98 per unit; DM, $2.20 per unit; and CC, $2.90 per unit B) TI, $2.28 per unit; DM, $2.53 per unit; and CC, $3.30 per unit C) TI, $2.50 per unit; DM, $2.77 per unit; and CC, $3.52 per unit D) TI, $2.53 per unit; DM, $2.28 per unit; and CC, $3.30 per unit Answer: B Explanation: This question will require multiple steps before arriving at the equivalent cost per unit. First, calculate the total equivalent costs for each cost category. For Transferred-In, Direct Materials, and Conversion Costs, add the costs in beginning WIP Inventory and costs added to WIP inventory. To calculate the equivalent cost per unit, divide the total accounted cost by the equivalent units. Transferred-In: $13,500/ 5,917 units = $2.28 per unit, Direct Materials: $14,958/ 5,917 units = $2.53 per unit, and Conversion Costs: $19,072/5,774 units = $3.30 per unit. Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

100

98) A factory manufactures sterling silver hoop earrings that it sells to large regional retail establishments. The company has just completed its first month of operations and has some important policy and procedure decisions to make. Their accountants have compiled some cost and production information so that a Process Costing method can be selected. The following table represents the cost data for the month: TransferredIn (TI)

Direct Materials (DM)

Conversion Costs (CC)

$6,443 $7,809

$4,556 $5,463

$7,908 $9,502

Costs added to Work-in-Progress (WIP) Inventory this period Total Costs to Account For

The above costs were generated in order to meet the following production for the month:

Beginning Inventory Units Transferred-In Ending Inventory

Degree of Completion Direct Conversion Transferred-In Materials Costs 100% 100% 69% 100%

100%

70%

Physical Units 884 7,352 903

What is the equivalent cost per unit for Transferred-In (TI), Direct Materials (DM), and Conversion Costs (CC) during the month using the First-In, First-Out (FIFO) method? (Round costs to two decimal places.) A) TI, $0.55 per unit; DM, $0.55 per unit; and CC, $0.99 per unit B) TI, $0.55 per unit; DM, $0.78 per unit; and CC, $0.99 per unit C) TI, $0.78 per unit; DM, $0.78 per unit; and CC, $0.99 per unit D) TI, $0.88 per unit; DM, $0.62 per unit; and CC, $1.08 per unit

101

Answer: D Explanation: This question requires two different figures to calculate the equivalent cost per unit: the total equivalent costs and the equivalent units. The total equivalent costs have been provided, so the equivalent units will have to be calculated. The costs for Transferred-In are given, but the units Transferred-In and completed needs to be calculated as: Units Transferred-In - Units in Ending Inventory = 7,352 units - 903 units = 6,449 units. Next, calculate the equivalent units for each cost category. For Transferred-In and Direct Materials, this is equal to, (884 units × 0%) + (6,449 units × 100%) + (903 units × 100%) = 0 + 6,449 units + 903 units = 7,352 units. Now, divide the total equivalent cost by these units to arrive at the equivalent cost per unit. For Transferred-In, $6,443/ 7,352 units = $0.88 per unit; and for Direct Materials, $4,556/ 7,352 units = $0.62 per unit. Equivalent units for Conversion Costs: (884 units × 31%) + (6,449 units × 100%) + (903 units × 70%) = 274 units + 6,449 units + 632 units = 7,355 units. Next, divide the total equivalent cost by these units to arrive at the equivalent cost per unit. Conversion Costs: $7,908/7,355 units = $1.08 per unit. Diff: 3 LO: 6 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

102

99) A factory manufactures sterling silver hoop earrings that it sells to large regional retail establishments. The company has just completed its first month of operations and has some important policy and procedure decisions to make. Their accountants have compiled some cost and production information so that a Process Costing method can be selected. The following table represents the cost data for the month:

First-In, First-Out (FIFO) Weighted-Average

Transferred-In Direct Materials Conversion Costs (TI) (DM) (CC) $6,443 $4,556 $7,908 $7,809 $5,463 $9,502

The above costs were generated in order to meet the following production for the month:

Beginning Inventory Units Transferred-In Ending Inventory

Degree of Completion Direct Conversion Transferred-In Materials Costs 100% 100% 69% 100%

100%

70%

Physical Units 884 7,352 903

What is the equivalent cost per unit for Transferred-In (TI), Direct Materials (DM), and Conversion Costs (CC) during the month using the Weighted-Average method? (Round units to the nearest whole number and costs to the two decimal places.) A) TI, $0.60; DM per unit, $0.86 per unit; and CC, $1.04 per unit B) TI, $0.86; DM per unit, $0.60 per unit; and CC, $1.04 per unit C) TI, $0.60; DM per unit, $0.86 per unit; and CC, $1.07 per unit D) TI, $0.95; DM per unit, $0.66 per unit; and CC, $1.19 per unit Answer: D Explanation: This question requires two different figures to calculate the equivalent cost per unit: the total equivalent costs and the equivalent units. The total equivalent costs have been provided, so the equivalent units will have to be calculated. The costs for Transferred-In are given, but the units completed needs to be calculated as Units in Beginning Inventory + Units Transferred-In - Units in Ending Inventory = 884 units + 7,352 units - 903 units = 7,333 units. Next, calculate the equivalent units for each cost category. For Transferred-In and Direct Materials, this will be equal to (7,333 units × 100%) + (903 units × 100%) = 7,333 + 903 units = 8,236 units. Now, divide the total equivalent cost by these units to arrive at the equivalent cost per unit. Transferred-In: $7,809/8,236 units = $0.95 per unit; and Direct Materials: $5,463/ 8,236 units = $0.66 per unit. Equivalent units for Conversion Costs: (7,333 units × 100%) + (903 units × 70%) = 7,333 units + 632 units = 7,965 units. Now, divide the total equivalent cost by these units to arrive at the equivalent cost per unit. Conversion Costs: $9,502/7,965 units = $1.19 per unit. Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 103

100) Annie, the accountant for a local cookie factory, has been finalizing costing information for the month so that the books can be updated and closed. After finishing the journal entries for the mixing department, she is now focusing on the baking department. The baking department began with Work-in-Progress (WIP) Inventory of $967, and added $1,340 of cookie materials, $3,566 of Direct Labor, and $3,028 of Manufacturing Overhead in the beginning WIP Inventory. It has completed $15,626 costs of units in the process and reported $347 of ending inventory in WIP. What is the total cost of units Transferred-In (TI) from the mixing department? A) $6,725 B) $7,072 C) $8,901 D) $15,626 Answer: B Explanation: To solve this, determine the total cost of units TI from the mixing department. It can be calculated as: Total Cost of Units TI from the mixing department = Total Cost of Units Completed - Costs of Units in Beginning WIP Inventory - Costs Added to Units in Beginning WIP Inventory this Period + Costs of Units in Ending WIP inventory = $15,626 - $967 - $7,934 + $347 = $7,072. Diff: 1 LO: 6 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 101) An organization specializes in manufacturing wooden wardrobes. It gives its customers a choice of woods including teak wood, satin wood, Sal wood, Indian rosewood etc. For the purpose of ascertainment of total cost, which costing system needs to be implemented? A) Batch Costing B) Job Costing C) Operation Costing D) Process Costing Answer: C Explanation: Operation costing is suitable for products that allow for choice of Direct Materials (DM) but that follow a common process thereafter for the addition of conversion cost. Diff: 1 LO: 7 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Strategic Cost Management.

104

102) 2 Tight Jeans is clothing manufacturer that specializes in the production of jeans that are offered in a variety of washes and cuts. Not every pair of jeans use all of 2 Tight's processes. The following costs per pair of jeans have been predetermined for the company's key processes for medium-sized jeans:

Estimated cost per pair

Cutting Sewing Acid Wash Sand Blasted Inspection $1.42 $1.31 $0.48 $0.52 $1.09

A batch of 4,280 pairs has recently been completed. This batch included 2,000 pairs of Acid Wash jeans that require the following processes: cutting, sewing, acid washing, and inspecting and 2,280 pairs of Sand Blasted jeans that require the following processes: cutting, sewing, sand blasting, and inspecting. The denim needed to make either type of jeans costs $1.00 per pair. What is the total cost that would be assigned to this batch? (Round the final answer to the nearest dollar.) A) $17,200 B) $18,495 C) $19,608 D) $22,775 Answer: D Explanation: This question requires familiarity with operation costing. To calculate the total cost assigned to the batch, calculate the total cost of each type of jeans within the batch. Acid Wash Jeans: ($1.42 × 2,000) + ($1.31 × 2,000) + ($0.48 × 2,000) + ($1.09 × 2,000) + ($1.00 × 2,000) = $2,840 + $2,620 + $960 + $2,180 + $2,000 = $10,600. Sand Blasted Jeans: ($1.42 × 2,280) + ($1.31 × 2,280) + ($0.52 × 2,280) + ($1.09 × 2,280) + ($1.00 × 2,280) = $3,237.60 + $2,986.80 + $1,185.60 + $2,485.20 + $2,280 = $12,175.20. Lastly, combine the total costs for each type of jeans to get the total cost: $10,600 + $12,175.20 = $22,775.20 = $22,775. Diff: 2 LO: 7 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

105

103) 2 Tight Jeans is clothing manufacturer that specializes in the production of jeans that are offered in a variety of washes and cuts. Not every pair of jeans use all of 2 Tight's processes. The following costs per pair of jeans have been predetermined for the company's key processes for medium-sized jeans:

Estimated cost per pair

Cutting Sewing Acid Wash Sand Blasted Inspection $1.42 $1.31 $0.48 $0.52 $1.09

A batch of 4,280 pairs has recently been completed. This batch included 2,000 pairs of Acid Wash jeans that require the following processes: cutting, sewing, acid washing, and inspecting and 2,280 pairs of Sand Blasted jeans that require the following processes: cutting, sewing, sand blasting, and inspecting. The denim needed to make either type of jeans costs $1.00 per pair. What is the total cost that would be assigned to each kind of jeans in this batch? (Round answers to the nearest dollar.) A) Acid Wash Jeans, $10,600; Sand Blasted Jeans, $12,175 B) Acid Wash Jeans, $12,175; Sand Blasted Jeans, $10,600 C) Acid Wash Jeans, $9,895; Sand Blasted Jeans, $8,600 D) Acid Wash Jeans, $8,600; Sand Blasted Jeans, $9,895 Answer: A Explanation: This question requires familiarity with operation costing. To calculate the total cost assigned to each kind of jeans in the batch, calculate the total cost of each type of jeans within the batch. Acid Wash Jeans: ($1.42 × 2,000) + ($1.31 × 2,000) + ($0.48 × 2,000) + ($1.09 × 2,000) + ($1.00 × 2,000) = $2,840 + $2,620 + $960 + $2,180 + $2,000 = $10,600. Sand Blasted Jeans: ($1.42 × 2,280) + ($1.31 × 2,280) + ($0.52 × 2,280) + ($1.09 × 2,280) + ($1.00 × 2,280) = $3,237.60 + $2,986.80 + $1,185.60 + $2,485.20 + $2,280 = $12,175.20 = $12,175. Diff: 2 LO: 7 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

106

104) All Terrain manufacturers bicycles for various sporting goods stores, and their top sellers include a cruiser bike and a mountain bike. They recently completed a batch that included 497 cruiser bikes and 766 mountain bikes. A second batch for a different supplier included 545 cruiser bikes and 812 mountain bikes. Costing information for the bikes is as follows:

Welding Assembly Matte Paint Reflective Paint Powder Coating Finishing Inspection

Cost per Bike $4.25 $3.58 $1.02 $1.58 $1.89 $2.42 $2.89

Cruiser x x x

Mountain x x x

x x x

x x

The cost of materials is $6.78 for each cruiser bike and $7.86 for each mountain bike. What is the total cost assigned to the first batch? A) $24,683.11 B) $24,992.72 C) $28,642.79 D) $29,000.56 Answer: C Explanation: This question requires familiarity with operation costing. To calculate the total cost assigned to the first batch, calculate the total cost of each type of bike within the batch. Cruiser Bike: ($4.25 × 497) + ($3.58 × 497) + ($1.02 × 497) + ($1.89 × 497) + ($2.42 × 497) + ($2.89 × 497) + ($6.78 × 497) = $2,112.25 + $1,779.26 + $506.94 + $939.33 + $1,202.74 + $1,436.33 + 3,369.66 = $11,346.51. Mountain Bike: ($4.25 × 766) + ($3.58 × 766) + ($1.58 × 766) + ($2.42 × 766) + ($2.89 × 766) + ($7.86 × 766) = $3,255.50 + $2,742.28 + $1,210.28 + $1,853.72+ $2,213.74 + 6,020.76 = $17,296.28. Lastly, combine the total costs of each type of bike to get the total cost for the batch: $11,346.51 + $17,296.28 = $28,642.79. Diff: 2 LO: 7 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

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105) All Terrain manufacturers bicycles for various sporting goods stores, and their top sellers include a cruiser bike and a mountain bike. They recently completed a batch that included 497 cruiser bikes and 766 mountain bikes. A second batch for a different supplier included 545 cruiser bikes and 812 mountain bikes. Costing information for the bikes is as follows:

Welding Assembly Matte Paint Reflective Paint Powder Coating Finishing Inspection

Cost per Bike $4.25 $3.58 $1.02 $1.58 $1.89 $2.42 $2.89

Cruiser x x x

Mountain x x x

x x x

x x

The cost of materials is $6.78 for each cruiser bike and $7.86 for each mountain bike. What is the total cost assigned to the second batch? A) $26,847.07 B) $30,777.31 C) $31,132.42 D) $35,062.66 Answer: B Explanation: This question requires familiarity with operation costing. To calculate the total cost assigned to the second batch, calculate the total cost of each type of bike within the batch. Cruiser Bike: ($4.25 × 545) + ($3.58 × 545) + ($1.02 × 545) + ($1.89 × 545) + ($2.42 × 545) + ($2.89 × 545) + ($6.78 × 545) = $2,316.25 + $1,951.10 + $555.90 + $1,030.05 + $1,318.90 + $1,575.05 + $3,695.10 = $12,442.35. Mountain Bike: ($4.25 × 812) + ($3.58 × 812) + ($1.58 × 812) + ($2.42 × 812) + ($2.89 × 812) + ($7.86 × 812) = $3,451.00 + $2,906.96 + $1,282.96 + $1,965.04 + $2,346.68 + $6,382.32 = $18,334.96. Lastly, combine the total costs of each type of bike to get the total cost for the batch: $12,442.35 + $18,334.96 = $30,777.31. Diff: 2 LO: 7 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

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106) A shoe company designs and manufactures a variety of shoes including their two top sellers, wedge heels and stilettos. The company has been debating a new advertising campaign in an effort to ramp up sales for these offerings. In order to decide, they feel that getting a handle on their costing information is critical. The company took the advice of their head accountant and implemented an operation costing system that cost them extra on the front end. The company has calculated the following predetermined cost for each of the key processes:

Cost per Pair Wedge Heels Stilettos

Machining

Assembly

$2.26

$2.15

x x

Cork Shaping

Cotton Sewing

$0.34

$0.42

Patent Leather Stitching

Packaging

$0.89

$1.58

x x

Each pair of wedge heels has a selling price of $25 and Direct Materials (DM) cost of $10. Each pair of stilettos has a selling price of $40 and DM cost of $12. A recent batch of 130 stilettos was sold to a high-end retailer. A second batch containing 85 wedge heels was sold to a bargain shoe store. What is total cost assigned to each batch? (Round answers to two decimal places.) A) Wedge Heels, $573.75; and Stilettos, $894.40 B) Wedge Heels, $894.40; and Stilettos, $573.75 C) Wedge Heels, $1,423.75; and Stilettos, $2,454.40 D) Wedge Heels, $2,454.40; and Stilettos, $1,423.75 Answer: C Explanation: This question requires calculating the total cost of each batch using operational costing. For the batch of 130 stilettos, calculate the cost as follows: (130 × $2.26) + (130 × $2.15) + (130 × $0.89) + (130 × $1.58) + (130 × $12.00) = $293.80 + $279.50 + $115.70 + $205.40 + $1,560.00 = $2,454.40. For the batch of 85 wedge heels, calculate the cost as follows: (85 × $2.26) + (85 × $2.15) + (85 × $0.34) + (85 × $0.42) + (85 × $1.58) + (85 × $10.00) = $192.10 + $182.75 + $28.90 + $35.70 + $134.30 + $850.00 = $1,423.75. Diff: 2 LO: 7 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

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107) A shoe company designs and manufactures a variety of shoes including their two top sellers, wedge heels and stilettos. The company has been debating a new advertising campaign in an effort to ramp up sales for these offerings. In order to decide, they feel that getting a handle on their costing information is critical. The company took the advice of their head accountant and implemented an operation costing system that cost them extra on the front end. The company has calculated the following predetermined cost for each of the key processes:

Cost per Pair Wedge Heels Stilettos

Machining

Assembly

$2.26

$2.15

x x

Cork Shaping

Cotton Sewing

$0.34

$0.42

Patent Leather Stitching

Packaging

$0.89

$1.58

x x

Each pair of wedge heels has a selling price of $25 and Direct Materials (DM) cost of $10. Each pair of stilettos has a selling price of $40 and DM cost of $12. A recent batch of 130 stilettos was sold to a high-end retailer. A second batch containing 85 wedge heels was sold to a bargain shoe store. What is the gross profit percentage for each batch? (Round calculations to two decimal places.) A) Wedge Heels, 33.0%; and Stilettos, 52.8% B) Wedge Heels, 52.8%; and Stilettos, 33.0% C) Wedge Heels, 73.0%; and Stilettos, 82.8% D) Wedge Heels, 82.8%; and Stilettos, 73.0% Answer: A Explanation: This question requires calculating the total cost of each batch using operational costing. For the batch of 130 stilettos, calculate the cost as follows: (130 × $2.26) + (130 × $2.15) + (130 × $0.89) + (130 × $1.58) + (130 × $12.00) = $293.80 + $279.50 + $115.70 + $205.40 + $1,560.00 = $2,454.40. Now, calculate the total sales amount for that batch: 130 × $40.00 = $5,200. Next, calculate the gross profit: $5,200 - $2,454.40 = $2,745.60. Lastly, calculate the gross profit percentage: $2,745.60/$5,200 = 52.8%. For the batch of 85 wedge heels, calculate the cost as follows: (85 × $2.26) + (85 × $2.15) + (85 × $0.34) + (85 × $0.42) + (85 × $1.58) + (85 × $10.00) = $192.10 + $182.75 + $28.90 + $35.70 + $134.30 + $850.00 = $1,423.75. Now, calculate the total sales amount: 85 × $25.00 = $2,125.00. Next, calculate the gross profit: $2,125.00 - $1,423.75 = $701.25. Lastly, calculate the gross profit percentage: $701.25/$2,125 = 33.00%. Diff: 2 LO: 7 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

110

108) Samantha is compiling the key processes of the factory where she works. Her focus on been on the key processes of the conversion work. All units require cutting and assembly, but not all units require quality control. Since the company is set up to create their products in batches while using the benefits of process costing, they have implemented an operation costing system. Samantha has collected the following budgeted costs and production volumes for the current year:

Cutting Assembly Quality Control

Budgeted Cost Budgeted Units in Volume $198,500 70,000 76,400 70,000 49,006 36,000

The company recently completed a batch of 1,280 units where the first half of the batch required cutting, assembly, and quality control, and the second half of batch only required cutting and assembly. The cost of Direct Materials (DM) associated with each type of these units is $4.89 per unit, and each unit has a selling price of $19.75 per unit. What is the total amount of Conversion Costs (CC) assigned to this batch? (Round answers to two decimal places.) A) $3,384.59 B) $5,026.74 C) $5,900.80 D) $6,769.18 Answer: C Explanation: This question requires familiarity with calculating Conversion Costs using an operation costing system. The first step entails calculating the per-unit budgeted cost for each key process. Cutting: $198,500/70,000 = $2.84 per unit, Assembly: $76,400/70,000 = $1.09 per unit, and Quality Control: $49,006/36,000 = $1.36 per unit. Since half of the units need all three processes and half need only cutting and assembly, the total amount of Conversion Costs will be (1,280 × $2.84) + (1,280 × $1.09) + (640 × $1.36) = $3,635.20 + $1,395.20 + $870.40 = $5,900.80. Diff: 2 LO: 7 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

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109) Samantha is compiling the key processes of the factory where she works. Her focus on been on the key processes of the conversion work. All units require cutting and assembly, but not all units require quality control. Since the company is set up to create their products in batches while using the benefits of process costing, they have implemented an operation costing system. Samantha has collected the following budgeted costs and production volumes for the current year:

Cutting Assembly Quality Control

Budgeted Cost Budgeted Units in Volume $198,500 70,000 76,400 70,000 49,006 36,000

The company recently completed a batch of 1,280 units where first half required cutting, assembly, and quality control, and the second half only required cutting and assembly. The total Direct Materials (DM) associated with either type of these units is $4.89 per unit, and each unit has a selling price of $19.75 per unit. What is the gross profit percentage per unit for each half of this batch? (Round calculations to two decimal places.) A) 1st Half, 48.46%; and 2nd Half, 55.34% B) 1st Half, 55.36%; and 2nd Half, 48.46% C) 1st Half, 73.22%; and 2nd Half, 80.12% D) 1st Half, 80.12%; and 2nd Half, 73.22% Answer: A Explanation: This question requires familiarity with calculating Conversion Costs (CC) using an operation costing system. The first step entails calculating a per-unit budgeted cost for each key process. Cutting: $198,500/70,000 = $2.84 per unit, Assembly: $76,400/70,000 = $1.09 per unit, and Quality Control: $49,006/36,000 = $1.36 per unit. The first half of the batch needs all three processes, and the second half only needs cutting and assembly. 1st half: $2.84 + $1.09 + $1.36 + $4.89 = $10.18. Now, subtract from sales price to arrive at the gross profit: $19.75 $10.18 = $9.57. Next, divide the gross profit by sales to arrive at the gross profit percentage: $9.57/$19.75 = 48.46%. 2nd half: $2.84 + $1.09 + $4.89 = $8.82. Now, subtract from sales price to arrive at the gross profit: $19.75 - $8.82 = $10.93. Lastly, divide the gross profit by sales to arrive at the gross profit percentage: $10.93/$19.75 = 55.34%. Diff: 3 LO: 7 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

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110) Operation costing, also known as hybrid costing, is a method employed by organizations that would like to have features in their system of both job costing and process costing. Which of the following scenarios would most likely lead to the exploration of implementing an operation costing system instead of using only a job costing or only a process costing system? A) A variety of Direct Materials are available, but common conversion processes exist. B) Costs of individual units are easily distinguishable from one another. C) Costs of individual units are impossible to distinguish from one another. D) One kind of Direct Material is available, but common conversion processes exist. Answer: A Explanation: This question requires familiarity with the features of operation costing as compared to job costing and process costing. Choice A is the only answer listed that correctly identifies a situation that would lead to the implementation of operation costing. The other choices are either inaccurate or apply to only job costing or only process costing. Diff: 2 LO: 7 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Strategic Cost Management. 111) What is the purpose of Process Costing? When is it typically used? What are the different ways that inventory can be costed? Answer: The purpose of Process Costing is to provide an effective and efficient way to provide accurate costing for homogeneous products that are produced in a continuous process rather than a discrete jobs. This results in a consistent and uniform cost for each unit produced. Process Costing is typically used when it is not plausible to separate or distinguish the costs of individual units from the other units that are being produced. Companies that use Process Costing are generally producers of similar or identical items where differentiating between items is not feasible. When a company is creating items in batches with tailored costs, they would instead elect to use Job Costing. Under Process Costing, inventory can be costed using either a First-In, First-Out (FIFO) or a Weighted-Average method. Diff: 2 LO: 1 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Strategic Cost Management.

113

112) Why is Cost of Goods Manufactured (COGM) a very important number to management? How does COGM vary between Process Costing and Job Costing? At a high level, what implications does the use of Process Costing have on periodic financial reporting? Answer: COGM is a very important number to management since it is used to determine whether or not the costs of their work has remained as planned and on track. The overall formula for COGM will not vary between process and Job Costing but Process Costing uses additional steps to account for computing quantities and values for the period; for example, the number of units completed and moved from Work-in-Progress (WIP) Inventory, or the number of units in ending inventory. At a high level, Process Costing impacts periodic financial reporting by trying to fine-tune the proper costing allocations between WIP inventory, Finished Good (FG) Inventory, and COGS, all of which appear on the income statement and focus on the current period. The overall goals are two-fold. The first goal is to reduce the likelihood of overstating inventory balances on the balance sheet since that would result in an understatement to COGS and an overstatement of net income on the income statement. The second goal is to avoid an understatement of inventory balances on the balance sheet since that would result in and overstatement of COGS and an understatement of net income on the income statement. Management should strive to report the most accurate numbers they can, so implementing measures to fight against misstatements is advisable. Diff: 2 LO: 1 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Strategic Cost Management.

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113) How many steps are involved in process costing? Please list each step, and describe what that step will entail. Answer: Process costing involves five steps: Step 1) Verify physical units in the period and identify their degrees of completion, 2) Determine physical status of units and convert into equivalent units, 3) Account for costs, 4) Calculate cost per equivalent unit, and 5) Assign costs to units in ending Work-in-Progress (WIP) Inventory and in Finished Goods (FG) Inventory. Step 1 involves the verification of units to account for by comparing the total of units in beginning WIP inventory and units started this period to the total of units completed and removed from WIP inventory and ending units remaining in WIP inventory. The totals of units to account for should be the same regardless of the method used. This step also discloses the degree of completion for Direct Materials (DM) and Conversion Costs (CC) at the beginning and at the ending of the period. Step 2 involves conversion of incomplete units into equivalent units of production. Equivalent units for Direct Materials and conversion costs are measured separately in this step. Equivalent units under the First-In, First-Out (FIFO) method are calculated by multiplying the Number of Physical Units by the Percentage of Resource Added this Period. On the other hand, the Weighted-Average method considers the Percentage of Resource Added to Date instead of the Percentage of Resource Added this Period. Step 3 calculates the total costs incurred to date for the WIP inventory account by tracking the costs of Direct Materials and conversion costs separately. Under each method, the processing of Step 3 remains same. Step 4 involves the calculation of equivalent costs per unit. Using the FIFO method, use the following formula: Cost added to WIP Inventory this Period/Total Equivalent Units of Work Done this Period. On the contrary, the Weighted-Average method focuses on the total costs to account for instead of just considering the Cost added to WIP inventory. Step 5 is the final step wherein costs to Ending WIP Inventory and Finished Goods Inventory are assigned based on the equivalent cost per unit calculated in Step 4. Diff: 2 LO: 1 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Strategic Cost Management.

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114) Process Costing affords companies the opportunity to select between First-In, First-Out (FIFO) or Weighted-Average for costing their inventory. When is it appropriate to use each method? How are FIFO and Weighted-Average similar? How are they different? Which method should a company that produces chemical liquid bleach utilize? Answer: While a company does have the flexibility to select between FIFO and WeightedAverage, it should be noted that they will be urged to use that method moving forward to remain consistent. FIFO would be an appropriate choice if the products being created have units that can be easily identified, for example, assembled lawnmowers. Weighted-Average would be an appropriate choice if the products being created are indistinguishable from one another, for example petroleum or natural gas that does not come in natural units. FIFO is considered more complex, costly, and accurate than Weighted-Average. Both methods should produce similar results in the event of low or no inflation. Weighted-Average will spread out inflation's impact during inflationary periods or if prices fluctuate. A company that produces chemicals, like liquid bleach in this example, would be advised to use Weighted-Average for their inventory costing. Diff: 2 LO: 2 Bloom: C AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Strategic Cost Management. 115) If a manager were trying to better understand the way in which Process Costing works, then how should the concept of equivalent units be explained to him? The manager would further like to understand how First-In, First-Out (FIFO) varies from Weighted-Average when determining equivalent units. How could this difference be described to the manager? Answer: Process Costing is driven by homogeneous units being moved through a process, and as a result, units will be at various stages of completion at the end of a given period. Management is charged with providing accurate financial records, and part of this process includes a determination of how much work was completed and ultimately, a correct calculation of the Cost of Goods Manufactured. Equivalent units are incomplete units that have been converted to better represent a portion or percentage of physical units that could have been completed with the number of resources consumed. FIFO and Weighted-Average both utilize the number of physical units in their calculation. FIFO multiplies the units against the percentage of resources added this period, while Weighted-Average multiplies it against the percentage of resource added to date. Diff: 2 LO: 3 Bloom: C AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Strategic Cost Management.

116

116) What is an operation costing system? Which systems are integrated and reflected using this method? Would the manufacturer of laptop computers be a suitable candidate for using operation costing? Please fully explain the rationale used. Answer: An operation costing system is considered a hybrid method that combines aspects of both Job and Process Costing. It is best utilized by companies that produce similar products through a common process, but where client customization choices such as fabrics, internal components, or finishes would result in a variety of products of similar types rather than one homogeneous offering. A manufacturer of laptops would be a suitable candidate to use operation costing. Laptop computers may appear homogeneous, but they can vary in color, the size of their screens, the type of software, and hardware installed, and other features that may be selected for different customized models. Diff: 2 LO: 7 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Strategic Cost Management.

117

117) Zesty Corp. produces bottles of ranch dressing in their regional factory. Jonah, the head cost accountant, would like to gather some data for the most recent year to calculate their unit costs. Jonah compiled the following cost information: Dressing Materials (DM), $34,500; Plastic Bottles and Labels, $18,428; Assembly Line Wages, $56,708; Packaging Wages, $33,303; and Manufacturing Overhead (MOH), $76,402. Their Beginning Work-in-Progress (WIP) Inventory was $6,500, and their Ending WIP Inventory was $9,803. During the year, Zesty Corp. produced 127,990 bottles of ranch dressing. What is the unit cost for the bottles of ranch based on the information Jonah has gathered? Answer: Unit Costs = $1.69 This question requires familiarity with formulas for both unit costs and Cost of Goods Manufactured (COGM), which becomes the numerator of unit costs. Begin with COGM which equals Beginning WIP Inventory plus Direct Materials used plus Direct Labor (DL) used plus MOH minus Ending WIP Inventory. To calculate DM, identify the costs that fit into this category: Dressing Materials and Plastic Bottles and Labels. $34,500 + $18,428 = $52,928 for Direct Materials. To calculate DL, identify the costs that fit into this category: Assembly Line Wages and Packaging Wages. $56,708 + $33,303 = $90,011 for Direct Labor. Now, calculate the COGM: Beginning WIP Inventory + DM Used + DL + MOH - Ending WIP Inventory COGM

6,500 52,928 90,011 76,402 9,803 $216,038

Lastly, use the COGM that was calculated to compute the unit costs: Unit Costs = COGM/Number of Units Manufactured Unit Costs = $216,038/127,990 bottles of ranch dressing Unit Costs = $1.69 Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

118

118) Cheshire Inc. manufactures chewy salmon-flavored cat treats. Cheshire is currently selling to vendors in their state, but they have plans to begin producing these treats for stores across the entire US within the next year. Susan, the accountant, is currently gathering costing data about the month of November at the request of management. She has documented the following information:

Ending Inventory, October Units Started, November Units Completed, November Ending Inventory, November

Physical Units 3,444 43,750 38,622 8,572

Degree of Completion DM Conversion 100% 66%

100%

33%

What are the equivalent units of production for the conversion costs of Cheshire Inc., if Susan employs the First-In, First-Out (FIFO) method? (Round your final answer to the nearest whole unit.) Answer: 39,178 units The end result of this question is to calculate the equivalent units of production with regard to conversion costs under FIFO, but there are intermediate steps to complete before doing the final calculation. Since the problem deals with conversion costs under FIFO, calculate the beginning inventory to apply the appropriate completion of work during this period. Even if the month of November does not have a beginning inventory listed, the ending balance for of October, and that becomes the beginning balance for November, so we can use 3,444 units at 66% complete. Now, calculate units started and completed as follows: 43,750 - 8,572 = 35,178. Finally, solve for the equivalent units: (3,444 × 34%) + (35,178 × 100%) + (8,572 × 33%) = 1,170.96 + 35,178.00 + 2,828.76 = 39,177.72 = 39,178 units. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

119

119) Luminous Tile manufactures ceramic subway tiles, producing tiles that are identical in size and thickness. The tiles are created from different materials, and they have different colors that also have the option of being metallic or matte. Not all tiles require the use of all processes utilized by Luminous. They have estimated the following predetermined costs per tile for their key processes:

Estimated cost per tile

Mining

Blending

Pressing

Metallic

Matte

Glazing

Firing

$0.58

$0.42

$0.46

$0.77

$0.49

$0.63

$0.61

Luminous completed a batch of 16,720 tiles that it then divided into boxes of 44 tiles each. If this batch required the use of the Blending, Pressing, Matte, Glazing, and Firing processes, and the tile materials cost $6,792 for the entire batch, how much total cost would be assigned to each box of 44 tiles in this batch? (Round all calculations to two decimal places.) Answer: $132.88 total cost per box In order to solve this question, determine the individual cost per box. This will involve calculating the process cost per box: Blending: Pressing: Matte: Glazing: Firing: Subtotal, per box

44 × $0.42 44 × $0.46 44 × $0.49 44 × $0.63 44 × $0.61

= $18.48 = $20.24 = $21.56 = $27.72 = $26.84 = $114.84

Direct Materials (DM) $6,792/16,720 = $0.41 $0.41 × 44 = $18.04 per box Total Cost per box = $114.84 + $18.04 = $132.88 Diff: 2 LO: 7 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

120

120) Sheldon is the senior manager at Stellar Corp., a factory that manufactures small containers of silver glitter that it sells to various crafting stores. Sheldon has started to become more involved in understanding how the Process Costing they use impacts their overall operations. He has asked their controller to gather and present their most recent data for the year that just ended. The following information pertains to units produced for that year along with the percentage of completion for conversion costs:

Beginning Inventory Units Started this Period Units Completed this Period Ending Inventory

Conversion Costs 62% 100% 46%

Physical Units 2,989 24,594 22,300

The controller suggested that they use the Weighted-Average method for their Process Costing calculations. Sheldon would like to know what their equivalent units of production would be for the most recent year. (Round your answer to the nearest whole unit.) Answer: Equivalent Units = 24,730 units This question requires calculation of several items including the ending inventory of containers of glitter that can then be used to calculate the equivalent units of production for the conversion costs. To complete this step, determine how many units to account for by adding the beginning inventory of 2,989 to the units started during the period of 24,594 and then subtract the number of units completed and removed, 22,300, to arrive at an ending inventory of 5,283 units. Since this is Weighted-Average, the beginning inventory does not need to be factored in separately. For conversion costs, add the following: (22,300 × 100%) + (5,283 × 46%) = 22,300 + 2,430.18 = 24,730 units. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

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121) Picture This Company manufactures 8.5" × 11" black plastic picture frames that it sells through an e-commerce site. They are now in their third month of operations, and the Beginning Work-in-Progress (WIP) Inventory included the following costs: Direct Materials (DM), $1,980; and Conversion Costs (CC), $2,330. During the month of June, they added the following costs: DM, $9,780; and CC, $12,568. Picture This will be using the First-In, First-Out (FIFO) method for their Process Costing. How much total conversion costs will they have to account for, and how much will they include in their cost of equivalent units for conversion costs? Answer: Total Costs = $14,898, and Equivalent Units Cost = $12,568 This question requires understanding how to calculate both the total conversion costs to be accounted for and the costs that will be used in the per equivalent unit calculation under FIFO for conversion costs. Costs in Beginning WIP Inventory is given, and it will be included in the total costs to account for but not the costs that will factor into the equivalent unit calculation. Total costs to account for the conversion costs = $2,330 + $12,568 = $14,898. Costs that will be included in the equivalent unit cost calculation will be equal to only costs added during the period = $12,568. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 122) Fresh Mint Co. produces packs of mint-flavored chewing gum that are sold to businesses in boxes that contain 50 packs each. Business has been steady, and Fresh Mint is gearing up to launch a new campaign with the hopes of increasing sales by at least 5% within the next quarter. They would like to use the current quarter to evaluate their Process Costing Costs and are going to look into both the First-In, First-Out (FIFO) and Weighted-Average methods. They began the quarter with the following costs: Direct Materials (DM), $3,400; and Conversion Costs (CC), $5,687, and during the quarter they added the following costs: DM - $18,977; and CC - $27,654. How much cost should they include in their calculation for equivalent unit costs for Direct Materials under both the FIFO and Weighted-Average methods? Answer: FIFO: $18,977 Weighted-Average: $22,377 In this question, determine which of the costs listed would be included in the calculation of equivalent unit costs for Direct Materials under both FIFO and Weighted-Average. FIFO will only include the costs added during the current period of $18,977 and will disregard the beginning Work-in-Progress (WIP) costs. Weighted-Average, on the other hand, will include all costs accumulated up to this point and will include both costs added during the current period of $18,977 and beginning costs of $3,400 for a total of $22,377. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 122

123) Sarah is the Head Cost Accountant for Hourglass Inc., a company that manufactures sand that is poured into containers and sold to various vendors. Hourglass uses Process Costing rather than Job Costing to account for its costs and has been performing the costing using the Weighted-Average method. Their Beginning Work-in-Progress (WIP) Inventory included the following: Conversion Costs (CC), $958; and Direct Materials (DM), $428. During the current year, they added the following costs: CC, $12,765; and DM, $10,444. Recently, Sarah has begun to wonder if First-In, First-Out (FIFO) would have produced a significant costing difference for Hourglass. What is the difference in equivalent unit costs between the FIFO and WeightedAverage methods? Answer: Conversion Costs: $958 more under Weighted-Average, Direct Materials: $428 more under Weighted-Average This question will require the calculation of equivalent unit costs under both methods and then comparison of those results. For FIFO, the cost included in equivalent units will only be what was added during the current period as it will omit the beginning WIP inventory costs. This will be equal to Conversion Costs of $12,765 and Direct Materials of $10,444. For WeightedAverage, take both the beginning WIP inventory costs and what was added during the period into consideration. This will be equal to Conversion Costs of $958 + $12,765 = $13,723 and Direct Materials of $428 + $10,444 = $10,872. First, compare the Conversion Costs between the two by taking Weighted-Average and subtracting FIFO: $13,723 - $12,765 = $958 more under Weighted-Average. Next, compare the Direct Materials between the two by taking WeightedAverage and subtracting FIFO: $10,872 - $10,444 = $428 more under Weighted-Average. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

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124) Archie's Orchard Company is an orchard that specializes in producing organic peach baby food that uses peaches grown on-site. Archie's uses the Weighted-Average method for their Process Costing. They had a beginning Work-in-Progress (WIP) Inventory of 1,400 units (100% complete for Direct Materials (DM) and 53% complete for Conversion Costs (CC)). They started 19,003 units and had ending WIP Inventory of 1,117 units (100% complete for DM and 76% complete for CC). Beginning WIP Inventory included the following costs: DM, $1,004; and CC, $1,135. During the year, they added the following costs: DM, $10,300; and CC, $14,331. What are the equivalent units and the cost per equivalent unit for Conversion Costs? (Round units to whole number and cost to two decimal places.) Answer: For Conversion Costs: Equivalent Units: 20,135 units Cost per Equivalent unit: $0.77 per unit This question requires calculation of the equivalent units and equivalent cost for Conversion Costs before calculating per unit cost. This is accomplished as follows: Equivalent Units: (19,286 × 100%) + (1,117 × 76%) 19,286 + 849 = 20,135 units Equivalent Costs: $1,135 + $14,331 = $15,466 Cost per Equivalent unit: $15,466/20,135 units = $0.77 per unit Diff: 2 LO: 3, 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

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125) Sharon is the head cost accountant at 10-Key, Inc., a factory that manufactures calculators. 10-Key is entering its second year of production and would like to expand operations into an online market. Prior to doing this, management has asked Sharon to gather as much data as possible about their Process Costing so they can make an informed decision. 10-Key has the following costs related to its first year of operation: Beginning Work-in-Progress (WIP) Inventory costs: Direct Materials (DM), $1,980; and Conversion Costs (CC), $2,330 Costs added this year: DM, $9,780; and CC, $12,568 During their first year, 10-Key had the following production: Beginning WIP Inventory of 897 units 100% complete for DM and 43% complete for CC Started 10,005 units Completed 8,743 units Ending WIP Inventory of 2,159 units 100% complete for DM and 35% complete for CC Using the First-In, First-Out (FIFO) method of Process Costing, Sharon will complete the analysis requested by management. What is the equivalent cost per unit for both Direct Materials and Conversion Costs? (Round units to whole number and cost to two decimal places.)

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Answer: Equivalent cost per unit for: Direct Materials, $0.98 per unit; and Conversion Costs, $1.38 per unit This question will require multiple steps to be completed in order to calculate the equivalent cost per unit for both Direct Materials and Conversion Costs. Direct Materials Equivalent Units: (897 × 0%) + (7,846 × 100%) + (2,159 × 100%) 0 + 7,846 + 2,159 = 10,005 units Equivalent Costs: $9,780 Equivalent Cost per Unit: $9,780/10,005 units = $0.98 per unit Conversion Costs Equivalent Units: (897 units × 57%) + (7,846 units × 100%) + (2,159 units × 35%) 511 + 7,846 + 756 = 9,113 units Equivalent Costs: $12,568 Equivalent Cost per Unit $12,568/9,113 units = $1.38 per unit Diff: 2 LO: 3, 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

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126) Rosey Inc. is a factory that manufactures pink silk flower petals. They have gathered the following production information along with percentages of completion for their most recent month of February:

Ending Inventory, January Units Started and Completed in Feb. Ending Inventory, February

Silk 100%

Conversion Costs 18%

100%

79%

Physical Units 5,440 19,800 2,201

Rosey had beginning Work-in-Progress (WIP) Inventory costs that included: Silk, $3,808; and Conversion Costs, $4,993. Rosey added the following costs during the year: Silk, $57,009; and Conversion Costs, $67,013. What is the cost per equivalent unit for Conversion Costs using both the First-In, First-Out (FIFO) and Weighted-Average methods? (Round units to whole number and cost to two decimal places.) Answer: FIFO, $2.58 per unit; and Weighted-Average, $2.67 per unit This question requires calculation of the cost per equivalent unit for Conversion Costs under two different costing methods. Each per unit cost will require intermediate steps before arriving at the final answer. FIFO Equivalent Units: (5,440 × 82%) + (19,800 × 100%) + (2,201 × 79%) 4,461 + 19,800 + 1,739 = 26,000 units Equivalent Costs: $67,013 Equivalent Cost per Unit : $67,013/26,000 units = $2.58 per unit Weighted-Average Equivalent Units: (25,240 × 100%) + (2,201 × 79%) 25,240 + 1,739 = 26,979 units Equivalent Costs: $4,993 + $67,013 = $72,006 Equivalent Cost per unit: $72,006/26,979 units = $2.67 per unit Diff: 2 LO: 3, 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 127

127) I Heart You Candies molds and cooks heart-shaped candy for Valentine's Day. I Heart You Candies had the following costs during their most recent year: Beginning WIP Inventory-Molding: $12,458 Additional Direct Materials (DM): $99,800 Additional Conversion Costs (CC): $143,670 Transferred-out Costs from the Molding Department: $248,900 What journal entry would be made in order to record moving cost of units completed out of WIP inventory-Molding? What is the ending balance in WIP Inventory-Molding? Answer: The journal will involve crediting the total cost of items that have been moved from the Molding Department to the Cooking Department. We will credit the Molding Department so we can decrease the asset and debit the Cooking Department to increase the asset. WIP Inventory- Cooking WIP Inventory-Molding 248,900

248,900

The ending balance involves the following formula: Beginning balance + DM Costs added + CC Costs added - Transferred-out from WIP = Ending Balance

+ + =

$ 12,458 99,800 143,670 248,900 $ 7,028

debit balance

Diff: 2 LO: 5 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

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128) Softy Sheets creates 500 thread-count sheets, and they started to focus on costing information for the various sizes and types of sheets they create. Their sheets originate in the Cutting department and then are put together in the Sewing department. All Direct Material (DM) in the Sewing department is added up front, and Conversion Costs (CC) are added evenly throughout the process. Beginning Work-in-Progress (WIP) Inventory for the Sewing department in May included 950 units with 100% complete for DM costs and 59% complete for CC. During May, 4,200 units were transferred in from the Cutting department, and Sewing had completed 4,788 units. By the end of May, all of this work left 362 units in Ending WIP Inventory for the Sewing department with 100% complete for DM costs and 38% complete for CC. What are the equivalent units of production for all three categories of cost using the First-In, First-Out (FIFO) method? (Round your answer to the nearest whole unit.) Answer: Transferred-In: 4,200 units Direct Materials: 4,200 units Conversion Costs: 4,366 units Transferred-In (950 × 0%) + (3,838 × 100%) + (362 × 100%) = 0 + 3,838 + 362 = 4,200 units Direct Materials (950 × 0%) + (3,838 × 100%) + (362 × 100%) = 0 + 3,838 + 362 = 4,200 units Conversion Costs (950 × 41%) + (3,838 × 100%) + (362 × 38%) = 390 + 3,838 + 138 = 4,366 units Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

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129) ShineBright is a chemical production company that specializes in the creation, bottling, and distribution of liquid bleach. ShineBright has continued to experience growth over the past few years and has decided to ask their controller, Shawn, to evaluate their current costing position. Management would like to determine whether switching to Process Costing in a previous year was the correct choice. The company understands that continuing to use this method requires a lot of deliberate planning to ensure that inventory is appropriately valued in its various stages of completion. Shawn has gathered the following data for the current year: Cost Beginning Work-in-Progress (WIP) Inventory Ending WIP Inventory Assembly Line Wages Bottling Wages Bleach Compound Plastic for Bottles Manufacturing Overhead

Amount $10,943 $12,387 $88,732 $65,220 $64,599 $37,806 90% of DL Cost

Shawn has been employed with ShineBright for a few years and believes that Process Costing is the correct choice for the company. The company produced 297,400 bottles of liquid bleach this year and anticipates a 10% increase for next year. Taking into consideration all of this information, please answer the following questions: a. What is the unit cost of the liquid bleach during the current year? b. Assuming that ShineBright sees a 10% increase in sales for the following year and a corresponding 12% increase in Direct Materials and a 15% increase in Direct Labor, how will this impact the unit cost? Use the beginning and ending WIP inventory from the current year. c. Is Process Costing the best option for ShineBright as Shawn predicts? How does this method compare to a method such as Job Order Costing?

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Answer: a. Unit Costs = $1.32 This question requires familiarity with formulas for both Unit Costs and Cost of Goods Manufacture (COGM), the numerator of unit costs. Begin with COGM, which equals Beginning WIP Inventory plus Direct Materials (DM) used plus Direct Labor (DL) used plus Manufacturing Overhead (MOH) minus Ending WIP Inventory. Some of these components are given but others require additional calculation. To calculate DM, identify the costs that fit into this category: Bleach Compound and Plastic for Bottles. $64,599 + $37,806 = $102,405 in Direct Materials. To calculate DL, identify the costs that fit into this category: Assembly Line Wages and Bottling Wages. $88,732 + $65,220 = $153,952 in Direct Labor. Lastly, calculate MOH which is 90% of the Direct Labor costs. $153,952 × 90% = $138,556.80. Now, calculate the Cost of Goods Manufactured: Beginning WIP Inventory + DM Used + DL + MOH - Ending WIP Inventory COGM

$10,943.00 102,405.00 153,952.00 138,556.80 12,387.00 $393,469.80

Lastly, use the COGM you calculated to compute the unit costs: Unit Costs = COGM/Number of Units Manufactured Unit Costs = $393,469.80/297,400 Bottles of Liquid Bleach Unit Costs = $1.32

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b. Unit Costs = $1.37 This question requires familiarity with formulas for both Unit Costs and Cost of Goods Manufacture, the numerator of unit costs. Using the costs calculated in part (a), update DM, DL, and MOH to reflect the increases. To calculate DM, identify the costs that fit into this category: Bleach Compound and Plastic for Bottles. $64,599 + $37,806 = $102,405 × 1.12 = $114,693.60 in Direct Materials. To calculate DL, identify the costs that fit into this category: Assembly Line Wages and Bottling Wages. $88,732 + $65,220 = $153,952 × 1.15 = $177,044.80 in Direct Labor. Lastly, calculate MOH which is 90% of the Direct Labor costs. $177,044.80 × 90% = $159,340.32. Now, calculate the Cost of Goods Manufactured: Beginning WIP Inventory + DM Used + DL + MOH - Ending WIP Inventory COGM

$10,943.00 114,693.60 177,044.80 159,340.32 12,387.00 $449,634.72

Next, calculate the new units that will be produced. 297,400 units × 1.10 = 327,140 projected units. Lastly, use the COGM that was calculated to compute the unit costs: Unit Costs = COGM/Number of Units Manufactured Unit Costs = $449,634.72/327,140 Bottles of Liquid Bleach Unit Costs = $1.37 c. Process Costing is the best choice for ShineBright as Shawn has predicted. When a company produces homogeneous products in a continuous process, this method produces the most accurate results. Since it would not be possible to distinguish the costs of one unit from another, it would make another method such as Job Costing an inappropriate choice. Job Order Costing is most appropriate when a company is producing its products in discrete jobs. Diff: 2 LO: 1 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

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130) Kenneth is the controller for Little Gems, a factory that manufactures small identical red gemstones. Their first month of operation was March of this year, and management feels that they are off to a strong start with a lot of potential for growth. They have asked Kenneth to move forward with the preparation of their Process Costing information for April. Kenneth is still preparing the data for April but should be able to ascertain the information he needs from what is currently in the system for March and most of April. He has gathered and compiled the following data about the gemstones:

Ending Inventory, March Units Started in April Units Completed in April Ending Inventory, April

Percent Complete Direct Materials Conversion (DM) Costs (CC) Physical Units 100% 89% 6,788 98,709 100% 48% 92,654

Before Kenneth can begin assigning costs to Ending Work-in-Progress (WIP) and Finished Goods (FG) Inventory, he must first focus his attention on determining the appropriate number of units to use moving forward. (Round your answer to the nearest whole unit.) a. What are the equivalent units of production for Direct Materials (DM) and Conversion Costs (CC) using the First-In, First-Out (FIFO) method? b. What are the equivalent units of production for DM and CC using the Weighted-Average method? c. After Kenneth has completed these initial calculations, which method do you believe he will recommend between FIFO and Weighted-Average? What are some of the characteristics of each method?

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Answer: a. Conversion Costs Equivalent Units of Production - 92,777 units, Direct Materials Equivalent Units of Production - 98,709 units This question requires familiarity with the calculation of equivalent units while using FIFO, and that means that beginning inventory will be factored in separately. In addition, it will be necessary to solve for both units in the beginning and the ending inventories. To calculate the beginning inventory, along with the percentage of completion, look at what was remaining at the end of the previous month as this will become the beginning balance in April. March ended with 6,788 gems with 89% completion, so use these numbers for the beginning of April. To solve for ending inventory, determine how many units to account for by using the following formula: Beginning inventory plus units started minus units completed. 6,788 + 98,709 - 92,654 = 12,843 ending inventory. For the Equivalent Units of Conversion Costs, add the following: (6,788 × 11%) + (85,866 × 100%) + (12,843 × 48%) = 746.68 + 85,866.00 + 6,164.64 = 92,777 units. For the Equivalent Units of Direct Materials, add the following: (6,788 × 0%) + (85,866 × 100%) + (12,843 × 100%) = 0 + 85,866 + 12,843 = 98,709 units. b. Conversion Costs Equivalent Units of Production: 98,819 units, and Direct Materials Equivalent Units of Production: 105,497 units This question requires familiarity with the calculation of equivalent units while using WeightedAverage, and that means that beginning inventory will not be factored in separately. To solve for ending inventory, determine how many units to account for by using the following formula: Beginning inventory plus units started minus units completed. 6,788 + 98,709 - 92,654 = 12,843 ending inventory. For the Equivalent Units of Conversion Costs, add the following: (92,654 × 100%) + (12,843 × 48%) = 92,654 + 6,164.64 = 98,819 units. For the Equivalent Units of Direct Materials, add the following: (92,654 × 100%) + (12,843 × 100%) = 92,654 + 12,843 = 105,497 units. c. After Kenneth has completed these initial calculations, Kenneth would most likely recommend Weighted-Average when comparing it to FIFO. Weighted-Average is the best fit when it is difficult to separately identify units. Since Little Gems produces large quantities of red gemstones with no way to differentiate one stone from another, Weighted-Average would be the appropriate selection. FIFO is best utilized when the product created can be separately identified, such as the assembly of a vehicle or a bicycle. Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

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131) Crushed Inc. is a factory that manufactures and distributes gravel to local construction companies. Their sales have increased year-over-year, and management would like to ensure that all of their accounting information is set up for success. They utilize Process Costing and have been trying to determine whether they should use the First-In, First-Out (FIFO) method or the Weighted-Average method. Crushed has gathered the following information: Direct Materials: Beginning Work-in-Progress (WIP) Inventory: $1,765 Costs Added During the Year: $17,890 Conversion Costs: Beginning WIP Inventory: $3,010 Costs Added During the Year: $22,777 Management believes that finalizing these decisions is the last piece to having their Process Costing streamlined and updated. Taking all of this information into consideration, please answer the following questions. a. What are the total Conversion Costs to be accounted for under both the FIFO and WeightedAverage method? b. What are the Conversion Costs that would be included in the calculation for Cost per Equivalent Units under both FIFO and Weighted-Average method? c. Between FIFO and Weighted-Average, which method is the accountant likely to use? If Crushed decides that they prefer the use of the other method the following year, is this a switch that would be easy to make?

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Answer: a. Under FIFO and Weighted-Average: $25,787 This question requires calculation of the total costs that must be accounted for as Conversion Costs under both FIFO and Weighted-Average. Under FIFO: $3,010 + $22,777 = $25,787 Under Weighted-Average: $3,010 + $22,777 = $25,787 b. Under FIFO, $22,777; and Weighted-Average: $25,787 This question requires calculation of the costs that will be included in the estimation of cost per equivalent units for Conversion Costs under FIFO and Weighted-Average. Under FIFO: $22,777, only accounts for costs added during the period Under Weighted-Average: $3,010 + $22,777 = $25,787, accounts for all costs added Once the costs that will be included in the calculation for equivalent units have been determined, the methods will diverge since FIFO does not include the beginning inventory costs. c. Since Crushed produces a homogeneous product where it may not be possible to differentiate between individual units, they are likely to utilize Weighted-Average. If Crushed also produced something like equipment that was not identical in nature, then they may be more likely to elect FIFO. It is not advisable to switch between methods once a method has been selected, so a company should spend time evaluating their choices before making their final selection. Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

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132) Wooly Corp. produces wool scarves, and they are approaching their busy season that runs from October to March of the following year. Wooly has spent a lot of time re-targeting their advertising efforts and believes that they will begin to see an increase in sales during the next year of 10-15%. In an effort to improve their operations, they are refining their Process Costing methods and attempting to do a better job of determining equivalent units and their related costs. Geraldine, their Senior Cost accountant has been gathering data so that she can prepare some estimates to present to management at their upcoming meeting. Geraldine has compiled the following information for the most recent calendar year:

Beginning Work-in-Progress (WIP) Inventory Costs Added During the Period

Direct Materials $ 989

Conversion Costs $ 1,754

Total Costs $ 2,743

$10,478

$15,677

$26,155

Geraldine would like to explore the potential use of both First-In, First-Out (FIFO) and Weighted-Average before making a recommendation to management. a. What are the total costs to account for both Direct Materials and Conversion Costs under Weighted-Average? What are the costs to be included in the cost per equivalent unit calculation for both Direct Materials and Conversion Costs under Weighted-Average? b. What are the total costs to account for both Direct Materials and Conversion Costs under FIFO? What are the costs to be included in the cost per equivalent unit calculation for both Direct Materials and Conversion Costs under FIFO? c. Does the industry in which a company operates impact which method they are likely to select? Why or why not? Which method should Geraldine recommend to the management of Wooly? Please provide as much detail as possible in your response.

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Answer: a. Total costs to account for as well as costs to include in cost per equivalent unit calculation: Direct Materials, $11,467; and Conversion Costs, $17,431. This question requires understanding the difference between the total costs to account for under Weighted-Average (includes all costs) and costs to be included within the calculation for cost per equivalent unit. Total costs to account can be calculated as follows: Direct Materials = $989 + $10,478 = $11,467 Conversion Costs = $1,754 + $15,677 = $17,431 b. Total costs to account for: Direct Materials, $11,467; and Conversion Costs, $17,431. Costs to include in cost per equivalent unit calculation: Direct Materials, $10,478; and Conversion Costs, $15,677. This question requires understanding the difference between the total costs to account for under FIFO and costs to be included within the calculation for cost per equivalent unit (no beginning inventory costs). Total costs to account for can be calculated as follows: Direct Materials = $989 + $10,478 = $11,467 Conversion Costs = $1,754 + $15,677 = $17,431 Costs to include in cost per equivalent unit calculation: Direct Materials = $10,478 Conversion Costs = $15,677 c. The industry in which a company operates may impact the method they ultimately select, but it is more likely that the product created is what would drive the method used. Since Wooly produces homogeneous items that are likely difficult to identify as separate units, Geraldine is likely to suggest the use of Weighted-Average. In addition to including all costs to date, Weighted-Average is also likely to be easier to use in this case and take less time and cost less overall. If Geraldine were also calculating the equivalent cost per unit, she would likely see that unit costs of FIFO and Weighted-Average are similar. Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

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133) Inky Pens Inc. is a factory that produces blue glitter ink and sells it to vendors in small glass vials. Inky has collected the following data for April, the most recent month of production:

Glass Ending Work-in-Progress (WIP) Inventory, March Units Started in April Units Completed in April Ending WIP Inventory, April

Ink

Conversion Costs

100%

63%

100%

96%

24%

Physical Units 2,948 34,780 33,528 4,200

They also compiled the following cost data for April:

Beginning WIP Inventory Costs added during the period

Glass $ 3,900 $48,903

Ink $ 1,003 $16,904

Conversion Costs $ 2,001 $55,674

The management of Inky is asking their accountant, Susan to provide information pertaining to both the First-In, First-Out (FIFO) method and the Weighted-Average method. Susan has worked for Inky for a few months, and she is looking forward to becoming involved in this process. With all of this information in mind, please answer the following questions. (Round units to whole number and cost to two decimal places.) a. What is the equivalent cost per unit for Glass, Ink, and Conversion Costs under FIFO? b. What is the equivalent cost per unit for Glass, Ink, and Conversion Costs under WeightedAverage? c. Inky has debated adding a new line of pink glitter ink, and wants Susan to provide guidance as to which method would be best. Would this answer vary if Inky was producing another office supply product other than glitter ink such as paperclips?

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Answer: a. Glass, $1.41 per unit; Ink, $0.49 per unit; and Conversion Costs, $1.70 per unit This question will require several steps before arriving at the final answer of the equivalent cost per unit for each cost using FIFO. First, calculate the equivalent units, then calculate the equivalent costs to account for, and then calculate the equivalent cost per unit. Glass Equivalent Units: (2,948 × 0%) + (30,580 × 100%) + (4,200 × 100%) = 0 + 30,580 + 4,200= 34,780 units Equivalent Costs: $48,903 (only account for costs added during the period) Equivalent Cost per Unit: $48,903/34,780 units = $1.41 per unit Ink Equivalent Units: (2,948 × 0%) + (30,580 × 100%) + (4,200 × 96%) = 0 + 30,580 + 4,032 = 34,612 units Equivalent Costs: $16,904 (only account for costs added during the period) Equivalent Cost per Unit: $16,904/34,612 units = $0.49 per unit Conversion Costs Equivalent Units: (2,948 × 37%) + (30,580 × 100%) + (4,200 × 24%) = 1,091 + 30,580 + 1,008 = 32,679 units Equivalent Costs: $55,674 (only account for costs added during the period) Equivalent Cost per Unit: $55,674/32,679 units = $1.70 per unit

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b. Glass, $1.40 per unit; Ink, $0.48 per unit; and Conversion Costs, $1.67 per unit This question will require several steps before arriving at the final answer of the equivalent cost per unit for each cost using Weighted-Average. First, calculate the equivalent units, then calculate the equivalent costs to account for, and then calculate the equivalent cost per unit. Glass Equivalent Units: (33,528 × 100%) + (4,200 × 100%)= 33,528 + 4,200 = 37,728 units Equivalent Costs: $3,900 + $48,903 = $52,803 Equivalent Cost per Unit: $52,803/37,728 units = $1.40 per unit Ink Equivalent Units: (33,528 × 100%) + (4,200 × 96%) = 33,528 + 4,032 = 37,560 units Equivalent Costs: $1,003 + $16,904 = $17,907 Equivalent Cost per Unit: $17,907/37,560 units = $0.48 per unit Conversion Costs Equivalent Units: (33,528 × 100%) + (4,200 × 24%) = 33,528 + 1,008 = 34,536 units Equivalent Costs: $2,001 + $55,674 = $57,675 Equivalent Cost per Unit: $57,675/34,536 units = $1.67 per unit

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c. Although the results of each item's equivalent cost per unit are similar when you compare the same item under FIFO and Weighted-Average, Susan is likely to suggest the Weighted-Average method. When companies produce items that are homogeneous and difficult to differentiate, the Weighted-Average method is a good choice. Susan could also explain that the addition of the new ink would not change the decision as it is an item nearly identical to the current ink they are producing. Susan's answer would likely be the same even if Inky produced a product such as paperclips as they are also homogeneous items that are difficult to differentiate between one paperclip and another. Diff: 2 LO: 3, 4 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

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134) Hot Cakes Co. manufactures dry pancake mix, and their accountant Tom has collected the following cost information for the current year: Beginning Work-in-Progress (WIP) Inventory: Pancake Mix, $425 Conversion Costs, $877 Costs added during this year: Pancake Mix, $18,994 Conversion Costs, $21,805 In addition to the aforementioned data, Tom has gathered the following production information for the year:

Beginning Inventory Units Started and Completed this period Ending Inventory

Physical Units Pancake Mix 5,806 100% 39,002 3,888

Tom has collected the following cost information for last year: Beginning WIP Inventory: Pancake Mix, $399 Conversion Costs, $654 Costs added during last year: Pancake Mix, $14,673 Conversion Costs, $17,662

143

100%

Conversion Costs 66%

81%

Tom has also gathered the following production information for last year:

Beginning Inventory Units Started and Completed this period Ending Inventory

Physical Units Pancake Mix 3,705 100% 31,310 5,806

100%

Conversion Costs 71%

34%

Hot Cakes uses the Weighted-Average method for its Process Costing. Please use the information above to answer the following questions: (Round units to whole number and cost to two decimal places.) a. What is the equivalent cost per unit for Direct Materials and Conversion Costs, respectively for the current year? b. What is the equivalent cost per unit for Direct Materials and Conversion Costs, respectively for last year? c. What is the increase or decrease for Direct Materials between last year and the current year? What is the increase or decrease in Conversion Costs between last year and the current year? If Hot Cakes would like to switch to the First-In, First-Out (FIFO) method, then would this be an acceptable transition?

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Answer: a. Pancake Mix, $0.40 per unit; and Conversion Costs, $0.47 per unit Using the Weighted-Average method, calculate the equivalent cost per unit for the current year through multiple steps: Pancake Mix Equivalent Units (44,808 × 100%) + (3,888 × 100%) = 48,696 units Equivalent Costs $425 + $18,994 = $19,419 Equivalent Cost per unit $19,419/48,696 units = $0.40 per unit Conversion Costs Equivalent Units (44,808 × 100%) + (3,888 × 81%) 44,808 + 3,149 = 47,957 units Equivalent Costs $877 + $21,805 = $22,682 Equivalent Cost per unit $22,682/47,957 units = $0.47 per unit

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b. Pancake Mix, $0.37 per unit; and Conversion Costs, $0.50 per unit Using the Weighted-Average method, calculate the equivalent cost per unit for last year through multiple steps: Pancake Mix Equivalent Units (35,015 × 100%) + (5,806 × 100%) = 40,821 units Equivalent Costs $399 + $14,673 = $15,072 Equivalent Cost per unit $15,072/40,821 units = $0.37 per unit Conversion Costs Equivalent Units (35,015 × 100%) + (5,806 × 34%) 35,015 + 1,974 = 36,989 units Equivalent Costs $654 + $17,662 = $18,316 Equivalent Cost per unit $18,316/36,989 units = $0.50 per unit c. Direct Materials: Pancake Mix, 8.11% increase Conversion Costs, 6.00% decrease Once a company chooses either FIFO or Weighted-Average, transitioning to the other is not easy, nor is it advisable. Hot Cakes should take their time and ensure that they are comfortable with the selection they ultimately make. To solve for the year-over-year increase, use horizontal analysis and the following formula: (Current Year - Last Year)/Last Year Direct Materials: ($0.40 - $0.37)/$0.37 = 0.0811 or 8.11% increase Conversion Costs: ($0.47 - $0.50)/$0.50 = 0.0600 or 6% decrease Diff: 2 LO: 3, 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management. 146

135) Simply Charmed produces silver lockets that it then sells through an online platform. Simply Charmed is determined to add more jewelry options in the future and would like to have a better understanding of the current performance of their original product, the locket. They are currently about to enter their fourth year of operations, and management would like to see at least a 10% increase in sales. During the most recent year, their production department reported the following information related to the production of lockets for the year: Physical Units Beginning Work-in-Progress (WIP) Inventory Units Started and Completed Ending WIP Inventory

Beginning WIP Inventory Costs Added During the Period

Direct Material (DM)

600 10,976 493 Total Costs $6,098 $82,567

Conversion Costs (CC)

100%

55%

100%

40%

DM $2,622 $37,895

CC $3,476 $44,672

Simply Charmed uses the Weighted-Average method for its Process Costing. Their accountant will be performing some analysis with the recent year's number for an upcoming strategy session. (Round units to whole number and cost to two decimal places.) a. What is the cost per equivalent unit for both Direct Materials (DM) and Conversion Costs (CC) for the year? b. How much cost will be assigned to the units completed and the units in ending WIP Inventory? c. What is the total cost of units completed and how many units were completed during the year? What is the actual cost per unit for completed units and is it the same as the cost per equivalent unit?

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Answer: Note: In this exercise, silver lockets are the direct materials. a. This will be a multi-step process. Before solving for each equivalent cost per unit, solve for the equivalent costs and equivalent units. DM Equivalent Units: (11,576 × 100%) + (493 × 100%) = 12,069 units Equivalent Costs: $2,622 + $37,895 = $40,517 Equivalent Cost per Unit: $40,517/12,069 units = $3.36 per unit CC Equivalent Units: (11,576 × 100%) + (493 × 40%) 11,576 + 197 = 11,773 units Equivalent Costs: $3,476 + $44,672 = $48,148 Equivalent Cost per Unit: $48,148/11,773 units = $4.09 per unit b. Costs assigned to: Completed and removed- $86,241.20, Ending WIP Inventory- $2,462.21 Following the template outlined in the text gives the following results: Total Costs Total cost of units completed and removed from WIP Inventory Costs of units in ending WIP Inventory

$86,241.20 $38,895.36 $47,345.84 $2,462.21 $1,656.48 $805.73

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c. Total cost of units completed, $86,241.20; Units completed, 11,576; so actual cost per unit completed $7.45; and equivalent cost per unit $7.45 (yes, these are the same) The total cost of units completed was calculated in part (b) and is $86,241.20. The total number of units completed for the year will be calculated as follows: Beginning WIP Inventory + Units Started and Completed 600 + 10,976 = 11,576 units completed The actual cost per completed unit will equal: $86,241.20/11,576 units = $7.45 The Equivalent Cost per unit = $3.36 + $4.09 = $7.45 Diff: 2 LO: 2, 3, 4, 5 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

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136) Pearl's is a high-end skincare line that has been created by dermatologists for people who have very dry skin. Pearl's is very selective about who carries their line and therefore is considered a boutique label. Their best-selling product is a lightweight moisturizer that also contains a high level of SPF that their customers have come to appreciate. Pearl's produces their products in limited quantities to best ensure that each container receives the time and attention that it deserves to ensure high quality. As of December 31 of last year, a batch in process contained 237 units that were 67% complete for Conversion Costs (CC) and 100% complete for direct materials (DM) because all DM is added at the front-end of processing. During the current year, Pearl's started 17,456 units and completed 16,879 units by the close of the year. Units remaining in ending inventory are 72% complete for CC and 100% complete for DM in the current year. Pearl's had the following costs for the year that are associated with all of the units described above: Total Costs Costs in beginning Work-in-Progress (WIP) Inventory Costs added to WIP Inventory this period

1,345 $ 452 $ 893 $65,509 $28,954 $36,555

Currently, each unit is in a small, recyclable plastic container. Pearl's uses the First-In, First-Out (FIFO) method of Process Costing. Using the information above, please answer the following questions. (Round units to whole number and cost to two decimal places.) a. What is the equivalent cost per unit for Direct Materials? What is the equivalent cost per unit for Conversion Costs? b. Using the Process Costing steps, assign Direct Materials and Conversion Costs to the physical units for the year. c. What is the total amount of cost transferred out of the production process and what would the journal entry look like?

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Answer: a. Direct Materials are $1.66 per unit, and Conversion Costs are $2.11 per unit Before solving for each equivalent cost per unit, solve for the equivalent costs and equivalent units. Additionally, ending units are not given, so they must be calculated: Beginning + Started - Completed = Ending 237 + 17,456 - 16,879 = 814 DM Equivalent Units: (237 × 0%) + (16,642 × 100%) + (814 × 100%) = 0 + 16,642 + 814 = 17,456 units Equivalent Costs: $28,954 (only account for costs added during the period) Equivalent Cost per Unit: $28,954/17,456 units = $1.66 per unit CC Equivalent Units: (237 × 33%) + (16,642 × 100%) + (814 × 72%) 78 + 16,642 + 586 = 17,306 units Equivalent Costs: $36,555 (only account for costs added during the period) Equivalent Cost per Unit: $36,555/17,306 units = $2.11 per unit

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b. Total cost assigned to: DM, $29,428.96 CC, $37,408.66 (Total cost calculated in steps 3 and 5 of process costing may vary due to rounding.) When looking at the initial problem, the overall costs that must be accounted for are $1,345 + $65,509 = $66,854. Once the template (as outlined in the text) is completed, the numbers should look like the following: Total Costs

Cost of units in beginning WIP Inventory Costs added to units in beginning WIP Inventory this period Cost of units started and completed Total cost of units completed and removed from WIP Inventory Costs of units in ending WIP Inventory Total costs accounted for

$ 1,345.00 $

452.00 $

893.00

164.58

0.00

164.58

62,740.34

27,625.72

35,114.62

$64,249.92

$28,077.72

$36,172.20

2,587.70 $66,837.62

1,351.24 $29,428.96

1,236.46 $37,408.66

c. The total cost removed and transferred will equal what was completed and removed, or $64,249.92. The journal entry would look like the following: Finished Good (FG) Inventory WIP Inventory 64,249.92

64,249.92

Diff: 2 LO: 2, 3, 4, 5 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

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137) Tiny Packs produces leather backpack purses that it markets to working professionals looking for an alternative to a briefcase or standard purse. Tiny Packs' products originate in the Cutting department, and they are then put together in the Assembly department. At the conclusion of the assembly process, each backpack is subject to a short inspection before being packaged for sale. The following unit information was compiled to reflect activity in the Assembly department for the most recent month of August: Physical Transferred-In Units (TI) Beginning Work-inProgress (WIP) Inventory Units Transferred-In Units Completed Ending WIP Inventory

1,980 5,496 6,517 959

Direct Materials (DM)

Conversion Costs (CC)

100%

72%

100%

47%

The costs associated with the aforementioned units for the month of August is as follows:

Beginning WIP Inventory Costs added during the period

Transferred-In Direct Materials Conversion Costs $2,342 $688 $ 802 $8,944 $981 $3,110

Tiny Packs has not yet made a final decision regarding the use of First-In, First-Out (FIFO) or Weighted-Average. They sell each backpack for $98.50 per backpack. (Round units to whole number and cost to two decimal places.) a. What is the equivalent cost per unit for each category of cost using the FIFO method? b. What is the equivalent cost per unit for each category of cost using the Weighted-Average method? c. What is the gross margin percentage under both FIFO and Weighted-Average? Which method should Tiny consider implementing?

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Answer: Before solving for any of the equivalent unit costs, it is best to determine the number of units started and completed during the period. This can be accomplished by first determining the number of units to account for: Units in beginning WIP Inventory- 1,980 (given) + Units Transferred-In- 5,496 (given) = Total Units to Account for- 7,476 Units in beginning WIP Inventory completed this period (1,980) + Units started and completed this period (?) + Units in ending WIP Inventory (959) = Total units accounted for (7,476) (calculated in previous step) *Rearrange and solve for Units started and completed: 7,476 - 1,980 - 959 = 4,537 (to be used in equivalent unit calculations)

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a. FIFO: Transferred-In, $1.63 per unit Direct Materials, $0.18 per unit Conversion Costs, $0.56 per unit First, calculate the equivalent units: Transferred-In (1,980 × 0%) + (4,537 × 100%) + (959 × 100%) = 0 + 4,537 + 959 = 5,496 units Direct Materials (1,980 × 0%) + (4,537 × 100%) + (959 × 100%) = 0 + 4,537 + 959 = 5,496 units Conversion Costs (1,980 × 28%) + (4,537 × 100%) + (959 × 47%) = 554 + 4,537 + 451 = 5,542 units Next, calculate the equivalent costs (FIFO includes only accounts for costs added during the period): Transferred-In $8,944 Direct Materials $981 Conversion Costs $3,110 Lastly, calculate the equivalent cost per unit using the numbers calculated in the previous two steps: Transferred-In $8,944/5,496 units = $1.63 per unit Direct Materials $981/5,496 units = $0.18 per unit Conversion Costs $3,110/5,542 units = $0.56 per unit

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b. Weighted-Average: Transferred-In, $1.51 per unit Direct Materials, $0.22 per unit Conversion Costs, $0.56 per unit First, calculate the equivalent units: Transferred-In (6,517 × 100%) + (959 × 100%) = 6,517 + 959 = 7,476 units Direct Materials (6,517 × 100%) + (959 × 100%) = 6,517 + 959 = 7,476 units Conversion Costs (6,517 × 100%) + (959 × 47%) = 6,517 + 451 = 6,968 units Next, calculate the equivalent costs: Transferred-In $2,342 + $8,944 = $11,286 Direct Materials $688 + $981 = $1,669 Conversion Costs $802 + $3,110 = $3,912 Lastly, calculate the equivalent cost per unit using the numbers calculated in the previous two steps: Transferred-In $11,286/7,476 units = $1.51 per unit Direct Materials $1,669/7,476 units = $0.22 per unit Conversion Costs $3,912/6,968 units = $0.56 per unit (Total cost calculated in steps 3 and 5 of process costing may vary due to rounding.)

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c. FIFO, 97.68%; and Weighted-Average, 97.68% Tiny Packs could consider the use of either method as they yield very similar results overall. Since the products created by Tiny Packs are homogeneous and go through various identifiable steps, they may consider Weighted-Average. Other considerations could include the additional cost associated with using FIFO as Weighted-Average tends to be less expensive although less accurate. All of these decisions should be weighed carefully before committing. To calculate the Gross Margin Percentage, calculate Gross Margin and divide it by Sales Price. This can be done on a per-unit basis. FIFO = Total costs of units completed and removed from WIP Inventory/(Units in beginning WIP Inventory completed + Units started and completed) = $14,894.93/6,517 units = $2.29 Sales $98.50 per backpack - Cost $2.29 per backpack = Gross Margin = $96.21 Gross Margin Percentage = $96.21/$98.50 = 97.68% Weighted-Average = Total costs of units completed and removed from WIP Inventory/Units completed this period = 14,923.93/6,517 units = $2.29 Sales $98.50 per backpack - Cost $2.29 per backpack = Gross Margin = $96.21 Gross Margin Percentage = $96.21/$98.50 = 97.68% Diff: 2 LO: 6 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

157

138) Retro Minis is a company that specializes in designing and manufacturing retro-inspired miniature refrigerators. Retro has seen an increase in sales over the past year and finds that many people are buying their products for home offices. Their initial offering was a shiny red fridge, and they have been contemplating adding a matte teal version within the next year. The two fridges would require different processes, and they have determined the following rates to apply to their key processes: Production Assembly Estimated cost per fridge

$4.04

Shiny Paint

$5.83

Matte Paint

$3.52

$3.37

Inspection $4.49

Retro has made the following predictions for the upcoming year: Color Red Teal

Sales Sale Price Cost of Materials 59,644 $158.00 $10.00 per unit 47,709 $175.00 $10.00 per unit

Retro will be completing a batch of each fridge that matches the budgeted amounts above. Both refrigerators will require production, assembly, and inspection, with the red fridge using shiny paint and the teal fridge using matte paint. Please use this information to answer the following questions. a. What are the total cost and cost per unit for the production of the red fridge batch? b. What are the total cost and cost per unit for the production of the teal fridge batch? c. What is the gross margin percentage for each fridge? Should Retro proceed with the production of the teal fridge or consider increasing its already popular red fridge?

158

Answer: a. Total production cost of red fridge batch, $1,662,874.72; and cost per unit, $27.88 Per Unit Cost = Process Costs + Direct Materials Costs = $4.04 + $5.83 + $3.52 + $4.49 + $10.00 = $27.88 Total Production Costs of batch = 59,644 × $27.88 per unit = $1,662,874.72 b. Total production cost of teal fridge batch, $1,322,970.57; and cost per unit = $27.73 Per Unit Cost = Process Costs + Direct Materials Costs = $4.04 + $5.83 + $3.37 + $4.49 + $10.00 = $27.73 Total Production Costs of batch = 47,709 × $27.73 per unit = $1,322,970.57 c. Red Fridge, 82.35%; Teal Fridge, 84.15% Retro should proceed with the production of the new teal fridge as it has a higher gross margin percentage than the red fridge. As sales increase for the teal fridge, it is also likely to produce a higher gross margin over time as well. Gross Margin Percentage is calculated by dividing Gross Profit by Sales Price. Red Fridge Teal Fridge $158.00 $175.00 Sales price Cost Gross margin Gross margin %

27.88 $130.12 82.35%

27.73 $147.27 84.15%

Diff: 2 LO: 6, 7 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

159

139) Ethan is the owner of Refresher Corp., a factory that produces white paint that is sold to hardware stores in 1-gallon containers. Their paint has been called revolutionary in that it produces almost no fumes and is very environmentally friendly. Ethan would like to continue expanding his operation but knows that Refresher will have to make some decisions about his accounting and the Process Costing procedures they use. His accountant, Arthur, would like to generate some figures for Ethan to review before a decision is made. Arthur has compiled the following information: Beginning Work-in-Progress (WIP) Inventory, 9,850 gallons; Direct Materials (DM), 100% Complete; and Conversion Costs, 30% complete Started: 85,600 gallons Completed: 73,422 gallons Ending WIP Inventory: Direct Materials, 100% Complete; and Conversion Costs, 82% complete Refresher adds Conversion Costs evenly throughout the process. Arthur has also pulled together the following cost information from the most recent year: Beginning WIP Inventory: Direct Materials, $3,456; and Conversion Costs, $5,997 Costs added during the period: Direct Materials, $42,677; and Conversion Costs, $56,980 Ethan knows that Arthur also provided solid guidance in the past and would like to see how each method of Process Costing turns out with respect to their operations. Taking all of this information into consideration, please answer the following questions. (Round units to whole number and cost to two decimal places.) a. What are the equivalent units for both Direct Materials and Conversion Costs under the FirstIn, First-Out (FIFO) method? b. What is the cost per equivalent unit for both Direct Materials and Conversion Costs under the FIFO method? c. What are the equivalent units for both Direct Materials and Conversion Costs under the Weighted-Average method? d. What is the cost per equivalent unit for both Direct Materials and Conversion Costs under the Weighted-Average method? e. Why do the two methods, FIFO and Weighted-Average, produce different results? Which method would be the appropriate selection for the company? Please make sure to include as many specifics as possible in your response.

160

Answer: a. Conversion Costs, Equivalent Units of Production: 88,530 units, and Direct Materials, Equivalent Units of Production: 85,600 units First, determine how many units to account for, so that includes adding the beginning WIP Inventory of 9,850 to the units started during the period of 85,600 for a total of 95,450. Next, subtract the number of units completed and removed, 73,422, to arrive at an ending WIP Inventory of 22,028 units. The equivalent units for Conversion Costs under the FIFO method will be equal to beginning WIP units multiplied by the percent completed (9,850 × 70%) plus units started and completed multiplied by the percent completed ((85,600 - 22,028) × 100%) plus the units in ending WIP Inventory multiplied by the percent completed (22,028 × 82%). 6,895 + 63,572 + 18,063 = 88,530 units. For the Equivalent Units of Direct Materials, add the following values: (9,850 × 0%) + (63,572 × 100%) + (22,028 × 100%) = 0 + 63,572 + 22,028 = 85,600 units. b. Conversion Cost, cost per equivalent unit: $0.64, and Direct Materials, cost per equivalent unit: $0.50 Conversion Costs: The total costs to account for the Conversion Costs under FIFO are $5,997 + $56,980 = $62,977 Now, determine what costs will be included in the calculation for equivalent units: Under FIFO: $56,980, only accounts for costs added during the period Now, calculate the cost per equivalent unit (uses the units from part (a)) $56,980/88,530 units = $0.64 per unit Direct Materials: The total costs to account for DM under FIFO are $3,456 + $42,677 = $46,133 Now, determine what costs will be included in the calculation for equivalent units: Under FIFO: $42,677, only accounts for costs added during the period Now, calculate the cost per equivalent unit (uses the units from part (a)) $42,677/85,600 units = $0.50 per unit c. Conversion Costs, Equivalent Units of Production: 91,485 units, and Direct Materials, Equivalent Units of Production: 95,450 units This question requires familiarity with the calculation of equivalent units while using WeightedAverage method, and that means that beginning WIP Inventory will not be factored in separately. To solve for ending WIP inventory, determine how many units to account for using the following formula: Beginning WIP Inventory plus units started minus units completed. 9,850 + 85,600 73,422 = 22,028 ending WIP Inventory. For the Equivalent Units of Conversion Costs, add the following: (73,422 × 100%) + (22,028 × 82%) = 73,422 + 18,063 = 91,485 units. For the Equivalent Units of Direct Materials, add the following: (73,422 × 100%) + (22,028 × 100%) = 73,422 + 22,028 = 95,450 units.

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d. Conversion Costs, Cost per equivalent unit: $0.69; and Direct Materials, Cost per equivalent unit: $0.48 Conversion Costs: This question requires the calculation of total costs to account for Conversion Costs under Weighted-Average. Under Weighted-Average: $5,997 + $56,980 = $62,977 (also used in the calculation for equivalent units) Now, calculate the cost per equivalent unit (uses the previous number and the units from part c): $62,977/91,485 units = $0.69 per unit Direct Materials: This question requires calculation of the total costs that must be accounted for DM under Weighted-Average. Under Weighted-Average: $3,456 + $42,677 = $46,133 (also used in the calculation for equivalent units) Now, calculate the cost per equivalent unit (uses the units from part c): $46,133/95,450 units = $0.48 per unit e. FIFO and Weighted-Average produce different results because of what each includes in its calculation of equivalent units and cost per equivalent unit. FIFO focuses on what has been added during a period, and the Weighted-Average focuses on costs accumulated until that time. Refresher is likely to employ the use of Weighted-Average since the product that is being created is a homogeneous product where it would be impractical or impossible to distinguish individual units of the product from one another. Refresher may also appreciate the fact that WeightedAverage is likely to be less costly and take less time while also being a bit simpler. They will have to acknowledge that it may be a bit less accurate than FIFO but still an appropriate selection. The cost per equivalent unit will remain similar between the conversion cost comparisons (FIFO vs. Weighted-Average) and the direct materials (FIFO vs. WeightedAverage) because direct materials and direct labor remain consistent on a per unit basis even if they vary on the overall cost. Diff: 2 LO: 2, 3, 4 Bloom: E AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

162

140) Chocolate Innovations is a factory that currently produces gourmet chocolate truffles that they sell in boxes of 50 truffles. They also produce chocolate turtles that are sold in boxes of 25 candies. Their accountant, Melissa, is gathering information about their performance over the two most recent years so that they can make an official decision as to whether they will use the First-In, First-Out (FIFO) or Weighted-Average method for their Process Costing. Melissa has been keeping general records for two years before making a strong suggestion one way or another. She has collected the following cost information regarding the truffles:

Beginning Work-in-Progress (WIP) Inventory Costs added during the period

Direct Materials (DM) Year 1 Year 2

Conversion Costs (CC) Year 1 Year 2

929 $ 1,003 $18,934 $19,980

$ 1,347 $ 1,578 $27,653 $29,901

Melissa also compiled production information for both years for the truffles: Year 1 Beginning WIP Inventory Units Started and Completed Ending WIP Inventory Year 2 Beginning WIP Inventory Units Started and Completed Ending WIP Inventory

Physical Units 2,056 39,342 3,444

DM 100%

Physical Units 3,444 42,781 2,630

DM 100%

CC 62%

100%

58% CC

100%

58% 44%

She has collected the following cost information regarding the turtles:

Beginning WIP Inventory Costs added during the period

Direct Materials Conversion Costs Year 1 Year 2 Year 1 Year 2 $ 726 $ 908 $ 1,567 $ 1,903 $12,899 $15,607 $17,004 $20,120

163

Melissa also compiled production information for both years for the turtles: Year 1

Beginning Inventory Units Started and Completed Ending Inventory

Physical Units 1,345 29,888 2,896

DM CC 100% 33% 100%

68%

Year 2

Beginning Inventory Units Started and Completed Ending Inventory

Physical Units 2,896 34,569 3,220

DM CC 100% 68% 100%

71%

Chocolate Innovations plans on selling each box of truffles for $75.00 and each box of turtles for $48.00. (Round units to whole number and dollar amount to two decimal places.) a. What is the equivalent cost per unit for both Direct Materials and Conversion Cost for truffles for Year 1 under both FIFO and Weighted-Average? b. What is the equivalent cost per unit for both Direct Materials and Conversion Cost for truffles for Year 2 under both FIFO and Weighted-Average? c. What is the equivalent cost per unit for both Direct Materials and Conversion Cost for turtles for Year 1 under both FIFO and Weighted-Average? d. What is the equivalent cost per unit for both Direct Materials and Conversion Cost for turtles for Year 2 under both FIFO and Weighted-Average? e. Using horizontal analysis, what is the increase year-to-year for all costs under both FIFO and Weighted-Average? What is the gross profit percentage for each box of truffles and each box of turtles for year 2?

164

Answer: a. Truffles Year 1 - FIFO: Direct Materials, $0.44 per unit; Conversion Costs, $0.66; and Weighted-Average: Direct Materials, $0.44 per unit; Conversion Costs, $0.67 per unit FIFO Direct Materials: Equivalent Units (2,056 × 0%) + (39,342 × 100%) + (3,444 × 100%) = 42,786 units Equivalent Costs $18,934 (only account for costs added during the period) Equivalent Cost per Unit $18,934/42,786 unit = $0.44 per unit Conversion Costs: Equivalent Units (2,056 × 38%) + (39,342 × 100%) + (3,444 × 58%) 781 + 39,342 + 1,998 = 42,121 units Equivalent Costs $27,653 (only account for costs added during the period) Equivalent Cost per Unit $27,653/42,121 units = $0.66 per unit Weighted-Average Direct Materials: Equivalent Units ((2,056 + 39,342) × 100%) + (3,444 × 100%) = 44,842 units Equivalent Costs $929 + $18,934 = $19,863 Equivalent Cost per Unit $19,863/44,842 units = $0.44 per unit Conversion Costs: Equivalent Units ((2,056 + 39,342) × 100%) + (3,444 × 58%) 41,398 + 1,998 = 43,396 units Equivalent Costs $1,347 + $27,653 = $29,000 Equivalent Cost per Unit $29,000/43,396 units = $0.67 per unit

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b. Truffles Year 2 - FIFO: Direct Materials, $0.44 per unit; Conversion Costs, $0.65 per unit; and Weighted-Average: Direct Materials, $0.43 per unit; Conversion Costs, $0.66 per unit FIFO Direct Materials: Equivalent Units (3,444 × 0%) + (42,781 × 100%) + (2,630 × 100%) = 45,411 units Equivalent Costs $19,980 (only account for costs added during the period) Equivalent Cost per Unit $19,980/45,411 units = $0.44 per unit Conversion Costs: Equivalent Units (3,444 × 42%) + (42,781 × 100%) + (2,630 × 44%) 1,446 + 42,781 + 1,157 = 45,384 units Equivalent Costs $29,901 (only account for costs added during the period) Equivalent Cost per Unit $29,901/45,384 units = $0.66 per unit Weighted-Average Direct Materials Equivalent Units ((3,444 + 42,781) × 100%) + (2,630 × 100%) = 48,855 units Equivalent Costs $1,003 + $19,980 = $20,983 Equivalent Cost per Unit $20,983/48,855 units = $0.43 per unit Conversion Costs Equivalent Units ((3,444 + 42,781) × 100%) + (2,630 × 44%) 46,225 + 1,157 = 47,382 units Equivalent Costs $1,578 + $29,901 = $31,479 Equivalent Cost per Unit $31,479/47,382 units = $0.66 per unit

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c. Turtles Year 1 - FIFO: Direct Materials, $0.39 per unit; Conversion Costs, $0.52 per unit; and Weighted-Average: Direct Materials, $0.40 per unit; Conversion Costs, $0.56 per unit FIFO Direct Materials Equivalent units (1,345 × 0%) + (29,888 × 100%) + (2,896 × 100%) = 32,784 units Equivalent Costs $12,899 (only account for costs added during the period) Equivalent cost per unit $12,899/32,784 units = $0.39 per unit Conversion Costs Equivalent Units (1,345 × 67%) + (29,888 × 100%) + (2,896 × 68%) 901 + 29,888 + 1,969 = 32,758 units Equivalent Costs $17,004 (only account for costs added during the period) Equivalent Cost per Unit $17,004/32,758 units = $0.52 per unit Weighted-Average Direct Materials Equivalent Units ((1,345 + 29,888) × 100%) + (2,896 × 100%) 31,233 + 2,896 = 34,129 units Equivalent Costs $726 + $12,899 = $13,625 Equivalent Cost per Unit $13,625/34,129 units = $0.40 per unit Conversion Costs Equivalent Units ((1,345 + 29,888) × 100%) + (2,896 × 68%) 31,233 + 1,969 = 33,202 units Equivalent Costs $1,567 + $17,004 = $18,571 Equivalent Cost per Unit $18,571/33,202 units = $0.56 per unit

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d. Turtles Year 2 - FIFO: Direct Materials, $0.41 per unit; Conversion Costs, $0.52 per unit; and Weighted-Average: Direct Materials, $0.41 per unit; Conversion Costs, $0.55 per unit FIFO Direct Materials Equivalent Units (2,896 × 0%) + (34,569 × 100%) + (3,220 × 100%) = 37,789 units Equivalent Costs $15,607 (only account for costs added during the period) Equivalent Cost per Unit $15,607/37,789 units = $0.41 per unit Conversion Costs Equivalent Units (2,896 × 32%) + (34,569 × 100%) + (3,220 × 71%) 927 + 34,569 + 2,286 = 37,782 units Equivalent Costs $20,120 (only account for costs added during the period) Equivalent Cost per Unit $20,120/37,782 units = $0.53 per unit Weighted-Average Direct Materials Equivalent Units ((2,896 + 34,569) × 100%) + (3,220 × 100%) 37,465 + 3,220 = 40,685 units Equivalent Costs $908 + $15,607 = $16,515 Equivalent Cost per Unit $16,515/40,685 units = $0.41 per unit Conversion Costs Equivalent Units ((2,896 + 34,569) × 100%) + (3,220 × 71%) 37,465 + 2,286 = 39,751 units Equivalent Costs $1,903 + $20,120 = $22,023 Equivalent Cost per Unit $22,023/39,751 units = $0.55 per unit

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e. Horizontal Analysis Truffles: FIFO, 0.91% decrease; and WA, 1.80% decrease; Turtles: FIFO, 2.20% increase; and WA, No change Gross Profit Percentages Truffles: FIFO, 27.33%; and WA, 27.33%; Turtles: FIFO, 51.56%; and WA, 50.00% Use horizontal analysis to solve for increases or decreases year to year, use the following formula: (New Year - Old Year)/Old Year Truffles FIFO Year 1: $0.44 + $0.66 = $1.10 Year 2: $0.44 + $0.66 = $1.10 No change Weighted-Average Year 1: $0.44 + $0.67 = $1.11 Year 2: $0.43 + $0.66 = $1.09 ($1.09 - $1.11)/$1.11 = 0.0180 or 1.80% decrease Turtles FIFO Year 1: $0.39 + $0.52 = $0.91 Year 2: $0.41 + $0.53 = $0.94 ($0.94 - $0.91)/$0.91 = 0.0330 or 3.30% increase Weighted-Average Year 1: $0.40 + $0.56 = $0.96 Year 2: $0.41 + $0.55 = $0.96 No change Gross Profit Percentage Assuming that there are no additional costs added, the gross profit percentage on a per unit basis can be calculated using the sale price given in the problem and the Year 2 per unit cost calculated in the first step of part (e) times the number of each item in a box that is sold. The formula needed to calculate gross profit is sales minus cost. Then, divide the gross profit by sales to arrive at the gross profit percentage.

169

Truffles: Sell at $75.00 per box FIFO Cost: ($1.10 × 50) = $55.00 $75.00 - $55.00 = $20.00 Gross Profit $20.00/$75.00 = 26.67% Weighted-Average Cost: ($1.09 × 50) = $54.50 $75.00 - $54.50 = $20.50 Gross Profit $20.50/$75.00 = 27.33% Turtles: Sell at $48.00 per box FIFO Cost: ($0.94 × 25) = $23.50 $48.00 - $23.50 = $24.50 Gross Profit $24.50/$48.00 = 51.04% Weighted-Average Cost: ($0.96 × 25) = $24.00 $48.00 - $24.00 = $24.00 Gross Profit $24.00/$48.00 = 50.00% Diff: 3 LO: 2, 3, 4, 6 Bloom: E AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

170

141) MCM Revisit manufactures mid-century modern inspired bookcases that are offered in a variety of wood and finishes. Trina, one of their accountants, is looking over the various key processes used for conversion work. All units require most of the processes while units will require either staining or painting, but not both. Since the units have varying process needs to arrive at completion, MCM has chosen an operation costing approach. Trina has compiled the following information about their budgeted costs and production volume for this year:

Cutting Sanding Assembly Staining Painting Finishing Quality Inspection

Budgeted Cost $333,786 $193,777 $ 69,804 $ 49,003 $ 29,670 $ 73,400 $ 43,704

Budgeted Volume in Units 47,400 47,400 47,400 24,180 23,220 47,400 47,400

MCM has collected the following cost information to accompany the budgeted numbers for the year: Type of Wood Material Cost per sq. ft. Sq. ft. per bookcase

Walnut $1.28 10

Oak $0.89 10

Pine $0.84 10

Cherry $1.13 10

Trina has also put together a breakdown of what each type of bookcase needs in order to be completed:

Cutting Sanding Assembly Staining Painting Finishing Quality Inspection

Walnut x x x x x x

Oak x x x

Pine x x x

171

Cherry x x x x x x

The following list represents the prices of each type of bookcase set by MCM:

Sales Price

Walnut $350.00

Oak $172.50

Pine $193.75

Cherry $299.99

Use the above information to answer the following questions. a. What is the budgeted cost per unit for each of the key processes? b. What is the total unit cost assigned to each type of bookcase? c. What is the gross margin percentage for each type of bookcase? Which bookcase is the strongest performer for MCM and which is the weakest? What can be recommended to the management of the company? d. Could MCM have used a purely Process Costing system instead of operation costing to track the costs of producing each type of bookcase?

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Answer: a. Cutting, $7.04; Sanding, $4.09; Assembly, $1.47; Staining, $2.03; Painting, $1.28; Finishing, $1.55; and Quality Inspection, $0.92 In order to calculate the budgeted cost per unit, divide the budgeted cost by the budgeted volume in units:

Cutting Sanding Assembly Staining Painting Finishing Quality Inspection

Budgeted Cost $333,786 $193,777 $ 69,804 $ 49,003 $ 29,670 $ 73,400 $ 43,704

Budgeted Volume in Budgeted Cost per Units Unit 47,400 $7.04 47,400 $4.09 47,400 $1.47 24,180 $2.03 23,220 $1.28 47,400 $1.55 47,400 $0.92

b. Walnut, $29.90; Oak, $23.70; Pine, $23.20; and Cherry, $28.40 Unit Costs

Cutting Sanding Assembly Staining Painting Finishing Quality Inspection Total Process Costs Add: Materials Costs Total Unit Costs

Walnut $7.04 4.09 1.47 2.03

Oak $7.04 4.09 1.47 1.28

1.55

Pine Cherry $7.04 $7.04 4.09 4.09 1.47 1.47 2.03 1.28 1.55

0.92 $17.10

0.92 $14.80

0.92 $17.10

12.80

8.90

8.40

11.30

$29.90

$23.70

$23.20

$28.40

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c. Walnut, 91.46%; Oak, 86.26%; Pine, 88.03%; and Cherry, 90.53% The strongest performer that MCM has are the walnut bookcases with a gross margin percentage of 91.46%, and the weakest performer are the oak bookcases with a gross margin percentage of 86.26%. A recommendation for management would be to consider increasing the sales price of the oak bookcases to increase the gross margin and the gross margin percentage. To calculate the gross margin percentage, first calculate the gross margin by subtracting the cost per unit calculated in part (b) from the sale price each unique unit.

Sales price per unit Less: cost per unit Gross margin per unit Gross margin %

Walnut $350.00

Oak $172.50

Pine Cherry $193.75 $299.99

29.90 $320.10 91.46%

23.70 $148.80 86.26%

23.20 $170.55 88.03%

28.40 $271.59 90.53%

d. MCM Revisit could not have used a purely Process Costing system as there are components of their bookcase offerings that vary, and therefore leave their products not entirely homogeneous. The operation costing system allows MCM to have the freedom to utilize aspects of Process Costing to account for their key processes while also integrating aspects of Job Costing that will accurately track their production by jobs or batches that reflect the unique differences that the production of different items have. Diff: 2 LO: 7 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

174

Cost Accounting, 1e (Farmer) Chapter 12 Absorption versus Variable Costing 1) A disadvantage of absorption costing is A) that it is not useful in management's decision-making process. B) that it might encourage inventory buildup when there is no demand. C) both answers are correct. D) none of the answers are correct. Answer: B Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 2) All the following are included as costs of inventory under absorption costing except A) direct labor. B) direct material. C) fixed operating. D) fixed manufacturing overhead. Answer: C Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 3) When computing product costs, direct materials, direct labor, and all manufacturing overhead (fixed and variable) are used with A) product costing. B) full costing. C) variable costing. D) absorption costing. Answer: D Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management.

4) All the following are true for absorption costing, except A) is used for GAAP reporting purposes. B) is used for external reporting purposes only. C) is also known as standard costing. D) treats fixed manufacturing overhead as a period cost. Answer: D Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 5) Operating income, using absorption costing, is gross profit less A) cost of goods sold. B) fixed manufacturing overhead and fixed operating expenses. C) fixed and variable operating expenses. D) fixed and variable manufacturing overhead. Answer: C Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 6) Income statements, using absorption costing, are sometimes difficult to interpret because they A) omit variable expenses when computing operating income. B) shift portions of fixed manufacturing overhead between periods according to changing levels of inventory. C) include all fixed manufacturing overhead in the calculation of operating income. D) ignore inventory levels when determining cost of goods sold. Answer: B Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management.

7) The formula for budgeted fixed manufacturing overhead rate is A) budgeted usage of cost driver divided by total budgeted fixed MOH. B) total budgeted fixed MOH divided by budgeted usage of cost driver. C) budgeted usage of cost driver times total budgeted fixed MOH. D) total budgeted fixed MOH times budgeted usage of cost driver. Answer: B Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 8) Determining the numerator and denominator when calculating the budgeted fixed-MOH rate A) can vary for each company and each department and will have no impact on the financial statements. B) can vary between departments and will impact the financial statements. C) will not matter, and departments can choose whichever method will increase operating income. D) will not vary, and all companies and departments will use the same cost drivers. Answer: B Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 9) The formula for applied fixed MOH is A) budgeted fixed MOH rate times the actual units produced. B) budgeted fixed MOH rate divided by the actual units produced. C) the actual units produced divided by the budgeted fixed MOH. D) budgeted fixed MOH rate times the budgeted units produced. Answer: A Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management.

10) The fixed MOH volume variance measures A) the difference between the budgeted fixed MOH cost and what was spent on fixed MOH. B) the difference between what a company spends versus what a company planned to spend. C) the actual usage of capacity compared to the planned usage of capacity. D) the amount of fixed MOH incurred versus the budgeted fixed MOH. Answer: C Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 11) The formula for fixed MOH volume variance is A) budgeted fixed MOH costs less actual fixed MOH. B) budgeted fixed MOH costs less applied fixed MOH. C) units budgeted less actual units produced times budgeted MOH rate. D) actual units produced less actual units sold times budgeted fixed MOH rate. Answer: B Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 12) Which fixed MOH variances help explain the under or overapplied fixed MOH that results in a difference in the fixed MOH Control account? A) Fixed MOH price variance B) Fixed MOH volume variance C) Both the Fixed MOH price variance and Fixed MOH volume variance D) Only the total Fixed MOH variance Answer: C Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management.

13) Conform AI planned to produce 6,000 units but only produced 5,300 for the current year. They had a beginning inventory of 300 units with variable manufacturing cost of $11 per unit. Budgeted fixed MOH for the year was $72,000 with actual costs incurred of $66,000. What will Conform AI report as total overhead variance for the current year? A) $2,400 F B) $2,400 U C) $6,000 F D) $6,000 U Answer: B Explanation: $72,000 ÷ 6,000 = $12 per unit. 5,300 × $12 = $63,600 $66,000 - $63,600 = $2,400 U Budgeted FMOH ÷ units produced = FMOH per unit Actual units produced × FMOH = applied FMOH Actual FMOH - applied FMOH = variance Diff: 2 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management. 14) Conform AI planned to produce 6,000 units but only produced 5,300 for the current year. They had a beginning inventory of 300 units with variable manufacturing cost of $11 per unit. Budgeted fixed MOH for the year was $72,000 with actual costs incurred of $66,000. What will Conform AI report as the fixed MOH price variance for the current year? A) $2,400 F B) $2,400 U C) $6,000 F D) $6,000 U Answer: C Explanation: $72,000 - $66,000 = $6,000 Budgeted FMOH - incurred FMOH = variance Diff: 2 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

15) Conform AI planned to produce 6,000 units but only produced 5,300 for the current year. They had a beginning inventory of 300 units with variable manufacturing cost of $11 per unit. Budgeted fixed MOH for the year was $72,000 with actual costs incurred of $66,000. What will Conform AI report as fixed MOH volume variance for the current year? A) $2,400 F B) $2,400 U C) $8,400 F D) $8,400 U Answer: D Explanation: $72,000 ÷ 6,000 = $12 per unit. 5,300 × $12 = $63,600 $72,000 - $63,600 = $8,400 U Budgeted FMOH ÷ units produced = FMOH per unit Actual units produced × FMOH = applied FMOH Budgeted FMOH - applied FMOH = variance Diff: 2 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

16) Angels R Us is currently operating at 100% capacity and incurred the following costs during the first month of operations: Units produced Direct labor Direct material Variable manufacturing overhead Fixed manufacturing overhead Variable operating expenses Fixed operating expenses

20,000 $240,000 180,000 280,000 100,000 130,000 50,000

If the company has ending inventory of 1,600 units for the month, how much inventory would be reported on the balance sheet using absorption costing? A) $64,000 B) $56,000 C) $66,400 D) $78,400 Answer: A Explanation: ($240,000 + $180,000 + $280,000 + $100,000) ÷ 20,000 = $40 per unit $40 × 1,600 = $64,000 (DL + DM + V manufacturing costs + F manufacturing costs) ÷ unit produced = manufacturing cost per unit Manufacturing cost per unit × end inventory units Diff: 2 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

17) Crystal, the owner of Crystal Clean, is planning for the next year. She uses the absorption method to determine the evaluation of employees and how much to increase their hourly wage. She has budgeted the following information: Variable operating expenses Fixed operating expenses Variable manufacturing cost Fixed manufacturing cost Units to be produced Unit selling price

$3 per unit $210,000 $10 per unit $225,000 25,000 units $32 per unit

Beginning inventory (units) Actual production (units) Sales volume (units)

Year 1 0 23,500 22,000

Year 2 1,500 26,000 27,000

There were no price or efficiency variances for either year. Crystal writes off any fixed MOH volume variance directly to COGS. Calculate the Fixed MOH volume variance for year 1. A) $15,000 F B) $15,000 U C) $13,500 F D) $13,500 U Answer: D Explanation: $225,000 ÷ 25,000 = $9 per unit. 23,500 × $9 = $211,500 $225,000 - $211,500 = $13,500 U Budgeted FMOH ÷ units produced = FMOH per unit Actual units produced × FMOH = applied FMOH Budgeted FMOH - applied FMOH = variance Diff: 2 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

18) Crystal, the owner of Crystal Clean, is planning for the next year. She uses the absorption method to determine the evaluation of employees and how much to increase their hourly wage. She has budgeted the following information: Variable operating expenses Fixed operating expenses Variable manufacturing cost Fixed manufacturing cost Units to be produced Unit selling price

$3 per unit $210,000 $10 per unit $225,000 25,000 units $32 per unit

Beginning inventory (units) Actual production (units) Sales volume (units)

Year 1 0 23,500 22,000

Year 2 1,500 26,000 27,000

There were no price or efficiency variances for either year. Crystal writes off any fixed MOH volume variance directly to COGS. Calculate the adjusted COGS for year 1. A) $286,000 B) $418,000 C) $431,500 D) $484,000 Answer: C Explanation: $225,000 ÷ 25,000 = $9 per unit. 23,500 × $9 = $211,500 $225,000 - $211,500 = $13,500 U ($10 + $9) × 22,000 + $13,500 = $431,500 Budgeted FMOH ÷ units produced = FMOH per unit Actual units produced × FMOH = applied FMOH Budgeted FMOH - applied FMOH = variance (V Manufacturing costs per unit + F manufacturing cost per unit) × units sold + variance Diff: 2 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

19) Crystal, the owner of Crystal Clean, is planning for the next year. She uses the absorption method to determine the evaluation of employees and how much to increase their hourly wage. She has budgeted the following information: Variable operating expenses Fixed operating expenses Variable manufacturing cost Fixed manufacturing cost Units to be produced Unit selling price

$3 per unit $210,000 $10 per unit $225,000 25,000 units $32 per unit

Beginning inventory (units) Actual production (units) Sales volume (units)

Year 1 0 23,500 22,000

Year 2 1,500 26,000 27,000

There were no price or efficiency variances for either year. Crystal writes off any fixed MOH volume variance directly to COGS. Calculate the gross margin for year 1. A) $220,000 B) $268,000 C) $272,500 D) $418,000 Answer: C Explanation: $225,000 ÷ 25,000 = $9 per unit. 23,500 × $9 = $211,500 $225,000 - $211,500 = $13,500 U ($10 + $9) × 22,000 + $13,500 = $431,500 ($32 × 22,000) - $431,500 = $272,500 Budgeted FMOH ÷ units produced = FMOH per unit Actual units produced × FMOH = applied FMOH Budgeted FMOH - applied FMOH = variance (V Manufacturing costs per unit + F manufacturing cost per unit) × units sold + variance = adj COGS (Selling price per unit × units sold) - adj COGS = GM Diff: 2 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

20) Crystal, the owner of Crystal Clean, is planning for the next year. She uses the absorption method to determine the evaluation of employees and how much to increase their hourly wage. She has budgeted the following information: Variable operating expenses Fixed operating expenses Variable manufacturing cost Fixed manufacturing cost Units to be produced Unit selling price

$3 per unit $210,000 $10 per unit $225,000 25,000 units $32 per unit

Beginning inventory (units) Actual production (units) Sales volume (units)

Year 1 0 23,500 22,000

Year 2 1,500 26,000 27,000

There were no price or efficiency variances for either year. Crystal writes off any fixed MOH volume variance directly to COGS. Calculate the operating income for year 1. A) ($56,000) B) ($3,500) C) $10,000 D) $142,000 Answer: B Explanation: $225,000 ÷ 25,000 = $9 per unit. 23,500 × $9 = $211,500 $225,000 - $211,500 = $13,500 U ($10 + $9) × 22,000 + $13,500 = $431,500 ($32 × 22,000) - $431,500 = $272,500 $272,500 - $210,000 - ($3 × 22,000) = ($3,500) Budgeted FMOH ÷ units produced = FMOH per unit Actual units produced × FMOH = applied FMOH Budgeted FMOH - applied FMOH = variance (V Manufacturing costs per unit + F manufacturing cost per unit) × units sold + variance = adj COGS (Selling price per unit × units sold) - adj COGS = GM GM - F operating ex - (V operating ex per unit × units sold) = Op income Diff: 3 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

21) Crystal, the owner of Crystal Clean, is planning for the next year. She uses the absorption method to determine the evaluation of employees and how much to increase their hourly wage. She has budgeted the following information: Variable operating expenses Fixed operating expenses Variable manufacturing cost Fixed manufacturing cost Units to be produced Unit selling price

$3 per unit $210,000 $10 per unit $225,000 25,000 units $32 per unit

Beginning inventory (units) Actual production (units) Sales volume (units)

Year 1 0 23,500 22,000

Year 2 1,500 26,000 27,000

There were no price or efficiency variances for either year. Crystal writes off any fixed MOH volume variance directly to COGS. Calculate the Fixed MOH volume variance for year 2. A) $13,500 F B) $13,500 U C) $18,000 F D) $18,000 U Answer: C Explanation: $225,000 ÷ 25,000 = $9 per unit. 27,000 × $9 = $243,000 $225,000 - $243,000 = $18,000 F Budgeted FMOH ÷ units produced = FMOH per unit Actual units produced × FMOH = applied FMOH Budgeted FMOH - applied FMOH = variance (V Manufacturing costs per unit + F manufacturing cost per unit) × units sold + variance Diff: 2 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

22) Crystal, the owner of Crystal Clean, is planning for the next year. She uses the absorption method to determine the evaluation of employees and how much to increase their hourly wage. She has budgeted the following information: Variable operating expenses Fixed operating expenses Variable manufacturing cost Fixed manufacturing cost Units to be produced Unit selling price

$3 per unit $210,000 $10 per unit $225,000 25,000 units $32 per unit

Beginning inventory (units) Actual production (units) Sales volume (units)

Year 1 0 23,500 22,000

Year 2 1,500 26,000 27,000

There were no price or efficiency variances for either year. Crystal writes off any fixed MOH volume variance directly to COGS. Calculate the adjusted COGS for year 2. A) $351,000 B) $495,000 C) $513,000 D) $594,000 Answer: B Explanation: $225,000 ÷ 25,000 = $9 per unit. 27,000 × $9 = $243,000 $225,000 - $243,000 = $18,000 F ($10 + $9) × 27,000 - $18,000 = $495,000 Budgeted FMOH ÷ units produced = FMOH per unit Actual units produced × FMOH = applied FMOH Budgeted FMOH - applied FMOH = variance (V Manufacturing costs per unit + F manufacturing cost per unit) × units sold - variance Diff: 2 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

23) Crystal, the owner of Crystal Clean, is planning for the next year. She uses the absorption method to determine the evaluation of employees and how much to increase their hourly wage. She has budgeted the following information: Variable operating expenses Fixed operating expenses Variable manufacturing cost Fixed manufacturing cost Units to be produced Unit selling price

$3 per unit $210,000 $10 per unit $225,000 25,000 units $32 per unit

Beginning inventory (units) Actual production (units) Sales volume (units)

Year 1 0 23,500 22,000

Year 2 1,500 26,000 27,000

There were no price or efficiency variances for either year. Crystal writes off any fixed MOH volume variance directly to COGS. Calculate the gross margin for year 2. A) $209,000 B) $270,000 C) $351,000 D) $360,000 Answer: A Explanation: $225,000 ÷ 25,000 = $9 per unit. 27,000 × $9 = $243,000 $225,000 - $243,000 = $18,000 F ($10 + $9) × 27,000 - $18,000 = $495,000 ($32 × 22,000) - $495,000 = $209,000 Budgeted FMOH ÷ units produced = FMOH per unit Actual units produced × FMOH = applied FMOH Budgeted FMOH - applied FMOH = variance (V Manufacturing costs per unit + F manufacturing cost per unit) × units sold + variance = adj COGS (Selling price per unit × units sold) - adj COGS = GM Diff: 2 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

24) Crystal, the owner of Crystal Clean, is planning for the next year. She uses the absorption method to determine the evaluation of employees and how much to increase their hourly wage. She has budgeted the following information: Variable operating expenses Fixed operating expenses Variable manufacturing cost Fixed manufacturing cost Units to be produced Unit selling price

$3 per unit $210,000 $10 per unit $225,000 25,000 units $32 per unit

Beginning inventory (units) Actual production (units) Sales volume (units)

Year 1 0 23,500 22,000

Year 2 1,500 26,000 27,000

There were no price or efficiency variances for either year. Crystal writes off any fixed MOH volume variance directly to COGS. Calculate the operating income for year 2. A) ($67,000) B) $(21,000) C) $60,000 D) $69,000 Answer: A Explanation: $225,000 ÷ 25,000 = $9 per unit. 27,000 × $9 = $243,000 $225,000 - $243,000 = $18,000 F ($10 + $9) × 27,000 - $18,000 = $495,000 ($32 × 22,000) - $495,000 = $209,000 $209,000 - $210,000 - ($3 × 22,000) = $(67,000) Budgeted FMOH ÷ units produced = FMOH per unit Actual units produced × FMOH = applied FMOH Budgeted FMOH - applied FMOH = variance (V Manufacturing costs per unit + F manufacturing cost per unit) × units sold + variance = adj COGS (Selling price per unit × units sold) - adj COGS = GM GM - F operating ex - (V operating ex per unit × units sold) = Op income Diff: 3 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

25) BioClinic sells its product for $80 per unit. During 2025, it produced 120,000 units and sold 105,000 units. Costs per unit are: direct materials $25, direct labor $10, variable overhead $5, and variable operating expenses $3. Fixed costs are $840,000 manufacturing overhead, and $75,000 operating expenses. Assuming no variances were reported, no beginning inventory and the company uses absorption costing, how much is the per unit product cost? A) $40 B) $43 C) $47 D) $50 Answer: C Explanation: $840,000 ÷ 120,000 = $7 per unit. $25 + $10 + $5 + $7 = $47 per unit. FMOH ÷ units produced = FMOH per unit DM per unit + DL per unit + VMOH per unit + FMOH per unit = Abs cost per unit Diff: 2 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management. 26) BioClinic sells its product for $80 per unit. During 2025, it produced 120,000 units and sold 105,000 units. Costs per unit are: direct materials $25, direct labor $10, variable overhead $5, and variable operating expenses $3. Fixed costs are $840,000 manufacturing overhead, and $75,000 operating expenses. Assuming no variances were reported, no beginning inventory and the company uses absorption costing, what will be reported as cost of goods sold? A) $4,200,000 B) $4,800,000 C) $4,935,000 D) $5,640,000 Answer: C Explanation: $840,000 ÷ 120,000 = $7 per unit. $25 + $10 + $5 + $7 = $47 per unit. $47 × 105,000 = $4,935,000 FMOH ÷ units produced = FMOH per unit DM per unit + DL per unit + VMOH per unit + FMOH per unit = Abs cost per unit Abs cost per unit × units sold = COGS Diff: 2 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

27) BioClinic sells its product for $80 per unit. During 2025, it produced 120,000 units and sold 105,000 units. Costs per unit are: direct materials $25, direct labor $10, variable overhead $5, and variable operating expenses $3. Fixed costs are $840,000 manufacturing overhead, and $75,000 operating expenses. Assuming no variances were reported, no beginning inventory and the company uses absorption costing, what will be reported as the ending inventory value? A) $600,000 B) $645,000 C) $705,000 D) $750,000 Answer: C Explanation: $840,000 ÷ 120,000 = $7 per unit. $25 + $10 + $5 + $7 = $47 per unit. $47 × (120,000 - 105,000) = $705,000 FMOH ÷ units produced = FMOH per unit DM per unit + DL per unit + VMOH per unit + FMOH per unit = Abs cost per unit Abs cost per unit × (units produced - units sold) = end inventory Diff: 2 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

28) BioClinic sells its product for $80 per unit. During 2025, it produced 120,000 units and sold 105,000 units. Costs per unit are: direct materials $25, direct labor $10, variable overhead $5, and variable operating expenses $3. Fixed costs are $840,000 manufacturing overhead, and $75,000 operating expenses. Assuming no variances were reported, no beginning inventory and the company uses absorption costing, what will be reported as gross margin? A) $2,760,000 B) $3,465,000 C) $3,600,000 D) $3,885,000 Answer: B Explanation: $840,000 ÷ 120,000 = $7 per unit. $25 + $10 + $5 + $7 = $47 per unit. $47 × 105,000 = $4,935,000 105,000 × $80 = $8,400,000 $8,400,000 - $4,935,000 = $3,465,000 FMOH ÷ units produced = FMOH per unit DM per unit + DL per unit + VMOH per unit + FMOH per unit = Abs cost per unit Abs cost per unit × units sold = COGS Units sold × selling price per unit = total sales Total sales - COGS = GM Diff: 2 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

29) BioClinic sells its product for $80 per unit. During 2025, it produced 120,000 units and sold 105,000 units. Costs per unit are: direct materials $25, direct labor $10, variable overhead $5, and variable operating expenses $3. Fixed costs are $840,000 manufacturing overhead, and $75,000 operating expenses. Assuming no variances were reported, no beginning inventory and the company uses absorption costing, what will be reported as operating income? A) $2,370,000 B) $2,685,000 C) $2,970,000 D) $3,075,000 Answer: D Explanation: $840,000 ÷ 120,000 = $7 per unit. $25 + $10 + $5 + $7 = $47 per unit. $47 × 105,000 = $4,935,000 105,000 × $80 = $8,400,000 $8,400,000 - $4,935,000 = $3,465,000 $3,465,000 - $75,000 - (105,000 × $3) = $3,075,000 FMOH ÷ units produced = FMOH per unit DM per unit + DL per unit + VMOH per unit + FMOH per unit = Abs cost per unit Abs cost per unit × units sold = COGS Units sold × selling price per unit = total sales Total sales - COGS = GM GM - F op expenses - (V op exp per unit × units sold) = op income Diff: 3 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

30) The following information applies to Hawks Corporation: Beginning Inventory Ending Inventory Units produced Direct labor per unit Direct materials per unit Variable manufacturing overhead per unit Fixed manufacturing overhead per unit Variable operating expenses per unit Fixed operating expenses

0 Units 4,000 units 40,000 units $22 $15 $5 $12 $10 $80,000

Using absorption costing, how much will the per unit product cost be? A) $42 B) $52 C) $54 D) $81 Answer: C Explanation: $22 + $15 + $5 + $12 = $54 per unit. DL per unit + DM per unit + VMOH per unit + FMOH per unit Diff: 2 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

31) The following information applies to Hawks Corporation: Beginning Inventory Ending Inventory Units produced Direct labor per unit Direct materials per unit Variable manufacturing overhead per unit Fixed manufacturing overhead per unit Variable operating expenses per unit Fixed operating expenses

0 Units 4,000 units 40,000 units $22 $15 $5 $12 $10 $80,000

Using absorption costing, what will Hawks record as total cost of goods sold, assuming no variances were reported? A) $1,512,000 B) $1,872,000 C) $1,944,000 D) $2,916,000 Answer: C Explanation: 0 + 40,000 - 4,000 = 36,000 units $22 + $15 + $5 + $12 = $54 per unit. 36,000 × $54 = $1,944,000 Beg inv + units produced - end inv = units sold DL per unit + Dm per unit + VMOH per unit + FMOH per unit = absorption product cost per unit Units sold × absorption product cost per unit Diff: 2 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

32) The following information applies to Hawks Corporation: Beginning Inventory Ending Inventory Units produced Direct labor per unit Direct materials per unit Variable manufacturing overhead per unit Fixed manufacturing overhead per unit Variable operating expenses per unit Fixed operating expenses

0 Units 4,000 units 40,000 units $22 $15 $5 $12 $10 $80,000

Using absorption costing, what will Hawks record as gross margin if the units were sold for $95 each and assuming no variances were reported? A) $504,000 B) $1,476,000 C) $1,548,000 D) $1,908,000 Answer: B Explanation: 0 + 40,000 - 4,000 = 36,000 units $22 + $15 + $5 + $12 = $54 per unit. 36,000 × $54 = $1,944,000 36,000 × $95 = $3,420,000 $3,420,000 - $1,944,000 = $1,476,000 Beg inv + units produced - end inv = units sold DL per unit + Dm per unit + VMOH per unit + FMOH per unit = absorption product cost per unit Units sold × absorption product cost per unit = COGS Units sold × selling price per unit = sales Sales - COGS = GM Diff: 2 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

33) The following information applies to Hawks Corporation: Beginning Inventory Ending Inventory Units produced Direct labor per unit Direct materials per unit Variable manufacturing overhead per unit Fixed manufacturing overhead per unit Variable operating expenses per unit

0 Units 4,000 units 40,000 units $22 $15 $5 $12 $80,000

Using absorption costing, what will Hawks record as operating income if the units were sold for $95 each and assuming no variances were reported? A) $556,000 B) $988,000 C) $1,036,000 D) $1,108,000 Answer: C Explanation: 0 + 40,000 - 4,000 = 36,000 units $22 + $15 + $5 + $12 = $54 per unit. 36,000 × $54 = $1,944,000 36,000 × $95 = $3,420,000 $3,420,000 - $1,944,000 = $1,476,000 ($10 × 36,000) + $80,000 = $440,000 $1,476,000 - $440,000 = $1,036,000 Beg inv + units produced - end inv = units sold DL per unit + Dm per unit + VMOH per unit + FMOH per unit = absorption product cost per unit Units sold × absorption product cost per unit = COGS Units sold × selling price per unit = sales Sales - COGS = GM (Var op exp per unit × units sold) + Fixed op exp = total op exp GM - total op exp Diff: 3 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

34) When computing product costs, direct materials, direct labor, and only variable manufacturing overhead are used with A) product costing. B) full costing. C) variable costing. D) absorption costing. Answer: C Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 35) Fixed manufacturing overhead costs are recognized as period costs when incurred using A) product costing. B) full costing. C) variable costing. D) absorption costing. Answer: C Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 36) Which of the following costs are charged to the product when using variable costing? A) Variable manufacturing overhead B) Fixed manufacturing overhead C) Variable operating costs D) Fixed operating costs Answer: A Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management.

37) If unit sales are constant, everything else remains the same, but units produced fluctuate, operating income under variable costing will A) fluctuate in direct proportion to changes in production. B) remain constant. C) fluctuate inversely with changes in production. D) generate a higher operating income than absorption costing. Answer: B Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 38) Operating income, using variable costing, is contribution margin less A) cost of goods sold. B) fixed manufacturing overhead and fixed operating expenses. C) fixed and variable operating expenses. D) fixed and variable manufacturing overhead. Answer: B Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 39) Variable costing A) is used for GAAP reporting purposes. B) is used for external reporting purposes only. C) is also known as standard costing. D) treats fixed manufacturing overhead as a period cost. Answer: D Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management.

40) Which of the following costs of a manufacturing company would be treated as a product cost under variable costing? A) Property taxes on the factory building B) Sales manager's salary C) Rent on the administration building D) Indirect labor Answer: D Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 41) Which of the following terms is used to describe the cost of the product being manufactured and is composed of direct materials, direct labor, and variable manufacturing overhead? A) Absorption costing B) Standard costing C) Variable costing D) Traditional costing Answer: C Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 42) On an income statement prepared using variable costing, to calculate contribution margin, a company will subtract what from sales? A) Variable manufacturing costs B) Variable cost of goods sold C) Cost of goods sold D) Variable manufacturing and operating costs Answer: D Diff: 2 LO: 2 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management.

43) On an income statement prepared using variable costing, variable operating expenses are deducted from ________ to get ________. A) sales, contribution margin B) contribution margin, operating income C) cost of goods sold, contribution margin D) sales, gross margin Answer: A Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 44) BioClinic sells its product for $80 per unit. During 2025, it produced 120,000 units and sold 105,000 units. Costs per unit are: direct materials $25, direct labor $10, variable overhead $5, and variable operating expenses $3. Fixed costs are $840,000 manufacturing overhead, and $75,000 operating expenses. Assuming no variances were reported, no beginning inventory and the company uses variable costing, how much is the per unit product cost? A) $40 B) $43 C) $47 D) $50 Answer: A Explanation: $25 + $10 + $5 = $40 DM per unit + DL per unit + VMOH per unit = variance cost per unit Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

45) BioClinic sells its product for $80 per unit. During 2025, it produced 120,000 units and sold 105,000 units. Costs per unit are: direct materials $25, direct labor $10, variable overhead $5, and variable operating expenses $3. Fixed costs are $840,000 manufacturing overhead, and $75,000 operating expenses. Assuming no variances were reported, no beginning inventory and the company uses variable costing, what will be reported as cost of goods sold? A) $4,200,000 B) $4,800,000 C) $4,935,000 D) $5,640,000 Answer: A Explanation: $25 + $10 + $5 = $40 per unit. $40 × 105,000 = $4,200,000 DM per unit + DL per unit + VMOH per unit = variance cost per unit Var cost per unit × units sold = COGS Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management. 46) BioClinic sells its product for $80 per unit. During 2025, it produced 120,000 units and sold 105,000 units. Costs per unit are: direct materials $25, direct labor $10, variable overhead $5, and variable operating expenses $3. Fixed costs are $840,000 manufacturing overhead, and $75,000 operating expenses. Assuming no variances were reported, no beginning inventory and the company uses variable costing, what will be reported as the ending inventory value? A) $600,000 B) $645,000 C) $705,000 D) $750,000 Answer: A Explanation: $25 + $10 + $5 = $40 per unit. $40 × (120,000 - 105,000) = $600,000 DM per unit + DL per unit + VMOH per unit = variance cost per unit Var cost per unit × (units produced - units sold) = end inventory Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

47) BioClinic sells its product for $80 per unit. During 2025, it produced 120,000 units and sold 105,000 units. Costs per unit are: direct materials $25, direct labor $10, variable overhead $5, and variable operating expenses $3. Fixed costs are $840,000 manufacturing overhead, and $75,000 operating expenses. Assuming no variances were reported, no beginning inventory and the company uses variable costing, what will be reported as contribution margin? A) $2,760,000 B) $3,465,000 C) $3,600,000 D) $3,885,000 Answer: D Explanation: $25 + $10 + $5 = $40 per unit. $40 × 105,000 = $4,200,000 105,000 × $80 = $8,400,000 $8,400,000 - $4,200,000 - ($3 × 105,000) = $3,885,000 DM per unit + DL per unit + VMOH per unit = variance cost per unit Var cost per unit × units sold = COGS Units sold × selling price per unit = total sales Total sales - COGS - (V op exp per unit × units sold) = CM Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

48) BioClinic sells its product for $80 per unit. During 2025, it produced 120,000 units and sold 105,000 units. Costs per unit are: direct materials $25, direct labor $10, variable overhead $5, and variable operating expenses $3. Fixed costs are $840,000 manufacturing overhead, and $75,000 operating expenses. Assuming no variances were reported, no beginning inventory and the company uses variable costing, what will be reported as operating income? A) $2,370,000 B) $2,685,000 C) $2,970,000 D) $3,075,000 Answer: C Explanation: $25 + $10 + $5 = $40 per unit. $40 × 105,000 = $4,200,000 105,000 × $80 = $8,400,000 $8,400,000 - $4,200,000 - ($3 × 105,000) = $3,885,000 $3,885,000 - $840,000 - $75,000 = $2,970,000 DM per unit + DL per unit + VMOH per unit = variance cost per unit Var cost per unit × units sold = COGS Units sold × selling price per unit = total sales Total sales - COGS - (V op exp per unit × units sold) = CM CM - FMOH - F op expenses = op income Diff: 3 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

49) The following information applies to Hawks Corporation: Beginning Inventory Ending Inventory Units produced Direct labor per unit Direct materials per unit Variable manufacturing overhead per unit Fixed manufacturing overhead per unit Variable operating expenses per unit Fixed operating expenses

0 Units 4,000 units 40,000 units $22 $15 $5 $12 $10 $80,000

Using variable costing, how much will the per unit product cost be? A) $42 B) $52 C) $54 D) $81 Answer: A Explanation: $22 + $15 + $5 = $42 per unit. DL per unit + Dm per unit + VMOH per unit Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

50) The following information applies to Hawks Corporation: Beginning Inventory Ending Inventory Units produced Direct labor per unit Direct materials per unit Variable manufacturing overhead per unit Fixed manufacturing overhead per unit Variable operating expenses per unit Fixed operating expenses

0 Units 4,000 units 40,000 units $22 $15 $5 $12 $10 $80,000

Using variable costing, what will Hawks record as total cost of goods sold, assuming no variances were reported? A) $1,512,000 B) $1,872,000 C) $1,944,000 D) $2,916,000 Answer: A Explanation: 0 + 40,000 - 4,000 = 36,000 units $22 + $15 + $5 = $42 per unit. 36,000 × $42 = $1,512,000 Beg inv + units produced - end inv = units sold DL per unit + Dm per unit + VMOH per unit = variable product cost per unit Units sold × variable product cost per unit Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

51) The following information applies to Hawks Corporation: Beginning Inventory Ending Inventory Units produced Direct labor per unit Direct materials per unit Variable manufacturing overhead per unit Fixed manufacturing overhead per unit Variable operating expenses per unit Fixed operating expenses

0 Units 4,000 units 40,000 units $22 $15 $5 $12 $10 $80,000

Using variable costing, what will Hawks record as contribution margin if the units were sold for $95 each and assuming no variances were reported? A) $504,000 B) $1,476,000 C) $1,548,000 D) $1,908,000 Answer: C Explanation: 0 + 40,000 - 4,000 = 36,000 units $22 + $15 + $5 = $42 per unit. 36,000 × $42 = $1,548,000 36,000 × $95 = $3,420,000 $3,420,000 - $1,944,000 - ($10 * 36,000) = $1,548,000 Beg inv + units produced - end inv = units sold DL per unit + Dm per unit + VMOH per unit = variable product cost per unit Units sold × variable product cost per unit = COGS Units sold × selling price per unit = sales Sales - COGS - (V op Exp per unit × units sold) = CM Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

52) The following information applies to Hawks Corporation: Beginning Inventory Ending Inventory Units produced Direct labor per unit Direct materials per unit Variable manufacturing overhead per unit Fixed manufacturing overhead per unit Variable operating expenses per unit Fixed operating expenses

0 Units 4,000 units 40,000 units $22 $15 $5 $12 $10 $80,000

Using variable costing, what will Hawks record as operating income if the units were sold for $95 each and assuming no variances were reported? A) $556,000 B) $988,000 C) $1,036,000 D) $1,108,000 Answer: B Explanation: 0 + 40,000 - 4,000 = 36,000 units $22 + $15 + $5 = $42 per unit. 36,000 × $42 = $1,548,000 36,000 × $95 = $3,420,000 $3,420,000 - $1,944,000 - ($10 * 36,000) = $1,548,000 $1,548,000 - ($80,000 + $12 × 40,000) = $988,000 Beg inv + units produced - end inv = units sold DL per unit + Dm per unit + VMOH per unit = variable product cost per unit Units sold × variable product cost per unit = COGS Units sold × selling price per unit = sales Sales - COGS - (V op Exp per unit × units sold) = CM CM - (F op Exp + FMOH per unit × units produced) = op income Diff: 3 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

53) Angels R Us is currently operating at 100% capacity and incurred the following costs during the first month of operations: Units produced Direct labor Direct material Variable manufacturing overhead Fixed manufacturing overhead Variable operating expenses Fixed operating expenses

20,000 $240,000 $180,000 $280,000 $100,000 $130,000 $50,000

If the company has ending inventory of 1,600 units for the month, how much inventory would be reported on the balance sheet using variable costing? A) $64,000 B) $56,000 C) $66,400 D) $78,400 Answer: B Explanation: ($240,000 + $180,000 + $280,000) ÷ 20,000 = $35 per unit $35 × 1,600 = $56,000 (DL + DM + V manufacturing costs) ÷ unit produced = manufacturing cost per unit Manufacturing cost per unit × end inventory units Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management. 54) When the monthly units produced are constant, and sales in units are less than the units produced, net income determined with absorption costing procedures will A) always be greater than operating income determined with variable costing. B) always be less than operating income determined with variable costing. C) be equal to operating income determined using variable costing. D) be equal to contribution margin per unit times units sold. Answer: A Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management.

55) The difference between variable costing and absorption costing in measuring net income lies in the treatment of A) direct labor costs. B) direct material costs. C) variable manufacturing overhead. D) fixed manufacturing overhead. Answer: D Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 56) When calculating inventory for the balance sheet using variable costing as opposed to absorption costing, the inventory values will generally be A) equal. B) greater. C) less. D) doubled. Answer: C Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 57) When using variable costing and absorption costing, fixed manufacturing costs are treated as A) product costs under both. B) product costs using absorption costing and period cost with variable costing. C) period costs under both. D) period costs using absorption costing and product cost with variable costing. Answer: B Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management.

58) When using variable costing and absorption costing, variable manufacturing costs are treated as A) product costs under both. B) product costs using absorption costing and period cost with variable costing. C) period costs under both. D) period costs using absorption costing and product cost with variable costing. Answer: A Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 59) Which of the following statements is true? A) Absorption costing net income exceeds variable costing net income when units produced are greater than units sold. B) Absorption costing net income exceeds variable costing net income when units produced are less than units sold. C) Variable costing net income exceeds absorption costing net income when units produced exceed units sold. D) Absorption costing net income exceeds variable costing net income when units produced and sold are equal. Answer: A Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 60) The primary difference between absorption and variable costing is A) inclusion of fixed manufacturing overhead in product costs. B) inclusion of fixed operating expenses in period costs. C) inclusion of variable manufacturing overhead in period costs. D) inclusion of fixed operating expenses in product costs. Answer: A Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management.

61) The product cost per unit for absorption costing is A) always higher than the product cost for variable costing. B) always lower than the product cost for variable costing. C) usually, but not always, higher than the product cost for variable costing. D) usually, but not always, lower than the product cost for variable costing. Answer: A Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 62) Operating income under absorption costing is higher than operating income under variable costing A) always, no matter how many units are sold and produced. B) when units produced equal units sold. C) when units produced are more than units sold. D) when units produced are less than units sold. Answer: C Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 63) Fixed manufacturing overhead costs from the current period are sometimes deferred to future periods using A) both absorption and variable costing. B) neither absorption or variable costing. C) variable costing. D) absorption costing. Answer: D Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management.

64) When the units produced is greater than the units sold, A) variable and fixed manufacturing overhead costs are deferred until a future period when using absorption costing. B) variable and fixed manufacturing overhead costs are deferred until a future period when using variable costing. C) some fixed manufacturing overhead costs are deferred until a future period when using absorption costing. D) some variable manufacturing overhead costs are deferred until a future period when using absorption costing. Answer: C Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 65) When the units sold is greater than the units produced, A) ending inventory using absorption costing will be greater than ending inventory under variable costing. B) ending inventory using absorption costing will be less than ending inventory under variable costing. C) ending inventory using absorption costing equal ending inventory under variable costing. D) ending inventory using absorption costing could be greater than, less than or equal to ending inventory under variable costing. Answer: A Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 66) When using ________ costing, management may be tempted to produce more units than demand when trying to increase operating income. A) absorption B) variable C) both absorption and variable D) neither absorption or variable Answer: A Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 39

67) If bonuses are awarded to a manager based on operating income, the manager may choose to increase production to meet the desired operating income when using A) variable costing to increase net income. B) variable costing to decrease net income. C) absorption costing to increase net income. D) variable costing to increase net income. Answer: C Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 68) When comparing variable costing to absorption costing, which of the following would be a potential advantage of using variable costing? A) Using variable costing is consistent with using the cost-volume-profit analysis. B) Operating income is affected by the changes in production. C) Operating income calculated using variable costing is not closely tied to changes in sales levels. D) All the answers are potential advantages. Answer: C Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 69) David Industries expects to sell 260,000 units in 2025. The manager is under pressure to increase operating income for the same period of time. He is trying to decide whether to produce the units required for demand, 260,000 or produce 300,000 units. David Industries would have a higher operating income if the manager decided to produce A) 260,000 units under variable costing. B) 260,000 units under absorption costing. C) 300,000 under variable costing. D) 300,000 under absorption costing. Answer: D Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management.

70) Powell Corporation produced 80,000 units and sold 78,000 units in its first year of operations. If the company had produced 1,000 fewer units, what would have been the effect on operating income under variable and absorption costing? A) There would be no effect on operating income under variable costing, but operating income under absorption costing would increase. B) There would be no effect on operating income under variable costing, but operating income under absorption costing would decrease. C) Operating income under variable costing would decrease, but operating income under absorption costing would increase. D) Operating income under both variable costing and absorption costing would decrease. Answer: B Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 71) During 2025, inventory increased by 7,000 units. The following information for the company is available:

Manufacturing costs per unit Operating costs (variable is per unit)

Variable $12.00 $4.00

Fixed $6.00 $10,500

If the company uses absorption costing rather than variable costing, the effect on operating income would be a A) $42,000 decrease. B) $42,000 increase. C) $52,500 increase. D) $52,500 decrease. Answer: B Explanation: ($12 - $6) × 7,000 = $42,000 (V manufacturing costs - F manufacturing costs) × increase in inventory Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management.

72) During 2025, KM Construction sold 10,000 units, with beginning and ending units for the year of 1,000. Manufacturing costs were as follows:

Manufacturing costs per unit Operating costs (variable is per unit)

Variable $11.00 $3.00

Fixed $7.00 $2.50

Which of the following statements is true? A) Net income will be the same under both variable and absorption costing. B) Net income under variable costing will be $45,000 less than net income under absorption costing. C) Net income under absorption costing will be $40,000 more than under variable costing. D) The difference in net income cannot be determined. Answer: A Explanation: Since the inventory level did not change, the number of units manufactured equals the number of units sold. Therefore, operating income is unchanged between variable and absorption costing. Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management.

73) Stanczyk Inc. started operations in January 2025. The company produces and sells cabinets for $5,200 each. The following information pertains to the cost and sales of the cabinets each year: Variable manufacturing costs Variable operating costs Fixed manufacturing costs Fixed operating costs

$2,300 per unit $65 per unit $25,000 $12,000

The company produced 25 units per year for 2025, 2026, and 2027. The company sold 22 units in 2025, 20 units in 2026, and 26 units in 2027. It reported no volume variances for the threeyear period. For 2025, A) absorption costing operating income exceeded variable costing operating income by $3,000. B) variable costing operating income exceeded absorption costing operating income by $3,000. C) the operating income for absorption costing equaled operating income for variable costing. D) the operating income for absorption costing may be greater than, equal to or less than operating income under variable costing. Answer: A Explanation: $25,000 ÷ 25 = $1,000 per unit. ($5,200 × 22) - (($2,300 + $1,000) × 22) = $41,800 $41,800 - ($65 × 22) - $12,000 = $28,370 (Absorption) ($5,200 × 22) - (($2,300 + $65) × 22) = $62,370 $62,370 - $25,000 - $12,000 = $25,370 (Variable) $28,370 - $25,370 = $3,000 FMOH ÷ units produced = FMOH per unit (sale price per unit × units sold) - ((VM costs per unit + FM costs per unit) × units sold) = GM GM - (V op exp per unit × units sold) - F Op exp = Abs op income (sale price per unit × units sold) - ((VM costs per unit + V Op costs per unit) × units sold) = CM CM - FM cost = F op costs = variance op income Abs op income - variance op income = variance Diff: 2 LO: 3 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

74) Angels R Us is currently operating at 100% capacity and incurred the following costs during the first month of operations: Units produced Direct labor Direct material Variable manufacturing overhead Fixed manufacturing overhead Variable operating expenses Fixed operating expenses

20,000 $240,000 $180,000 $280,000 $100,000 $130,000 $50,000

If the company has ending inventory of 1,600 units for the month, what would be the difference in inventory reported on the balance sheet between absorption and variable costing? A) Absorption would report $8,000 more in inventory than variable costing. B) Absorption would report $8,000 less in inventory than variable costing. C) Absorption would report $2,400 more in inventory than variable costing. D) Absorption would report $2,400 less in inventory than variable costing. Answer: A Explanation: $100,000 ÷ 20,000 = $5 per unit $5 × 1,600 = $8,000 Fixed Manufacturing costs ÷ unit produced = Fixed manufacturing cost per unit Fixed manufacturing cost per unit × end inventory units = difference Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

75) Stanczyk Inc. started operations in January 2025. The company produces and sells cabinets for $5,200 each. The following information pertains to the cost and sales of the cabinets each year: Variable manufacturing costs Variable operating costs Fixed manufacturing costs Fixed operating costs

$2,300 per unit $65 per unit $25,000 $12,000

The company produced 25 units per year for 2025, 2026, and 2027. The company sold 22 units in 2025, 20 units in 2026, and 26 units in 2027. It reported no volume variances for the threeyear period. For 2026, A) absorption costing operating income exceeded variable costing operating income by $5,000. B) variable costing operating income exceeded absorption costing operating income by $5,000. C) the operating income for absorption costing equaled operating income for variable costing. D) the operating income for absorption costing may be greater than, equal to or less than operating income under variable costing. Answer: A Explanation: $25,000 ÷ 25 = $1,000 per unit. ($5,200 × 20) - (($2,300 + $1,000) × 20) = $38,000 $38,000 - ($65 × 20) - $12,000 = $24,700 (Absorption) ($5,200 × 20) - (($2,300 + $65) × 20) = $56,700 $56,700 - $25,000 - $12,000 = $19,700 (Variable) $24,700 - $19,700 = $5,000 FMOH ÷ units produced = FMOH per unit (sale price per unit × units sold) - ((VM costs per unit + FM costs per unit) × units sold) = GM GM - (V op exp per unit × units sold) - F Op exp = Abs op income (sale price per unit × units sold) - ((VM costs per unit + V Op costs per unit) × units sold) = CM CM - FM cost = F op costs = variance op income Abs op income - variance op income = variance Diff: 2 LO: 3 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

76) Stanczyk Inc. started operations in January 2025. The company produces and sells cabinets for $5,200 each. The following information pertains to the cost and sales of the cabinets each year: Variable manufacturing costs Variable operating costs Fixed manufacturing costs Fixed operating costs

$2,300 per unit $65 per unit $25,000 $12,000

The company produced 25 units per year for 2025, 2026, and 2027. The company sold 22 units in 2025, 20 units in 2026, and 26 units in 2027. It reported no volume variances for the threeyear period. For 2027, A) absorption costing operating income exceeded variable costing operating income by $1,000. B) variable costing operating income exceeded absorption costing operating income by $1,000. C) the operating income for absorption costing equaled operating income for variable costing. D) the operating income for absorption costing may be greater than, equal to or less than operating income under variable costing. Answer: B Explanation: $25,000 ÷ 25 = $1,000 per unit. ($5,200 × 26) - (($2,300 + $1,000) × 26) = $49,400 $49,400 - ($65 × 26) - $12,000 = $35,710 (Absorption) ($5,200 × 26) - (($2,300 + $65) × 26) = $73,710 $73,710 - $25,000 - $12,000 = $36,710 (Variable) $36,710 - $35,710 = $1,000 FMOH ÷ units produced = FMOH per unit (sale price per unit × units sold) - ((VM costs per unit + FM costs per unit) × units sold) = GM GM - (V op exp per unit × units sold) - F Op exp = Abs op income (sale price per unit × units sold) - ((VM costs per unit + V Op costs per unit) × units sold) = CM CM - FM cost = F op costs = variance op income Abs op income - variance op income = variance Diff: 2 LO: 3 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

77) Stanczyk Inc. started operations in January 2025. The company produces and sells cabinets for $5,200 each. The following information pertains to the cost and sales of the cabinets each year: Variable manufacturing costs Variable operating costs Fixed manufacturing costs Fixed operating costs

$2,300 per unit $65 per unit $25,000 $12,000

Answer: A Explanation: $25,000 ÷ 25 = $1,000 per unit. 2025: ($5,200 × 22) - (($2,300 + $1,000) × 22) = $41,800 $41,800 - ($65 × 22) - $12,000 = $28,370 (Absorption) ($5,200 × 22) - (($2,300 + $65) × 22) = $62,370 $62,370 - $25,000 - $12,000 = $25,370 (Variable) $28,370 - $25,370 = $3,000 2026: ($5,200 × 20) - (($2,300 + $1,000) × 20) = $38,000 $38,000 - ($65 × 20) - $12,000 = $24,700 (Absorption) ($5,200 × 20) - (($2,300 + $65) × 20) = $56,700 $56,700 - $25,000 - $12,000 = $19,700 (Variable) $24,700 - $19,700 = $5,000 2027: ($5,200 × 26) - (($2,300 + $1,000) × 26) = $49,400 $49,400 - ($65 × 26) - $12,000 = $35,710 (Absorption) ($5,200 × 26) - (($2,300 + $65) × 26) = $73,710 $73,710 - $25,000 - $12,000 = $36,710 (Variable) $36,710 - $35,710 = $1,000 2025 - 2027 $3,000 + $5,000 - $1,000 = $7,000 For each year 2025, 2026, 2027: FMOH ÷ units produced = FMOH per unit (sale price per unit × units sold) - ((VM costs per unit + FM costs per unit) × units sold) = GM GM - (V op exp per unit × units sold) - F Op exp = Abs op income (sale price per unit × units sold) - ((VM costs per unit + V Op costs per unit) × units sold) = CM CM - FM cost = F op costs = variance op income Abs op income - variable op income = variance 2025 - 2027: 2025 variance + 2026 variance - 2027 variance - total variance Diff: 3 LO: 3 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

78) The efficient level of activity performance that is active in the production of goods and services is known as A) idle capacity. B) nonproductive capacity. C) productive capacity. D) efficient capacity. Answer: C Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning. 79) An example of activity capacity that is acquired but not used and will not provide future benefits is A) idle capacity. B) nonproductive capacity. C) productive capacity. D) efficient capacity. Answer: B Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning. 80) If a company acquires the resources needed to perform an activity and the resources are used for its intended purposes, it is known as A) idle capacity. B) nonproductive capacity. C) productive capacity. D) efficient capacity. Answer: C Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning.

81) An example of activity capacity that is acquired but not used but could be converted for future benefits is A) idle capacity. B) nonproductive capacity. C) productive capacity. D) efficient capacity. Answer: A Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning. 82) The type of available capacity that signals the need to improve factory operations is A) idle capacity. B) nonproductive capacity. C) productive capacity. D) efficient capacity. Answer: B Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning. 83) The type of available capacity that signals the potential for growth opportunities or policy changes is A) idle capacity. B) nonproductive capacity. C) productive capacity. D) efficient capacity. Answer: A Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning.

84) When calculating the budgeted number of units to be produced, all the following are options except A) theoretical capacity. B) practical capacity. C) productive capacity. D) normal capacity. Answer: C Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning. 85) Theoretical capacity A) results in lower, more attainable production expectations based on existing capacity. B) results in the lowest budgeted fixed MOH rate. C) results in a higher fixed MOH rate than the normal capacity. D) results in the highest fixed MOH rate. Answer: B Diff: 2 LO: 4 Bloom: C AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning. 86) Practical capacity A) typically leads to an unusually large, unfavorable fixed-MOH volume variance. B) will lead to an unfavorable fixed MOH volume variance if actual production exceeds planned practical capacity. C) will lead to a fixed MOH rate that will fluctuate with demand changes. D) will lead to an unfavorable fixed MOH volume variance if actual production does not meet planned practical capacity. Answer: D Diff: 2 LO: 4 Bloom: C AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning.

87) Normal capacity A) results in the highest product cost. B) is the method used according to IRS guidelines. C) results in the lowest product cost. D) results in moderate prices. Answer: A Diff: 2 LO: 4 Bloom: C AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning. 88) All the following are true regarding theoretical capacity except A) theoretical capacity results in the lowest product cost. B) theoretical capacity results in the lowest budgeted fixed MOH rate. C) theoretical capacity usually gives unrealistic targets, which demotivates employees. D) theoretical capacity results in the highest fixed MOH rate. Answer: D Diff: 2 LO: 4 Bloom: C AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning. 89) All the following are true regarding practical capacity except A) practical capacity produces challenging but feasible goals. B) practical capacity will lead to an unfavorable fixed MOH volume variance if actual production exceeds planned practical capacity. C) practical capacity has a moderate fixed MOH rate and moderate prices. D) practical capacity will lead to an unfavorable fixed MOH volume variance if actual production does not meet planned practical capacity. Answer: B Diff: 2 LO: 4 Bloom: C AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning.

90) All the following are true regarding normal capacity except A) normal capacity results in the highest product cost. B) normal capacity can fluctuate depending on demand. C) normal capacity results in the lowest product cost. D) normal capacity can lead to higher prices causing a downward spiral. Answer: C Diff: 2 LO: 4 Bloom: C AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning. 91) Which method of closing out the fixed MOH volume variance will have no effect on the financial statements, no matter the capacity used? A) Allocating the fixed MOH volume variance to COGS. B) Allocating the fixed MOH volume variance equally among WIP Inventory, FG inventory and COGS. C) Prorating the fixed MOH volume variance to WIP Inventory, FG inventory and COGS. D) Prorating the fixed MOH volume variance to FG inventory and COGS. Answer: C Diff: 2 LO: 4 Bloom: C AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning. 92) The capacity that could cause a downward spiral (or death spiral) is A) theoretical capacity. B) practical capacity. C) productive capacity. D) normal capacity. Answer: D Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning.

93) Malena is working on budgeting for the next fiscal year. The company recently upgraded their equipment purchases to increase capacity. The new equipment, with the current workforce can produce 225 units per hour, working 365 days per year. The operations currently run 24 hours a day. Malena estimates a more realistic goal is 210 units per hour. She also believes the company will be closed 15 days during the year for maintenance and holidays. She is also accounting for setups and inspection of 3 hours per day that will temporarily stop production. The current system produces 1,300,000 units per year and is tied to demand. If the budgeted fixed MOH costs are $2,100,000 for the upcoming year, what would be the fixed MOH rate using the theoretical capacity? A) $1.07 B) $1.19 C) $1.36 D) $1.62 Answer: A Explanation: 225 × 365 × 24 = 1,971,000 units $2,100,000 ÷ 1,971,000 = $1.07 per unit. Units per hour × 365 × 24 = budgeted units produced Budgeted fixed MOH ÷ budgeted units produced = budgeted fixed MOH rate per unit. Diff: 2 LO: 4 Bloom: AP AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning.

94) Malena is working on budgeting for the next fiscal year. The company recently upgraded their equipment purchases to increase capacity. The new equipment, with the current workforce can produce 225 units per hour, working 365 days per year. The operations currently run 24 hours a day. Malena estimates a more realistic goal is 210 units per hour. She also believes the company will be closed 15 days during the year for maintenance and holidays. She is also accounting for setups and inspection of 3 hours per day that will temporarily stop production. The current system produces 1,300,000 units per year and is tied to demand. If the budgeted fixed MOH costs are $2,100,000 for the upcoming year, what would be the fixed MOH rate using the practical capacity? A) $1.07 B) $1.19 C) $1.36 D) $1.62 Answer: C Explanation: 210 × (365 - 15) × (24 - 3) = 1,543,500 units $2,100,000 ÷ 1,543,500 = $1.36 per unit. Units per hour × (365 - days closed) × (24 - hours shutdown) = budgeted units produced Budgeted fixed MOH ÷ budgeted units produced = budgeted fixed MOH rate per unit. Diff: 2 LO: 4 Bloom: AP AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning. 95) Malena is working on budgeting for the next fiscal year. The company recently upgraded their equipment purchases to increase capacity. The new equipment, with the current workforce can produce 225 units per hour, working 365 days per year. The operations currently run 24 hours a day. Malena estimates a more realistic goal is 210 units per hour. She also believes the company will be closed 15 days during the year for maintenance and holidays. She is also accounting for setups and inspection of 3 hours per day that will temporarily stop production. The current system produces 1,300,000 units per year and is tied to demand. If the budgeted fixed MOH costs are $2,100,000 for the upcoming year, what would be the fixed MOH rate using the normal capacity? A) $1.07 B) $1.19 C) $1.36 D) $1.62 Answer: D Explanation: $2,100,000 ÷ 1,300,000 = $1.62 per unit. Budgeted fixed MOH ÷ budgeted units produced = budgeted fixed MOH rate per unit. Diff: 2 LO: 4 Bloom: AP AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning. 55

96) Amanha just learned her company will start a new workday policy. There is a 60% chance the company will start to enforce the policy this year and she has been tasked in determining how the new policy will affect the company. The new policy will have a significant effect on the company's production output because specific lines will close for periods of time during mandatory layoffs. The current demand of the company is 400,000 units per year. The budgeted fixed MOH costs are $920,000. She has put together the following information to plan for the coming policy:

Theoretical level Practical level

Units Per Hour 145 130

Hours per Day 20 15

Days per Month 25 20

Using theoretical capacity, what is the denominator level? A) 400,000 B) 468,000 C) 870,000 D) 920,000 Answer: C Explanation: 145 × 20 × 25 × 12 months = 870,000 units Units per hour × hours per day × days per month × months per year = budgeted units produced Diff: 2 LO: 4 Bloom: AP AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning.

97) Amanha just learned her company will start a new workday policy. There is a 60% chance the company will start to enforce the policy this year and she has been tasked in determining how the new policy will affect the company. The new policy will have a significant effect on the company's production output because specific lines will close for periods of time during mandatory layoffs. The current demand of the company is 400,000 units per year. The budgeted fixed MOH costs are $920,000. She has put together the following information to plan for the coming policy:

Theoretical level Practical level

Units Per Hour 145 130

Hours per Day 20 15

Days per Month 25 20

Using practical capacity, what is the denominator level? A) 400,000 B) 468,000 C) 870,000 D) 920,000 Answer: B Explanation: 130 × 15 × 20 × 12 months = 468,000 units Units per hour × hours per day × days per month × months per year = budgeted units produced Diff: 2 LO: 4 Bloom: AP AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning.

98) Amanha just learned her company will start a new workday policy. There is a 60% chance the company will start to enforce the policy this year and she has been tasked in determining how the new policy will affect the company. The new policy will have a significant effect on the company's production output because specific lines will close for periods of time during mandatory layoffs. The current demand of the company is 400,000 units per year. The budgeted fixed MOH costs are $920,000. She has put together the following information to plan for the coming policy:

Theoretical level Practical level

Units Per Hour 145 130

Hours per Day 20 15

Using normal capacity, what is the denominator level? A) 400,000 B) 468,000 C) 870,000 D) 920,000 Answer: A Diff: 2 LO: 4 Bloom: AP AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning.

Days per Month 25 20

99) Amanha just learned her company will start a new workday policy. There is a 60% chance the company will start to enforce the policy this year and she has been tasked in determining how the new policy will affect the company. The new policy will have a significant effect on the company's production output because specific lines will close for periods of time during mandatory layoffs. The current demand of the company is 400,000 units per year. The budgeted fixed MOH costs are $920,000. She has put together the following information to plan for the coming policy:

Theoretical level Practical level

Units Per Hour 145 130

Hours per Day 20 15

Days per Month 25 20

Using normal capacity, what is the budgeted fixed MOH rate? A) $1.06 B) $1.97 C) $2.30 D) $2.37 Answer: C Explanation: $920,000 ÷ 400,000 = $2.30 per unit. Budgeted fixed MOH ÷ budgeted units produced = budgeted fixed MOH rate per unit. Diff: 2 LO: 4 Bloom: AP AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning.

100) Amanha just learned her company will start a new workday policy. There is a 60% chance the company will start to enforce the policy this year and she has been tasked in determining how the new policy will affect the company. The new policy will have a significant effect on the company's production output because specific lines will close for periods of time during mandatory layoffs. The current demand of the company is 400,000 units per year. The budgeted fixed MOH costs are $920,000. She has put together the following information to plan for the coming policy:

Theoretical level Practical level

Units Per Hour 145 130

Hours per Day 20 15

Days per Month 25 20

Using practical capacity, what is the budgeted fixed MOH rate? Round final answer to the nearest cent. A) $1.06 B) $1.97 C) $2.30 D) $2.37 Answer: B Explanation: 130 × 15 × 20 × 12 months = 468,000 units $920,000 ÷ 468,000 = $1.97 per unit. Units per hour × hours per day × days per month × months per year = budgeted units produced Budgeted fixed MOH ÷ budgeted units produced = budgeted fixed MOH rate Diff: 2 LO: 4 Bloom: AP AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning.

101) Amanha just learned her company will start a new workday policy. There is a 60% chance the company will start to enforce the policy this year and she has been tasked in determining how the new policy will affect the company. The new policy will have a significant effect on the company's production output because specific lines will close for periods of time during mandatory layoffs. The current demand of the company is 400,000 units per year. The budgeted fixed MOH costs are $920,000. She has put together the following information to plan for the coming policy:

Theoretical level Practical level

Units Per Hour 145 130

Hours per Day 20 15

Days per Month 25 20

Using theoretical capacity, what is the budgeted fixed MOH rate? A) $1.06 B) $1.97 C) $2.30 D) $2.37 Answer: A Explanation: 145 × 20 × 25 × 12 months = 870,000 units $920,000 ÷ 870,000 = $1.06 per unit. Units per hour × hours per day × days per month × months per year = budgeted units produced Budgeted fixed MOH ÷ budgeted units produced = budgeted fixed MOH rate per unit. Diff: 2 LO: 4 Bloom: AP AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning.

102) Amanha just learned her company will start a new workday policy. There is a 60% chance the company will start to enforce the policy this year and she has been tasked in determining how the new policy will affect the company. The new policy will have a significant effect on the company's production output because specific lines will close for periods of time during mandatory layoffs. The current demand of the company is 400,000 units per year. The budgeted fixed MOH costs are $920,000. She has put together the following information to plan for the coming policy:

Theoretical level Practical level

Units Per Hour 145 130

Hours per Day 20 15

Days per Month 25 20

If the company's actual production was 450,000 units, what is the fixed MOH volume variance using normal capacity? (Round the budgeted fixed MOH rate to the nearest two decimals.) A) $115,000 F B) $115,000 U C) $35,450 F D) $35,460 U Answer: A Explanation: $920,000 ÷ 400,000 = $2.30 per unit. 400,000 - 450,000 = (50,000) × $2.30 per unit = $115,000 F Budgeted fixed MOH ÷ budgeted units produced = budgeted fixed MOH rate per unit. Budgeted Units produced - actual unit produced = difference × fixed MOH rate = variance Diff: 2 LO: 4 Bloom: AP AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning.

103) Amanha just learned her company will start a new workday policy. There is a 60% chance the company will start to enforce the policy this year and she has been tasked in determining how the new policy will affect the company. The new policy will have a significant effect on the company's production output because specific lines will close for periods of time during mandatory layoffs. The current demand of the company is 400,000 units per year. The budgeted fixed MOH costs are $920,000. She has put together the following information to plan for the coming policy:

Theoretical level Practical level

Units Per Hour 145 130

Hours per Day 20 15

Days per Month 25 20

If the company's actual production was 450,000 units, what is the fixed MOH volume variance using practical capacity? (Round the budgeted fixed MOH rate to the nearest two decimals.) A) $115,000 F B) $115,000 U C) $35,450 F D) $35,460 U Answer: D Explanation: 130 × 15 × 20 × 12 months = 468,000 units $920,000 ÷ 468,000 = $1.97 per unit. 468,000 - 450,000 = 18,000 × $1.97 per unit = $35,460 U Units per hour × hours per day × days per month × months per year = budgeted units produced Budgeted fixed MOH ÷ budgeted units produced = budgeted fixed MOH rate per unit. Budgeted Units produced - actual unit produced = difference × fixed MOH rate = variance Diff: 3 LO: 4 Bloom: AP AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning.

104) Amanha just learned her company will start a new workday policy. There is a 60% chance the company will start to enforce the policy this year and she has been tasked in determining how the new policy will affect the company. The new policy will have a significant effect on the company's production output because specific lines will close for periods of time during mandatory layoffs. The current demand of the company is 400,000 units per year. The budgeted fixed MOH costs are $920,000. She has put together the following information to plan for the coming policy:

Theoretical level Practical level

Units Per Hour 145 130

Hours per Day 20 15

Days per Month 25 20

If the company's actual production was 450,000 units, what is the fixed MOH volume variance using theoretical capacity? (Round the budgeted fixed MOH rate to the nearest two decimals.) A) $115,000 F B) $115,000 U C) $445,200 F D) $445,200 U Answer: D Explanation: 145 × 20 × 25 × 12 months = 870,000 units $920,000 ÷ 870,000 = $1.06 per unit. 870,000 - 450,000 = 420,000 × $1.06 per unit = $445,200 U Units per hour × hours per day × days per month × months per year = budgeted units produced Budgeted fixed MOH ÷ budgeted units produced = budgeted fixed MOH rate per unit. Budgeted Units produced - actual unit produced = difference × fixed MOH rate = variance Diff: 3 LO: 4 Bloom: AP AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning.

105) What is the purpose of absorption costing and how does it work? Answer: Absorption costing is when fixed manufacturing overhead costs are absorbed into the product cost, along with direct materials, direct labor and variable manufacturing overhead costs. Absorption costing is required by GAAP for external reporting purposes. The connection to GAAP is that costs to make the product reside on the balance sheet until sold. Once sold, the costs become cost of goods on the income statement. The fixed manufacturing costs that are on the balance sheet as inventory are typically referred to as deferred assets as their cost will be recognized as an expense on the income statement in future periods. Because fixed overhead costs are absorbed into the product cost, companies must also consider volume variances when calculating cost of goods sold on the income statement. Diff: 1 LO: 1 Bloom: AN AACSB: Analytic AICPA: FN: Measurement IMA: Cost Management. 106) When using absorption costing, managers tend to overproduce inventory to show a larger operating income. What are 2 advantages and 2 disadvantages of building inventory? Answer: Advantages — • If external market signals increased demand, then this approach is reasonable. • One or more inputs might be constrained, or available only seasonally • External forces may dictate inventory building • Moves fixed-MOH to the balance sheet, which boosts income. This could result in benefits to the company, such as access to capital, and/or it could result in benefits to managers and employees via bonuses or other increased compensation. Disadvantages — • Incurs storage and carrying costs: physical space requirements and employees to manage goods. • Ties up working capital, and the process of moving/storing extra inventory carries risk that it will be damaged. • Potential uncertainty around future market demand and/or obsolescence. • Building excess inventory simply to boost income, with no legitimate business reason to do so, pushes the boundaries of ethics, which is just not good business practice. Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management.

107) What is the purpose of variable costing and how does it work? Answer: Variable costing only includes direct material, direct labor, and variable manufacturing overhead as part of its product costs. All fixed manufacturing overhead is treated as a period cost and expensed in the period incurred. According to GAAP, the variable costing method can only be used for internal purposes. However, this costing method support management decision-making as it separates costs by behavior, which makes them more straightforward. It also better aligns manager, subunit, and company goals, since managers are no longer incentivized to stockpile inventory to improve performance. It also provides more predictable income results, as its treatment of fixed manufacturing overhead costs are consistent. Diff: 1 LO: 2 Bloom: AN AACSB: Analytic AICPA: FN: Measurement IMA: Cost Management. 108) When comparing inventory under absorption and variable costing there are two stable truths. What are they? Answer: 1. The difference in FG Inventory values arises because absorption costing includes fixed-MOH as a product cost, while variable costing excludes fixed-MOH from product cost and sends it to the income statement in the period it is incurred. 2. As long as there are units on hand in inventory, absorption costing's inventory balance will always be higher than variable costing's inventory balance, since it includes fixed-MOH as a product cost and variable costing doesn't. Diff: 1 LO: 3 Bloom: K AACSB: Analytic AICPA: FN: Measurement IMA: Cost Management.

109) There are three categories of capacity. What are they and why do they exist? Answer: Productive capacity is time, space, and equipment being used for its intended purpose–the active production of goods or services. Nonproductive capacity is usage of time, space, and equipment that does not result in good products. Examples include downtime for machine setups, factory maintenance, and employees on break. Other examples include capacity usage that results in waste, scrap, and rework. Nonproductive capacity signals a need to improve factory operations. Idle capacity is the time, space, and equipment that is unused at present but could be converted to productive capacity to grow the business. Causes of unused capacity include contractual agreements like work arrangements and holiday closures, or market reasons, like lack of orders and foregone market share. Idle capacity is a signal for growth opportunities or policy changes that would enable unused capacity to be converted to productive capacity to advance the business. Diff: 1 LO: 4 Bloom: AN AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning. 110) There are three capacities that are impacted by the denominator levels' volume. Describe the effect on the budgeted fixed manufacturing overhead rate of each type. Answer: Productive capacity results in the lowest budgeted fixed-MOH rate, given that fixedMOH is spread over the greatest number of units that available capacity can possibly supply. The budgeted fixed-MOH rate is stable, assuming our facility's resources stay stable. But the fixedMOH rate is unrealistically low, which could lead to understated product cost. Nonproductive capacity results in lower, more attainable production expectations based on existing capacity costs, leading to a stable, reasonably low fixed-MOH rate. This begets a moderate product cost. Idle capacity results in higher fixed-MOH rates, given that planned production aligns with customer demand that could be lower than available capacity. Higher fixed-MOH rates mean higher product costs, which may mask the cost of unused capacity. Unfavorable fixed-MOH volume variances are less likely when using this denominator level because this level of output is generally not difficult to achieve. Diff: 1 LO: 4 Bloom: AN AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning.

111) Mariah is compiling annual financial statements for her business. She uses absorption costing, as per GAAP. Budgeted variable manufacturing costs are $10 per unit and variable operating costs are $2 per unit. Budgeted fixed MOH is $50,000, and budgeted operating costs are $20,000. If she plans to produce 10,000 units, how much cost should be capitalized to inventory for each unit produced? Answer: $15 per unit Solution: $50,000 ÷ 10,000 = $5 + $10 = $15 Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FN: Measurement IMA: Cost Management. 112) Hall Enterprises has budgeted variable and fixed manufacturing costs of $90,000 and $51,000, respectively. The budgets are based on producing 3,000 units. For the same budget period, variable and fixed operating expenses were budgeted at $12,000 and $24,000, respectively. Hall Enterprises currently uses absorption costing. Assuming no beginning inventory for the period, all 3,000 units were produced, and the company sold 2,700 units, how much in COGS did the company report for the year? How much inventory cost will be on the balance sheet at year end? Answer: COGS = $126,900 Ending Inventory = $14,100 Solution: $90,000 + $51,000 = $141,000 ÷ 3,000 = $47 per unit 2,700 units × $47 = $126,900 (3,000 - 2,700) × $47 = $14,100 Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

113) Aresia is the manager for Dawson Company. She budgeted for $230,000 in fixed MOH and $80 per unit for variable manufacturing costs for the upcoming fiscal year. She was planning to produce 8,000 units. Actual fixed MOH costs and actual variable manufacturing costs came in on budget but the company was only able to produce and sell 7,600 units. If the company uses absorption costing with standard costs, what is the company's initial COGS (before any variance is considered)? What is the adjusted COGS after writing off the variance directly to COGS? Answer: Unadjusted COGS = $826,500 Adjusted COGS = $838,000 Solution: $230,000 ÷ 8,000 = $28.75 per unit ($28.75 + $80) × 7,600 = $826,500 COGS (unadjusted) Applied MOH = $28.75 × 7,600 = $218,500 $230,000 - $218,500 = $11,500 U $826,500 + $11,500 = $838,000 COGS (adjusted) Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FN: Measurement IMA: Cost Management. 114) Hall Enterprises has budgeted variable and fixed manufacturing costs of $90,000 and $51,000, respectively. The budgets are based on producing 3,000 units. For the same budget period, variable and fixed operating expenses were budgeted at $12,000 and $24,000, respectively. Hall Enterprises currently uses variable costing. Assuming no beginning inventory for the period, all 3,000 units were produced, and the company sold 2,700 units, how much in COGS did the company report for the year? How much inventory cost will be on the balance sheet at year end? Answer: COGS = $81,000 Ending Inventory = $9,000 Solution: $90,000 ÷ 3,000 = $30 per unit $30 × 2,700 = $81,000 COGS $30 × (3,000 - 2,700) = $9,000 Ending Inventory Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FN: Measurement IMA: Cost Management.

115) Dylan, manager of Burkley Company, is using a variable costing system to evaluate the company's performance. The company uses standard costing and budgeted to produce 5,000 units with a budgeted cost of $25,000 of fixed MOH and $20 per unit of variable manufacturing costs. Because of supply chain issues, the company was only able to produce 3,500 units with fixed MOH incurred of $17,850. However, they did sell all the units produced, plus the 600 units in beginning inventory. Assuming no changes in costs from last year to this year, how much will Dylan show on Burkley Company's report for its COGS this year? How much will be recognized for a fixed MOH volume variance? Answer: COGS = $82,000 Fixed MOH Volume Variance = $0 Solution: 3,500 + 600 = 4,100 units sold 4,100 × $20 = $82,000 COGS Fixed MOH volume variance is not recognized in variable costing because all fixed MOH is expensed in the period incurred. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FN: Measurement IMA: Cost Management.

116) Perla Industries produced 30,000 units and sold 29,000 units in 2025 with no beginning inventory. During the year, the following costs were incurred: Variable manufacturing costs per unit Variable operating costs per unit Fixed manufacturing costs Fixed operating costs

$106 $40 $270,000 $180,000

Calculate the ending inventory balance using both absorption costing and variable costing. Which method would you recommend Perla use for external purposes? Which method should be used to evaluate the managers of the company? Be sure to state your reason why. Answer: Absorption ending inventory = $115,000 Variable ending inventory = $106,000 If the company is reporting operating income for external purposes, absorption costing should be used as it is required by GAAP. However, if the company is evaluating its managers for internal purposes, it should use variable costing. This system supports management decision-making as it separates costs by behavior which is more straight forward. It will also help eliminate overproducing inventory. Solution: Ending Inventory = 30,000 - 29,000 = 1,000 Absorption cost per unit = ($270,000 ÷ 30,000) + $106 = $115 $115 × 1,000 = $115,000, absorption ending inventory $106 × 1,000 = $106,000, variable ending inventory Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FN: Measurement IMA: Cost Management.

117) Perla Industries produced 30,000 units and sold 29,000 units in 2025 with no beginning inventory. During the year, the following costs were incurred: Variable manufacturing costs per unit Variable operating costs per unit Fixed MOH costs Fixed operating costs

$106 $40 $270,000 $180,000

Calculate the COGS for both absorption and variable costing, assuming no variances were recorded. Explain the difference between the two systems. Answer: Absorption ending inventory = $3,335,000 Variable ending inventory = $3,074,000 The difference is the fixed MOH of $9 per unit or $261,000 in total Solution: Absorption cost per unit = ($270,000 ÷ 30,000) + $106 = $115 $115 × 29,000 = $3,335,000 $106 × 29,000 = $3,074,000 $3,335,000 - $3,074,000 = $261,000 or $9 × 29,000 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FN: Measurement IMA: Cost Management.

118) Patterson Inc.'s income statement, using absorption costing is as follows: Sales COGS Gross Margin Operating expenses Operating income

$125,000 82,500 42,500 12,000 $ 30,500

Patterson produced 3,000 units and sold 2,500 units. The company shows a cost per unit for variable manufacturing costs of $20 per unit and $1 per unit for variable operating expenses. If the manager would like to use the same period and create a variable costing income statement, what would it look like? Answer: Sales $125,000 Less: Variable expenses COGS 50,000 Operating expenses 2,500 52,500 Contribution Margin 72,500 Less: Fixed expenses Manufacturing expenses 39,000 Operating expenses 9,500 48,500 Operating income $ 24,000 Solution: $20 × 2,500 = $50,000 $1 × 2,500 = $2,500 $82,500 ÷ 2,500 units sold = $33 per unit absorption costing $33 - $20 = $13 per unit fixed manufacturing costs $13 × 3,000 = $39,000 fixed manufacturing costs $12,000 - $2,500 = $9,500 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FN: Measurement IMA: Cost Management.

119) Tercero Company sold 42,000 units in 2025. The manager did not find any variable cost variances and actual production equaled budgeted production of 40,000 units. Beginning inventory for the year was 3,500 units and last period's inventory carried the same cost per unit as this period's production. The company's income statement used for internal reporting shows the following: Sales Less: Variable expenses COGS Operating expenses Contribution Margin Less: Fixed expenses Manufacturing expenses Operating expenses Operating income

$199,500 100,800 27,300

20,000 14,000

128,100 71,400

34,000 $ 37,400

The CEO of Tercero wants to determine operating income under absorption costing. Prepare an absorption costing income statement for 2025. Answer: Sales $199,500 COGS 121,800 Gross Margin 77,700 Operating expenses 41,300 Operating income $ 36,400 Solution: $100,800 ÷ 42,000 = $2.40 variable manufacturing cost per unit $20,000 ÷ 40,000 = $.50 fixed MOH per unit ($2.40 + $.50) × 42,000 = $121,800 $27,300 + $14,000 = $41,300 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FN: Measurement IMA: Cost Management.

120) Chaviano Construction is planning on purchasing new machinery for the upcoming year. The company believes, if everything is perfect, the machinery can generate 110 units per hour, 24 hours per day, 365 days per year. However, the manager is more realistic and understands the company will shut down for 10 days a year for holidays and will have downtime of approximately 2 hours per day, each day. A more reasonable output of units is 96 per day. The budgeted fixed MOH costs are expected to be $960,000. Calculate Chaviano's theoretical and practical capacity for the next year. What will the fixed MOH rate be for the theoretical and practical capacity? (Round final answer to nearest cent for fixed MOH rate.) Answer: Theoretical capacity = 963,600 units Practical capacity = 749,760 units Theoretical fixed MOH rate = $1.00 Practical fixed MOH rate = $1.28 Solution: Theoretical capacity = 110 × 24 × 365 = 963,600 Practical capacity = 96 × (24 - 2) × (365 - 10) = 749,760 Theoretical fixed MOH rate = $960,000 ÷ 963,600 = $1.00 Practical fixed MOH rate = $960,000 ÷ 749,760 = $1.28 Diff: 1 LO: 4 Bloom: AP AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning.

121) Howard is considering two different denominators levels: theoretical capacity of 2,300 units and practical capacity of 1,900 units. With budgeted fixed MOH costs of $53,000, he thinks the actual production and sales for the two levels will be 2,100 units and 1,650 units, respectively. Calculate the budgeted fixed MOH rate, fixed MOH volume variance (amount and sign), and inventory cost per unit, assuming variable manufacturing costs of $65 per unit for both capacity levels. (Round Fixed MOH rate to the nearest cent. Fixed MOH volume variable round to the nearest dollar.) Answer: Theoretical capacity: Fixed MOH rate = $23.04 Fixed MOH volume variance = $4,608 U Inventory cost per unit = $88.04 Practical capacity: Fixed MOH rate = $27.89 Fixed MOH volume variance = $6,973 U Inventory cost per unit = $92.89 Solution: Theoretical capacity: Fixed MOH rate = $53,000 ÷ 2,300 = $23.04 Fixed MOH volume variance = (2,300 - 2,100) × $23.04 = $4,608 U Inventory cost per unit = $23.04 + $65 = $88.04 Practical capacity: Fixed MOH rate =$53,000 ÷ 1,900 = $27.89 Fixed MOH volume variance = (1,900 - 1,650) × $27.89 = $6,973 U Inventory cost per unit = $27.89 + $65 = $92.89 Diff: 1 LO: 4 Bloom: AP AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning.

122) Boyd Manufacturing opened for business on January 1, 2025. During 2025, the company budgeted for 12,000 units with fixed manufacturing costs of $78,000 but only produced 10,000 units and incurred fixed productions costs of $64,000 and fixed operating expenses of $23,000. The variable cost to produce each unit was $22 with $6 of variable operating expenses per unit. The company prepares its income statement using absorption costing. Boyd uses standard costing within its absorption costing system. There were no price or efficiency variances this year, and any other variances are written off directly to COGS. Instructions a. Calculate the cost per unit that Boyd will capitalize into inventory this year. b. Calculate Boyd's fixed MOH volume variance for 2025. (Identify amount and sign) c. If Boyd sold 9,500 units at $45 per unit, prepare the company's income statement in good form. d. Determine the FG Inventory balance to be reported on the balance sheet at the end of 2025. Answer: a. $28.50 per unit b. $13,000 U c. Sales $427,500 Less: COGS COGS (unadjusted) $270,750 Fixed-MOH volume variance 13,000 Adjusted COGS 283,750 Gross margin 143,750 Less: Operating expenses Variable 57,000 Fixed 23,000 80,000 Operating income $ 63,750 d. $14,250 Solution: a. ($78,000 ÷ 12,000) = $6.50 + $22 = $28.50 per unit b. (12,000 - 10,000) × $6.50 = $13,000 U c. 9,500 × $45 = $427,500 9,500 × $28.50 = $270,750 9,500 × $22 = $57,000 d. (10,000 - 9,500) × $28.50 = $14,250 Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FN: Measurement IMA: Cost Management.

123) Ziska Engineering prepares its internal reports using standard costing within its variable costing system. As a result, the company writes off any variances directly to COGS. The company has continued to see growth over the last five years but feels it will become stagnant if it can't meet its budgeted production level due to a disrupted supply chain. Information to make and sell 1,300 units of its design plans are as follows: Direct material Direct labor Variable MOH Variable operating Fixed-MOH Fixed operating

$12 per unit $26 per unit $16 per unit $2 per unit $26,000 $6,500

Actual costs came in as budgeted. However, the company only produced 1,150 units and sold 1,200 units at a selling price of $110 per unit. The company began the year with 250 units, and its standard product costs per unit were the same last year as they were this year. Instructions a. Calculate the cost per unit that Ziska will capitalize into inventory this year. b. Calculate how many units were in ending FG inventory this year and the total cost that will be capitalized on the balance sheet. c. Present Ziska's current year income statement, in good form, using variable costing. d. Last year, the company reported an operating income of $24,200. Comment on whether management will be pleased with the current year's performance.

Answer: a. $54 per unit b. Ending Inventory 200 units, $10,800 c. Sales Less: Variable expenses COGS $64,800 Operating expenses Contribution margin Less: Fixed expenses Manufacturing expenses Operating expenses Operating income

$132,000

2,400

26,000 6,500

67,200 64,800

32,500 $ 32,300

d. While operating income showed an improvement from the previous year, management should still be concerned with the decreased production numbers. Because fixed manufacturing costs are expensed as incurred, part of the costs from the current sales was expensed in the prior period. Solution: a. $12 + $26 + $16 = $54 per unit b. 250 + 1,150 - 1,200 = 200 units 200 × $54 = $10,800 c. 1,200 × $110 = $132,000 1,200 × $54 = $64,800 1,200 × $2 = $2,400 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FN: Measurement IMA: Cost Management.

124) Juanita prepared her company's variable costing income statement for internal planning. The income statement was as follows: Sales Less: Variable expenses COGS Operating expenses Contribution margin Less: Fixed expenses Manufacturing expenses Operating expenses Operating income

$540,000 $297,000 54,000

74,800 68,000

351,000 189,000

142,800 $ 46,200

She was planning to compare the results to the prior period and to plan for the upcoming fiscal year. However, she expects the results to be lower than last year. The company produced 9,200 units, which was 400 units more than budgeted and sold 9,000 units. Juanita did not discover any price or efficiency variances within the standard costing system for the current period, and the variable operating costs per unit were $6. Instructions a. Is there a fixed-MOH volume variable hiding within the variable costing income statement? If so, how much and what is the sign, and where is it hidden? b. If Juanita used absorption costing for the current period, would she have reported a fixedMOH volume variance? If so, how much and what is the sign, and where would it be reported? c. If the company writes off standard variances directly to COGS, prepare the company's current year absorption costing income statement. d. Explain the operating income difference or no difference between the two methods.

Answer: a. There is not a fixed-MOH volume variance using variable costing. Fixed MOH is expensed as incurred. b. Yes, 3,400 F, reported with COGS before GM c. Sales $540,000 Less: COGS COGS (unadjusted) $373,500 Fixed-MOH volume variance (3,400) Adjusted COGS 370,100 Gross margin 169,900 Less: Operating expenses Variable 54,000 Fixed 68,000 122,000 Operating income $ 47,900 d. The difference in operating income is the Fixed-MOH. Using absorption costing, the FixedMOH is calculated into the product cost (COGS) and expensed as sold. Variable costing expenses Fixed-MOH in the period incurred. Solution: b. $74,800 ÷ 8,800 = $8.50 per unit (9,200 - 8,800) × $8.50 = $3,400 F c. $297,000 ÷ 9,000 = $33 per unit ($33 + $8.50) × 9,000 = $373,500 d. $46,200 - $47,900 = $1,700 ÷ (9,200 - 9,000) = $8.50 (proof of variance) Diff: 3 LO: 3 Bloom: AN AACSB: Analytic AICPA: FN: Measurement IMA: Cost Management.

125) Bailey and Ben, B&B Ice Cream, were excited to prepare their current year income statement. This year was the best year yet and they were excited to provide bonuses for their employees, if profit exceeded the company's expectations. Information for the financial statements is as follows: Budgeted variable manufacturing costs Budgeted variable operating costs Budgeted fixed-MOH Budgeted fixed operating costs Budgeted production Budgeted selling price Actual sales volume Actual production

$1.50 per unit $.50 per unit $18,000 $6,200 60,000 units $5.50 per unit 61,000 units 58,000 units

The company had 5,000 units in beginning inventory, and they carried the same standard costs per unit as this year's production. Instructions a. Calculate the cost per unit that Ziska will capitalize into inventory this year using (1) variable costing and (2) absorption costing. b. Determine if there would be a fixed-MOH volume variance under either method. If yes, calculate the amount and specify the sign of the variance, if applicable. c. Prepare a current year income statement, in good form, using variable costing. d. Prepare a current year income statement, in good form, using absorption costing.

Answer: a. (1) $1.50 per unit (2) $1.80 per unit b. Variable — no variance Absorption 600 U c. Sales Less: Variable expenses COGS Operating expenses Contribution margin Less: Fixed expenses Manufacturing expenses Operating expenses Operating income

$335,500 $91,500 30,500

18,000 6,200

122,000 213,500

24,200 $ 189,300

d. Sales Less: COGS COGS (unadjusted) Fixed-MOH volume variance Adjusted COGS Gross margin Less: Operating expenses Variable Fixed Operating income

$335,500 $109,800 600 110,400 225,100 30,500 6,200

Solution: a. (1) $1.50 per unit (given) (2) $18,000 ÷ 60,000 = $.30 + $1.50 = $1.80 per unit b. (60,000 - 58,000) × .30 = 600 U c. 61,000 × $5.50 = $335,500 61,000 × $1.50 = $91,500 61,000 × $.50 = $30,500 d. 61,000 × $1.80 (from part a) = $109,800 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FN: Measurement IMA: Cost Management.

36,700 $ 188,400

126) Kristin, the accountant for XYZ Industries, is studying the working papers for her client. She knows the client uses standard costing within its accounting system, but she is not sure which inventory costing method they use to prepare their reports. No variances were reported, except those as noted below, and the prior per-unit costs were the same as the current year. The working papers showed the following information: Sales volume Budgeted production Beginning FG Inventory Ending FG Inventory Gross margin Fixed-MOH Volume variance (unfavorable) Operating Income Sales

1,000 units 1,125 units 130 units 145 units $7,450 $550 $4,450 $20,000

Instructions a. Did the client use absorption costing or variable costing? How can Kristin tell? b. How much did the client capitalize into inventory on a per-unit basis? c. How many units did the client produce last year? d. If the client had used the other costing method (not the one determined in part (a)), how much operating income would the client have reported for the current year? Answer: a. Absorption costing, the gross margin, and fixed-MOH volume variance were calculated. b. $12 per unit c. 1,015 units d. $4,375 (variable costing) Solution: b. $20,000 - $7,450 = $12,550 adjusted COGS $12,550 - $550 = $12,000 COGS unadjusted $12,000 ÷ 1,000 = $12 per unit c. 145 + 1,000 - 130 = 1,015 d. (1,125 - 1,015) = 110 550 ÷ 110 = $5 fixed MOH per unit (1,015 - 1,000) × $5 = $75 $4,450 - $75 = $4,375 Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: FN: Measurement IMA: Cost Management.

127) Sullivan is pleased with how his company is doing. He sells his car dividers for $35 each. The company has been increasing the number of units produced each year and expects sales to meet production demand. He prepares his income statement using both variable costing and absorption costing. The following income statements were prepared for the current year. There were no price or efficiency variances noted as part of the company's standard cost system. Sales Cost of goods sold Unadjusted COGS Fixed-MOH volume var Adjusted COGS Gross margin Operating expenses Operating income Sales Variable expenses COGS Operating expenses Contribution margin Fixed expenses Fixed-MOH Operating expenses Operating income

$287,000 $172,200 1,800 174,000 113,000 80,600 $ 32,400 $287,000 $123,000 24,600

54,000 56,000

147,600 139,400

110,000 $ 29,400

Sullivan believes the upcoming fiscal year will show an increased sales volume of 10%. All per unit variable costs, selling price, and fixed costs will be consistent with the current year's information. Budgeted and actual production will remain the same, as the company has enough inventory to cover the increase. Instructions a. Identify which income statement reflects which method. b. Explain the difference in operating income between the two statements. c. Based on the anticipated sales volume increase, prepare projected income statements under both absorption and variable costing.

Answer: a. The left is absorption costing, the right is variable costing. b. The difference is fixed MOH. Variable costing expensed it as incurred, absorption costing includes the cost in the product cost and expenses it as units are sold. c. Absorption Sales $315,700 Less: COGS COGS (unadjusted) $189,420 Fixed-MOH volume variance 1,800 Adjusted COGS 191,220 Gross margin 124,480 Less: Operating expenses Variable 27,060 Fixed 56,000 83,060 Operating income $ 41,420 Variable Sales Less: Variable expenses COGS Operating expenses Contribution margin Less: Fixed expenses Manufacturing expenses Operating expenses Operating income

$315,700 $135,300 27,060

54,000 56,000

162,360 153,340

110,000 $ 43,340

Solution: c. 287,000 ÷ $35 = 8,200 units sold current 8,200 * (8,200 * 10%) = 9,020 budgeted units sold $172,200 ÷ 8,200 = $21 per unit (absorption) $24,600 ÷ 8,200 = $3 per unit variable operating costs $54,000 ÷ 9,000 = $6 per unit Fixed MOH $21 - $6 = $15 per unit (variable) 9,020 × $35 = $315,700 (Sales) 9,020 × $3 = $27,060 (V operating costs) Absorption 9,020 × $21 = $189,420 (COGS) Variable 9,020 × $15 = $135,300 (COGS) Diff: 3 LO: 3 Bloom: AN AACSB: Analytic AICPA: FN: Measurement IMA: Cost Management.

128) Stivrins Company is in the process of negotiating a new union contract. If the new contract goes into effect, there could be a significant decrease in the company's production output. More vacation time and shorter shifts will cause several production lines to be inoperable for a short period of time. The normal capacity of the company is set at 93,000 units. Nicklin, the manager, put together the following chart that incorporates the new contract.

Theoretical Practical

Units per Hour 250 225

Hours per Day 20 18

Days per month 25 24

Budgeted monthly fixed-MOH costs are expected to be $250,000 with budgeted variable manufacturing costs of $6 per unit. The selling price per unit would be $14, and the company plans to sell 94,000 units per month. Instructions a. Calculate the denominator level in units for the theoretical and practical capacity levels for one month. b. Calculate the budgeted fixed MOH rate of each of the three levels. (Round to the nearest cent.) c. If the company's actual production was 97,000 units for the current month, calculate the fixed-MOH volume variance for each denominator level. Be sure to notate the sign of the variance. d. Assuming there are no price or efficiency variances, and the company's policy is to write off any variances directly to COGS, prepare a partial income statement through gross margin for each denominator level.

Answer: a. Theoretical = 125,000 Practical = 97,200 b. Theoretical = $2.00 per unit Practical = $2.57 per unit Normal = $2.69 per unit c. Theoretical = $56,000 U Practical = $514 U Normal = $10,760 F d. Sales $1,316,000 $1,316,000 COGS COGS (Unadjusted) 752,000 805,580 Fixed MOH Variance 56,000 514 Adjusted COGS 808,000 806,094 Gross margin $ 508,000 $ 509,906 Solution: a. Theoretical = 250 × 20 × 25 = 125,000 Practical = 225 × 18 × 24 = 97,200 b. Theoretical = $250,000 ÷ 125,000 = $2.00 per unit Practical = $250,000 ÷ 97,200 = $2.57 per unit Normal = $250,000 ÷ 93,000 = $2.69 per unit c. Theoretical = (125,000 - 97,000) × $2.00 = $56,000 U Practical = (97,200 - 97,000) × $2.57 = $514 U Normal = (93,000 - 97,000) × $2.69 = $10,760 F d. 94,000 × $14 = $1,316,000 94,000 × ($6 + $2.00) = $752,000 94,000 × ($6 + $2.57) = $805,580 94,000 × ($6 + $2.69) = $816,860 Diff: 2 LO: 4 Bloom: AP AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning.

$1,316,000 816,860 (10,760) 806,100 $ 509,900

129) Knuckles is trying to determine a denominator level for the company's budgeted production that will accurately portray the fixed-MOH cost per unit. The level should provide a solid gross margin and operating income. The company wants to set an achievable denominator so employees are not discouraged, but that will also motivate the employees to work harder to reach the goal. Knuckles has come up with three fixed-MOH capacity options with fixed-MOH expected to be $240,000 next year. Theoretical level Practical level Normal level

120,000 units 110,000 units 100,000 units

Instructions a. Calculate the budgeted fixed MOH rate of each level. (Round to the nearest cent.) b. Which level will generate the highest estimated gross margin per unit? c. Which level will generate the highest operating income in total? Explain your answer. d. Which level will best achieve Knuckles' goal of improving employee motivation? Why? e. Which level represents the most accurate measurement of the fixed-MOH cost per unit? Why? Answer: a. Theoretical = $2.00 per unit Practical = $2.18 per unit Normal = $2.40 per unit b. Theoretical c. Theoretical. This level has the lowest cost per unit. A lower cost per unit indicates a lower COGS and a higher operating income. d. Practical - This level is challenging yet feasible. e. Practical - This level applies a moderate fixed-MOH rate with a moderate product cost and moderate prices. Solution: a. Theoretical = $240,000 ÷ 120,000 = $2.00 per unit Practical = $240,000 ÷ 110,000 = $2.18 per unit Normal = $240,000 ÷ 100,000 = $2.40 per unit Diff: 2 LO: 4 Bloom: AN AACSB: None AICPA: BB: Resource Management IMA: Strategic Planning.

130) Vasquez Supply Company hired Adrianna as its accountant to replace a retiree. She comes with experience in various industries and can prepare financial statements that use standard costing within an absorption costing system. However, Vasquez would like to prepare its financial statements using variable costing for its internal reports. Adrianna has gathered the following information for the last 2 years of operation Budgeted production Budgeted fixed manufacturing costs Budgeted fixed operating expenses Budgeted variable operating expenses Budgeted variable manufacturing cost Budgeted selling price Beginning FG Inventory (in units) Actual units produced Sales (in units)

120,000 units $720,000 $535,000 $12 per unit $32 per unit $60 per unit 2025 2026 2,600 115,000 122,000 112,400 124,000

Adrianna noted there were no price or efficiency variances for either year. It's the company's policy to write off any fixed-MOH volume variances directly to COGS. Instructions a. Determine the per-unit cost that would be capitalized under each costing system. b. Calculate the ending FG Inventory balance under each costing system for 2026. c. Calculate the Fixed-MOH volume variance for (1) 2025 and (2) 2026. List amount and sign. d. Prepare an income statement for both years under absorption costing. e. Prepare an income statement for both years under variable costing. f. Calculate the difference in operating income (if any) between the two methods for (1) 2025 and (2) 2026. Explain any differences with calculations. g. Which method would you recommend for internal performance evaluation purposes and why? h. Which method would you recommend when preparing your financial statements to obtain a loan and why?

Answer: a. Absorption = $38.00 per unit Variable = $32.00 per unit b. Absorption = $22,800 Variable = $19,200 c. 2025 = $30,000 U 2026 = $12,000 F d. 2025 $6,744,000

Sales Less: COGS COGS (unadjusted) $4,271,200 $4,712,000 Fixed-MOH volume variance 30,000 (12,000) Adjusted COGS 4,301,200 Gross margin 2,442,800 Less: Operating expenses Variable 1,348,800 1,488,000 Fixed 535,000 1,883,800 535,000 Operating income $ 559,000

2026 $7,440,000

4,700,000 2,740,000

2,023,000 $ 717,000

e. Sales Less: Variable expenses COGS Operating expenses Contribution margin Less: Fixed expenses Manufacturing costs Operating expenses Operating income

2025 $6,744,000 $3,596,800 1,348,800

720,000 535,000

2026 $7,440,000

$3,968,000 4,945,600 1,488,000 1,798,400

1,255,000 $ 543,400

5,456,000 1,984,000

720,000 535,000 1,255,000 $ 729,000

f. 2025 - difference is $15,600 ((115,000 - 112,400) × $6) 2026 - difference is $12,000 ((122,000 - 124,000) × $6) g. Variable costing - it supports management decision-making as it separates costs by behavior. It also better aligns manager, subunit, and company goals as building inventory is no longer an incentive for improvement. h. Absorption costing - GAAP requires all financial statements be reported under absorption costing for external purposes. This method capitalizes fixed-MOH costs until the product is sold, per the expense recognition principal.

Solution: a. Absorption = ($720,000 ÷ 120,000) = $6 + $32 = $38.00 per unit b. 2,600 + 122,000 - 124,000 = 600 units in ending inventory Absorption = 600 × $38 = $22,800 Variable = 600 × 32$ = $19,200 c. 2025 = $720,000 - (115,000 × $6) = $30,000 U 2026 = $720,000 - (122,000 × $6) = $12,000 F d. 2025 Sales = 112,400 × $60 = $6,744,000 COGS = 112,400 × $38 = $4,271,200 V Operating expenses = 112,400 × $12 = 1,348,800 2026 Sales = 124,000 × $60 = $7,440,000 COGS = 124,000 × $38 = $4,712,000 V Operating expenses = 124,000 × $12 = 1,488,000 e. See part d solutions for sales and V operating expenses 2025 COGS = 112,400 × $32 = $3,596,800 2026 COGS = 124,000 × $32 = $3,968,000 f. 2025 $559,000 - $543,400 = $15,600 Or (115,000 - 112,400) × $6 = $15,600 2026 $717,000 - $729,000 = $12,000 Or (122,000 - 124,000) × $6 = $12,000 Diff: 3 LO: 1, 2, 3 Bloom: AP AACSB: Analytic AICPA: FC: Decision Modeling IMA: Cost Management.

131) Utensils N More manufactures a special ladle that sits upright or can be attached to any pot. The accounting manager, Candace, presents three different income statements to the board of directors at year-end. The board understands absorption costing, as they evaluate the gross margin and gross margin rate on a regular basis. However, it's Candace's job to help them understand how fixed-MOH affects the product cost under absorption costing. Information for three possible capacity levels is shown below. Candace also notes there are no price or efficiency variances this period. Therefore, any fixed-MOH volume variance is written off to COGS. Budgeted fixed-MOH cost Budgeted fixed operating cost Budgeted variable manufacturing cost Budgeted variable operating cost Theoretical capacity Practical capacity Normal capacity Beginning FG Inventory Selling price

$300,000 $200,000 $26 per unit $4 per unit 25,000 units 20,000 units 15,000 units 3,000 units $65 per unit 2025 18,800 $18,700

Actual units produced Sales (in units)

2026 19,200 $19,500

Instructions a. Calculate the cost per unit that would be capitalized under each possible denominator level. Break out the variable and fixed components and list the total cost per unit. b. Calculate the fixed-MOH volume variance for each denominator level, identifying amount and sign, for (1) 2025 and (2) 2026. c. Prepare income statements for 2025 for each denominator level. d. Prepare income statements for 2026 for each denominator level. e. Why is income the same or different under each denominator level? f. What gross margin percentage is earned under each capacity level for (1) 2025 and (2) 2026? g. If the budgeted sales volume for 2025 was 19,000 units, prepare an income statement for 2025 if Candace used the budgeted sales as its denominator. (Round the fixed-MOH cost per unit to the nearest two cents.) h. Candace is worried that the demand will decrease in 2027. If the budgeted demand does decrease, how will that affect the fixed-MOH rate? The gross margin and operating income? Should Candace increase the selling price on the ladles? Explain your answer.

Answer: a. Theoretical Variable cost per unit = $26 Fixed cost per unit = $12 Total cost per unit = $38 Practical Variable cost per unit = $26 Fixed cost per unit = $15 Total cost per unit = $41 Normal Variable cost per unit = $26 Fixed cost per unit = $20 Total cost per unit = $46 b. 2025 Theoretical Practical Normal

74,400 U 18,000 U 76,000 F

2026 Theoretical Practical Normal

69,600 U 12,000 U 84,000 F

c. Theoretical $1,215,500

Practical $1,215,500

Normal $1,215,500

Sales Less: COGS COGS (unadjusted) $710,600 $766,700 $860,200 Fixed-MOH volume variance 74,400 18,000 (76,000) Adjusted COGS 785,000 784,700 784,200 Gross margin 430,500 430,800 431,300 Less: Operating expenses Variable 74,800 74,800 74,800 Fixed 200,000 274,800 200,000 274,800 200,000 274,800 Operating income $155,700 $156,000 $156,500

d. Theoretical Practical Normal Sales $1,267,500 $1,267,500 $1,267,500 Less: COGS COGS (unadjusted) $741,000 $799,500 $897,000 Fixed-MOH volume variance 69,600 12,000 (84,000) Adjusted COGS 810,600 811,500 813,000 Gross margin 456,900 456,000 454,500 Less: Operating expenses Variable 78,000 78,000 78,000 Fixed 200,000 278,000 200,000 278,000 200,000278,000 Operating income $178,900 $178,000 $176,500 e. With any absorption costing income statement, income varies depending on how many units were sold versus how many units were produced. For 2025, theoretical compared to practical, the difference was $300. The fixed-MOH cost between the 2 levels varied by $3 ($12 - $15) and the units sold compared to the units produced varied by 100 units (18,800 - 18,700). So, 100 units × $3 per unit = $300. This same calculation between methods will work to describe the variances amongst methods. f. 2025 = 35% 2026 = 36% Because of the minor differences in gross margin between the three methods, all three methods gross margin rate will be the same each year. g. Sales Less: COGS COGS (unadjusted) Fixed-MOH volume variance Adjusted COGS Gross margin Less: Operating expenses Variable Fixed Operating income

$1,215,500 $781,473 3,158 784,631 430,869 74,800 200,000

274,800 $ 156,069

h. If demand decreases, the fixed-MOH rate will increase, causing the overall product cost to increase. This increase will reduce gross margin and operating income. While increasing prices will help the bottom line, if prices follow costs, this could create a downward demand spiral. Candace should not increase the prices on the ladles.

Solution: a. Variable cost per unit given Total cost per unit = Variable cost per unit + Fixed cost per unit Theoretical Fixed cost per unit = $300,000 ÷ 25,000 = $12 Practical Fixed cost per unit = $300,000 ÷ 20,000 = $15 Normal Fixed cost per unit = $300,000 ÷ 15,000 = $20 b. 2025 Theoretical Practical Normal

74,400 U 18,000 U 76,000 F

(25,000 - 18,800) × $12 (20,000 - 18,800) × $15 (15,000 - 18,800) × $20

2026 Theoretical Practical Normal

69,600 U 12,000 U 84,000 F

(25,000 - 19,200) × $12 (20,000 - 19,200) × $15 (15,000 - 19,200) × $20

c. Sales = 18,700 × 65 = 1,215,500 Variable operating expenses = 18,700 × $4 = $74,800 COGS: Theoretical 710,600 Practical 766,700 Normal 860,200

18,700 × $38 18,700 × $41 18,700 × $46

d. Sales = 19,500 × 65 = 1,267,500 Variable operating expenses = 19,500 × $4 = $78,000 COGS: Theoretical 741,000 Practical 799,500 Normal 897,000

19,500 × $38 19,500 × $41 19,500 × $46

f. Gross margin rate = gross margin ÷ sales 2025 Theoretical = $430,500 ÷ $1,215,500 = 35% Practical = $430,800 ÷ $1,215,500 = 35% Normal = $431,300 ÷ $1,215,500 = 35% 2025 Theoretical = $456,900 ÷ $1,267,500 = 36% Practical = $456,000 ÷ $1,267,500 = 36% Normal = $454,500 ÷ $1,267,500 = 36% g. Fixed MOH-rate = $300,000 ÷ $19,000 = $15.79 Unit cost = $15.79 + $26 = $41.79 Fixed MOH volume variance = (19,000 - 18,700) × $15.79 = $3,158 U COGS = 18,700 × $41.79 = $781,473 Diff: 3 LO: 1, 4 Bloom: AP AACSB: Analytic AICPA: FC: Decision Modeling IMA: Cost Management.

Cost Accounting, 1e (Farmer) Chapter 13 Data Analytics 1) As consumers have increased their use of and reliance on the internet, data usage has grown exponentially. As consumers use more data, organizations develop ways to gather and retain that information. This big data is divided into structured and unstructured data. Which of the following is an example of a characteristic of unstructured data? A) Data that exists without definition, like an image. B) Data that is organized and easy to manipulate. C) Data that is organized into rows and columns. D) Data that is ready to be added to a database. Answer: A Explanation: This question requires familiarity with the characteristics of unstructured and structured data. Choice A is correct because data that exists without definition is an example of unstructured data. The remaining choices are incorrect because they are all examples of structured data. Diff: 1 LO: 1 Bloom: C AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 2) As a result of people's increased internet usage, companies have an enormous amount of user data. These companies can spend a lot of time and effort trying to determine how to best use this information for themselves. Which of the following represents an appropriate use of data a company collected from its users? A) A clothing boutique uses recent sales data to determine which type of person is most likely to shoplift so they can ensure they do not leave people fitting that profile alone in the store. B) A doctor's office runs an analysis on customer accounts to determine which patients lack insurance so they can intentionally give them poor service. C) A restaurant uses customer credit card information to add gratuities to closed checks. D) An airline uses data collected to understand customers' preferences and other maintenancerelated issues. Answer: D Explanation: This question requires familiarity with data collection and the ways businesses might use the data they collect. This question focuses on determining when the use of that collected data is appropriate. Choice D is correct because it accurately depicts an instance of using data in an appropriate manner. The remaining choices are incorrect since they depict instances where companies use data in an inappropriate manner. Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 1

3) As a result of people's increased internet usage, companies have an enormous amount of user data. These companies can spend a lot of time and effort trying to determine how to best use this information for themselves. Which of the following represents an inappropriate use of data a company collected from its users? A) A clothing company uses the credit card application data to open additional accounts for their customers as a courtesy. B) A dental office runs an analysis on their patient ledgers to determine which customers have overdue balances. C) A restaurant uses the loyalty program sign-up information collected to send customers a free birthday dessert. D) An airline uses flight check-in information to determine who boarded a flight before takingoff. Answer: A Explanation: This question requires familiarity with data collection and the ways businesses might use the data they collect. This question focuses on determining when the use of that collected data is inappropriate. Choice A is correct because it accurately depicts an instance where the company uses data collected from customers in an inappropriate manner. The remaining choices are incorrect since they depict instances where the company uses customer data in an appropriate manner. Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

4) As new aspects of technology work their way into normal business practices, professionals in various fields must adjust. One of the largest adjustments requires learning new terminology in both large and small regards. Which of the following represents the difference between data analytics and big data? A) Big data is the study of analyzing data and discovering patterns while data analytics represents the kind of data generated from various sources. B) Big data is the study of analyzing data and discovering patterns while data analytics represents the kind of data generated from a single specific source. C) Data analytics is the study of analyzing data and discovering patterns while big data refers to the kind of data generated from a variety of sources. D) Data analytics is the study of analyzing data and discovering patterns while big data represents the kind of data generated from a single specific source. Answer: C Explanation: This question focuses on the difference between the definitions of big data and data analytics. Choice C is correct because it accurately describes the difference between the definitions of data analytics and big data. The remaining choices are incorrect as they are all incorrect definitions of big data or data analytics or they switch their meanings. Diff: 2 LO: 1 Bloom: K AACSB: Data Analytics AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 5) As new aspects of technology work their way into normal business practices, professionals in various fields must adjust. One of the largest adjustments requires learning new terminology in both large and small regards. Which of the following represents an example of big data? A) Data generated from a single source in volumes too large for traditional technology B) Data generated from a variety of sources in volumes too large for traditional technology C) Data generated from a variety of sources in volumes too small for traditional technology D) The study and art of collecting and analyzing massive amounts of data Answer: B Explanation: This question focuses on knowing differences between big data and data analytics. Choice B correctly describes an example of big data, data generated from a variety of sources in large volumes. The remaining choices are incorrect since they are all incorrect examples of big data or are the definition of data analytics. Diff: 2 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

6) As data is gathered and collected, organizations must determine how to make the best use of this vast resource. When left in its raw state, this data might remain unusable but would continue to consume storage space at an exponential rate. Within the data, there exists both structured and unstructured data. Which of the following is an example of structured data? A) A series of digital photographs of a company's newly designed logo B) A spreadsheet file containing copy-pasted images of products C) A spreadsheet file containing customer information for recent orders D) Sound bites obtained from recordings of local online advertisements Answer: C Explanation: This question requires familiarity with data collection and the ways organizations use this data. This question focuses on differences between structured and unstructured data. Choice C correctly describes an example of structured data, data that uses a known and predefined format. The remaining choices are incorrect as they are all examples of unstructured data. Diff: 2 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 7) As data is gathered and collected, organizations must determine how to make the best use of this vast resource. When left in its raw state, this data might remain unusable but would continue to consume storage space at an exponential rate. Within the data, there exists both structured and unstructured data. Which of the following is an example of unstructured data? A) A digital photograph of the client's customer database B) A document file exported from a company's database C) A printable listing of all company vendors with their contact information D) A spreadsheet file containing recent customers' order history Answer: A Explanation: This question requires familiarity with data collection and the ways organizations use that data. This question focuses on the differences between structured and unstructured data. Choice A correctly describes an example of unstructured data, data that exists in free form without structured definition. The remaining choices are incorrect as they are all examples of structured data. Diff: 2 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

8) As companies continue to embrace the evolution of data collection and data analytics, they also need to determine what data to collect. After establishing what data to collect, they may want to determine the best way to collect the needed information. Which of the following best represents information a burger restaurant would need to collect? A) A forecast of customer demand for their new milkshake flavor B) Customer satisfaction ratings for drive-thru times across franchise locations C) Customer satisfaction ratings for the intersection nearest to each franchise location D) The temperatures of their fryers after the store has closed Answer: B Explanation: This question requires familiarity with big data, data analytics, and ways companies might collect and utilize data. Choice B is correct because customer satisfaction ratings for the drive-thru times evaluate aspects of the business operations and operational needs. The remaining choices are incorrect because they describe irrelevant data collection or analyses performed rather than the data needed. Diff: 2 LO: 1 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 9) As companies continue to embrace the evolution of data collection and data analytics, they also need to determine what data to collect. After establishing what data to collect, they may want to determine the best way to collect the needed information. Which of the following best represents information a lawn care business would need to collect for data analytics? A) Forecasted weekly customer demand by service offered B) The contact information of sales team members for the bio section on the company's website C) The names of each customer who has currently signed up for services D) The price per pound of grass seed from various suppliers Answer: D Explanation: This question requires familiarity with big data, data analytics, and the ways that companies collect and utilize data. Choice D is correct because the price per pound of grass seed from various suppliers would be used to evaluate aspects of the business. The remaining choices are incorrect because they describe irrelevant data collection or analyses performed rather than the data needed. Diff: 2 LO: 1 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

10) Using data analytics in cost accounting is proving to be a big opportunity to improve operations for various businesses. While data analytics have come a long way, there are still challenges and opportunities to consider. Which of the following is a challenge for an accountant that uses data analytics? A) Being comfortable working with diverse teams which is not something accountants normally do B) Convincing others in the organization that data analytics is not a worthwhile endeavor C) Finding a way to add value through insights generated from data analytics D) Helping coworkers learn the technical terms associated with data analytics Answer: D Explanation: This question requires familiarity with challenges and opportunities faced by accountants that use data analytics. Choice D is correct because it accurately describes a challenge that an accountant who uses data analytics might face. The remaining choices are incorrect because they describe opportunities faced by accountants that use data analytics or incorrect assumptions about the uses of data analytics. Diff: 2 LO: 1 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 11) Using data analytics in cost accounting is proving to be a big opportunity to improve operations for various businesses. While data analytics have come a long way, there are still challenges and opportunities to consider. Which of the following is an opportunity for an accountant that uses data analytics? A) Helping coworkers learn the technical terms associated with data analytics B) Training other employees and managers with the technical skills necessary to perform effective data analytics C) Using data analytics to select data relevant to an identified business problem the company would like to address D) Using good oral and written communication skills to help others see how decisions impact various financial aspects of the business Answer: D Explanation: This question requires familiarity with the challenges and opportunities faced by accountants that use data analytics. Choice D is correct because it accurately describes an opportunity an accountant who uses data analytics might face. The remaining choices are incorrect because they describe challenges faced by accountants that use data analytics. Diff: 2 LO: 1 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

12) A public university has been evaluating its admissions policies and procedures. The university has recently seen a downturn in enrollment, and the university's leadership does not entirely understand why this happened. The university has not changed or updated their admissions decision-making processes in years. The current process uses an algorithm based on data available years ago to do enrollment modeling. What change or changes could they make to try to increase the number of enrollments? A) The university may need to dig deep and update its data analytical practice to stay competitive. B) The university may want to lower their stated target number of enrollments during analyses so the downturn in the enrollment is not highlighted. C) The university may want to attract new professors since they recently launched a new faculty recruitment campaign. D) The university may want to maintain the status quo and collect more input from their various funding streams. Answer: A Explanation: This question requires familiarity with data analytics and the importance of modernizing methodology as new tools, techniques, and inputs become available. Choice A is correct because competitive data analytical practice should optimize enrollment potential. The remaining choices are incorrect since they are not directly relevant to the question asked. Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

13) A public university has been evaluating its admissions policies and procedures. The university has recently seen a downturn in enrollment, and university leadership does not entirely understand why this happened. The university has not changed or updated their admissions decision-making processes in years. The current process uses an algorithm based on data available years ago to do enrollment modeling. Which of the following could be a disadvantage of not updating the process? A) The algorithm is probably outdated, and that could result in the university missing out on quality applicants. B) The algorithm might be outdated, and that could lead to results that build a robust and diverse applicant pool. C) The university will have a better chance of maintaining their current standards even with a smaller applicant pool by not examining changes in the available data. D) The university will save much-needed funds that it can spend on more pressing needs. Answer: A Explanation: This question requires familiarity with data analytics and the importance of modernizing methodology as new tools, techniques, and inputs become available. Choice A is correct because not updating the algorithm used in the admissions process would almost definitely lead to it being outdated and they would subsequently miss potential candidates they could have enrolled with a better model. The remaining choices are incorrect. Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

14) Marco Corp. is a medium-sized textile factory that supplies local boutiques in their area. In the past few years, they have experienced a lot of growth and would like to continue to grow at a manageable rate. Marco knows that to do so, they will need to become more data-informed in their decision-making processes. To make the best use of their available resources, which of the following should Marco Corp. consider? A) Hire a Chief Data Analyst to handle all data analytics for the company B) Train multiple employees in the basics of data analytics techniques so they can form a team and consolidate the knowledge C) Train multiple employees in the basics of data analytics techniques so they can be dispersed throughout the organization in multiple departments D) Train upper management on data analytics so they have something to discuss at weekly strategy meetings Answer: C Explanation: This question requires familiarity with the ways that companies can effectively integrate data analytics into their existing operations. Choice C is correct because training multiple employees and dispersing them throughout the organization is generally the best use of existing resources and provides an opportunity for all departments to benefit from individuals with those skills. The remaining choices are incorrect because they represent using resources the company may not currently have or they would not be the most effective use. Diff: 2 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

15) Marco Corp. is a medium-sized textile factory that supplies local boutiques in their area. In the past few years, they have experienced a lot of growth and would like to continue to grow at a manageable rate. Marco knows that to do so, they will need to become more data-informed in their decision-making processes. To make best use of their resources, which of the following represents the most effective way to integrate data analytics into the company? A) Create a silo, much like accounting or human resources, to consolidate those with the skillset in a single area of the company. B) Do the analyses with a team sport mentality where everyone shares knowledge and works collaboratively. C) Train all employees to use data analytics, and make it a priority over any of their other tasks. D) Treat the analyses like a team sport where there is often a single star and many supporting players. Answer: B Explanation: This question requires familiarity with ways companies can effectively integrate data analytics into their existing operations. Choice B is correct because data analytics and its integration should be treated like a team sport where skills are shared amongst a group with the same goal in mind. The remaining choices are incorrect because they place focus on consolidating the skillset to one or very few people and do not prioritize the skills-sharing aspects of a company-wide data analytics deployment. Diff: 2 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

16) Companies doing business in the modern era often look for ways to maximize the resources they have at their disposal. This can vary in the way it is executed and will look different from company to company. Which of the following represents an effective way for individual employees to add to their personal data analytics skillset? A) Alexis, who works in human resources, is taking an economics course after work at the local community college. B) David, who works in accounting, is pursuing a certification in Microsoft Excel. C) Jerry, who works in production, is taking a course about improving time management skills in the workplace. D) Sarah, who works in advertising, is pursuing an online certificate in Microsoft Word. Answer: B Explanation: This question requires familiarity with effective ways employees can learn about, expand, or improve their own data analytics skills. Choice B is correct because expert level proficiency with Microsoft Excel is an excellent skill to have and increases the employee's dataspecific knowledge and abilities. The remaining choices are incorrect because they are skills that are useful for their jobs but do not directly improve or enhance the other employees' data analytics skillsets. Diff: 2 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 17) Companies doing business in the modern era often look for ways to maximize the resources they have at their disposal. This can vary in the way it is executed and will look different from company to company. Which of the following represents an ineffective way for employees to add to their data analytics skillset? A) Christopher is taking a training course about sourcing data to meet a company's needs. B) Jaclyn has decided to pursue a certification in Tableau to help with her evolving workload at work. C) Jason decided to take a class at the local community college about Microsoft Access. D) Roland signed up for a session at the local community center that will give an introduction to hand-illustrating beautiful and effective graphs and posters. Answer: D Explanation: This question requires familiarity with effective ways employees can learn about and acquire data analytics skills. Choice D is correct because it even though it does relate to graphs and visual presentation, it is not an effective way to add to their data analytics skillset. The remaining choices are incorrect since they do represent effective ways for employees to add to their data analytics skillset. Diff: 2 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 11

18) Sharon is the marketing manager for Smith Inc., and she has decided to launch a new campaign in the next couple of months. For this to be successful, Sharon will need to accumulate data and determine how to best target her demographic of young working professionals. Which of the following is an example of hard data that may be helpful as she plans her campaign? A) A dataset about employment trends from the Department of Labor B) A dataset that contains customer review comments from Google C) A report commissioned from a website reviewer that writes for the youth section D) Customer service survey results from existing customers Answer: A Explanation: This question requires familiarity with the difference between hard and soft data. Choice A is correct since a dataset about employment trends from a government agency is verifiable and acquired from a reliable source. The remaining choices are incorrect as they are examples of soft data. Diff: 2 LO: 2 Bloom: C AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 19) Sharon is the marketing manager for Smith Inc., and she has decided to launch a new campaign in the next couple of months. For this to be successful, Sharon will need to accumulate data and determine how to best target her demographic of young working professionals. Which of the following is an example of soft data that may be helpful as she plans her campaign? A) A report about average employment ages generated by a state's labor board B) A report from the Internal Revenue Service (IRS) that provides data about average earned income by age groups C) A research paper published by scholars about desired salary ranges of recent college graduates D) Click ad survey results from the young professionals' section of the company's website Answer: D Explanation: This question requires familiarity with the difference between hard and soft data. Choice D is correct because a click ad survey from a portion of the company's website targeting professionals is subjective data that is more qualitative in nature. The remaining choices are incorrect as they are examples of hard data. Diff: 2 LO: 2 Bloom: C AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

20) The management for Lyra Corp. has decided to work towards streamlining processes across many of their divisions. Each department chair must collect data relevant to their unique functions and operations to assist management with constructing ad hoc reports. If management would like to gain insight into their collections processes, then what information would be best to use for this goal? A) A sample of purchase orders from the shipping department B) An accounts receivable aging report from the accounting department C) Customer credit applications obtained from the company's website D) Customer feedback from a survey sent out from the customer service department Answer: B Explanation: This question requires familiarity with data & possible sources and data types that will assist a decision maker as they attempt to achieve certain goals. Choice B is correct because an accounts receivable aging report is the option most likely to provide insight into the company's collections processes currently in place. The remaining choices are incorrect as they provide other insights. Diff: 2 LO: 2 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 21) The management for Lyra Corp. has decided to work towards streamlining processes across many of their divisions. Each department chair must collect data relevant to their unique functions and operations to assist management with constructing ad hoc reports. If management would like to gain insight into their customers' satisfaction, then what information would be best to use for this goal? A) A lead generation report from the sales and marketing department B) A report with survey scores received from a customer survey sent out by the customer service department C) A website user summary report generated by the information and technology department D) An accounts receivable aging report from the accounting department Answer: B Explanation: This question requires familiarity with data & possible sources and data types that will assist a decision maker as they attempt to achieve certain goals. Choice B is correct because a report with survey scores received from a customer service survey sent out by the customer service department is the option most likely to provide insight into customers' satisfaction with the company. The remaining choices are incorrect because they provide other insights. Diff: 2 LO: 2 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

22) Cynthia has been working at her current job for a little more than two years as a customer service representative. She has expressed interest in obtaining more job responsibilities and is seeking out ways that she could be promoted to a management role. She knows one thing she could do would be to assist with a new marketing campaign. If the campaign targets attracting new customers, then what would her best source of data be? A) A customer satisfaction survey sent out by the company's sales department B) A press release from a competitor about their new line of products for toddlers C) A production summary from the operations department for the most recent year D) A search engine optimization report that outlines top user queries for different groups of people Answer: D Explanation: This question requires familiarity with data & possible sources and data types that would help a decision maker with a new project or campaign. Choice D is correct because a search engine optimization report that can provide some insight into what specific groups of people are looking at would be the most helpful for planning the new marketing campaign. The remaining choices are incorrect as those would be good data for other tasks. Diff: 2 LO: 2 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 23) Cynthia has been working at her current job for a little more than two years as a customer service representative. She has expressed interest in obtaining more job responsibilities and is seeking out ways that she could be promoted to a management role. She knows one thing she could do would be to assist with a new marketing campaign. If the campaign targets attracting customers who like to use dating apps, then what would her best source of data be? A) A click ad for a stylist service specializing in those looking for after-work apparel B) A currently trending hashtag about a data breach from a dating app C) A news article about the stock prices of social media apps D) A news article with interviews about modern dating Answer: D Explanation: This question requires familiarity with data & possible sources and data types that could help a decision maker plan a new project or campaign. Choice D is correct because a news article with interviews from people who are actively dating is the best option listed for gaining insight about people who might want to use a dating app. The remaining choices are incorrect because they provide good data for other tasks. Diff: 2 LO: 2 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

24) Dan is the Chief Information Officer for Humphrey Company, and he is reviewing securityrelated policies for the organization. Humphrey Company collects a wide array of data from its employees and understands the importance of it. Which of the following is an example of an appropriate policy or practice based on the principles of proper data usage? A) Employees disclose any security breach to management within five minutes of its initial discovery. B) Employees keep passwords documented in an easily accessible place in case they are out of the office and someone else needs to access their accounts. C) Employees submit their social media passwords to management so the organization can protect its online integrity. D) Employers get access to personal files on each employee from human resources when they suspect malfeasance. Answer: A Explanation: This question requires familiarity with the three broad principles of proper data usage and how they guide decision makers' treatment of sensitive data. Choice A is correct since it is a policy that strives to protect the integrity of the company's data while keeping reasonable accountability in place. The remaining choices are incorrect because they are not appropriate policies for security purposes and do not adhere to the three principles. Diff: 2 LO: 2 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

25) Dan is the Chief Information Officer for Humphrey Company, and he is reviewing securityrelated policies for the organization. Humphrey Company collects a wide array of data from its customers and understands the importance of it. Which of the following is an example of an inappropriate policy or practice in the context of the three principles of proper data usage? A) Allowing customers to create their own unique login where they can access their account information including their past orders and sensitive personal and credit card information B) Selling a customer list from the company database for customers that signed a waiver when they came aboard C) Selling an email distribution list to an outside company for a fair price without users' prior permission D) Sharing customer spending trends from the current year with company shareholders Answer: C Explanation: This question requires familiarity with the three broad principle of proper data usage and how they guide decision makers' treatment of sensitive data. Choice C is correct because it is a policy that does not strive to protect the integrity of the company's data. The remaining choices are incorrect because they are appropriate policies and practices for security purposes and do adhere to the three broad principles of proper data usage. Diff: 2 LO: 2 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 26) Corbin Inc. is a small factory, and they are in the process of evaluating their data storage system. The biggest question management needs to answer is whether their current setup is enough for their needs or if they should invest in a more robust and comprehensive system. Which of the following types of information would be found in the customers module of a data storage system? A) Credit Status, Method of Payment, Name, and Notes from personnel files B) Current Employee Pay Rates, Date of Hire, and Credit Status C) Discounts Redeemed, Name, Address, and Transaction Dates D) Transaction Dates, Quality Ratings, Percent On-time, and Transportation Arrangements Answer: C Explanation: This question requires familiarity with data storage systems and how some companies divide their data into different modules within their data storage systems. Choice C is correct as those are likely data types stored in the customers module of a company's data storage system. The remaining choices are incorrect because each other choice contains a blend of the types of data stored in other modules including human resources, suppliers, and customers' modules. Diff: 2 LO: 2 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 16

27) Corbin Inc. is a small factory, and they are in the process of evaluating their data storage system. The biggest question management needs to answer is whether their current setup is enough to meet their needs or if they should invest in a more robust and comprehensive system. Which of the following types of information would be in the human resources module of a company's data storage system? A) Date of Hire, Current Wage, Birth Date, and Transaction Dates B) Date of Hire, Notes from Personnel File, Current Employee Pay Rates, and Employee Areas of Expertise C) Discounts Redeemed, Birthday, Title, and Credit Status D) Quality Rating, Date of Hire, Birthday, and Credit Status Answer: B Explanation: This question requires familiarity with data storage systems and how some companies might divide their data into different modules within their storage system. Choice B is correct because it shows a list of data that would be stored in the human resources module of a data storage system. The remaining choices are incorrect because each other choice contains a blend of the types of data stored in other modules including human resources, supplier, and customer modules. Diff: 2 LO: 2 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 28) Decision-making involving data analytics includes a five-step process. Which of the following best represents the correct order for these steps? A) Make Decisions, Gain Insight, Retrieve and Manipulate, Store, Source B) Source, Store, Gain Insight, Retrieve and Manipulate, Make Decisions C) Source, Store, Retrieve and Manipulate, Gain Insight, Make Decisions D) Store, Gain Insight, Source, Make Decisions, Retrieve and Manipulate Answer: C Explanation: This question requires familiarity with the five data analytics steps used by decision-makers. Choice C is correct because it accurately lists all five steps. The remaining choices are incorrect as they each contain an incorrect order. Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

29) To protect consumers from undue harm from entities that would use unfair or deceptive trade practices, the United States created the Federal Trade Commission (FTC) Act. Which of the following is an example of a violation over which the FTC has jurisdiction? A) Failing to maintain reasonable customer data security measures B) Failing to provide insufficient security for personal data C) Making accurate privacy and security disclosures to customers D) Transferring personal information in a manner consistent with written privacy policy Answer: A Explanation: This question requires familiarity with data protection, the FTC Act, and the jurisdiction of the FTC. Choice A is correct because it accurately identifies a violation that would be under the purview of the FTC Act. The remaining choices are incorrect either because they are not violations the Act would deal with or are small but incorrect variations on issues that would be violations. Diff: 2 LO: 2 Bloom: C AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 30) To protect consumers from undue harm from entities that would use unfair or deceptive trade practices, the United States created the Federal Trade Commission (FTC) Act. Which of the following is an example of behavior not permitted under this Act? A) Buffay Corp. learned hackers recently broke through their security and are working to get this resolved immediately. B) Le Blanc Company is migrating to a new server and hired additional information technology staff to assist. C) Sampson Inc. had a data leak and notified affected users right away per their written protocols in the company policy. D) Sunrize Corp. decided to forego installing additional firewalls despite being told in an audit this would be needed to minimally protect users. Answer: D Explanation: This question requires familiarity with data protection measures and the implications of the FTC Act. Choice D is correct since it accurately identifies a behavior, namely intentionally foregoing needed security measures that are not permitted under the Act. The remaining choices are incorrect because they represent acceptable actions since the companies in those scenarios are transparently attempting to address concerns as soon as possible. Diff: 2 LO: 2 Bloom: C AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

31) As more users engage in online activity, more data circulates and more information is collected by outside entities. In the United States, there are laws that govern the collection of information rather than a single comprehensive policy or agency. Which of the following is an example of a law that governs personal information collection by banks or financial institutions? A) The Fair Credit Reporting Act B) The Federal Deposit Insurance Act C) The Gramm-Leach-Bliley Act D) The Sarbanes-Oxley Act of 2002 Answer: C Explanation: This question requires familiarity with laws used in the United States to govern and protect personal information, specifically information collected by banks and financial institutions. Choice C is correct because this is exactly why the Gramm-Leach-Bliley Act exists. The remaining choices are incorrect because they have other goals or do not exist. Diff: 2 LO: 2 Bloom: K AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 32) As more users engage in online activity, more data circulates and more information is collected by outside entities. In the United States, there are laws that govern the collection of information rather than a single comprehensive policy or agency. Which of the following is an example of a law that oversees the collection and use of credit information? A) The Freedom of Information and Protection of Privacy Act B) The Consumer Data Protection Act C) The Fair Credit Reporting Act D) The General Data Protection Regulation Answer: C Explanation: This question requires familiarity with laws used in the United States to govern and protect personal information, specifically credit information collection. Choice C is correct because this is what the Fair Credit Reporting Act was created to do. The remaining choices are incorrect because they accomplish similar yet different overall goals. Diff: 2 LO: 2 Bloom: K AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

33) Companies that collect data from their users must do so with great care and consideration before proceeding. Failure to exercise due care can have strongly negative consequences for companies who neglect this responsibility. Which of the following is an example of a company who violated the privacy of its users? A) Alice's Tapestries had a data leak that exposed customers' email addresses for a brief time. B) Delicious Deserts sent an email about promotions to all customers rather than only to those who opted-in for email announcements. C) Java Inc. accidentally made its social media page public, including access to all members who had joined. D) Purple Plastics' head accountant forgot to close a spreadsheet that listed pay rates of employees on their office computer screen. Answer: A Explanation: This question requires familiarity with data collection, privacy, and the ways a company could violate the privacy of its users. Choice A is correct because Alice's Tapestries had a data leak that exposed private information collected from its users. The remaining choices are incorrect because they do not involve leaks of private information that could be maliciously exploited. Diff: 2 LO: 2 Bloom: C AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 34) Companies that collect data from their users must do so with great care and consideration before proceeding. Failure to exercise due care can have very strong consequences for companies who neglect this responsibility. Which of the following is an example of a consideration made to protect the privacy of collected user data? A) A company must decide on ways to make user data more easily identifiable to minimize costs. B) A company must decide whether it is prudent to adhere to new privacy laws as they are created. C) A company must devise a best practices plan for securing and storing user data. D) A company must devise a best practices plan to help employees secure their belongings while on company premises. Answer: C Explanation: This question requires familiarity with data collection, privacy, and the ways a company could protect the privacy of its users. Choice C is correct because a company devising a best practices plan to secure and store user data is a consideration that would directly protect the privacy of users. The remaining choices are incorrect because they do not specifically or primarily address protecting users' privacy or leave too many decisions in a state of ambiguity. Diff: 2 LO: 2 Bloom: C AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 20

35) Monica has been working with her IT department to capture user data from online profiles potential customers create on the company's website. Monica is working on a project to build internal customer profiles so that they can tailor offers and target emails to unique preferences. After she receives an initial Excel document with data, she notices some of the data appears multiple times. What could cause this? A) The analyst who collected the data forgot to include columns that Monica needs. B) The code written for the data collection page had an error. C) The customer copied and pasted data into the reply form, resulting in multiple entries. D) The Excel document was saved in the wrong format before being shared with Monica. Answer: B Explanation: This question requires familiarity with the data collection process and the process entailed with collected data's retrieval. Choice B is correct because it provides a logical reason that a file could contain duplicates. An error in the source code would be the most likely cause of the reasons provided for this error. The remaining choices are incorrect because they are not likely to lead to the duplication that Monica is seeing. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

36) Monica has been working with her IT department to capture user data from online profiles potential customers create on the company's website. Monica is working on a project to build internal customer profiles so that they can tailor offers and target emails to unique preferences. After she receives an Excel document, she realizes that there appear to be some erroneous records and duplicate entries and that some required fields are blank. What stage of the data cleaning process will correct these errors? A) The rinse cycle since these appear to be mid-level errors that will take a medium level of effort to correct. B) The scrub cycle since these appear to be deeper errors that will necessitate a deeper study and one-at-a-time manual corrections. C) The steam cycle since these appear to be errors of little concern and therefore can be left alone without impact. D) The wash cycle since these appear to be obvious errors that will require minimum effort to correct. Answer: B Explanation: This question requires familiarity with data collection and the processes entailed with its retrieval. Choice B is correct because the errors described within this problem will require the methods involved in the scrub cycle since they would require in-depth correction. The remaining choices are incorrect because they are not proper alignments of parts of the cycle to the difficulty levels or they do not represent the place in the data cleaning cycle that type of error would be addressed. Diff: 2 LO: 2 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

37) Chelsea's Candles is a medium-sized factory that produces candles that hold a small trinket in the wax. As the candle burns and the wax melts, eventually the trinket reveals itself. As part of their yearly review, they utilize data analytics to determine what changes they may need to implement in the coming year. Which of the following best represents a step in a higher-order type of analytics they may use? A) Meet with the production department to review their outputs during the most recent quarter. B) Meet with the sales team to discuss new strategies they would like to implement in the coming year to increase revenues. C) Meet with the West region sales team to gain insight into why their sales were not as high as the East's. D) Review order reports, and call a vendor about a delay in recent shipments. Answer: B Explanation: This question requires familiarity with how a company uses various types of analytics to make different levels of decisions. Choice B is correct because it describes a way that Chelsea's Candles could use analytics to make a higher-order decision using prescriptive analytics. The remaining choices are incorrect since they use lower-order types of analytics. Diff: 2 LO: 2 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 38) Chelsea's Candles is a medium-sized factory that produces candles that hold a small trinket in the wax. As the candle burns and the wax melts, eventually the trinket reveals itself. As part of their yearly review, they use data analytics to determine what changes they might implement in the coming year. Which of the following actions would most likely be part of the "Make Decisions" step in the decision-making process? A) Chelsea tasked the accounting department with gathering data and generating graphs that support their conclusions. B) Chelsea tasked the information technology team with explaining how a security breach occurred and outlining their response to the subsequent data leak. C) Chelsea tasked the management team with using data collected on employees to conduct performance evaluations. D) Chelsea tasked the marketing department with reviewing ad revenues over the past five years to determine the strongest region for returns on advertising. Answer: C Explanation: This question requires familiarity with how analytics fit into the larger decisionmaking process. Choice C is correct because it involves using gathered data to make decisions for the future. The remaining choices are incorrect because they focus on using lower-order analytics or summaries that occur earlier in the decision-making process. Diff: 2 LO: 2 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 23

39) A company investigates what types of data it wants to gather and how they plan to collect it. They know a variety of methods can be employed, and each company will select the most costeffective and secure option that meets their specific needs. If a company would like to purchase data from outside vendors, then which of the following best represents a credible external source a company could use? A) The Center for Data Integrity B) The Center for Research in Security Prices C) The EDGAR Personal Filings Repository D) The Federal Depository Laboratory Program Answer: B Explanation: This question requires familiarity with data sources, security, and their relevance as valid and validated data sources. Choice B is correct because it accurately identifies a credible external source that companies get data from as either one-time purchases or on a subscription basis. The remaining choices are incorrect because they either do not exist or there is something close that exists but with a minor error that invalidates the entity. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 40) A company investigates what types of data it wants to gather and how they plan to collect it. They know a variety of methods can be employed, and each company will select the most costeffective and secure option that meets their specific needs. Which of the following best represents an acceptable storage method a company could use to secure their data? A) Housing data off-site in a designated room where the data farm's other customers can also access the servers B) Housing data on-site in a designated room that all employees can access C) Purchasing a cloud storage contract with a new unsecured data provider D) Purchasing a cloud storage contract with a vetted and secured leading data servicer Answer: D Explanation: This question requires familiarity with data sources and internal and external data security. Choice D is correct because it accurately identifies an acceptable storage method a company could use to store their data. The remaining choices are incorrect because they represent data storage choices that exist but would not be acceptable in this scenario. Diff: 2 LO: 2 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

41) Decision-making involving data analytics includes a five-step process. Which of the following best outlines what happens in the Gain Insight steps? A) Accessing information and using tools to expand knowledge B) Examining data for patterns, trends, and relationships C) Gathering internal/external data D) Using insights in decision-making and future planning Answer: B Explanation: This question requires familiarity with the five data analytics steps used by decision makers. Choice B is correct because it accurately identifies parts of gaining insight. The remaining choices are incorrect as they describe parts of at least one of the other four steps. Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 42) Decision makers have to establish their needs and discover what data will help them to answer their queries. This data can be attained from a variety of sources, but these sources can be divided into the categories of internal or external. Which of the following best represents an example of a source of internal data? A) A hashtag on Twitter B) A market forecast generated by an analyst C) A trade publication D) Customer service department Answer: D Explanation: This question requires familiarity with potential data sources and the way that internal data differs from external data. Choice D is correct because a customer service department is an example of an internal data source. The remaining choices are incorrect since they represent external data sources. Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

43) As companies expand and work towards better understanding their existing and potential clients, they accumulate virtual profiles of their customers. The information gathered can vary in nature and scope but ultimately creates a snapshot of a typical customer. Which of the following are examples of Activity and History information that could be collected about a customer? A) Devices used B) Number of credit card purchases C) Residential history D) Status updates/tweets Answer: D Explanation: This question requires familiarity with general practices for collecting information about customers. Choice D is correct because status updates/tweets is an example of Activity and History information that a business might gather about its customers. The remaining choices are incorrect because they would provide information about other aspects of a customer. Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 44) Decision makers have to establish their needs and discover what data will help them to answer their queries. This data can be attained from a variety of sources, but these sources can be divided into the categories of internal or external. Which of the following best represents an example of a source of external data? A) Click Ads found on Google B) Human resources C) Production/operations D) Sales and Marketing data Answer: A Explanation: This question requires familiarity with potential sources of data and the ways that internal data differs from external data. Choice A is correct because Click Ads found on Google is an example of an external data source. The remaining choices are incorrect as they represent internal data sources. Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

45) As companies expand and work towards better understanding their existing and potential clients, they accumulate virtual profiles of their customers. The information gathered can vary in nature and scope but ultimately creates a snapshot of a typical customer. Which of the following are examples of financial information that may be collected about a customer? A) Frequent walking routes B) Properties owned/rented C) Residential information D) Social media habits Answer: B Explanation: This question requires familiarity with general practices for collecting information about customers. Choice B is correct because properties owned/rented is an example of financial information that a business might gather about its customers. The remaining choices are incorrect because they would provide information about other aspects of a customer. Diff: 1 LO: 2 Bloom: K AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 46) Data analytics has four broad categories that range in value and complexity. Each of the four category types strives towards raising questions that assist decision makers in their efforts to gather relevant data. Which of the following is an example of a question answered by descriptive analytics? A) How would hiring additional staff impact the bonus potential of existing employees? B) What are the selling price trends of a single product across the United States? C) Why did the direct material cost increase over the past year? D) Why have our customers stopped ordering a certain category of products? Answer: B Explanation: This question requires familiarity with the four broad categories that data analytics can be placed in. Choice B is correct because asking what the selling price trends are about a single product is an example of a question that would be answered using descriptive analytics. The remaining choices are incorrect because they represent questions answered by one of the other three categories. Diff: 1 LO: 3 Bloom: C AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

47) Benson Company is a retailer that specializes in the e-commerce sale of small office supplies including decorative file folders, personalized desk calendars, and trendy desk accessories. As part of their annual review, management decided to perform some analysis on trends over the past five years. One manager suggested they use data visualization for this purpose. If management would like to analyze how well the company achieved their sales targets over the past five years, then what type of chart would be the best to use to do this? A) A bar chart that shows total values between the years B) A pie chart that shows how much of the total sales target materialized each year C) A Tableau or other business intelligence tool chart that shows the data in a trendy and unique way D) A time series graph that shows how the performance each year compared to the target values Answer: D Explanation: This question requires familiarity with descriptive analytics and charts generated from the available data. Choice D is correct as a time series graph looks at a performance, sales in this case, over time, and compares it to target values. The remaining choices are incorrect as they would be better suited to display other kinds of information or they are a non-existent choice. Diff: 1 LO: 2 Bloom: AP AACSB: Data Analytics AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 48) Data analytics can be broken into four broad categories. Each category serves a unique purpose and will vary by value and complexity. Which of the following correctly identifies the four categories? A) Defective, Diagnostic, Predictive, Prescriptive B) Descriptive, Diagnostic, Predatory, Prescriptive C) Descriptive, Diagnostic, Predictive, Prescriptive D) Descriptive, Diagonal, Predictive, Prescriptive Answer: C Explanation: This question requires familiarity with the four categories of data analytics. Choice C is correct in that it accurately lists all four categories. The remaining choices are incorrect as they contain at least one incorrect category. Diff: 1 LO: 3 Bloom: K AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

49) Benson Company is a retailer that specializes in e-commerce sales of small office supplies including decorative file folders, personalized desk calendars, and trendy desk accessories. As part of their annual review, management decided to perform some analysis on trends over the past five years. One manager suggested they use data visualization for this purpose. Which of the following best represents the correct list and ordering of the data visualization process? A) Raw Data, Articulated, Sorted, Prepared Visually B) Raw Data, Sorted, Arranged, Presented Visually C) Rough Data, Arranged, Sorted, Presented Visually D) Rough Data, Presented Visually, Sorted, Articulated Answer: B Explanation: This question requires familiarity with specific descriptive analytics and their visual representation. Choice B is correct because it is the only choice that has the correct list of steps in the correct order. The remaining choices contain either an incorrect order or at least one incorrect element in the list. Diff: 1 LO: 3 Bloom: K AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 50) As companies integrate data analytics and shift their focus towards the future, they will need to utilize predictive analytics. This kind of analytics uses both historical data and statistical models to predict future outcomes. If a company is interested in looking more closely at its sales department, then what is an appropriate question to answer using predictive analytics? A) How can we correct a budget deficit from last year in the new financial plans? B) How would the addition of a 5% bonus impact the compensation expenses for last year? C) How would the addition of a 5% bonus impact the net income for the current year? D) What is the budget-to-actual comparison for profits for the past two years? Answer: C Explanation: This question requires familiarity with data analytics and more specifically the methodology of predictive analytics. Choice C is correct because it uses existing data to make a prediction about how a change to the current setup would impact something in the future. The remaining choices are incorrect because they describe other types of data analytics, especially focusing on past events and already decided outcomes rather than a predictive future focus. Diff: 2 LO: 3 Bloom: AP AACSB: Data Analytics AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

51) As companies integrate data analytics and shift their focus towards the future, they need to utilize predictive analytics. This kind of analytics uses both historical data and statistical models to predict future outcomes. If a company is interested in looking more closely at its shipping department, then which of the following is a challenge this company might face using predictive analytics? A) All decision makers are numerate, and they will be able to understand the outcomes presented. B) The data is available in a variety of formats, all of which are usable. C) The data is free of biases and errors as promised by the vendor they acquired the data from. D) There is a high level of uncertainty around a potential situation. Answer: D Explanation: This question requires familiarity with data analytics and more specifically challenges faced when using predictive analytics. Choice D is correct because it accurately represents a challenge a company could face when using predictive analytics. The remaining choices are incorrect because they do not represent challenges that companies will face with most of the statements being false or incomplete. Diff: 2 LO: 3 Bloom: AP AACSB: Data Analytics AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 52) Sampson Inc. is a producer of plastic products including bottles and sandwich bags. Management decided they need to be pre-informed about the financial performance of the organization and will utilize data analytics. As part of their predictive analytics, they are going to use association rules. Which of the following is a potential outcome of using this method? A) Building a replenishment plan to decide when to send supply to each vendor to adequately meet their demand B) Determination of a region's demographics to predict vendor product needs C) Determination of overtime needed to generate detailed schedules D) Upselling products from one customer group to another customer group Answer: B Explanation: This question requires familiarity with data analytics and more specifically the methodology of predictive analytics. Choice B is correct as it accurately describes a potential outcome under association rules. If Sampson uses association rules to determine what vendors will need based upon their region's demographics, then they will be able to better plan their own production. The remaining choices are incorrect since they are ineffective uses of analytics, and they will not produce useful predictions or they contain outcomes not related to predictive analytics. Diff: 2 LO: 3 Bloom: AP AACSB: Data Analytics AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 30

53) Sampson Inc. is a producer of plastic products including bottles and sandwich bags. Management decided they need to be pre-informed about the financial performance of the organization and will use data analytics. As part of their predictive analytics, they are going to use regression analysis. Which of the following is a potential reason for using this method? A) Sampson would like to understand if a third quarter decrease in sales is attributable to a onetime decrease in shipping cost. B) Sampson would like to understand if a third quarter increase in sales is attributable to a newly implemented sales tactic. C) Sampson would like to understand if an increase in the cost of shipping in the North region is attributable to a one-time reduction in selling price. D) Sampson would like to understand if an increase in the cost of shipping in the North region is attributable to a newly implemented sales tactic. Answer: B Explanation: This question requires familiarity with data analytics and more specifically the methodology of predictive analytics. Choice B is correct since it accurately describes a potential reason to use regression analysis namely to evaluate outliers from costs or sales data points. Understanding an increase in sales for a specific time and determining if the newly implemented sales tactic is the cause is a valid potential reason for using the regression analysis. The remaining choices are incorrect because they do not accurately represent a valid combination of independent and dependent variables. Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

54) The management at Gellar Corp. is compiling data for their analytics team. Gellar is a factory that produces candy gummy bears, and they are very interested in what changes in the next few years will reduce costs. Which of the following type of data analytics will be the most useful for this purpose, and why? A) Descriptive analytics because management wants to look at historical data in precise detail B) Diagnostic analytics because management wants to look at historical data in precise detail C) Predictive analytics because management wants to use historical data to make changes in the future D) Prescriptive analytics because management wants to use historical data to see how changes would impact future performance Answer: D Explanation: This question requires familiarity with the branches of data analytics and when to use tools from each type. Choice D is correct because it accurately describes the type of analytics that will help management address their concerns along with an accurate description of what it does. The remaining choices are incorrect because these types of analytics are either incorrectly described or do not represent the type of analysis needed to address management's concerns. Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 55) Tara oversees materials acquisition at an HVAC company, and she raised some concerns about year-to-year increases in direct materials cost, and she would like to use analytics to help determine why this happened. What can Tara do in order to answer this question? A) She can look at different attributes of her supplier origins, such as by region or supplier. B) She could chart the price in each region and compare. C) She could try to obtain bids from new vendors. D) She could use a pie chart to demonstrate the region with the largest change. Answer: A Explanation: This question requires familiarity with different types of analytics and to recognize that Tara needs to use diagnostic analytics to answer an implied "Why?" question. Choice A is correct because she is investigating different attributes of the data, such as region of origin or supplier. The remaining choices are incorrect because they try to answer questions unrelated to the one Tara is investigating, and in those situations, she might use a different type of analysis. Diff: 2 LO: 3 Bloom: AP AACSB: Data Analytics AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

56) Jessica recently compiled a budget for herself. She believes she needs to do a better job planning her finances and knows establishing a budget could be a step in the right direction. Her take home pay is $2,500. The following information is for the month of May:

From an overall perspective, by what percent is Jessica over or under budget for the month of May? A) 9.68% over budget B) 9.68% under budget C) 10.72% over budget D) 10.72% under budget Answer: C Explanation: This question requires familiarity using Excel to calculate percentages. To calculate the over or under budget percentage, first add the values in the Budget Column and then add the values the Actual Column. Place these answers in cells B9 and C9 respectively. The total budgeted amount equals $1,950, and the total actual amount equals $2,159. Then, use the formula: "=(C9 - B9)/B9" typed into a different cell. ($2,159 - $1,950)/$1,950 = 10.72% over budget (Choice C). The remaining choices are incorrect. Diff: 2 LO: 3 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Data Analytics.

57) Jessica recently compiled a budget for herself. She believes she needs to do a better job planning her finances and knows this could be a step in the right direction. Her take home pay is $2,500. The following table shows her budgeted and actual values for the month of May:

Jessica puts any unallocated funds into her savings account. Assume Jessica's take-home pay increased to $2,750 and use her Actual numbers from May, by what percent would the amount she can put into savings change? A) 42.30% less into savings B) 42.30% more into savings C) 73.31% less into savings D) 73.31% more into savings Answer: D Explanation: This question requires familiarity using Excel to calculate percentages. To calculate the percent change, first sum the Actual Column and place the total in row 9. The total actual amount equals $2,159. When you subtract this from the original take-home pay of $2,500, this leaves $341 surplus income for her savings account. When you subtract this from the increased take home pay value $2,750, this leaves $591 in surplus income for saving. Then, you use the formula: (New amount of savings - Old amount of savings)/(Old amount of savings) placed in an unoccupied cell. ($591 - $341)/$341 = 73.31% more for savings (Choice D). The remaining choices are incorrect in value, sign, or both. Diff: 2 LO: 3 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Data Analytics.

58) Lauren launched her online boutique at the beginning of last year and would like to review her performance so far. She gathered the following information:

She would like to use data analytics to evaluate her year. What is the highest net income percentage for the months listed? A) 8.98% B) 10.15% C) 64.10% D) 100.00% Answer: C Explanation: This question requires familiarity using Excel to calculate percentages. To calculate the net income percentage for January, use the formula: "=(B2 - C2)/B2" placed in cell D2. Then, carry the formula down the column for each month row. Once you complete this, Excel will return percentages for each month. Choice C is correct because it uses the formula correctly, and 64.10% belongs to February. The remaining choices are incorrect because they do not list the correct amounts. Diff: 2 LO: 3 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Data Analytics.

59) Lauren launched her online boutique at the beginning of last year and would like to review her performance so far. She gathered the following information:

Lauren would like to use her data analytics skillset to help with her assessment of the year. Which graph would most accurately depict this data visually in a compelling manner? A) A bar chart, it compares sales to expenses. B) A histogram, it groups sales amounts and expenses within preset ranges. C) A pie chart, it displays the overall amount of sales and expenses allocated to each month. D) A time series graph, it shows how the sales and expenses change over the course of the year. Answer: D Explanation: This question requires familiarity looking at data and determining the most appropriate graph. Choice D is correct because the purpose of a time series graph is to display how numbers change over a time. The remaining choices are incorrect because they would not depict the data in the way it is needed. Diff: 2 LO: 3 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Visualization.

60) The management at Gellar Corp. is compiling data for their data analytics team. Gellar is a factory that produces gummy bear candy, and they are very interested in what changes can be made in the next few years to reduce costs. What specific technique could be utilized to evaluate various scenarios that management may envision happening? A) Association rules, a prescriptive analytics technique B) Regression analysis, a predictive analytics technique C) What-if analysis, a predictive analytics technique D) What-if analysis, a prescriptive analytics technique Answer: D Explanation: This question requires familiarity with data analytics and more specifically the techniques available under prescriptive analytics. While the question does not specifically identify prescriptive analytics, you must be able to determine the management of Gellar Corp. needs that type to satisfy their needs. Choice D is correct because it both correctly identifies the type of data analysis and a specific technique from that type that would help management evaluate various scenarios. The remaining choices are incorrect because they contain mismatches of a data analysis and corresponding techniques, or the selection would not address the concerns of management. Diff: 2 LO: 3 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Data Analytics. 61) Jordan is an economics student entering their senior year of college, and they are compiling data about their time in school. Jordan requested their transcript and needs to determine the best way to present their academic data. If Jordan wishes to calculate the number of A-grade they received during their time in college, which formula function would be the most appropriate? A) The COUNTIF function in Microsoft Excel B) The MEDIAN function in Microsoft Excel C) The MODE function in Microsoft Excel D) The What-If Analysis function in Microsoft Excel Answer: A Explanation: This question requires familiarity with data analysis and the use of various formulas and functions to solve for different items. Choice A is correct because the COUNTIF function in Microsoft Excel would let Jordan aggregate the number of A-grade they received during their time in college. The remaining choices are incorrect since they would not solve for the intended answer. Diff: 2 LO: 3 Bloom: K AACSB: Knowledge AICPA: AC: Technology and Tools IMA: Technology & Analytics: Data Analytics.

62) Jordan is an economics student entering their senior year of college, and they are compiling some data about their time in school. Jordan requested their transcript and needs to determine the best way to present their academic data. If Jordan wishes to calculate their most frequently occurring course GPA earned during their time in college, then what formula function would be the most appropriate? A) The MEDIAN function in Microsoft Excel B) The MEDIAN function in Tableau C) The MODE function in Microsoft Excel D) The MODE function in Microsoft Word Answer: C Explanation: This question requires familiarity with data analysis and the use of various formulas and functions to solve for different items. Choice C is correct because the MODE function in Excel would help Jordan calculate their most frequently occurring course GPA. The remaining choices are incorrect since they either would not solve for the intended answer, do not exist, or are an incorrect pairing of a formula and the program that utilizes it. Diff: 2 LO: 3 Bloom: K AACSB: Knowledge AICPA: AC: Technology and Tools IMA: Technology & Analytics: Data Analytics. 63) Trevor is about to enter his third year of a pre-med program and knows the program will continue to become more competitive. He needs to ensure his GPA will be on par with that of his classmates. He has earned the following GPAs in courses to date: 4, 3, 3, 2, 2, 4, 4, 4, 4, 3, 3, 3, 3, 4, 2, 2, 3, 4, 4, and 3. Using Excel, determine the Mode and the Median for his GPAs thus far. A) GPA Mode is 3, and GPA Median is 4. B) GPA Mode is 3.2, and GPA Median is 4. C) GPA Mode is 4, and GPA Median is 3. D) GPA Mode is 4, and GPA Median is 3.2. Answer: C Explanation: This question requires familiarity with data analysis and the use of Excel as a tool to calculate various items. The first task would be to copy the data into Excel. Next, to calculate the Mode, you would enter =MODE(number1, [number2], …) which returns an answer of 4. Lastly, to calculate the Median, you would enter =MEDIAN(number1, [number2], …) which returns an answer of 3. This makes choice C the correct choice. The remaining choices are incorrect because each contains at least one incorrect number, either switching the Mode or the Median or using the GPA Mean instead. Diff: 2 LO: 3 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Data Analytics.

64) Trevor is about to enter his third year of a pre-med program and knows the program will continue to become more competitive. He needs to ensure that his GPA will be on par with that of his classmates. He has earned the following GPAs in his courses to date: 4, 3, 3, 2, 2, 4, 4, 4, 4, 3, 3, 3, 3, 4, 2, 2, 3, 4, 4, and 3. The average GPA for pre-med students is 3.75. Using Excel, determine how close Trevor's GPA is to that average. (Round intermediate calculations to two decimal places.) A) 14.67% higher than the average B) 14.67% lower than the average C) 17.19% higher than the average D) 17.19% lower than the average Answer: B Explanation: This question requires familiarity with data analysis and the use of Excel as a tool to calculate various items. The first task would be to copy the data into Excel. Next, you would calculate the average with =AVERAGE(number1, [number2], …) which returns an answer of 3.2. To determine the difference, use the following formula: (Trevor's Average GPA - Average GPA of a pre-med student) / (Average GPA of pre-med student) = (3.2 - 3.75)/3.75 = 0.14666667 or 14.67% lower than the average of a pre-med student (Choice B). Diff: 2 LO: 3 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Data Analytics. 65) Data analytics can be broken into four broad categories. Each category serves a unique purpose and will vary by value and complexity. Which of the following would be a question answered by using diagnostic data analysis? A) What happened? B) What is likely to happen? C) What should we do about it? D) Why did it happen? Answer: D Explanation: This question requires familiarity with the four categories of data analytics. Choice D is correct because it accurately identifies what question is answered by diagnostic data analysis. The remaining choices are incorrect as they align with one of the other three categories. Diff: 1 LO: 3 Bloom: K AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

66) Data analytics has four broad categories that range in value and complexity. Each of the four category types strives towards answering questions that assist decision makers in their efforts to gather relevant data. Which of the following is an example of a question answered by diagnostic data analytics? A) What is the change in the company's profitability across regions? B) What is the expected volume of production for the next year? C) What is the number of five-star reviews for the company online? D) Why did the Western region have a decrease in profits when the East did not? Answer: D Explanation: This question requires familiarity with the four broad categories that data analytics can be placed in. Choice D is correct because answering the question of why a particular region experienced a change but another did not is an example of a question that would be answered using diagnostic data analytics. The remaining choices are incorrect because they represent questions answered by one of the other three categories. Diff: 1 LO: 3 Bloom: C AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 67) Houz Inc. is a regional furniture manufacturer who specializes in new midcentury replicas at affordable prices. The management and decision makers at Houz gathered data from past years and are performing some analysis. If the company wants to address the change in raw materials costs over the past five years, then what type of data analysis would be most appropriate for that, and why? A) Descriptive: they need to know what happened to price over the past five years B) Diagnostic: they need to know what caused price changes over the past five years C) Predictive: they need to know what is likely going to happen moving forward D) Prescriptive: they need to plan what they can do about these changes Answer: B Explanation: This question requires familiarity with the four categories of data analytics and when and how to use each type. Choice B is correct because Houz needs to know what caused price changes over the last five years. The remaining choices are incorrect because they focus on other analyses. Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

68) Houz Inc. is a regional furniture manufacturer who specializes in new midcentury replicas at affordable prices. The management and decision makers at Houz gathered data from past years and are performing some analysis. If the company wants to address why their southern region recently experienced a decrease in customer orders, then what type of data analysis would be most appropriate for this, and why? A) Descriptive: they need to know what happened to the number of customer orders in the Southern region B) Diagnostic: they need to know why there was a decrease in customer orders in the Southern region C) Predictive: they need to know what is most likely to happen to customer orders in the Southern region moving forward D) Prescriptive: they need to plan what to do about the decrease in customer orders in the Southern region moving forward Answer: B Explanation: This question requires familiarity with the four categories of data analytics and when and how to use each type. Choice B is correct because Houz needs to know why there was a decrease in their Southern region, and diagnostic analytics focuses on possible reasons for past performance. The remaining choices are incorrect because they focus on other analyses. Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 69) Data analytics has been increasing in popularity as businesses realized these techniques provide unique insights that they would otherwise be unlikely to see. There are four main categories of data analytics each with its own benefits, complexities, and corresponding levels of insight provided to users. Which of the following is the most likely reason a company would choose to use diagnostic analytics? A) They need to examine past results and observe trend for a specific outcome. B) They need to know what they can do about a situation to achieve a desired outcome in the future. C) They need to look at past data and gain an understanding of why something occurred. D) They would like to have a better understanding of something that is likely to occur at some point in the future. Answer: C Explanation: This question requires familiarity with the four categories of data analytics and when and how to use each. Choice C is correct because it represents an accurate reason that a company would use diagnostic analytics to address a specific concern. The remaining choices are incorrect because they each deal with one of the other three categories of analytics. Diff: 2 LO: 3 Bloom: C AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 41

70) Data analytics has been increasing in popularity as businesses realized these techniques provide unique insights that they would otherwise be unlikely to see. There are four main categories of data analytics each with its own benefits, complexities, and corresponding levels of insight provided to users. Which of the following is the most likely reason a company would choose to use predictive analytics? A) A butcher wants to know why the cost of his products has been increasing lately. B) A dog groomer wants to know what steps to take to grow their sales over the next two years. C) A law firm wants to know how giving a year-end bonus would impact their profit. D) A lawn care business wants to know how many likes their recent social media post received. Answer: C Explanation: This question requires familiarity with the four categories of data analytics and when and how to use each. Choice C is correct because it represents an accurate reason a law firm would utilize predictive analytics to address a specific need or concern. The remaining choices are incorrect because they each deal with one of the other three categories of analytics. Diff: 2 LO: 3 Bloom: C AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 71) Carson is the marketing manager at a local travel publication. He is working with department heads to get some data to help him in his efforts to attract new clients and investigate aspects of their existing clientele. Why would Carson choose to use descriptive analytics? A) Management would like Carson to analyze the change in revenue per existing customer over the past two years. B) Management would like Carson to analyze what steps to take to reduce the time it takes to fully onboard a client. C) Management would like Carson to analyze what the expected increase in new clients will be over the next year. D) Management would like Carson to analyze why the south end of town has higher sales than other areas. Answer: A Explanation: This question requires familiarity with the four categories of data analytics and when and how to use each. Choice A is correct because it represents an accurate reason for Carson to choose descriptive analytics to address their concerns about attracting new clients while also looking into aspects of existing clients. The remaining choices are incorrect because they each deal with one of the other three categories of analytics. Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

72) Carson is the marketing manager at a local travel publication. He is working with department heads to get some data to help him in his efforts to attract new clients while also investigating aspects of their existing clientele. Why would Carson choose to use prescriptive analytics? A) Carson wants to know how to increase sales to new customers over the next three years. B) Carson wants to know what market uncertainties may exist in the next year that might impact the acquisition of new customers C) Carson wants to know why the business had an easier time attracting a younger demographic last year than it did in the three years before that one. D) Carson wants to understand what caused customers to leave the company in the past two years Answer: A Explanation: This question requires familiarity with the four categories of data analytics and when and how to use each. Choice A is correct because it represents an accurate reason Carson would choose prescriptive analytics to address their concerns about attracting new clients while looking into aspects of existing clients. The remaining choices are incorrect because they each deal with one of the other three categories of analytics. Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 73) Tara oversees materials acquisition for an HVAC company, and she has raised concerns about their year-to-year increases in direct materials cost, and they would like to use analytics to help determine why this happened. What question could Tara ask first to help her start the analysis? A) Was there a difference in costs between the different vendors we have used? B) What can we do to prevent this from happening moving forward? C) What do we expect the vendors we use to charge next year? D) What was the overall difference in prices year-to-year? Answer: A Explanation: This question requires familiarity with different types of analytics and to recognize that Tara would need to use diagnostic analytics to answer this "Why…?" question. Choice A is correct because investigating if there was a difference in costs between the vendors used may help answer why the increase occurred. The remaining choices are incorrect because they each investigate issues other than the one Tara is investigating and may require a different type of analytics. Diff: 2 LO: 3 Bloom: AP AACSB: Data Analytics AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

74) Data analytics has become an increasingly in-demand skill across business world since its inception. As employers focus on what they are looking for in potential employees, data analytics has become a desirable skill for accountants. Which of the following is an example of a skill that entry-level accountants should hone? A) Being an ineffective communicator B) Being curious and improving critical thinking skills C) Being uncomfortable with failure D) Focusing on developing accounting skills only with no regard for technical skills Answer: B Explanation: This question requires familiarity with skills that entry-level accountants should have to be prepared for employment in a world of data analytics. Choice B is correct because being curious and working to improve critical thinking skills would be a skill that entry-level accountants should hone. The remaining choices are incorrect because they represent skills accountants should not hone and/or avoid. Diff: 1 LO: 4 Bloom: C AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 75) As practitioners increase their knowledge in data analytics, some companies have moved towards collecting information in new and different ways. Additionally, decision makers have taken their newly collected data and devised ways that it can benefit the organization the most. Which of the following is an example of a way that organizations use data analytics in cost accounting decisions? A) Addressing Supply Chain Problems B) Eliminating Value-Added Activities C) Performance Evaluation D) Strategy Deformation Answer: C Explanation: This question requires familiarity with ways data analytics can assist with cost accounting decisions. Choice C is correct because performance evaluation is an accurate example of a way data analytics assist with cost accounting decisions. The remaining choices are incorrect because they are all incorrect variations of accurate ways that this can be accomplished. Diff: 1 LO: 4 Bloom: C AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

76) As more practitioners acquire data analytics skills, organizations have made a concerted effort to collect more data and find new ways to make use of that data. A positive byproduct of this is that decision making has improved, and organizations have used these techniques to improve insights gleaned from the data. According to a 2019 survey from the Society of Actuaries, what types of analytics experienced major growth? A) Descriptive and Diagnostic B) Descriptive and Prescriptive C) Diagnostic and Predictive D) Predictive and Prescriptive Answer: D Explanation: This question requires familiarity with the way that companies are using data analytics to engage in specific activities. Choice D is correct because the main text noted that Predictive and Prescriptive analytics had experienced the most growth according to the Society of Actuaries' 2019 survey. The remaining choices are incorrect since each contains at least one type of analytics not noted as having major growth according to the survey. Diff: 1 LO: 4 Bloom: K AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 77) As practitioners increase their knowledge in data analytics, some companies have moved towards collecting information in new and different ways. Additionally, decision makers have taken their newly collected data and devised ways that it can benefit the organization the most. Which of the following is an example of a way that organizations use data analytics in performance evaluation? A) Providing near real-time feedback to an employee after a sales pitch with a client. B) Providing real-time feedback about shipping times to communicate with suppliers. C) Using algorithms to predict how likely a customer is to default on an invoice. D) Using customer survey responses to improve dining experiences at a restaurant. Answer: A Explanation: This question requires familiarity with ways data analytics can assist with performance evaluations. Choice A is correct because providing near real-time feedback to an employee about their performance is an example of using data analytics in performance evaluation. The remaining choices are incorrect because they are all examples of ways that data analytics can be used in areas other than performance evaluation. Diff: 1 LO: 4 Bloom: C AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

78) As more practitioners acquire data analytics skills, organizations have made a concerted effort to collect data to analyze and to find new ways to use that analysis. A positive byproduct of this is that decision-making options have improved, and organizations have used these techniques to improve the insights arrived at. Which of the following is a way that a healthcare organization could use data analytics to eliminate non-value-added activities? A) To determine the most cost-efficient way to check-in patients when they arrive B) To determine what employees arrived late and caused delays in seeing patients C) To determine what patients are at greatest risk for needing readmission D) To distribute and collect a patient survey to determine what departments are not performing well Answer: A Explanation: This question requires familiarity with the way that companies use data analytics to engage in specific activities. Choice A is correct because using data to determine what may happen in the future to create meaningful changes to achieve a specific goal is a viable way to eliminate non-value-added activities. Diff: 2 LO: 4 Bloom: AP AACSB: Data Analytics AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 79) An area of business that uses data analytics to improve operations is supply chain management. Managers are constantly looking for ways to make their operations more efficient and cost-effective. Which of the following represents an area of supply chain management that could be improved using data analytics? A) The check-in system for patients at a local dentist's office B) The inventory management of the tennis ball division of a sporting goods company C) The order approval system for a construction company D) The performance evaluation of the production team at a trucking company Answer: B Explanation: This question requires familiarity with data analytics and its impact on the supply chain management functions of an organization. Choice B is correct because the inventory management of a sporting goods company is an area that could be improved using data analytics. The remaining choices are incorrect because they are areas outside of supply chain management that could be improved using data analytics. Diff: 2 LO: 4 Bloom: K AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

80) An area of business that uses data analytics to improve operations is supply chain management. Managers are constantly looking for ways to make their operations more efficient and cost-effective. Which of the following is a way that a light bulb manufacturer could use data analytics to improve its supply chain management? A) Use the data collected on production wages to determine why the LED division went over budget B) Use the data collected to create a demand forecast for a new LED bulb C) Use the data collected to determine what the change in glass costs were year-to-year D) Use the data collected to determine why the costs of copper from their copper supplier increased Answer: B Explanation: This question requires familiarity with data analytics and its impact on supply chain management functions for an organization. Choice B is correct because creating a demand forecast for a specific product or product line is a way that data analytics could improve supply chain management for a light bulb manufacturer. The remaining choices are incorrect because they evaluate past events and do not focus on possible improvements, or they contain analyses that may improve other areas of the organization. Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 81) An organizational area that often needs attention but may be overlooked is Performance Evaluation. Having a well-developed and thorough performance evaluation system helps a company have successful and productive employees. Which of the following represents a way data analytics could improve the performance evaluation process? A) To generate feedback in real time but not allow employees to review it until their annual review B) To provide feedback in real time so employees are quickly reprimanded for errors C) To provide feedback in real time so employees can determine how to take advantage of the company's flexible sick time policy D) To provide feedback in real time so employees can optimize their performance Answer: D Explanation: This question requires familiarity with data analytics and its impact on the Performance Evaluation processes of an organization. Choice D is correct because employees receiving feedback in real time and being able to adjust their performance accordingly is a way that data analytics could improve this area. The remaining choices are incorrect because they are not ways to improve Performance Evaluation or describe a negative impact. Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 47

82) An organizational area that often needs attention but may be overlooked is Performance Evaluation. Having a well-developed and thorough performance evaluation system helps a company have successful and productive employees. Which of the following is an appropriate rationale for using data analytics to improve performance evaluation? A) Management does not want to increase the time they have to make constructive contact with their employees. B) Management hopes to move away from annual performance review and to provide employees with more frequent reviews. C) Management wants to allow their systems to provide real-time feedback eliminating this as their task. D) Management would like to continue their current process of only providing employee feedback annually. Answer: B Explanation: This question requires familiarity with data analytics and its impact on the Performance Evaluation processes for an organization. Choice B is correct because management's desire to move away from an annual review and to provide more frequent reviews is a way that data analytics could improve this area. The remaining choices are incorrect because they are not rationales for using data analytics for Performance Evaluation or describe a negative impact. Diff: 2 LO: 4 Bloom: AN AACSB: Data Analytics AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

83) One of the areas where data analytics helps organizations with is Strategy Formation. Companies will typically spend significant time, energy, and resources in this area as they lay out plans for the future. What type of data analytics is best suited to help in this area, and why? A) Descriptive analytics since it helps pinpoint trends in the past so the organization can plan for the future B) Diagnostic analytics since it looks at past data to determine a cause that they can then mitigate in the future C) Predictive analytics since it uses models to predict what will happen in the future D) Prescriptive analytics since that is the type of analytics that provides information about what a company should do to achieve a desired outcome Answer: D Explanation: This question requires familiarity with data analytics and how it applies to strategy formation. Choice D is correct because creating future plans is exactly the goal of prescriptive analytics. It is the category that focuses on the future. The remaining choices are incorrect because they would not be the best suited for strategy formation since they either focus on the past or make estimates of what will happen as opposed to providing guidance for planning. Diff: 2 LO: 4 Bloom: AN AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

84) One of the areas where data analytics helps organizations with is Strategy Formation. Companies will typically spend significant time, energy, and resources in this area as they lay out plans for the future. Which of the following is the best example of a company using data analytics for strategy formation? A) A clothing store collects real-time data about employee clock-in times to determine who has been late in the past week. B) A clothing store collects real-time data about what items are being sold so they can improve the inventory they have on hand. C) A restaurant collects real-time survey data from customers to determine how to not attract customers who are unhappy. D) A restaurant collects real-time survey data from customers to improve future customers' dining experiences. Answer: D Explanation: This question requires familiarity with data analytics and how it is used in strategy formation. Choice D is correct because using real-time data to create an improvement for the group the data is collected from would be a proper use in strategy formation. The remaining choices are incorrect as they are not proper uses of data analytics or present scenarios best served by another category of data analytics. Diff: 2 LO: 4 Bloom: AP AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

85) Data analytics has become a very high-demand skill for employees regardless of their industry. The goal of decision makers continues to gravitate towards increasing data accessibility and usability with an overall goal of making more data-informed decisions. Within the cost accounting sphere, outcomes achieved are divided into four areas. Which of the following is a correct list of those areas? A) Eliminating non-value-added activities, managing supply chain, escalating performance, forming strategies B) Eliminating non-value-added activities, managing supply chain, evaluating performance, forming strategies C) Eliminating non-value-added activities, managing supply link, evaluating performance, forming strategies D) Eliminating value-added activities, managing supply chain, evaluating performance, forming strategies Answer: B Explanation: This question requires familiarity with data analytics and the four areas that businesses may use data analytics in. Choice B is correct because it is a correct list of all four areas without any modifications. The remaining choices are incorrect because each contains at least one incorrect modification. Diff: 2 LO: 4 Bloom: K AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

86) Data analytics has become a very high-demand skill for employees regardless of their industry. The goal of decision makers gravitates towards the increase of data accessibility and usability with an overall goal of making more data-informed decisions. Within the cost accounting sphere, outcomes achieved are divided into four areas. Which of the following is an accurate description of one of these four areas? A) Eliminating non-value-added activities: Use data analytics to create a plan to shut down one of the company's factories next year. B) Performance evaluation: Use data analytics to gain insight into why a specific employee was absent last month. C) Performance evaluation: Use data analytics to improve production forecasting. D) Strategy formation: Use prescriptive analytics to create a plan for the future. Answer: D Explanation: This question requires familiarity with data analytics and the four areas that businesses might use data analytics in. Choice D is correct because it is a correct description of one of the four areas and the way that data analytics would be used. The remaining choices are incorrect because each contains at least one incorrect description as to how data analytics would be applied to that area. Diff: 2 LO: 4 Bloom: K AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

87) Accountants are the traditional stewards of accounting information and are in-tune with the financial health of an organization. As data analytics becomes a more prevalent force within the business world, accountants acquire new skills in this area. In doing so, they have become strategic business partners with decision makers. Which of the following is an example of why accountants are well-suited for data analytics? A) Accountants are critical thinkers that look for problems in everything they work with so that they have something to fix. B) Accountants are curious by nature and are often willing to dig into anything that might be of interest, regardless of the information's source. C) Accountants are typically detail-oriented and adept at finding patterns that are not always obvious to others. D) Accountants work well in teams and are generally effective communicators who also possess soft skills in addition to their accounting acumen. Answer: C Explanation: This question requires familiarity with some qualities accountants possess that make them well-suited to work in business and more specifically in data analytics. Choice C is correct because accountants are detail-oriented and adept at finding patterns, and this skillset lends itself well to data analytics. The remaining choices are incorrect because they contain examples of behaviors that are not attributable to accountants or they do not explain why accountants are well-suited for data analytics. Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

88) Accountants are the traditional stewards of accounting information and are in-tune with the financial health of an organization. As data analytics becomes a more prevalent force within the business world, accountants acquire new skills in this area. In doing so, they have become strategic business partners with decision makers. Which of the following is an example of a nonaccounting skill expected of modern accountants by management? A) Management expects accountants to be able to utilize professional non-technical soft skills. B) Management expects accountants to utilize advanced math-specific skills like calculus. C) Management expects accountants to utilize professional technical accounting hard skills. D) Management expects accountants to utilize their knowledge of financial statements to make better journal entries. Answer: A Explanation: This question requires familiarity with qualities accountants possess that make them well-suited to work in business. Choice A is correct because utilizing professional soft skills is a non-accounting skill expected of modern accountants by management. The remaining choices are incorrect because they either contain non-accounting skills not expected of accountants or list specific accounting skills. Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 89) As students prepare for a life beyond the classroom, they must anticipate what skills will best translate into the business world. Employers created lists of their most in-demand skills for entry-level accountants. Which of the following is an example of one of the top five skills from these lists? A) Be a data scientist B) Be curious and work to improve critical-thinking skills C) Develop decision making skills D) Get comfortable with always having to win, no matter the cost Answer: B Explanation: This question requires familiarity with skills employers currently seek for in entry-level accounting hires. Choice B is correct because being curious and working to improve critical-thinking skills is one of those top-five skills on many lists. The remaining choices are incorrect because they contain skills that are not correct representations of any of the top-five skills from most lists. Diff: 2 LO: 4 Bloom: K AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

90) As students prepare for a life beyond the classroom, they must anticipate what skills will best translate into the business world. Employers created lists of their most in-demand skills for entry-level accountants. Which of the following is an example of how an entry-level accountant could use one of these top-ranked skills? A) Receiving data, analyzing it, and writing a highly technical report with as many industryspecific terms as possible so everyone will know that you understand the material B) Receiving data, analyzing it, but not reporting any patterns that was found within the datasets to avoid creating extra work for your coworkers C) Spending time with your coworkers to review the company's policies, its position within the industry, and information about their competitors to help fix an issue D) Spending time with your coworkers to review the company's policies, its position within the industry, and information about competitors so you can boast about an issue you can fix without fixing it Answer: C Explanation: This question requires familiarity with the skills employers seek in entry-level accounting hires. Choice C is correct because spending time with coworkers and asking them questions to help the team fix an issue is a great example of how to use these in-demand skills appropriately. The remaining choices are incorrect because they contain skills not useful to an organization or in opposition to what the organization needs. Diff: 2 LO: 4 Bloom: AN AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 91) Courtney is preparing to graduate in a few months with a degree in accounting. She has been working diligently on mastering the material she is learning in her classes as well learning about what potential employers seek in a job candidate. Aside from technical accounting knowledge, which of the following is the best example of a skill Courtney should ensure she has? A) Being able to manage a team effectively with minimal oversight B) Being an effective communicator who can tell the story of the data C) Being uncomfortable with ambiguity as a sign of weakness D) Having strong basic math skills: as addition, subtraction, multiplication, and division Answer: B Explanation: This question requires familiarity with skills employers seek in entry-level accounting hires. Choice B is correct because being an effective communicator who can tell a story with data is a data analyst-specific skill that is desirable. The remaining choices are incorrect because they contain skills not useful to Courtney or describe a skill that would be counterproductive. Diff: 2 LO: 4 Bloom: AP AACSB: Data Analytics AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 55

92) Courtney is preparing to graduate in a few months with a degree in accounting. She has been working diligently on mastering the material she is learning in her classes as well learning about what potential employers seek in a job candidate. In addition to accounting and business knowledge, which of the following could be a potential skill sought after by an employer? A) Being curious and willing to ask a manager for guidance rather than conducting self-directed research B) Being curious and willing to solve a problem C) Being resistant to acquiring new technical skills since accounting should be an accountant's focus D) Being willing to acquire new tax-related skills to assist the company at tax time Answer: B Explanation: This question requires familiarity with skills employers seek in entry-level accounting hires. Choice B is correct because curiosity and a willingness to ask questions to solve a problem are desirable skills in a potential employee. The remaining choices are incorrect because they contain skills not useful to Courtney or describe a skill that would be either counterproductive or too specific. Diff: 2 LO: 4 Bloom: AP AACSB: Data Analytics AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 93) At the cross-section of descriptive and diagnostic analytics, there lies a place where analysts create a whole picture. The two types of data analytics accomplish different objectives but can also work together to create better analyses. Which of the following is an appropriate suggestion for improving your ability to communicate what your data is saying using data visualizations? A) Do not leave blank or white spaces since this can make the graphics appear incomplete. B) Make the data challenging to read so users will feel a sense of accomplishment if they comprehend it. C) Use black and white only because color can make the visualizations overwhelming and difficult to decipher. D) Use simple visualization tools like graphs or charts to help users orient themselves in the data. Answer: D Explanation: This question requires familiarity with the communicating and storytelling aspects of data analytics and how to use data visualizations as effective tools. Choice D is correct because visualization tools like graphs or charts can help users follow the narrative of the data and improve communication and storytelling. The remaining choices are incorrect because they contain suggestions that are inaccurate or would not improve communication and storytelling. Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

94) At the cross-section of descriptive and diagnostic analytics, there lies a place where analysts create a whole picture. The two types of data analytics accomplish different objectives but can also work together to create better analyses. Which of the following explains how the two types of data analytics are interrelated? A) Effective communication using descriptive techniques will cause decision-makers to dig in to hear the reasons behind the results using diagnostic data analytics. B) Effective communication using descriptive techniques will prevent decision-makers from digging in to hear the reasons behind the results using diagnostic data analytics. C) Effective communication using diagnostics techniques will cause decision-makers to dig in to hear the reasons behind the results using descriptive data analytics. D) Effective communication using diagnostics techniques will prevent decision-makers from digging in to hear the reasons behind the results using descriptive data analytics. Answer: A Explanation: This question requires familiarity with the descriptive and diagnostic techniques from data analytics. Choice A is correct because having effective communication from descriptive analytics will encourage decision-makers to dig in to hear the reasons behind the results. The remaining choices are incorrect because they contain suggestions that are inaccurate and do not explain how descriptive and diagnostic analytics are interrelated. Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 95) Sarah works for a mid-size law firm as a staff accountant. Sarah wants to develop her skills into something more valuable to her organization and more marketable in general. She knows data analytics is an incredibly popular new area for high-demand skills. What are some ways that Sarah can add some data analytics perspective to support her goals? A) Conferences, Training Courses, Coding and Programming Courses, and Website Reviews B) Data Analytics Degree, Social Media Tools, and Literature Reviews C) Data Analytics Degree, Wikipedia Review, Conferences, and Training Courses D) YouTube Videos, Website Reviews, Conferences, and Training Courses Answer: B Explanation: This question requires familiarity with acquiring marketable data analytic skills from reputable sources. Choice B is correct because all the items on that list are effective ways to develop data analytics skills. The remaining choices are incorrect because they contain at least one inaccurate suggestion. Diff: 2 LO: 4 Bloom: AP AACSB: Data Analytics AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

96) Sarah works for a mid-size law firm as a staff accountant. Sarah wants to develop her skills into something more valuable to her organization and more marketable in general. She knows that data analytics is an incredibly popular new area for high-demand skills. What routes could Sarah pursue to become more numerate? A) Complete an online company-sponsored software certification program to demonstrate proficiency in a commonly used non-analytical office software program. B) Complete an online tutorial for a popular data visualization or business intelligence tool. C) Complete free CPE courses from non-accredited online sources covering certification topics. D) Read publications from fields like engineering to become well-versed in a variety of data. Answer: B Explanation: This question requires familiarity with how and where to develop data analyticspecific skills. Choice B is correct because completing an online tutorial for a data visualization tool or business intelligence tool would help Sarah become more numerate in data analyticsspecific ways. The remaining choices are incorrect because they would not be from a reliable source, relevant to data analytics, or result specifically in being more numerate. Diff: 2 LO: 4 Bloom: AP AACSB: Data Analytics AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 97) The field of data analytics has become an increasingly in-demand skill across business world since its inception. As employers focus on what they are looking for in potential employees, data analytics has become a desirable skill for accountants. Which of the following is an example of why accountants are well-suited for data analytics? A) Accountants are typically loners and do not work well in teams. B) Accountants typically do not have the best oral or written skills. C) Accountants typically have insights to add value as it pertains to the use of data. D) Accountants typically lack intuition for cause-and-effect. Answer: C Explanation: This question requires familiarity with skills that make accountants well-suited for data analytics. Choice C is correct because accountants typically have insights to add value when the topic pertains to the use of data. The remaining choices are incorrect because they represent examples that are opposed to skills that accountants should possess. Diff: 1 LO: 1, 4 Bloom: C AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

98) Fancy Footwear is a premier designer and manufacturer of designer shoes for women. Over the past two years, they have concerted a lot of effort into both their boots and heels divisions. The results of their efforts are shown here:

Management is interested in analyzing this data. What is the percent change in gross profit for both the Boots and Heels divisions from Year 1 to year 2? (Use parentheses around a number to indicate a negative value or loss.) A) Boots: (29.15%), Heels: (26.75%) B) Boots: (26.75%), Heels: (29.15%) C) Boots: 36.52%, Heels: 41.13% D) Boots: 41.13%, Heels: 36.52% Answer: D Explanation: This question requires familiarity with manipulating data in Excel. To calculate the change in gross profit, you must first calculate the Gross Profits for Years 1 and 2. Create a new column with rows for Boots and Heels, and in the cells to the right of those columns, you will calculate the gross profit for Boots for Year 1. Use the following formula: "Year 1 Sales Year 1 Cost of Goods Sold (COGS)", or =B2-B6 for a result of $38,009. Now, do the same for Year 2 in a new cell using the following formula: "Year 2 Sales - Year 2 COGS", or =C2-C6 for a result of $53,644. To calculate the percent change in gross profit for Boots, use the following formula: "(Year 2 Gross Profit - Year 1 Gross Profit)/Year 1 Gross Profit" that should give an answer of 41.13% increase in Year 2. Repeat this process for Heels, and you should get an answer of 36.52% increase in Year 2 (Choice D). Diff: 3 LO: 3, 4 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Data Analytics.

99) Fancy Footwear is a premier designer and manufacturer of designer shoes for women. Over the past two years, they have concerted a lot of effort into both their Boots and Heels divisions. The results of these efforts are shown here:

Management is interested in analyzing this data. What is the percent change in Net Income for both the Boots and Heels divisions from Year 1 to year 2? (Use parentheses around a number to indicate a negative value or loss.) A) Boots: 28.12%, Heels: 31.38% B) Boots: 31.38%, Heels: 28.12% C) Boots: 39.12%, Heels: 45.73% D) Boots: 45.73%, Heels: 39.12% Answer: D Explanation: This question requires familiarity with manipulating data in Excel. To calculate the change in net income, you must first calculate the Net Incomes for Years 1 and 2. Create new rows for Boots and Heels, and in the column to the right of that, calculate the net income on Boots for Year 1. Use the following formula: "Year 1 Sales - Year 1 Cost of Goods Sold (COGS) - Year 1 Expenses", or =B2-B6-B10 that should return an answer of $17,307. Now, do the same for Year 2 in a new cell using the following formula: "Year 2 Sales - Year 2 COGS - Year 2 Expenses", or C2-C6-C10 that should return a value of $25,221. To calculate the percent change in net income for Boots, use the following formula: (Year 2 Net Income - Year 1 Net Income)/(Year 1 Net Income) that should give a result of 45.73%. Repeat this process for Heels, and the answer should be 39.12% (Choice D). Diff: 3 LO: 3, 4 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Data Analytics.

100) Fancy Footwear is a premier designer and manufacturer of designer shoes for women. Over the past two years, they have concerted a lot of effort into both their Boots and Heels divisions. The results of their efforts are as follows:

Management is interested in analyzing this data. Find out whether Boots or Heels had a greater percent change in the cost of goods sold (COGS) from Year 1 to Year 2. A) Boots did, they have a 20.29% change in cost of goods sold over that span. B) Boots did, they have a 27.37% change in cost of goods sold over that span. C) Heels did, they had a 20.29% change in cost of goods sold over that span. D) Heels did, they have a 9.93% change in cost of goods sold over that span. Answer: A Explanation: To calculate the percent change in Cost of Goods Sold for Boots from Year 1 to year 2, use the following formula: "(COGS for Year 2 - COGS for Year 1)/(COGS for Year 1)" that should return an answer of 20.29%. Repeat this process for Heels, and you should get a value of 9.93%. Hence, you can say that Boots have a higher percentage change value of 20.29% in COGS from year 1 to year 2 compared to 9.93% for Heels. (Choice A). Diff: 3 LO: 3, 4 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Data Analytics.

101) Joseph is a business student at a local university. He is looking over his transcripts to determine how his performance looks so far. He pulled the following report from his profile on the University's Student Information section:

At his University, A = 4, B = 3, C = 2, D = 1, and F = 0. What are the average value, mode, and median for Joseph's GPA values so far? A) Average = 2.90; Mode = 3; and Median = 4 B) Average = 2.90; Mode = 4; and Median = 3 C) Average = 2.95; Mode = 3; and Median = 4 D) Average = 2.95; Mode = 4; and Median = 3 Answer: D Explanation: This question requires familiarity using Excel to calculate key statistics. To solve for each, you will need to use an appropriate function on the values in cells C2 through C21. The functions to calculate each of the desired outcomes are: =AVERAGE(C2:C21) that returns 2.95; =MODE(C2:C21) that returns 4; and =Median(C2:C21) that returns 3 (Choice D). Diff: 3 LO: 3, 4 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Data Analytics.

102) Joseph is a business student at a local university. He is looking over his transcripts to determine how his performance looks so far. He pulled the following report from his profile on the University's Student Information section:

At this University, A = 4, B = 3, C = 2, D = 1, and F = 0. How many of each of the possible letter grades did Joseph receive? A) A: 6; B: 7; C: 5; D: 1; F: 1 B) A: 7; B: 6; C: 4; D: 2; F: 0 C) A: 7; B: 7; C: 4; D: 2; F: 0 D) A: 7; B: 7; C: 5; D: 2; F: 0 Answer: C Explanation: This question requires familiarity using Excel to do some simple data manipulation. This question requires the use of the Excel COUNTIF function. First, create a column with a list of all the letter grades. To the right of each letter, use the COUNTIF function to count the number of times that value occurs in the grades list. This will appear as follows: for a grade of A, use "=COUNTIF(C2:C21,4)" that should return the count of 7. Repeat this for each letter, and Excel should return the following counts: B = 7, C = 4, D = 2, and F = 0 (Choice C). Diff: 3 LO: 3, 4 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Data Analytics.

103) Joseph is a business student at a local university. He is looking over his transcripts to determine how his performance looks so far. He pulled the following report from his profile on the University's Student Information section:

At this University, A = 4, B = 3, C = 2, D = 1, and F = 0. Select the graphs that Joseph should use to display his course GPA data and the total number of each letter grade earned over his years of school.

Answer: A Explanation: This question requires familiarity with various graphs and when it is appropriate to use each type for displaying this data. For displaying his GPA over a period, a line or timeseries graph is best. To display the number of each letter grade earned, Joseph could use a Bar Chart (Choice A). Diff: 3 LO: 3, 4 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Visualization.

104) Sophia owns a salon that provides an array of services for her customers. She has been collecting data for the past 2 years. The sales revenues from her five most-common services are as follows:

Which service had the largest magnitude of change in sales revenue from Year 1 to year 2 (up or down)? A) Color: 23.00% Decrease B) Cut: 23.62% Increase C) Pedicure: 27.37% Decrease D) Pedicure: 27.37% Increase Answer: D Explanation: This question requires familiarity with using Excel for simple calculations. To solve for the change in sales revenue for each row, calculate the percent difference in sales revenue for Year 1 and Year 2. For Cut: (Year 2 Sales - Year 1 Sales)/(Year 1 Sales), or =(C2B2)/B2 that should return a percent increase of 23.62%. Repeat the process for the remaining services, and the values returned for each row should be: Color: 23.00% increase; Perm: 21.66% decrease; Manicure: 22.99% increase; and Pedicure: 27.37% increase. Pedicure had the biggest change with an increase of 27.37% (Choice D). Diff: 3 LO: 3, 4 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Data Analytics.

105) Sophia owns a salon that provides an array of services for her customers. She has been collecting data for the past 2 years. The sales revenue from her five most-common services are shown below:

Determine the average amount of two years' sales revenue for the service that makes up the largest percentage of the total average revenue. A) Color: 29.20%, $90,307 B) Color: 58.41%, $180,613 C) Cut: 29.22%, $90,318 D) Cut: 52.45%, $162,172 Answer: A Explanation: This question requires familiarity using Excel to do some basic calculations. First, average the sales revenue of two years for each service. For Cut, use the formula: "=AVERAGE(B2:C2)" and the value returned should be $81,086. Repeat this process for the remaining services, and these should be the results: Color = $90,307; Perm = $21,312; Manicure = $65,723; and Pedicure = $50,790. Next, calculate the percentage of two years' total average revenue made up by each type of service. For Cut, use the formula: "(Average Revenue from Cut)/(Two Years' Total Average Revenue for All Services)" to get a value of 26.22%. Repeat the process for the remaining services, and the returned values should look like this: Color = 29.20%; Perm = 6.89%; Manicure = 21.25%; and Pedicure = 16.43%. Color is the largest contributor to the total average revenues for Year 1 and Year 2 (Choice A). Diff: 3 LO: 3, 4 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Data Analytics.

106) Rhoades Corp. is a law firm. They continue to bring on new associates because they continue to attract new clients and cases. Their accounting department has compiled the following information for the three years they have been in operation:

What is the percent change in net income from Year 1 to Year 3? A) 11.51% decrease B) 11.51% increase C) 29.87% increase D) 75.03% increase Answer: D Explanation: This question requires familiarity doing calculations using Excel. To calculate the change in net income from Year 1 to Year 3, first calculate the net income for Year 1 and for Year 3. Year 1: In a cell B4 enter formula "= B2 - B3" that should return a value of $37,277. Repeat this process for Year 3 to find the value of $65,247. Finally, to calculate the percentage change, use the following formula (Year 3 Net Income - Year 1 Net Income)/(Year 1 Net Income) = ($65,247 - $37,277)/$37,277 or 75.03% increase (Choice D). Diff: 2 LO: 1, 2, 3, 4 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Data Analytics.

107) Rhoades Corp. is a law firm. They continue to bring on new associates because they continue to attract new clients and cases. Their accounting department compiled the following information for the three years they have been in operation:

What is the percent change in service revenue from Year 1 to Year 2? A) 18.64% decrease B) 18.64% increase C) 22.90% decrease D) 22.90% increase Answer: D Explanation: This question requires familiarity using Excel to make calculations. To calculate the change in service revenue from Year 1 to Year 2, use the following formula (Year 2 Service Revenue - Year 1 Service Revenue)/(Year 1 Service Revenue) = ($298,532 $242,900)/$242,900 = 0.22903252 or 22.90% increase (Choice D). Diff: 2 LO: 1, 2, 3, 4 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Data Analytics.

108) Rhoades Corp. is a law firm. They continue to bring on new associates because they continue to attract new clients and cases. Their accounting department compiled the following information for the three years they have been in operation:

What is the average revenue for Years 1 to 3? A) $48,413 B) $250,119 C) $298,532 D) $305,877 Answer: D Explanation: This question requires familiarity using Excel to calculate certain numbers. To calculate this value for each year, you need to use the AVERAGE function in Excel. In cell E2, enter "=AVERAGE(B2:D2)" to get a value of $305,877 (Choice D). The remaining choices are incorrect. Diff: 2 LO: 1, 2, 3, 4 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Data Analytics.

109) Windows R Us is a nationwide producer and wholesaler of residential windows. They are in the process of analyzing financial data from their most recent year and compiled the following information:

Their accountant is putting together a presentation to demonstrate their performance during the year. Which quarter produced the highest average Net Income and what was that value? A) Quarter 1: $237,455.00 B) Quarter 2: $234,170.50 C) Quarter 3: $228,854.67 D) Quarter 4: $239,486.33 Answer: D Explanation: This question requires familiarity with calculating values in Excel and using the AVERAGE function. To solve this problem in the most efficient manner, first solve for Net Income for each month in the appropriate row. The formula for January is: "=B2-C2" placed in cell D2, and it returns an answer of $288,170.00 in that cell. Next, carry the formula down the column for each month, and the results will appear in cells D3-D13. Now, use the AVERAGE function to determine the average net income for each quarter. To calculate the value for quarter 1, use any empty cell and type in the formula "=AVERAGE(D2:D4)" to calculate the average for January through March. The returned value should be $228,735.33. Repeat this for the other 3 quarters. Once you have completed this, you should have the following results: Quarter 2: $192,706.00; Quarter 3: $228,854.67; and Quarter 4: $239,486.33. Quarter 4 has the highest average Net Income (Choice D). Diff: 3 LO: 2, 3, 4 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Data Analytics. 74

110) Windows R Us is a nationwide producer and wholesaler of residential windows. They are analyzing some financial data from their most recent year and compiled the information in this table:

Their accountant is putting together a presentation to demonstrate their performance during the year. Which single month showed the largest magnitude of change in Net Income (up or down)? A) February: Decrease of 35.20% B) February: Increase of 54.32% C) September: Decrease of 41.08% D) September: Increase of 41.08% Answer: D Explanation: This question requires familiarity with calculating items in Excel, including Net Income and the increase or decrease in that value between months. To solve this problem in the most efficient manner, first solve for Net Income for each month in the appropriate row. The formula for January would be as follows: "=B2-C2," and you would place this in Cell D2. This should return a value of $288,170.00. You can now carry the formula down the column for each month row and the result will appear in cells D3-D13. Now, determine the change in Net Income between months using the following formula: (Current Month - Previous Month)/(Previous Month). Locate an empty cell next to D3, and calculate the change seen in February using this formula: "=(D3-D2)/D2" that returns a value of -35.20%. You can then carry the formula down the column into the additional cells. After doing so, you will see that the highest change happened in September with an Increase of 41.08% (Choice D). Diff: 3 LO: 2, 3, 4 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Data Analytics. 75

111) What is big data and how does it compare to data analytics? What are structured and unstructured data, and how do they relate to big data? Answer: Data analytics is the art and science of analyzing data while big data is an umbrella term for the collection of massive datasets. Data analytics cannot exist without the collection of data itself, so the field of data analytics is dependent upon big data to provide the data it needs. Big data can contain both structured and unstructured data. Structured data uses a predefined format that is easy to use and manipulate. Unstructured data, by comparison, exists in a freer form with no predefined format or definition and includes items such as image files. Big data is the collection of data, whether structured or unstructured, while data analytics will help users take that data and make useful observations. Diff: 2 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 112) Although the field of data analytics is not perfect, it contains useful tools for management. What are three challenges and three opportunities for the use of data analytics? Answer: Three challenges for using data analytics could include: • Defining a business problem that will need to be answered and selecting data that is appropriate to analyze and address the problem. • Being able to successfully use data analytics, employees at various levels, such as staff, analyst, and manager must have enough skills to work with the data they have access to. • Using data analytics requires a technical terminology that needs to be woven into the language used within business and executive contexts to enhance data-informed decision making. Three opportunities for using data analytics could include: • Accountants could be natural choices to teach data analytics to since they have many existing skills that lend themselves well to the field including an innate understanding of cause-and-effect and the ability to be able to see how a decision can impact other people or areas. • Accountants are generally good team players who are adept at working with a diversified team and are often in leadership roles that could create an excellent opportunity to have them act as liaisons between technical teams and leadership teams. • Accountants possess insights that add value to companies as it pertains to the use of data analytics and how management can take full advantage of it. Diff: 2 LO: 1 Bloom: K AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

113) In data analytics, decision makers will express a variety of needs for the data gathered. How do hard data and soft data factor into their decision making? What about internal data and external data? Answer: Data exists in a variety of forms each with its own purpose and usefulness for decision makers. Hard data is based on quantifiable data that is verifiable and acquired from reliable sources. Soft data includes qualitative inputs such as ratings or surveys. Some decision makers prefer a blend of both so they can make the most data-informed decision possible after evaluating data from multiple angles. Internal data is data generated by a company's existing internal processes and sources include customer service, accounting and finance, and sales and marketing. External data includes data of interest to a company and its stakeholders that is not generated internally and could be sourced from outside platforms such as Google Analytics or Twitter. Decision makers can pull both internal and external data to ensure they are addressing concerns and interests of all parties that have a vested interest in the organization. Diff: 2 LO: 2 Bloom: C AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 114) What are the four broad categories of analytics? How are they different from one another, and what kind of information can each assist in addressing? Answer: The four broad categories of analytics include (in order of least complex to most complex) descriptive, diagnostic, predictive, and prescriptive. Descriptive uses hindsight to answer questions about what happened while diagnostic uses a blend of hindsight and insight to ask why something happened. Predictive uses a blend of insight and foresight to ask what is likely to happen while prescriptive uses foresight to ask what should be done about something. Aside from the spectrum of complexity, descriptive and diagnostic focus on the past and have a different, yet significant value for making future decisions than predictive and prescriptive, which focus on the future. All types can be of value to an organization, and the actions of the past, along with a data-informed understanding of them, can help shape future decisions. Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

115) More accountants continue to train in the area of data analytics and are using this new knowledge to help businesses look at data in new ways. What are a few ways companies can use data analytics in their cost accounting decisions? Answer: Data analytics can be used in the following ways as it pertains to cost accounting decisions: • Eliminating non-value-added activities: Companies can utilize data gathered to analyze various aspects of their business and determine whether they are adding value and efficiency or if their removal would better benefit the company. • Supply chain management: By gathering data on the supply chain functions of an organization, managers may be able to identify weaknesses or inefficiencies. • Performance evaluation: An annual review can be a useful tool for management, but there is often a notable lag between the time data is gathered and when the review is conducted. Having real-time feedback could help improve employee performance and morale. • Strategy formation: Companies can use data analytics to gather pertinent data to help them analyze future states of operations. By gathering timely and relevant data, management can strive to create policies, procedures, and plans to take the company in a desirable direction. Diff: 2 LO: 4 Bloom: C AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

116) Entry-level accountants continue to be in demand in almost every industry. What are some of the top skills employers seek in entry-level accountants? What is an ideal skillset for accountants at this level? Answer: Some of the top skills that employers seek include the following: • The ability to use business and accounting skills to understand the business you work for: Having this understanding will allow you to be a better team player and problem solver. • Curiosity and perpetual honing of critical-thinking skills: Those who are curious and ask questions strive to gain a new and unique understanding of various issues. • Effective communication skills: In addition to evaluating data, the ability to communicate findings well and effectively is a valuable skill. • Comfort with ambiguity and/or failure: Life and plans sometimes go in unplanned directions, but being able to navigate these changes and persevere will help make someone a better professional. • Development of technical/data analytical skills: Continually working to acquire new technical skills like proficiency with statistics or database management could help the employee become a better analyst and accountant. An ideal skillset for an accountant would also include a well-balanced overlap of business and accounting knowledge, soft skills, and data/technical skills. Diff: 2 LO: 4 Bloom: K AACSB: Knowledge AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

117) Truman Corp. is a factory that produces plastic containers for food companies. Management has growing concerns that their performance is suffering and that they have lost control over certain processes due to higher than usual employee turnover. They would like to spend some time narrowing down what areas of production are most inefficient, but they are not entirely sure how to go about doing that. If you were working at Truman, then what approach would you suggest? Please, name a few examples of how your solution could directly impact and improve their operations. Answer: This question requires familiarity with ways a company can address questions about suspected inefficiencies in production. To begin investigating whether certain processes are inefficient, I would recommend the use of data analytics. By using data analytics, we can gather data about various production processes and identify what improvements, if any, would help. Truman could use data analytics to investigate what the current turnover rate is for each production area and compare it to past years. Truman could use data analytics to look at product waste or to rework numbers for the current year and compare it to previous years' totals. Truman could also look at the complete cycle from beginning to finished product during this current production cycle and compare it to past cycles. Each of these analyses could provide some financial data to draw conclusions about what led to the various outcomes. This can have a very positive impact on the organization as they may be able to implement meaningful changes based on what they see in their analyses. Diff: 2 LO: 1 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

118) Rachel is a cost accountant for a local architect, and she knows this company needs to adopt data analytics to improve operations and become more efficient. Previous departments have attempted to use data analytics but ultimately abandoned the process. What challenges and opportunities can you identify for Rachel as she attempts to reintroduce data analytics to the organization? Answer: This question requires familiarity with the challenges and opportunities presented when implementing data analytics for cost accounting. Rachel may encounter the following challenges: • She needs to determine definitions for current problems and questions to investigate. This will require discussions with management and all departments to determine the needs of the business as a whole. • She needs a baseline of understanding of the technical skills involved in the data analytics process, and she needs to find ways to help others acquire these as needed. • Rachel will likely have to spend time working with others to bring them up to speed with basic technical skills while ensuring they are aware of any potential biases that may exist. • She will have to help coworkers learn the language and technical terms needed for data analytics to facilitate business decision-making processes. Rachel may encounter the following opportunities: • As an accountant, Rachel is likely to have the required good oral and written skills and an intuition for cause-and-effect. This means that she will be in a position to integrate data analytics into the work they already complete. • As an accountant, Rachel is likely comfortable working with diverse teams of people, and she probably has some foundational management skills. • As an accountant, Rachel is likely to have insights to add value to the company regarding the use of data analytics for strategy formation and execution. Diff: 2 LO: 1 Bloom: AP AACSB: Data Analytics AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

119) Sarah is a manager of a regional bakery chain in the Midwest, and she is helping the corporate office evaluate the data they have been collecting. As decision makers for this organization evaluate the state of their data usage and framework, they will need to gather all relevant information and locate the correct data. Those occupying these positions will have to determine which sources of data are best and for what purposes. What are some of the questions that Sarah may ask to determine which sources of data are best and what purpose might they serve? Answer: As Sarah begins evaluating which sources of data are best to focus on in the information-collecting process, she may ask some of the following questions: • Are we asking the right questions? While it may be appealing or tempting to amass as much data as is possible, this does not always work optimally to serve an organization. A decision maker will want to spend time refining their search to find the best information to complete the larger task at hand. • Does our data tell a story? The form that data arrives in can vary from whole and complete to fragmented, and it is in the best interest of managers to make it as useful as possible. In order to be most useful, the data must be rearranged into a logical story or narrative and requires both the insight and experience of managers to fill in any missing pieces. • Does our data help us look ahead rather than look back? Decision makers will need to ensure that their focus is forward-thinking in nature rather than focusing on what has already transpired in the past. In doing so, they have a greater chance of gathering meaningful data. • Do we have a good mix of quantitative and qualitative data? For data to paint a complete picture of a business, it cannot rely solely on quantitative or qualitative data. Having a mix of both data types gives the business insight not only into numerical data but the causes of outcomes as well. Diff: 2 LO: 2 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

120) Eagle Inc. has been collecting data over the past year in a variety of areas for their business, both internally and externally. Management is eager to utilize this data and to analyze their findings, but they were advised to postpone this until the data is properly cleaned. What does it mean for data to be cleaned, and what does the cleaning process entail? Answer: Before a company uses data to generate any insights, the data should be cleaned. Cleaning data entails retrieving, examining, and manipulating the data to prepare it for use. Data cleaning strives to ensure that data is formatted correctly and in the manner that makes it most usable. The process entails three steps: Rinse, Wash, and Scrub. The Rinse step includes replacing any obvious errors with missing value labels or correcting the missing points if they are easy to do. The second step, Wash, is considered the middle section, and it entails tasks like removing duplicates entries. The third step is Scrub, and this step requires the most detail and time. This step involves a deep study of the data where corrections are made one at a time, by hand, and where every piece of data is heavily scrutinized. The overall goal of this process is to make the data organized, complete, and clean. Diff: 2 LO: 2 Bloom: AP AACSB: Data Analytics AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

121) Oren has been tasked to compile a list of information about their customers he feels his company, Legacy LL, should begin collecting. Legacy LL is a manufacturer of sports-themed apparel that is determined to not only retain existing customers but to attract new ones in coming years. What are the categories of data that Oren may consider for collection? What are some examples of the types of data collected within each category? Answer: As Oren determines what data to collect, he may want to consider some of the following types: • Financial: This area includes customer information about pertinent financial information that may impact customer behavior. Examples include income, loans, number of credit card purchases in the last year, and employment status. • Activity and history: This area focuses on personal and social behaviors of a customer. Examples include calendar events attended, social media habits, and personal internet search history. • Health and fitness: This area focuses on the health, fitness, and exercise behaviors of a customer. Examples might include heart rate, hours slept, club or gym memberships, and steps taken per day. • Interests: This area focuses on the personal interests, likes, and dislikes of a given customer. Examples include vacations taken and travel history, music streamed, political views, and devices used. • Personal: This area focuses on personal information about a customer. Examples include their home address, age, number of children, relationship status, ethnicity, gender, facial recognition data, contacts, and residential history. Oren will want to take his time and select the data most likely to assist him in achieving the goals of the organization. While this data is available, not all of it may useful for the task at hand. Diff: 2 LO: 2 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

122) Martha is a manager for a florist. The company's owner has recently been talking about data analytics. Martha has heard the term before but is largely unfamiliar with it, so she asks for assistance from the accounting department. Assume you are the accounting manager, and you need to explain data analytics to Martha. What information would you share with her, and what would she need to know to be ready to do data analytics? Answer: This question requires familiarity with what data analytics is and how it is useful to a business trying to reach its operational goals. I would tell Martha a definition of data analytics: the art and science of analyzing data to draw conclusions and make inferences from collected data. To begin data analytics, first outline the problem to investigate and figure out any related unknown quantities. Then, decide if the analysis will be quantitative, qualitative, or a blend of both, and figure out what the data collection needs are. Next, collect the data, and then begin analytics on that data. Martha would also want to make sure she enlists help from managers of various areas and departments while she tries to address questions that impact that area or department. Overall data analytics can be incredibly useful when implemented efficiently, correctly, and with buy-in from across the organization. Diff: 2 LO: 1, 2 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics. 123) Alec is a manager for Baldwin Inc., and he is in charge of compiling data and producing analysis for various aspects of the business. Alec's most recent undertaking involves looking into what to expect in the upcoming year. Alec would like to focus on what their expected production volume may be for next year. Which type of analytics would Alec want to use, and what are some challenges and constraints to consider? Answer: Since Alec's focus is on what can be expected in the future, he would want to utilize predictive analytics that use historical data and statistical models to predict the future. Descriptive and diagnostic analytics are used to explain what has happened in the past and why, while prescriptive analytics look at the future and give a specific recommendation. Since Alec's inquiry is forward-focused on what is to come rather what has transpired or how to achieve something, that makes predictive analytics the best option. Although it can provide incredible insights, predictive analytics is not without its challenges and constraints. These can include the quality of the data available, the degree of uncertainty around the situation, the degree of statistical training needed to increase the reliability of the model, the potential biases and errors, and the ability to communicate results effectively to key decision makers. Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

124) The decision makers for Tangerine Corp. decided that they want to be more attuned to examining their operations from a more analytical perspective. They have asked Susanna, a department manager to spearhead this effort and to determine what she may need to get the company on the right path. Susanna needs to explore her current analytics options and identify when they may be useful. What are the four types of data analytics? When is each useful, and how do they differ from one another? Would Susanna be better off selecting just one type of data analytics? Answer: Susanna will have the choice of four data analytics categories: descriptive, diagnostic, predictive, and prescriptive. Descriptive analytics are less complex and focus on hindsight and past activity, so they are most useful for examining what transpired. Diagnostic analytics are more insightful than descriptive, but they also remain focused on past events and are most useful when analyzing why something happened. Predictive analytics are more complex than descriptive and diagnostic, focus on the future, and are most useful to analyze what is likely to happen moving forward. Prescriptive analytics are the most complex of the types of data analytics, focused wholly on the future, and they are best used to determine what to do about something, often using modeling, optimization, or what-if scenarios. Susanna may find she is better off using one of the four categories more than the others, but only after she determines what question(s) she is trying to answer. She may find all four types to be incredibly helpful for answering different questions that may arise during her analysis. Diff: 2 LO: 3 Bloom: AP AACSB: Data Analytics AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

125) Fey Company is a small factory that produces fashionable hats it sells on its website and to other wholesale vendors. Fey's managers have been reviewing their financial statements and are growing concerned that their profit margins have continued shrinking year after year. Management has begun the process of collecting data and would like to employ data analytics to determine the causes of these changes in profit margins and create a plan to implement meaningful changes moving forward. What type of data analytics should management employ to satisfy their needs, and why? Answer: Fey Company would be best served by considering all of the options for analytics before picking a method. To perform analysis and best answer the question of what caused a change or why a change occurred, such as their change in profit margins, Fey should consider the use of diagnostic data analytics. Through this type of analytics, they will be able to gather data and drill down in more detail pertaining to different factors that may have impacted the margin such as suppliers, wages, and product costs. To create a plan to implement meaningful changes, this will involve looking into the future. The most impactful data analysis would be prescriptive. Under this category, Fey could utilize machine learning tools and simulations to help design and articulate their plan. The combination of these two types of data analytics should provide the best opportunities to fully satisfy the needs to management. Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

126) With the advent of analytical technology, organizations have been striving to incorporate more data analytics into their operations. This could result in hiring employees who have the skills necessary to assist the company in achieving these goals or an organization may choose to pay for training its existing employees so they can acquire these valuable skills. As it pertains to cost accounting, data analytical skills are immensely helpful and can be achieved in a number of ways. How can a person who is still in school obtain the data analytic skills that could help them to be an asset to a potential future employer? Answer: Data analytic skills are obtained in a variety of ways and from a variety of sources. Those who strive to learn these skills will find themselves with a number of options on how they can obtain these skills. For those who are currently in school and thinking about making themselves more relevant to a future employer, data analytic skills could be obtained in the following ways: • Take extra analytics or statistics courses. • Pursue a data analytics certificate from the educational institution. • Gain a certification in a useful data-related tool to demonstrate proficiency in a specific program. • Read industry-specific publications that focus on data analytics and their applications to a particular industry. • Complete free online tutorials that teach topics like data visualization and how to use tools that work with data analytics techniques. The list above is not comprehensive but illustrates a few ways that a current student could obtain data analytics skills that will be useful for a future employer. Diff: 2 LO: 4 Bloom: E AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

127) Data analytics serve a number of purposes for an organization, and each type of analytics provides an opportunity for an organization to make evaluations of a given situation. While the questions raised and answered by analytics can vary from organization to organization, the overall goals of making a business the best version of itself remain true. As it pertains to cost accounting, in what contexts have organizations used data analytics, and is it pertinent to use analytics in all four contexts discussed in the chapter? Answer: The outcomes experienced by organizations that use data analytics occur in the following contexts: eliminating non-value-added activities, improving supply chain management, performance evaluation, and strategy formation. Eliminating non-value-added activities involves evaluating existing systems using data analytics with the goal of reducing inefficiencies that should lead to more appealing results for an organization. Improving supply chain management involves using data analytics to evaluate everything in the supply chain from production/demand forecasting to manufacturing to inventory management and creating more efficient and effective systems. Performance evaluation improves with data analytics by ensuring that data used to provide feedback to employees is provided in near real time, and that provides a better opportunity for an employee to adjust their performance as opposed to waiting for an annual review. Strategy formation uses prescriptive analytics to help decision makers gain insights into various issues in organization and formulate plans. It is pertinent to use analytics to produce the desired results within each context, but an organization may find varying degrees of usefulness for each context depending on the industry and aspects of the organization itself. Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

128) Being career-ready has become a major objective for many accounting students as they prepare to graduate from college. It is not enough to just obtain a degree since employers now look for additional skills outside of hard technical skills. What are the top skills required for entry-level accountants, and why are they so important? Answer: Entry-level accountants are expected to have a multitude of skills now in addition to hard technical skills they acquire from their accounting coursework. The top skills for entry-level accountants include: • Understanding the business your organization conducts. • Being curious and honing your critical-thinking skills. • Being an effective communicator. • Getting comfortable with ambiguity and/or failure. • Developing technical data analytics skills. The field of accounting has grown to include many useful skills that go beyond financial statements and journal entries. Today's accountants have to be constant problem- and puzzlesolvers who feel comfortable navigating not only data but the tools that help analyze that data as well. These skills are imperative to being a successful accountant in the modern business world. Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

129) Artemis Inc. is a major producer of high-end designer dog collars and other accessories. Over the past few years, their goals have focused on increasing sales and expanding into new territories. Management feels that they do not have a good handle on what their current year looks like compared to the past several years. They would like to use data analytics to fix this issue because they realize the relevance and importance these analyses have in a modern business landscape. With this information in mind, please answer the following questions. a. After considering what management hopes to investigate, will data analytics be useful in their decision-making? Please support your answer. b. If the company were to use data analytics, then what kinds of questions could they ask and answer using these analyses? c. Are there any additional considerations that pertain to their use of data analytics? Does a potential for error or misuse exist?

Answer: a. After considering what management hopes to investigate, data analytics could assist with decision-making. Data analytics is the art and science of analyzing data with a focus on insights and patterns gathered from those analyses. Management is interested in growing sales and expanding into new territories, and to do so, they will need to take a deep look into their performance over recent years. b. When using data analytics, it is crucial to first identify what issues or business questions you would like to address. The company may find a variety of questions it could ask and answer using data analytics. Some examples might include: • What was the overall sales percentage year-to-year for the past few fiscal cycles? • Are there territories where competitors are succeeding and Artemis does not currently have a presence? • Have Artemis's supplier's prices increased year-to-year? • Are some current territories more successful than others? • How have any increases in costs impacted overall profit margins? • What products are most popular, and is there a particular size, style, or color that performs better? The above list of potential questions is only a beginning, and there could be many more questions raised that data analytics help answer. c. Data analytics is a useful tool, but only when used properly and with an appropriate amount of planning. Mistakes happen when someone does not take the time to determine what questions they would like to answer before diving in to their analyses. Another consideration would be that while it is important to integrate data analytics and the respective terminology into everyday events, failure to do so could lead to misunderstandings and frustration. Mistakes can also occur when an analyst does not set the correct parameters or misunderstands what is being asked for. A potential for misuse exists when people might choose to take existing data and manipulate it in a way that demonstrates that it proves or supports something that it does not in fact support. Diff: 2 LO: 1, 2 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

130) Tara is a cost accountant for Jameson's Flavored Sparkling Water, and she is in the process of implementing a data analytics program. Management currently feels overwhelmed by the prospect of integrating a brand-new system of any kind, especially when they do not fully understand what that means for the company. Tara decided to create some documentation to put their minds at ease. With this goal in mind, please answer the following questions so Tara can complete her documentation. a. What are hard and soft data, where does each of these come from, and how much effort does this require? Can Tara exclusively use only one type or the other? b. What are internal and external data, and can you list several examples of sources for each? c. What are some of the categories of data a company may try to collect about its customers, and can you list several examples of items that fall within each category?

Answer: a. Hard data is data that is verifiable and comes from reliable sources. Examples of hard data include information from statistics and numerical summations or aggregations. The amount of time and effort needed to collect this kind of information varies by both the type and the scope of the data collected. Additional effort and consideration must happen to verify the data sources for approval. Soft data is data based on qualitative inputs, and examples could include results from surveys or customer ratings. The amount of time and effort needed to collect this kind of information will also vary by the kind of collection tool needed. For example, if a survey is performed, then its distribution channel or channels will impact the time needed. Tara can choose to exclusively use one or the other or she could use combination of both types if she feels this route would best support her efforts to analyze a problem the business faces. b. Internal data is data generated through internal processes a company already has in place. Data could come from multiple organizational systems or areas including: • Customers • Accounting and finance • Information and technology • Suppliers • Sales and marketing • Human resources • Production • Customer service External data is data not generated internally but that may be interesting or useful to the organization or its stakeholders. These data sets inform companies about the users they serve and their preferences or can contain socioeconomic feedback. Sources for external data could include the following: • Hashtags that trend on social media • Google Analytics • Online ads click logs • Online surveys • User profiles set up on company websites While internal and external data come from different places, both can help a company better address their organizational needs.

c. Companies may wish to gather information about users and to compile it into a neater and more usable customer profile. In doing so, the company will have a complete and more wellrounded picture of what their users need and want. With this increased knowledge, a company can determine how they will provide a service or product to help these users satisfy their wants to achieve company goals. Some of the areas of information they may try to collect about their customers include the following: • Personal: This area could include information about the customer including their address, age, gender, residential history, contacts, number of children, ethnicity, and relationship status. • Financial: This area could include information about the customer including their loans, educational level or background, income, employment history, number of credit cards, credit rating, and properties owned. • Activity and history: This area could include information about the customer's search history, browsing history, calendar events, social media habits, and chat conversations. • Health/fitness: This area could include information about the customer's average steps taken in a day, hours slept, frequent walking routes, heart rate, and gym or club memberships. • Interests: This area could include information about the customer's choices in music streamed, hobbies, devices used, vacations taken, political views, and events attended. While each area of a person's data can provide some insight into their wants and needs, having information in multiple areas helps a company develop a more nuanced understanding of their customer's needs. Diff: 2 LO: 2 Bloom: AN AACSB: Analytic AICPA: AC: Research IMA: Technology & Analytics: Data Analytics.

131) Samantha is a Human Resource Associate for a small factory, and management asked her department to evaluate current wage trends. Ultimately, management has expressed concerns about the turnover the factory experienced over the past couple of years, and they hope to use analytics to determine possible causes. The company experienced a lot of turnover that has caused a lot of change in the rates paid to different hourly workers. The accounting department gathered the following data about 10 factory workers employed during the two-year period:

Samantha needs to use data analytics to assist in the investigation into possible causes for this turnover. With this information in mind, please answer the following questions. Use Excel or a similar spreadsheet program as appropriate. a. Samantha would like to determine what the average hourly wage is. Using horizontal analysis, what is the percent change in the average hourly wage between this year and last year? b. Samantha determines the market average wage rate for similar positions is $14.54 per hour. According to the data used in part a), is the factory competitive? What course of action could management take to ensure they either become or remain competitive? c. Samantha would like to create a visual depiction of the average wages for the current and previous year compared to the average wages mentioned in b). Create an appropriate graph or visual, and explain why you selected that type of graph or visual.

Answer: a. Average Hourly Wages: Current Year is $14.20; Previous Year is $14.06; 0.97% increase from the previous year. To calculate this average, you could calculate it manually by adding the wages in each respective year and dividing by the total number of employees. Alternatively, Excel or a similar spreadsheet program could also do the calculation using the following formulas: Average Hourly Wages (Current Year) = AVERAGE(number1, [number2], …), which returns the value of $14.20. Average Hourly Wages (Previous Year) = AVERAGE(number1, [number2], …), which returns the value of $14.06. To calculate the percentage change, use the following formula: (Average Hourly Wages (Current Year) - Average Hourly Wages (Previous Year)) / (Average Hourly Wages (Previous Year)) = ($14.20 - $14.06)/$14.06 = 0.97% increase from the previous year. b. If the average pay for similar positions at other companies is currently $14.54, then this would indicate that Samantha's company is not currently competitive with the average hourly wage of $14.20. For the company to become competitive, they would need to increase the average hourly wage offered to their employees. Failure to do so could result in the increased turnover they have noticed since employees may leave to seek higher-paying opportunities. Samantha could also consider showing what additional benefits other companies offer, including health insurance and amount of vacation time, to increase the value of what her factory offers current employees.

c. To depict the information visually, Samantha will need to use Excel or another data analytics tool. In these tools, she should generate a bar graph to visually depict the differences in pay. It might look like this:

A bar graph is the most appropriate choice here since it displays the differences in pay at the company for each year alongside the market average. Diff: 2 LO: 3 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Visualization.

132) Phoebe started her first job out of college, and she decided that creating a budget is incredibly important. After her first month on the job, she brought home a net sum of $1,853 in take-home pay, and she currently has savings of $500. She has constructed a chart to summarize her budgeted and actual financial amounts.

Rent Utilities Food Car Entertainment Gas Health Insurance

Budgeted $800 $185 $300 $215 $100 $78 $175 $1,853

Actual $800 $200 $420 $215 $62 $56 $175 $1,928

Phoebe knows living within her means is very important and is open to the possibility of obtaining additional income when needed. With all of this information in mind, please answer the following questions. Use Excel where appropriate. a. Create a chart that shows both the budgeted and actual amounts for each expense category (a form of descriptive analytics), and comment on any observations you have. b. Are there any external data sets Phoebe could use to determine whether her budgeted amounts are appropriate and realistic? What actions could she take to better align her budgeted values with the results of this external data? c. Phoebe is debating whether she should accept a part-time baking job on weekends where she could net an extra $200 per week. What are the pros and cons of Phoebe taking on this extra work? How could Phoebe utilize what-if analysis (prescriptive analytics) to consider different scenarios?

Answer: a. Phoebe should select a bar graph because it will do the most efficient job of visually displaying the differences between budgeted and actual amounts. The graph should look like this:

Based on this graph, Phoebe will need to pay close attention to what is spent on Food and Utilities in coming months since she went over her budgeted amounts in both categories. She did a much better job of staying under her budget on Gas and Entertainment. b. Part of the budgeting process should entail that budget expectations are realistic, and Phoebe should evaluate her budgeted numbers regularly. External sources might include a website that displays apartment rents in her area, apps and websites showing the prices of groceries for nearby grocery stores, her utilities provider's website for utilities rate information, and various websites to determine if what she budgets for entertainment is a good approximation of what she pays. If she discovers any discrepancies from these external data sources, then she could update her budget with a more accurate number. She could also consider adding roommates to offset some of the costs with her current place of residence. Additionally, she could use the data she collects to reduce some of her current expenses, such as determining if she should clip coupons for groceries.

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c. A what-if analysis is a form of scenario analysis that allows a user to create hypothetical situations and evaluate the various outcomes for differing incomes. Phoebe earning additional money from a part time job would definitely be a great scenario to run through a what-if analysis. Phoebe may want to determine how quickly she could save for a specific goal, or if it could help her in maintaining her current spending without making changes. Some pros for accepting additional work include an increased cash flow, increased spending power, and the ability to better meet her current financial needs. Some cons for accepting additional work include having less free time, a potential for increased stress, and a decrease in flexibility as it pertains to travel and general mobility. Overall, this additional work could result in benefits that could help Phoebe achieve new goals in addition to ones currently budgeted for. Diff: 2 LO: 3 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Visualization.

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133) Larry is the owner and operator of Larry's Pool Services, and he is performing his yearly financial review for the past year. The first step in the process is to look at his sales performance before evaluating any other metrics.

Larry decided to use data analytics for the first time. He recently took a course covering basic data analytics and how to apply the methodologies. With all of this in mind, please answer the following questions. a. Larry believes a pie chart will best display his data for evaluation. Do you agree with this assessment? Why or why not? If you disagree, then please explain what graph you would recommend. b. Using Excel or a similar spreadsheet program, create the graph from part a). What observations can you make looking at this graph? c. Based upon your assessment from part b), what recommendations would you have for Larry for next year? Do you believe Larry has done an efficient job of budgeting for his business? What reasons could explain the drastic changes in revenues from June - August?

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Answer: a. A pie chart would not be the best choice for effectively displaying the data Larry collected. If Larry instead wanted to demonstrate how much of the overall budgeted revenue was allocated to each month, then a pie chart would be an appropriate choice. Larry should create a time series graph to display the actual and budgeted amounts across the span of the whole year for comparison. b. To create a time series graph, you need to first enter the data into Excel. Then, highlight Cells A1:C13, select "Insert", select "Chart", and select "Line Graph" from the choices provided. After doing this, your graph should look like this:

Based on this graph, there are many possible observations. The business was under their budget in the beginning of the year, surpassed it in the middle of the year, and was very close to its goal from September to December. c. Larry has done an efficient job of managing his budgeting, but he may want to reevaluate whether to reallocate some of the budget to the summer months when revenues were higher than normal. As a pool service business, the cyclical nature of the business could help explain the peak in the summer months and the decline in the traditionally colder months. Without additional information about the geographic location of the business or specific weather patterns for that area during that year, more specifics cannot be determined. You should also recommend that Larry try to incorporate weather predictions into his budgeting if he is not yet doing so. If the following year will be warmer, then they may be able to anticipate periods of higher sales or periods of lower sales should it be colder. Diff: 2 LO: 2, 3 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Visualization.

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134) Jeweltopia is a trendy online jewelry boutique that completed its first year of operations. Management would like to conduct some data analysis to take a detailed look at various business activities. Jill, the sales head, is concerned that their sales have not met their budgeted sales every month. Analysts collected the following data:

Jill decided to analyze his data and create some visuals to assist during the presentation of her findings to management. With all this in mind, please answer the following questions. a. Using Excel, determine sales variances for each month. Also, determine if the Jeweltopia had favorable or unfavorable sales variance for the year as a whole. b. Jill would like to create visual aids to depict this data in a way. What kind of graph would you create for Jill and why? Using Excel, create this graph. c. Based on your answers to parts a) and b), do you believe Jill's concerns are warranted? What would you recommend Jill do about their budgeting or current sales figures?

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Answer: a. To complete this task, re-enter this information into Excel. To calculate the variance, you will use the following formula: (Actual Sales - Budgeted Sales) or enter the following into Excel: =(C2-B2). Repeat this action for each row to determine each variance's idealized return for each month. The results will appear as follows:

To determine the overall variance, first total the budgeted sales and actual sales columns. Then, use the same formula you did for the previous data above.

According to the data, Jeweltopia had unfavorable sales variance for the year as a whole. 105

b. To display the information in a visually useful way, Jill will want to use a time series graph. This type of graph allows data to be displayed chronologically while comparing budgeted and actual sales amounts. To create a time series graph, first re-enter the data set into Excel. Then, highlight Cells A1:C13, select "Insert," select "Chart," and select "Line Graph" from the choices provided. After doing this, your graph should look like this:

Based on the answers from parts a) and b), Jill's concerns seem warranted. Jeweltopia managed to be close to or surpass their budgeted sales projections for four months while missing their budgeted sales projections over the remaining 8 months. Jill and the management team should consider looking into January, June, and November in particular as unfavorable variance for these three months was much higher than other months. They could also look into March and July to see why they were able to surpass the budget compared to other months. It would also be prudent to know if any other market conditions impacted sales of their products. Overall, Jeweltopia was not able to meet their budgeted sales for the year, so they definitely need to determine how they can do a more efficient job of budgeting and/or increasing sales. Diff: 2 LO: 2, 3 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Visualization.

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135) Wally's Window Emporium is a leading producer and provider of residential windows across the United States. They just completed their second year of operations and compiled the following data:

Management feels overwhelmed when they look at the data in this format, and they do not feel comfortable making decisions for the upcoming year until the data is easier to understand. The analytics team needs to present this information in a more user-friendly fashion so management can make data-informed decisions. With this information in mind, please answer the following questions. a. What was the Gross Profit Percentage for each region for Year 2? What was the Net Income Percentage for each region for Year 2? (Round your answers to two decimal places.) b. Which region had the largest percentage increase between years for Sales, Cost of Goods Sold (COGS), and Expenses? (Round your answers to two decimal places.) c. What kind of graph would be most useful to display a comparison of net incomes for each region for Year 2? Create this graph.

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Answer: a. Gross Profit Percentage: North = 58.26% East = 60.20% South = 46.35% West = 47.24% Net Income Percentage: North = 15.32% East = 15.77% South = 12.55% West = 12.95% To calculate the Gross Profit Percentage, you need to create new cells with each region's name. In the cell to the right of the cell North, use the following formula: (Sales - COGS)/Sales, or = (C2-C8)/C2, which returns an answer of 58.26%. Repeat this for each region, and this results in: East = 60.20%, South = 46.35%, and West = 47.24%. To calculate the Net Income Percentage, you need to create new cells with each region's name. In the cell to the right of the name for North, use the following formula: (Sales - COGS Expenses)/Sales, or = (C2-C8-C14)/C2, which returns an answer of 15.32%. Repeat this for each region, and this results in: East = 15.77%, South = 12.55%, and West = 12.95%. b. Largest Percentage Increase: For Sales, North at 4.42%, for Cost of Goods Sold, West at 6.17%, and for Expenses, North at 5.96%. To calculate increases or decreases in sales, use the cell next to each region's name in Column D. Use the following formula: (Year 2 Sales - Year 1 Sales)/Year 1 Sales or, (C2-B2)/B2, which returns an answer of 4.42%. Repeat this for each region and this results in: East = -2.25%, South = 2.79%, and West = 0.93%. North had the largest percentage increase in Sales. To calculate increases or decreases in COGS, use the cell next to each region's name in Column D. Use the following formula: (Year 2 COGS - Year 1 COGS)/Year 1 COGS, or (C8-B8)/B8, which returns an answer of 5.15%. Repeat this for each region and this results in: East = -6.80%, South = 6.17%, and West = 4.36%. So, West has the largest percentage increase in COGS. To calculate increases or decreases in Expenses, use the cell next to each region's name in Column D. Use the following formula: (Year 2 Expenses - Year 1 Expenses)/Year 1 Expenses, or (C14-B14)/B14, which returns an answer of 5.96%. Repeat this for each region and this results in: East = -4.75%, South = -5.75%, and West = -5.47%. So, North has the largest percentage increase in Expenses.

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c. The best graph to display a comparison of net incomes for each region in Year 2 would be a bar chart. Bar charts are useful when comparing total values between groups. To create a bar chart, enter the name of each region vertically. In the cell to the right of each name, you will need to calculate net income for that region for Year 2. Use the following formula: (Sales COGS - Expenses). Repeat this for each region. Once you have finished, select the name of each region along with its Net Income. Select Insert, then Chart, and then Bar. The resulting chart should look like this:

Diff: 2 LO: 2, 3, 4 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Visualization.

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136) Wally's Window Emporium is a leading producer and provider of residential windows across the United States. They just completed their second year of operations and compiled the following data:

Management feels overwhelmed when they look at the data in this format, and management does not feel comfortable making decisions for the upcoming year until the data is easier to understand. The analytics team needs to present this information in a more user-friendly fashion so management can make data-informed decisions for the coming year. With this information in mind, please answer the following questions. a. What are the average sales, average cost of goods sold (COGS), and average expenses for each region across both years? b. Which region had the largest increase in gross profit from Year 1 to Year 2, and which region showed the largest increase in net income from Year 1 to Year 2? c. What kind of graph would be the most useful to display the division of sales revenues for the South region in Year 1?

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Answer: a. Average Sales: North = $740,312 East= $780,262 West = $821,702 South = $808,978 Average COGS: North = $307,941 East = $318,232 West = $433,921 South = $419,845 Average Expenses: North = $315,649 East = $351,245 West = $290,143 South = $286,723 To calculate the average Sales, create a new range with each region's name. In the next cell in the "North" row, use the AVERAGE function, or "=AVERAGE(B2:C2)," which returns an answer of $740,312. Repeat this for each region, and these values should result: East = $780,262, West = $821,702, and South = $808,978. To calculate the average COGS, create a new range with each region's name. In the next cell in the "North" row, use the AVERAGE function, or "=AVERAGE(B8:C8)," which returns an answer of $307,941. Repeat this for each region, and these values should result: East = $318,232, West = $433,921, and South = $419,845. To calculate the average Expenses, create a new range with each region's name. In the next cell in the "North" row, use the AVERAGE function, or "=AVERAGE(B14:C14)" which returns an answer of $315,649. Repeat this for each region, and these values should result: East = $351,245, West = $290,143, and South = $286,723.

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b. Largest Increase in Gross Profit from Year 1 to Year 2 occurs in the North region at 3.91%; and, the Largest Increase in Net Income from Year 1 to Year 2 occurs in the East region at 21.78% To calculate the increases in gross profit for each region, calculate the Gross Profit in Years 1 and 2. Create a new list of the regions, and in the cells to the right of this list, calculate the gross profit for Year 1 for each region in its row. Use the following formula: "Year 1 Sales - Year 1 COGS" or B2-B8 and that should return an answer of $424,090 (for the North region). Now, do the same for Year 2 in a new column of cells using the following formula: "Year 2 Sales - Year 2 COGS" or C2-C8 and that should return an answer of $440,652 (for the North region). To calculate the increase, use the following formula: "(Year 2 Gross Profit - Year 1 Gross Profit)/Year 1 Gross Profit", and that should return an answer of 3.91% (for the North region). Repeat this for each region, and the following values should result: East = 1.02%; West = 0.87%; and South = -2.65%. The North region is the region with the largest increase in gross profit. To calculate increases or decreases in net income, calculate the Net Income in Years 1 and 2. Create a new list of regions, and in the column to the right of that list, calculate the net income for Year 1 for the North region. Use the following formula: "Year 1 Sales - Year 1 COGS - Year 1 Expenses", or B2-B8-B14, and that should return an answer of $117,580. Now, do the same for Year 2 in the next column using the following formula: "Year 2 Sales - Year 2 COGS - Year 1 Expenses", or C2 - C8 - C14, and that should return an answer of $115,864 for the North region. To calculate the increase, use the following formula: "(Year 2 Net Income - Year 1 Net Income)/Year 1 Net Income," and that returns value of -1.46%. Repeat this for each region, and these values should result: East = 21.78%; West = 15.23%; and South = 5.69%. The East region is the region with the largest increase in Net Income.

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c. To display the division and allocation of sales revenue for the South region in Year 1, a pie chart would be the most appropriate chart to use. This type of chart demonstrates how components of a total sum distribute between different subgroups. To create a chart, type a list of categories: COGS, Expenses, and Net Income, in a new area. Then, copy the values of the subtotals for those fields for Year 1 for the South region. Once you have finished, select the name of each item and its total. Select Insert, Chart, and then Pie. The result should look something like this (after formatting and adding titles and labels):

Diff: 2 LO: 2, 3, 4 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Visualization.

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137) Chocolate Delights Company manufactures gourmet chocolate candy that it sells online. Chocolate Delights takes customer service very seriously and asks customers if they would like to complete a survey after each purchase. The company has been in business for 5 years and have had a good response rate on the surveys sent so far. The company needs to decide whether to add 4th of July-themed candy to its current offerings, so they solicited feedback from 20 randomly selected customers to rate the idea on a scale from 1 to 10, along with other questions. Here are some results from those 20 randomly selected individuals:

On their customer survey scores, the following ranges exist: Scores Ratings A+ 9-10 A 7-9 B+ 5-7 B 3-5 C 0-3 a. How many of each converted letter scores (column B) did Chocolate Designs receive from this survey? b. What is the overall average score from these 20 results? What is the median score? And what is the mode score? c. If you were going to create a graph to display results of the survey (from part a), then what kind of graph would you create, and why? Create the graph you just mentioned. 114

Answer: a. A+: 1; A: 4; B+:12; B:3; C:0 To solve this question, utilize the COUNTIF function in Excel. First, create a list for each potential grade. In the cell next to converted letter score "A+," use a formula containing the COUNTIF function as follows: =COUNTIF(B2:B21,">=9") that returns value of 1. In the cell next to converted letter score "A," use a formula containing the COUNTIF function as follows: =COUNTIF($B$2:$B$21,">=7")-COUNTIF($B$2:$B$21,">=9") that should return the value of 4. Repeat this process for the other converted letter score ranges, and the following values result: B+: 12; B: 3; and C: 0. b. Overall Converted Letter Score (Average): B+; Median Score: B+; and Mode Score: B+ To solve this question, use the AVERAGE, MEDIAN, and MODE functions in Excel. The average numeric score is =AVERAGE(B2:B21), and that is 6.225. The median numeric score is =MEDIAN(B2:B21) and that is 6. The numeric mode is: =MODE(B2:B21), and that is 5.75. Converting these numeric values using the given scale:

Average Median Mode

Value 6.225 6 5.75

Score B+ B+ B+

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c. The best graph to use would be a bar graph. A bar graph displays overall (or stacked) totals to compare between distinct mutually exclusive groups. In this case, the different groups are the letter scores converted from the numeric ratings received on the original scale of 1 to 10. The graph should look like this after formatting and some customizations:

Diff: 2 LO: 1, 2, 3, 4 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Visualization.

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138) Chocolate Delights Company manufactures gourmet chocolate candy that it sells online. Chocolate Delights takes customer service very seriously and asks customers if they would like to complete a survey after each purchase. They have been in business for 5 years and experienced a good response when measured in terms of sales revenue. In their first year of operations, they successfully sold 1,050,000 boxes of chocolate containing different flavors at $20.00 per box. In subsequent years, the sales price per box remained constant at $20.00, but year-by-year, the company experienced a 6%, 5%, 8%, and 8% growth in the number of boxes sold per year compared to each previous year. Based on the information above, answer the following: (If necessary, round the number of units sold to whole units since they do not sell fractional chocolates.) a. What is the average sales amount (in dollars) over the company's 5-year lifetime? What is their median sales value over the same span? b. What year made up their largest percentage of the overall sales compared to every other year? Disregarding Year 1, what might explain that increase in sales? c. If you were going to create a graph to display the results of their sales over the company's 5year history, then what kind of graph would you create, and why? Create a version of the graph you just mentioned.

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Answer: a. Average sales were $23,827,624; and, the median sales value was: $23,373,000 First, find out the dollar amounts of sales and the numbers of units sold for each of the five years of the company's operations. Based on the information given and the value for Year 1, subsequent sales figures for other years will be as follows: A

1 2 3 4 5 6

Years Year 1 Year 2 Year 3 Year 4 Year 5

C Percentage Sale Price per Increase in Box ($) Sales 20 20 6% 20 5% 20 8% 20 8%

Boxes Sold 1,050,000 1,113,000 1,168,650 1,262,142 1,363,114

Sales ($) 21,000,000 22,260,000 23,373,000 25,242,840 27,262,280

To find the average annual sales amount, use the AVERAGE function in Excel over the relevant range "=AVERAGE(E2:E6)" to get a value of $23,827,624. To solve for the median, use the MEDIAN function in Excel over the same range "=MEDIAN(E2:E6)" to get a value of $23,373,000. b. Year 5 had the largest percentage of the overall sales for all years. To determine what year made up the largest percentage of the overall sales for all years, calculate the total sales for all five years. You can calculate this by using the following formula "=SUM(D2:D6)" to get a value of $119,138,120. Next, divide each year of sales by the total sales to find the percentage of sales made in that year. For Year 1, enter =D2/D7 to get a value of 17.63% after appropriate formatting. Repeat this process for the other years to get these values: Year 2 = 18.68%; Year 3 = 19.62%; Year 4 = 21.19%; and Year 5 = 22.88%. Therefore, Year 5 comprises the largest percentage of the total sales. A 1 2 3 4 5 6 7

Years Year 1 Year 2 Year 3 Year 4 Year 5

B C Sale Price per Box ($) Boxes Sold 20 1,050,000 20 1,113,000 20 1,168,650 20 1,262,142 20 1,363,114

D Sales ($) 21,000,000 22,260,000 23,373,000 25,242,840 27,262,280 119,138,120

E Percentage of Overall Sales 17.63% 18.68% 19.62% 21.19% 22.88% 100.00%

There could be many possible explanations for such an increase including increased volume of boxes, success in marketing campaigns, new product offerings, website redesign, customer loyalty incentives, shipping discounts, or promotional discounts that increased sales overall.

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c. To display data that changes over time, such as the sales data from Chocolate Delights, a line or time series graph is best. This type of chart will display each sales point along a path of connected points demonstrating the value's changes over time. This data's graph should look similar to this after appropriate formatting and customizations:

Diff: 2 LO: 1, 2, 3, 4 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Visualization.

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139) Starling Corporation completed their fifth year of operations as a manufacturer of chalkboard paint. Starling has seen growth in sales. But they have concerns about whether their spending is higher than they would like it to be. As part of their annual review process, management would like to put together some data and analyze it to create some visuals that better illustrate their performance over the year. The accounting department compiled the following data for the previous five years:

Management asked the analysts to help in this year's review and will need the information compiled within the next week. With all of this in mind, please assist Starling by answering the following questions. Use Excel where appropriate. a. What is the average value for Sales over those five years? What is the average Cost of Goods Sold for five years? What were the average Expenses for five years? (Round your answers to whole number.) b. What is the Gross Profit percentage for each year? What are the Net Income percentages for each year? c. To visually depict this information, Starling would like to create a graph. Which type of graph is most appropriate, and why? Create the graph you just mentioned. d. Based on the analysis and graph you provided so far, what observations can you make about Starling Corporation? Is there any advice you would like to give management to help them move forward?

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Answer: a. Average Sales per year: $148,049; Average Cost of Goods Sold per year: $72,605; and Average Expenses per year: $63,394 To calculate the average value for each item, use the AVERAGE function in Excel. Starting in cell G2, you will enter =AVERAGE(B2:F2), and that should return an answer of $148,049 for Sales. Next, in cell G3, you could enter =AVERAGE(B3:F3), that returns an answer of $72,605 of Cost of Goods Sold. Next, in cell G4, enter =AVERAGE(B4:F4) and that returns an answer of $63,394 of Expenses. b. Gross Profit Percentage: Year 1, 57.63%; Year 2, 58.42%; Year 3, 58.67%; Year 4, 44.92%; and Year 5: 43.86%. Also, Net Income Percentage: Year 1, 7.52%; Year 2, 11.82%; Year 3, 7.18%; Year 4, 8.27%; Year 5, 6.93% To calculate the gross profit percentage, calculate the gross profit, and divide by sales for each year. For Year 1: =(B2-B3)/B2 = 57.63%, For Year 2: =(C2-C3)/C2 = 58.42%, For Year 3: =(D2-D3)/D2 = 58.67%, for Year 4: =(E2-E3)/E2 = 44.92%, and for Year 5: =(F2-F3)/F2 = 43.86%. To calculate the net income percentage, calculate the net income, and divide by sales per year for each year. For Year 1: =(B2-B3-B4)/B2 = 7.52%, For Year 2: =(C2-C3-C4)/C2 = 11.82%, For Year 3: =(D2-D3-D4)/D2 = 7.18%, Year 4: =(E2-E3-E4)/E2 = 8.27%, and Year 5: =(F2-F3F4)/F2 = 6.93%.

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c. Starling should create a time series graph or line graph that depicts sales, cost of goods sold, and expenses over the course of the five-year period provided. Displaying your data in this way will allow you to see how each of the variables displayed has changed over course of five years. To create a line graph in Excel, highlight the Sales, Cost of Goods Sold, Expenses, and its data points. Next, click the Insert tab, then Chart, then line. The graph should look like the following:

d. Based on the analysis and graph given, Starling had a steady increase in Sales as well as their Cost of Goods Sold and Expenses. Both gross profit percentages and net income percentages are positive, indicating that management did a sufficient job to date at the management level of their operations. They need to be mindful that there has been a decline in gross profit percentage every year since year 3 and that year 5's net income percentage also experienced a decrease compared to Year 4. I would encourage them to use this historical data to budget for future years so they can then measure their performance against their budgeted numbers. They could also run some what-if analysis to determine how different scenarios may have impacted life on business. Doing so would also help management focus on specific outcomes rather than a single measure. Diff: 2 LO: 3 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Visualization.

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140) Simon recently completed the third year of his four-year college and is trying to decide what he would like to do after graduation. Simon decided to pursue a one-year graduate degree in Accounting with a minor in Finance. Simon also accepted an internship for the coming summer at a local accounting firm where he is hoping to gain insight into what his life would look like if he went into an accounting-specific position after 4th year. Simon's grades and GPA for the first three years of his college look as follows:

In order to be accepted into the graduate program, Simon needs a minimum GPA of 3.5. He believes he would be offered a starting salary of $48,000 if he went straight into working as opposed to attending graduate school. After graduate school, he expects a starting salary of $58,000, assuming he does complete his graduation. With all of this in mind, please help Simon evaluate his past three year's performances by answering the following questions. a. Use Excel to calculate the following totals for Simon's GPA: Average, Median, and Mode. What does each of these figures tell you? b. Based on data calculated in part a), is Simon's GPA on track for what will be needed to get into graduate school? Is there any additional advice to give Simon about his senior year? c. Simon would like to know how many As he has earned compared to Bs and Cs. Create a Count Data chart that summarizes this data. d. Using Excel, create a graph that displays the information you collected in part c). Why did you select the graph you did, and why is it the best way to represent this data? e. Assume Simon's GPA is sufficient and does not change much. He is accepted into a graduate program, so how many years would it take him after entering his profession to make up the lost year of income from extending his time in school? Please ignore inflation, and please explain how you arrived at your answer.

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Answer: To best use the data, re-enter it into Excel as a column or set of columns that look like this:

a. AVERAGE = 3.57, MEDIAN = 4, MODE = 4 To calculate each figure in a given row, you need to use a different Excel-based formula as follows: Average: The average is the overall GPA of the courses listed. =AVERAGE(D2:31) returns an answer of 3.57. Median: This is the midpoint of his GPA. =MEDIAN(D2:31) returns an answer of 4. Mode: This statistic gives information about the most frequently occurring GPA of the courses listed. =MODE(D2:31), which returns an answer of 4.

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b. According to data calculated in part a), Simon's average GPA is 3.57 and a minimum of 3.5 is needed to be considered for the graduate program. He currently has more than the required GPA of 3.5. Simon needs to be mindful that he still has one year left of classes and receiving more Bs and Cs might drag his average GPA below the required 3.5. He will want to make sure he monitors his grades so he does not ruin his chances of being accepted. c. In order to calculate the number of letter grades earned, Simon will want to utilize a formula with the COUNTIF function in Excel. He would input the formulas as follows: For As =COUNTIF(D2:D31,4), and that returns an answer of 19 For Bs =COUNTIF(D2:D31,3), and that returns an answer of 9 For Cs =COUNTIF(D2:D31,2), and that returns an answer of 2 Now, assemble a Count Data chart that should look like the following: Count Data A 19 B 9 C 2 According to the chart, Simon earned 19 As compared to 9 Bs and 2 Cs. c. A bar chart is an appropriate graph to fully represent the data, when Simon is comparing total values between different grades earned. To create a bar chart in Excel, first highlight the cells in the Count Data chart (in part c). Next, click the Insert tab, then Chart, then column. A graph should appear as follows:

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d. Simon is missing out on $48,000 of income if he passes up the available job. When Simon graduates from the one-year graduate-level program, he will earn $58,000. This is an additional $10,000 of income per year. To determine how many years it would take to make up that year of missed income, divide the $48,000 of missed income by the extra $10,000 of income earned by finishing graduate school. $48,000/$10,000 = 4.8 years to recoup the missed income using the additional income. This does not account for any potential raises Simon received at either position that would have impacted this time as well. Diff: 2 LO: 1, 2, 3 Bloom: AP AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Visualization.

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141) Archer is a sales associate at a music equipment store. He worked for this store for while finishing a degree at a local university. Archer is debating whether he should stay and accept a promoted role of manager in his current music store or accept a management position at a different store once he finishes his schooling. He determined that as a manager, his take home pay for both jobs will be $4,000 per month, and he constructed a following budget for each scenario:

Each job has different benefits. The new job pays for a larger portion of health insurance premiums, provides company-paid internet, and is closer to Archer's house, while the current job provides onsite lunches frequently resulting in a lower overall food budget. These different benefits result in differing amounts in the budget. Archer decided that any unspent funds will go to a savings account. With this information in mind, please answer the following questions. Use Excel or a similar spreadsheet where appropriate. a. Under each budget, how much will Archer be able to put in his savings account? What is the percent difference in savings that Archer can amass per month? How many months would it take in each scenario to save enough money to afford a down payment of $22,500 towards a new house? b. Create a chart for each job's budget to visualize the proportion of Archer's budget needed for each category in each scenario. What chart is appropriate for this, and why is it the best option? What type of data analytics is this an example of? c. Assume Archer decides to stay at his current job and accept the management role. He did a good job in his first month of the new role but he did go over budget in a few areas. His actual spending was $340 on food, $71 on phone, and $191 on household supplies. Create a chart to show the budgeted and actual amounts for each category. To add some diagnostic analysis, provide at least three plausible explanations for the overages. d. Now, assume Archer decides to accept the management position in a different store, and his actual spending was $502 on food, $89 on gas, $71 on phone, and $199 on household supplies. Create a chart to show the budgeted and actual amounts for each category. To add some diagnostic analysis, provide at least three plausible explanations for the overages. e. Archer has come to you for guidance and help deciding what job to take based on the available information gathered in parts a-d. Which job would you advise him take, and why? How could Archer use what-if analysis, a form of prescriptive analytics, to help with this decision? What is a potential scenario that Archer should investigate? 127

Answer: a. Under each budget, Archer would be able to save the following amounts: Current store = Take home pay - Total expenses = $4,000 - $3,070 = $930 for Savings New store = Take home pay - current expenses = $4,000 - $3,009 = $991 for Savings To determine the percent change between savings generated in each scenario, you can take the higher savings minus lower savings and divide by the lower savings amount. ($991 - $930)/$930 = 0.06559 or 6.6% higher savings with the job at new store. To save up for a down payment on the house would take the following times: Job at the current store = $22,500/$930 = 24.19 months, so 25 months to save at least the down payment amount Job at the new store = $22,500/$991 = 22.70 months, so 23 months to save at least the down payment amount

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b. The chart most appropriate to demonstrate the allocation of a budget to different areas would be a pie chart. As shown in the pie charts created for each job, the pie divides the $4,000 take home pay and shows the budgeted proportions using a color-coded radial slice. In the budget for current store job, rent is the largest expense and uses a major part of the budget. Savings is the next largest item followed by health insurance. In the job for the new store, rent is still the largest expense, using the largest part of the budget. Savings is the next item, followed by food. These pie charts are examples of descriptive analytics since they display what has already transpired.

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c. When you compare his budgeted expenditures to his actual expenditures, the numbers are as follows:

Rent (utilities included) Household supplies Food Health Insurance Car Payment Gas Car Insurance Phone Bill Internet Savings

Budgeted $1,600 $185 $320 $425 $215 $78 $150 $63 $34 $930

Actual $1,600 $191 $340 $425 $215 $78 $150 $71 $34 $896

Using Excel, you can generate a bar chart that will visually display budget versus actual. This bar chart will do an effective job of demonstrating the differences in budgeted and actual amounts.

Budgeted versus Actual Savings Internet Phone Bill Car Insurance Gas Car Payment Health Insurance Food Household supplies Rent (utilities included)

$200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800 Actual

Budgeted

Archer could give many reasons to explain the overages including the following: • Archer got home from the office later than usual and decided to get takeout which increased his food amount. • Archer ended up using more data than usual on his phone which accounts for the increase in phone bill. • Archer had to restock household supplies which increased what he spent in that area. • The increase in spending led to a decrease in what Archer was able to put into savings.

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d. When you compare his budgeted expenditures to actual expenditures, the numbers are as follows:

Rent (utilities included) Household supplies Food Health Insurance Car Payment Gas Car Insurance Phone Bill Internet Savings

Budgeted $1,600 $185 $444 $300 $215 $52 $150 $63 $0 $991

Actual $1,600 $199 $502 $300 $215 $89 $150 $71 $0 $874

Using Excel, you can generate a bar chart that will visually display budget versus actual. This bar chart will do an effective job of demonstrating the differences in budgeted and actual amounts.

Budgeted versus Actual Savings Internet Phone Bill Car Insurance Gas Car Payment Health Insurance Food Household supplies Rent (utilities included)

$200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800 Actual

Budgeted

Archer could give many reasons to explain the overages including the following: • Archer got home from the office later than usual and decided to get takeout which increased his food amount. • Archer ended up using more data than usual on his phone which accounts for the increase in phone bill. • Archer had to drive home a few days during his lunch period which increased the amount of gas used. • Archer had to restock household supplies which increased what he spent in that area. • The increase in spending led to a decrease in what Archer was able to put into savings.

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e. Based upon the information gathered in parts a-d, Archer may be best off by accepting the job at the new store if he is willing and able to reduce some of his actual expenses incurred. If he can stick to his budget, then this will allow him to save more per month and achieve his goal of saving for a down payment faster than he could do at his current job. If he does not believe he can stick to the initial budget he laid out, then he would be better off accepting the manager position at his current store since it affords him the ability to save more per month. Archer can use what-if analysis to determine multiple scenarios moving forward that could ultimately help him decide what option is most sensible for him. Based on the data we have; Archer could conduct a what-if analysis to determine how much he would need to cut in spending at the new job to break even with his current job. He could also use this form of analysis to estimate the extra number of months needed to save for the down payment assuming parts or all of his spending were to change. Overall, what-if analysis is an excellent tool for gaining insight into future possibilities. Diff: 3 LO: 1, 2, 3, 4 Bloom: S AACSB: Data Analytics AICPA: AC: Technology and Tools IMA: Technology & Analytics: Visualization.

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Cost Accounting, 1e (Farmer) Chapter 14 Support Department Costing 1) Which of the following terms describes departments within a company that provides the necessary services to produce a product but is not directly involved in the production of the product? A) Revenue departments B) Support departments C) Expense departments D) Costing departments Answer: B Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 2) Support departments A) provide necessary services to the operating units. B) provide services directly to the customers. C) provide services directly to the vendors. D) work directly on the products of the company. Answer: A Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 3) An example of support departments includes all of the following except A) security. B) maintenance. C) sales. D) machining. Answer: D Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management.

4) Support departments are also known as A) cost departments. B) an operating unit. C) service departments. D) indirect departments. Answer: C Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 5) Support departments costs are related to production A) as part of both direct labor and direct material costs. B) as part of direct labor costs. C) as part of direct material costs. D) indirectly. Answer: D Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 6) The highest cost that relates to support departments costs is A) personnel. B) legal. C) professional fees. D) accounting. Answer: A Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management.

7) All of the following are types of work completed in a support department except A) janitorial services for the production facility. B) maintenance repairs on production machines. C) security services for the production facility. D) production work to produce the product. Answer: D Diff: 1 LO: 1 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 8) Tasha Burdett, CEO of Burdett Inc. believes that support department costs are facility costs and should not be allocated to the products produced. Which of the following best explains why Tasha is incorrect? A) Product costs may be inaccurate because direct material and direct labor are not correctly accounted for. B) Product costs may be inaccurate because support department services may be consumed more heavily by one product than another. C) Product costs may be inaccurate because administrative costs play a key role in producing the products. D) Product costs may be inaccurate because operating units do not depend on support services to produce the products. Answer: B Diff: 1 LO: 1 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 9) Which of the following statements explains why it is challenging to allocate support department costs, like maintenance work, to products? A) The costs cannot be adequately known or calculated. B) The support activities are hard to define. C) The appropriate allocation base can be difficult to determine. D) Total costs per department are not accurate and may result in undercharging the customer. Answer: C Diff: 1 LO: 1 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management.

10) What type of costs would support department costs be classified as? A) Indirect costs B) Direct costs C) Personnel costs D) Office supply costs Answer: A Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 11) The best way to allocate support department costs is A) averaging. B) based on square footage. C) based on the number of personnel. D) based on the support department and the most logical allocation base for that department. Answer: D Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 12) Support department costs are applied to product costs as A) variable cost of goods sold. B) overhead. C) fixed manufacturing costs. D) fixed selling and administrative costs. Answer: B Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management.

13) Service department costs should be allocated to a user department because A) they consume costs of the operating unit. B) a user department uses the services of a service department. C) they measure plant capacity. D) they are the final costs of the product. Answer: B Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 14) Which of the following allocation bases would be appropriate to allocate the costs of the company cafeteria? A) Square footage of the cafeteria B) The number of hours the facility has used C) The number of meals that are served D) The number of personnel in the organization Answer: D Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 15) Which of the following allocation bases would be appropriate to allocate the costs of the housekeeping department? A) Square footage of the facility B) Machine hours C) Direct labor hours D) The number of employees Answer: A Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management.

16) Which of the following allocation bases would be appropriate to allocate the costs of the maintenance department? A) Square footage of the facility B) Machine hours C) Direct labor hours D) The number of employees Answer: B Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 17) Which of the following department(s) would most likely use machine hours to allocate its support costs? A) Maintenance B) Personnel C) Purchasing D) Maintenance and personnel Answer: A Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 18) Which of the following department(s) would most likely use the number of employees to allocate its support costs? A) Maintenance B) Personnel C) Purchasing D) Accounting Answer: B Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management.

19) Which of the following reasons for allocating service department costs to user departments would not be applicable? A) Provide the best possible incentives for each service level B) Accurately calculate the profitability of each operating unit C) Evaluate the performance of managers D) Correctly calculate the units' profit contribution to the company Answer: A Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 20) Support department costs are A) rarely found in a manufacturing organization. B) allocated by the user department to the units produced. C) treated as period costs. D) expensed as incurred. Answer: B Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 21) Which support department costs would most likely allocate its costs based on square footage? A) Accounting B) Maintenance C) Cafeteria D) Custodial Answer: D Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management.

22) All of the following would be considered a support department in a manufacturing company except A) design. B) assembly. C) human resources. D) information technology. Answer: B Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 23) All the following would be adequate criteria for selecting an allocation base for support departments except A) the sales dollars generated during the period. B) the extent of facilities provided. C) the ease of allocating the costs. D) the direct benefits from the service provided. Answer: A Diff: 1 LO: 1 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 24) Determining the basis used to allocate support department costs follows which guideline? A) Revenue generation B) Profit maximization C) Cause and effect D) Goal comparison Answer: C Diff: 2 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management.

25) A local community college has more than 15 different departments. The testing department assists instructors in grading exams. TRIO attempts to teach students valuable skills of innovation on surviving college. How would these two departments be classified? A) Testing - service; TRIO - service B) Testing - user; TRIO - service C) Testing - service; TRIO - user D) Testing - user; TRIO - user Answer: B Diff: 2 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management. 26) Allocating service department costs provides a service firm a basis for evaluating the A) value of its services. B) costs and profitability of its services. C) manufacturing costs for the company. D) profitability of its customers. Answer: B Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 27) The key implementation issue for cost allocation is the A) complexity of the equation. B) time-intensive calculations. C) changes in financial reporting. D) choice of the more accurate allocation method. Answer: D Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management.

28) The accountant of XYZ Company allocated support department costs between its two divisions. The information for each division is as follows: Division A $200,000 80,000 $15,000

Sales Cost of Goods Sold Allocated support costs

Division B $120,000 80,000 $10,000

What is the gross margin for Division A? A) $200,000 B) $120,000 C) $105,000 D) $15,000 Answer: B Explanation: $200,000 - $80,000 = $120,000 Div A sales - Div A cogs Diff: 2 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management. 29) The accountant of XYZ Company allocated support department costs between its two divisions. The information for each division is as follows: Division A $200,000 80,000 $15,000

Sales Cost of Goods Sold Allocated support costs What is the gross margin for Division B? A) $120,000 B) $40,000 C) $30,000 D) $10,000 Answer: B Explanation: $120,000 - $80,000 = $40,000 Div B sales - Div B cogs Diff: 2 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

Division B $120,000 80,000 $10,000

30) The accountant of XYZ Company allocated support department costs between its two divisions. The information for each division is as follows: Division A $200,000 80,000 $15,000

Sales Cost of Goods Sold Allocated support costs

Division B $120,000 80,000 $10,000

What is the operating income for Division A? A) $200,000 B) $120,000 C) $105,000 D) $15,000 Answer: C Explanation: $200,000 - $80,000 - $15,000 = $105,000 Div A sales - Div A cogs - Div A sup costs Diff: 2 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management. 31) The accountant of XYZ Company allocated support department costs between its two divisions. The information for each division is as follows: Division A $200,000 80,000 $15,000

Sales Cost of Goods Sold Allocated support costs

What is the operating income for Division B? A) $120,000 B) $40,000 C) $30,000 D) $10,000 Answer: C Explanation: $120,000 - $80,000 - $10,000 = $30,000 Div B sales - Div B cogs - Div B sup costs Diff: 2 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

Division B $120,000 80,000 $10,000

32) CCC Inc. operates two separate divisions. The admissions department produces revenues of $50,000 per year with a cost of service of $12,000. The company also incurs the following centralized operating costs: Human Resources Rent Accounting Utilities

$5,000 2,500 1,000 1,000

All support costs are allocated between the two divisions. Based on the accountant's calculation, the admission department's share of support costs is $4,000. How much will CCC report for a gross margin and operating income for the admissions department? A) $38,000, $34,000 B) $38,000, $24,500 C) $50,000, $34,000 D) $50,000, $24,500 Answer: A Explanation: $50,000 - $12,000 = $38,000 $38,000 - $4,000 = $34,000 Rev - cost = gr margin Gr margin - sup cost = op inc. Diff: 2 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management. 33) All of the following methods are acceptable allocation methods except the A) reciprocal method. B) direct method. C) step method. D) average method. Answer: D Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management.

34) Which method of allocating support department costs is completed by taking the service flows to production departments only and determining each production department's share of that service? A) Reciprocal method B) Direct method C) Step method D) Average method Answer: B Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 35) Which method of allocating support department costs is easiest but least accurate? A) Reciprocal method B) Direct method C) Step method D) Average method Answer: B Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 36) Which method of allocating support department costs is most accurate but also more complex? A) Reciprocal method B) Direct method C) Step method D) Average method Answer: A Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management.

37) Which method of allocating support department costs does not provide data for the support departments to monitor each other's costs? A) Reciprocal method B) Direct method C) Step method D) Average method Answer: B Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 38) If a company uses the direct method of allocating support department costs to production departments, which of the following statements is true? A) The direct method is more complex than the step method. B) The direct method only allocates some of the support department costs directly to production and is more accurate than the reciprocal method. C) The direct method allocates all the support department costs directly to the production departments and is the simplest method. D) The direct method requires that the same allocation method be used for each support department. Answer: C Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management.

39) Dickson Company has two production departments and two support departments. Each department occupies the following square footage: Housekeeping services Administration Accounting Department - Producing Tax Department - Producing

1,500 2,500 5,000 5,000

Housekeeping department costs are allocated on the basis of the square footage of space. If the budget for housekeeping costs is $45,000, what amount would be allocated to Administration using the direct method to allocate costs? A) $0 B) $4,821 C) $8,036 D) $16,875 Answer: A Explanation: $0 - using the direct method, no allocation between service departments occur. Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

40) Dickson Company has two production departments and two support departments. Each department occupies the following square footage: Housekeeping services Administration Accounting Department - Producing Tax Department - Producing

1,500 2,500 5,000 5,000

Housekeeping department costs are allocated on the basis of the square footage of space. If the budget for housekeeping costs is $45,000, what amount would be allocated to the accounting department using the direct method? A) $0 B) $16,071 C) $22,500 D) $45,000 Answer: C Explanation: 5,000 + 5,000 = 10,000 5,000 ÷ 10,000 = 50% × $45,000 = $22,500 Acct sq ft + tax sq ft = total prod sq ft Acct Sq ft ÷ total prod sq ft = percent alloc × housek costs = alloc housek costs Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

41) Expo manufacturing has two production departments and two support departments. The number of employees for each department is as follows: Human resource Accounting Machining - Producing Assembly - Producing

5 10 520 220

Accounting department costs are allocated on the basis of the number of employees. If the budget for accounting costs is $98,000, what amount would be allocated to Machining using the direct method? A) $0 B) $67,497 C) $67,947 D) $68,865 Answer: D Explanation: 520 + 220 = 740 520 ÷ 740 × $98,000 = $68,865 Mach empl + Assm emply = total empl Mach empl ÷ total empl × acct costs = alloc costs Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

42) Using the direct method, Natasha allocates Custodial Department costs based on square footage serviced and budgets $25,000 for the coming period. She allocates Accounting Department costs based on the number of employees served and is budgeting $105,000 for the next period. She shows the following information about the two service departments and two production departments.

Square Feet 250 5,000 8,000 4,000

Custodial Department Accounting Department Machining - Producing Assembly - Producing

Number of Employees 25 5 120 40

The total amount of costs allocated to Machining from the Custodial Department and Accounting Department is A) $77,910. B) $79,873. C) $87,413. D) $95,417. Answer: D Explanation: 8,000 + 4,000 = 12,000 8,000 ÷ 12,000 × $25,000 = $16,667 120 + 40 = 160 120 ÷ 160 × $105,000 = $78,750 $78,750 + $16,667 = $95,417 Mach sq ft + Assm sq ft = total sq ft Mach sq ft ÷ total sq ft × cust costs = cust alloc costs Mach empl + Assm emply = total empl Mach empl ÷ total empl × acct costs = acct alloc costs Cust alloc costs + acct alloc costs = total alloc costs Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

43) Using the direct method, Natasha allocates Custodial Department costs based on square footage serviced and budgets $25,000 for the coming period. She allocates Accounting Department costs based on the number of employees served and is budgeting $105,000 for the next period. She shows the following information about the two service departments and two production departments.

Square Feet 250 5,000 8,000 4,000

Custodial Department Accounting Department Machining - Producing Assembly - Producing

Number of Employees 25 5 120 40

The total amount of costs allocated to Assembly from the Custodial Department and Accounting Department is A) $27,902. B) $28,585. C) $34,583. D) $37,985. Answer: C Explanation: 8,000 + 4,000 = 12,000 4,000 ÷ 12,000 × $25,000 = $8,333 120 + 40 = 160 40 ÷ 160 × $105,000 = $26,250 $8,333 + $26,250 = $34,583 Mach sq ft + Assm sq ft = total sq ft Assm sq ft ÷ total sq ft × cust costs = cust alloc costs Mach empl + Assm emply = total empl Assm empl ÷ total empl × acct costs = acct alloc costs Cust alloc costs + acct alloc costs = total alloc costs Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

44) Spirits and More operates two departments, Cutting and Fabrication. Two service departments, maintenance and purchasing, are also included within the company. The operating costs and distribution of each service department's efforts to the other departments is as follows:

Maintenance Purchasing Cutting Fabrication

Maintenance 0% 35% 15% 50%

Purchasing 25% 0% 60% 15%

Operating Costs $87,000 16,000 80,000 56,000

Using the direct method of allocating support costs, what is the total cost accumulated in the cutting department? A) $32,877 B) $80,000 C) $85,600 D) $112,877 Answer: D Explanation: 15% + 50% = 65% 15% ÷ 65% × $ $87,000 = $20,077 60% + 15% = 75% 60% ÷ 75% × $16,000 = $12,800 $20,077 + $12,800 + $80,000 = $112,877 Maint Cut % + Maint Fab % = total maint % Maint cut % ÷ total maint % × maint costs = maint alloc costs Pur cut % + Pur fab % = purch alloc costs Pur cut % ÷ purch alloc costs × pur costs = purch alloc costs maint alloc costs + purch alloc costs + cut op costs = total cut costs Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

45) Spirits and More operates two departments, Cutting and Fabrication. Two service departments, maintenance and purchasing, are also included within the company. The operating costs and distribution of each service department's efforts to the other departments is as follows:

Maintenance Purchasing Cutting Fabrication

Maintenance 0% 35% 15% 50%

Purchasing 25% 0% 60% 15%

Operating Costs $87,000 16,000 80,000 56,000

Using the direct method of allocating support costs, what is the total cost accumulated in the fabrication department? A) $56,000 B) $70,123 C) $77,750 D) $126,123 Answer: D Explanation: 15% + 50% = 65% 50% ÷ 65% × $ $87,000 = $66,923 60% + 15% = 75% 15% ÷ 75% × $16,000 = $3,200 $66,923 + $3,200 + $56,000 = $126,123 Maint Cut % + Maint Fab % = total maint % Maint fab % ÷ total maint % × maint costs = maint alloc costs Pur cut % + Pur fab % = purch alloc costs Pur fab % ÷ purch alloc costs × pur costs = purch alloc costs maint alloc costs + purch alloc costs + fab op costs = total fab costs Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

46) If a company operates two producing departments and they are serviced by the same three support departments, which support departments costs should be allocated first when using the step method? A) The support department that provides the most service to other support departments B) The support department with the least amount of cost C) The support department that provides the most service to the user departments D) The service department that provides the least service to other service departments Answer: A Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 47) When using the step method to allocate support department costs, what is considered a weakness in the method? A) The order of support department allocation must be determined. B) All intradepartmental supports are ignored. C) All interdepartmental supports are ignored. D) Computations are more complex than the reciprocal method. Answer: A Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 48) What is the first step in allocating support costs using the step method? A) Allocate costs from the highest-ranked support department to the other support departments and operating units. B) Rank support departments by the service that provides the most support to other support departments. C) Rank support departments by the service that provides the most support to the operating units. D) Allocate costs from the highest-ranked support department to the other support departments. Answer: B Diff: 1 LO: 2 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management.

49) What is the second step in allocating support costs using the step method? A) Allocate costs from the highest-ranked support department to the other support departments and operating units. B) Rank support departments by the service that provides the most support to other support departments. C) Rank support departments by the service that provides the most support to the operating units D) Allocate costs from the highest-ranked support department to the other support departments. Answer: A Diff: 1 LO: 2 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 50) When using the step method to allocate support department costs, which of the following statements is true? A) The step method is also called the step-up method. B) The step method is more accurate than the direct method but less accurate than the reciprocal method. C) The step method requires the same allocation base to be used for each support department. D) The step method captures some, but not all, inter-support department services by allocating support department costs to other support departments and production departments. Answer: D Diff: 1 LO: 2 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 51) When determining the sequence of support, using the step method to allocate support department costs, all of the following statements are true except A) departments with more employees are allocated earlier. B) departments with more accurate allocation bases are allocated earlier. C) departments that serve a larger number of support departments are allocated earlier. D) departments that have a higher cost are allocated earlier. Answer: A Diff: 1 LO: 2 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management.

52) Which of the following best explains the major difference between the direct method and step method? A) Under the step method, the total support department costs to be allocated will also include any costs that were allocated to that support department from other support departments. B) Under the direct method, the total support department costs to be allocated will also include any costs that were allocated to that support department from other support departments. C) Under the step method, the total support department costs to be allocated will never include any costs that were allocated to that support department from other support departments. D) Under the step method, every support department receives costs allocated from every other support department. Answer: A Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 53) Dickson Company has two production departments and two support departments. Each department occupies the following square footage: Housekeeping Services Administration Accounting Department - Producing Tax Department - Producing

1,500 2,500 5,000 5,000

Housekeeping department costs are allocated on the basis of the square footage of space. If the budget for housekeeping costs is $45,000, what amount would be allocated to Administration using the step method to allocate costs? A) $0 B) $4,821 C) $6,750 D) $16,875 Answer: A Explanation: $0 - because admin provides more support (based on % of total sq ft) than housekeeping, costs from housekeeping are not allocated up. Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

54) Dickson Company has two production departments and two support departments. Each department occupies the following square footage: Housekeeping services Administration Accounting Department - Producing Tax Department - Producing

1,500 2,500 5,000 5,000

Support department costs are allocated on the basis of the square footage of space. If the budget for administration costs is $67,000 and housekeeping costs are $45,000, what amount would be allocated to housekeeping (from administration) using the step method to allocate costs? A) $0 B) $7,179 C) $8,739 D) $67,000 Answer: A Explanation: 1,500 + 5,000 + 5,000 = 11,500 1,500 ÷ 11,500 × $67,000 = $8,739 Housek sq ft + acct sq ft + tax sq ft = total sq ft Housek sq ft ÷ total sq ft × admin costs = alloc costs Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

55) Dickson Company has two production departments and two support departments. Each department occupies the following square footage: Housekeeping services Administration Accounting Department - Producing Tax Department - Producing

1,500 2,500 5,000 5,000

Support department costs are allocated on the basis of the square footage of space. If the administration costs are $67,000 and housekeeping costs are $45,000, what amount would be allocated to the accounting department if the company uses the step method? A) $26,870 B) $29,130 C) $53,739 D) $56,000 Answer: D Explanation: 1,500 + 5,000 + 5,000 = 11,500 1,500 ÷ 11,500 × $67,000 = $8,739 5,000 ÷ 11,500 × $67,000 = $29,130 $45,000 + $8,739 = $53,739 5,000 + 5,000 = 10,000 5,000 ÷ 10,000 × $53,739 = $26,870 $26,870 + $29,130 = $56,000 Housek sq ft + acct sq ft + tax sq ft = total sq ft Housek sq ft ÷ total sq ft × admin costs = alloc costs admin to housek acct sq ft ÷ total sq ft × admin costs = alloc costs admin to acct housek costs + alloc costs admin to housek = total housek costs acct sq ft + tax sq ft = total sq ft acct sq ft ÷ total sq ft × housek costs = alloc costs housek to acct alloc costs admin to acct + alloc costs housek to acct = total acct costs Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

56) Expo manufacturing has two production departments and two support departments. The number of employees for each department is as follows: Human Resources Accounting Machining - Producing Assembly - Producing

5 10 520 220

Human Resources shows a budget of $21,000 and accounting, $98,000, for the coming year. Support department costs are allocated on the basis of the number of employees. What amount would be allocated to accounting using the step method? A) $0 B) $278 C) $14,000 D) $21,000 Answer: A Explanation: $0 - because accounting provides more support (based on % of total employees) than hr, costs from hr are not allocated up. Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

57) Expo manufacturing has two production departments and two support departments. The number of employees for each department is as follows: Human Resources Accounting Machining - Producing Assembly - Producing

5 10 520 220

58) Expo manufacturing has two production departments and two support departments. The number of employees for each department is as follows: Human Resources Accounting Machining - Producing Assembly - Producing

5 10 520 220

Human Resources shows a budget of $21,000 and accounting, $98,000, for the coming year. Support department costs are allocated on the basis of the number of employees. What amount of human resource costs would be allocated to machining, using the step method? A) $14,757 B) $14,917 C) $15,219 D) $21,000 Answer: C Explanation: 5 + 520 + 220 = 745 5 ÷ 745 × $98,000 = $658 $21,000 + $658 = $21,658 520 + 220 = 740 520 ÷ 740 × $21,658 = $15,219 Hr # of empl + mach # of empl + assm # of empl = total # of empl Hr # of empl ÷ total # of empl × acct costs = hr alloc costs Hr costs + hr alloc costs = total hr costs to alloc mach # of empl + assm # of empl = total # of empl mach # of empl ÷ total # of empl × hr costs = mach alloc cost from hr Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

59) Expo manufacturing has two production departments and two support departments. The number of employees for each department is as follows: Human Resources Accounting Machining - Producing Assembly - Producing

5 10 520 220

Human Resources shows a budget of $21,000 and accounting, $98,000, for the coming year. Support department costs are allocated on the basis of the number of employees. What amount of human resource costs would be allocated to assembly, using the step method? A) $6,243 B) $6,311 C) $6,439 D) $21,000 Answer: C Explanation: 5 + 520 + 220 = 745 5 ÷ 745 × $98,000 = $658 $21,000 + $658 = $21,658 520 + 220 = 740 220 ÷ 740 × $21,658 = $6,439 Hr # of empl + mach # of empl + assm # of empl = total # of empl Hr # of empl ÷ total # of empl × acct costs = hr alloc costs Hr costs + hr alloc costs = total hr costs to alloc mach # of empl + assm # of empl = total # of emplassm alloc cost from hr Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

60) Expo manufacturing has two production departments and two support departments. The number of employees for each department is as follows: Human Resources Accounting Machining - Producing Assembly - Producing

5 10 520 220

Human Resources shows a budget of $21,000 and accounting, $98,000, for the coming year. Support department costs are allocated on the basis of the number of employees. How much in total support costs would be allocated to machining, using the step method? A) $82,413 B) $83,622 C) $68,403 D) $119,000 Answer: B Explanation: 5 + 520 + 220 = 745 5 ÷ 745 × $98,000 = $658 $21,000 + $658 = $21,658 520 ÷ 745 × $98,000 = $68,403 520 + 220 = 740 520 ÷ 740 × $21,658 = $15,219 $68,403 + $15,219 = $83,622 Hr # of empl + mach # of empl + assm # of empl = total # of empl Hr # of empl ÷ total # of empl × acct costs = hr alloc costs Hr costs + hr alloc costs = total hr costs to alloc mach # of empl + assm # of empl = total # of prod empl mach # of empl ÷ total # of prod empl × acct costs = acct cost alloc to maint mach # of empl ÷ total # of empl × hr costs = mach alloc cost from hr acct cost alloc to maint + mach alloc cost from hr = total mach sup costs Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

61) Expo manufacturing has two production departments and two support departments. The number of employees for each department is as follows: Human Resources Accounting Machining - Producing Assembly - Producing

5 10 520 220

Human Resources shows a budget of $21,000 and accounting, $98,000, for the coming year. Support department costs are allocated on the basis of the number of employees. How much in total support costs would be allocated to assembly, using the step method? A) $34,867 B) $35,378 C) $28,940 D) $119,000 Answer: B Explanation: 5 + 520 + 220 = 745 5 ÷ 745 × $98,000 = $658 $21,000 + $658 = $21,658 220 ÷ 745 × $98,000 = $28,940 220 + 520 = 740 220 ÷ 740 × $21,658 = $6,439 $28,940 + $6,439 = $35,378 Hr # of empl + mach # of empl + assm # of empl = total # of empl Hr # of empl ÷ total # of empl × acct costs = hr alloc costs Hr costs + hr alloc costs = total hr costs to alloc mach # of empl + assm # of empl = total # of prod empl assm # of empl ÷ total # of prod empl × acct costs = acct cost alloc to assm assm # of empl ÷ total # of empl × hr costs = assm alloc cost from hr acct cost alloc to assm + assm alloc cost from hr = total assm sup costs Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

62) Using the step method, Natasha allocates Custodial Department costs based on square footage serviced and budgets $25,000 for the coming period. She allocates Accounting Department costs based on the number of employees served and is budgeting $105,000 for the next period. She shows the following information about the two service departments and two production departments.

Square Feet 250 5,000 8,000 4,000

Custodial Department Accounting Department Machining - Producing Assembly - Producing

Number of Employees 25 5 120 40

Assuming Natasha allocates the accounting costs first, how much support costs would be allocated to the Custodial Department? A) $2,188 B) $14,189 C) $27,188 D) $39,189 Answer: B Explanation: 25 + 120 + 40 = 185 25 ÷ 185 × $105,000 = $14,189 Cust # of empl + mach # of empl + assm # of empl = total # of empl Cust # of empl ÷ total # of empl = acct cost alloc to cust Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

63) Using the step method, Natasha allocates Custodial Department costs based on square footage serviced and budgets $25,000 for the coming period. She allocates Accounting Department costs based on the number of employees served and is budgeting $105,000 for the next period. She shows the following information about the two service departments and two production departments.

Square Feet 250 5,000 8,000 4,000

Custodial Department Accounting Department Machining - Producing Assembly - Producing

Number of Employees 25 5 120 40

Assuming Natasha allocates the accounting costs first, how much in support costs would be allocated to machining? A) $68,108 B) $70,000 C) $87,635 D) $94,234 Answer: D Explanation: 25 + 120 + 40 = 185 25 ÷ 185 × $105,000 = $14,189 120 ÷ 185 × $105,000 = $68,108 $14,189 + $25,000 = $39,189 8,000 + 4,000 = 12,000 8,000 ÷ 12,000 × $39,189 = $26,126 $26,126 + $68,108 = $94,234 Cust # of empl + mach # of empl + assm # of empl = total # of empl Cust # of empl ÷ total # of empl = acct cost alloc to cust mach # of empl ÷ total # of empl = acct cost alloc to mach acct cost alloc to cust + cust costs = cust costs to alloc Mach sq ft + assm sq ft = total sq ft Mach sq ft ÷ total sq ft × cust costs to alloc = cust costs alloc to mach cust costs alloc to mach + acct cost alloc to mach = total sup costs to mach Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

64) Using the step method, Natasha allocates Custodial Department costs based on square footage serviced and budgets $25,000 for the coming period. She allocates Accounting Department costs based on the number of employees served and is budgeting $105,000 for the next period. She shows the following information about the two service departments and two production departments.

Square Feet 250 5,000 8,000 4,000

Custodial Department Accounting Department Machining - Producing Assembly - Producing

Number of Employees 25 5 120 40

Assuming Natasha allocates the accounting costs first, how much in support costs would be allocated to assembly? A) $22,703 B) $35,000 C) $35,766 D) $40,878 Answer: C Explanation: 25 + 120 + 40 = 185 25 ÷ 185 × $105,000 = $14,189 40 ÷ 185 × $105,000 = $22,703 $14,189 + $25,000 = $39,189 8,000 + 4,000 = 12,000 4,000 ÷ 12,000 × $39,189 = $13,063 $13,063 + $22,703 = $35,766 Cust # of empl + mach # of empl + assm # of empl = total # of empl Cust # of empl ÷ total # of empl = acct cost alloc to cust assm # of empl ÷ total # of empl = acct cost alloc to assm acct cost alloc to cust + cust costs = cust costs to alloc Mach sq ft + assm sq ft = total sq ft assm sq ft ÷ total sq ft × cust costs to alloc = cust costs alloc to assm cust costs alloc to assm + acct cost alloc to mach = total sup costs to assm Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

65) Which of the methods used to allocate support costs recognizes the services that support departments provide to each other? A) Direct method B) Step method C) Reciprocal method D) All three methods Answer: C Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 66) When using the reciprocal method, which function in excel can assist in solving the allocation? A) Goal Seek B) Solver C) Iterations D) Regression Answer: C Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 67) When allocating support department costs, the reciprocal method is preferred over the step method because it considers all reciprocal flows between A) support departments. B) producing departments. C) user departments. D) competing departments. Answer: A Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management.

68) Which method is considered the more accurate method in allocating costs because it first recognizes interdepartmental support services? A) Direct method B) Step method C) Reciprocal method D) All three methods Answer: C Diff: 1 LO: 2 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 69) Which of the following statements best explains the significant difference between the step method and the reciprocal method? A) Under the reciprocal method, some but not all inter-support-department services are allocated to support departments. B) Under the reciprocal method, all inter-support-department services are allocated to support departments. C) The reciprocal method is less accurate than the step method. D) The reciprocal method is easier to implement than the step method. Answer: B Diff: 1 LO: 2 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 70) When using the reciprocal method to allocate support costs, which of the following equations represents the algebraic expression for the total costs of a Custodial Department (C) that includes not only $120,000 of direct costs but also 15% of the Maintenance Departments (M) cost? A) C = $120,000 + (.15 ÷ M) B) C = ($120,000 × .15) + M C) C = $120,000 - (.15 × M) D) C = $120,000 + (.15 × M) Answer: D Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

71) When using the reciprocal method to allocate support costs, which of the following equations represents the two algebraic expressions needed for the total costs of a Custodial Department (C) that includes not only $120,000 of direct costs but also 15% of the Maintenance Departments (M) cost and the Maintenance Department that consists of $10,000 of direct costs and $40% of the Custodial Department? A) C = $120,000 + (.15 ÷ M) and M = $10,000 + (.40 ÷ C) B) C = ($120,000 × .15) + M and M = ($10,000 × .40) + C C) C = $120,000 - (.15 × M) and M = $10,000 - (.40 × C) D) C = $120,000 + (.15 × M) and M = $10,000 + (.40 × C) Answer: D Diff: 3 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management. 72) Xaric Industries operates two support departments, Personnel and Accounting, and two producing departments, Fabrication and Assembly. Information on the support percentages and cost for each department is as follows:

Personnel Accounting Fabrication Assembly

Personnel 0% 10% 35% 55%

Accounting 6% 0% 50% 44%

Operating Costs $15,000 8,000 105,000 97,500

Using the reciprocal method of allocating support costs, what is the total cost allocated from the Personnel Department? A) $15,573 B) $8,000 C) $9,500 D) $15,000 Answer: A Explanation: ($15,000 + (.06 × $8,000)) ÷ (1- (.06 * .10)) = $15,573 Per Op Costs + (Per % of acct × Acct op costs) ÷ (1 - (per % of Acct × Acct % of per)) = cost from per Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

73) Xaric Industries operates two support departments, Personnel and Accounting, and two producing departments, Fabrication and Assembly. Information on the support percentages and cost for each department is as follows:

Personnel Accounting Fabrication Assembly

Personnel 0% 10% 35% 55%

Accounting 6% 0% 50% 44%

Operating Costs $15,000 8,000 105,000 97,500

Using the reciprocal method of allocating support costs, what is the total cost allocated from the Accounting Department? A) $15,573 B) $8,000 C) $9,500 D) $9,557 Answer: D Explanation: ($8,000 + (.10 × $15,000)) ÷ (1- (.06 * .10)) = $9,557 acct Op Costs + (acct % of per × per op costs) ÷ (1 - (per % of Acct × Acct % of per)) = cost from acct Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

74) Xaric Industries operates two support departments, Personnel and Accounting, and two producing departments, Fabrication and Assembly. Information on the support percentages and cost for each department is as follows:

Personnel Accounting Fabrication Assembly

Personnel 0% 10% 35% 55%

Accounting 6% 0% 50% 44%

Operating Costs $15,000 8,000 105,000 97,500

Using the reciprocal method of allocating support costs, what is the total cost allocated to the Fabrication Department from the two support departments? A) $10,300 B) $9,943 C) $9,250 D) $10,229 Answer: D Explanation: ($15,000 + (.06 × $8,000)) ÷ (1- (.06 * .10)) = $15,573 ($8,000 + (.10 × $15,000)) ÷ (1- (.06 * .10)) = $9,557 $15,573 × 35% = $5,451 $9,557 × 50% = $4,205 $5,451 + $4,779 = $10,229 Per Op Costs + (Per % of acct × Acct op costs) ÷ (1 - (per % of Acct × Acct % of per)) = cost from per acct Op Costs + (acct % of per × per op costs) ÷ (1 - (per % of Acct × Acct % of per)) = cost from acct costs from per × fab-per % = cost from per to fab costs from acct × fab-acct% = cost from acct to fab cost from per to fab + cost from acct to fab = total cost alloc to fab Diff: 3 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

75) Xaric Industries operates two support departments, Personnel and Accounting, and two producing departments, Fabrication and Assembly. Information on the support percentages and cost for each department is as follows:

Personnel Accounting Fabrication Assembly

Personnel 0% 10% 35% 55%

Accounting 6% 0% 50% 44%

Operating Costs $15,000 8,000 105,000 97,500

Using the reciprocal method of allocating support costs, what is the total cost allocated to the Assembly Department from the two support departments? A) $11,000 B) $12,859 C) $12,771 D) $11,770 Answer: C Explanation: ($15,000 + (.06 × $8,000)) ÷ (1- (.06 * .10)) = $15,573 ($8,000 + (.10 × $15,000)) ÷ (1- (.06 * .10)) = $9,557 $15,573 × 55% = $8,565 $9,557 × 44% = $4,205 $8,565 + $4,205 = $12,771 Per Op Costs + (Per % of acct × Acct op costs) ÷ (1 - (per % of Acct × Acct % of per)) = cost from per acct Op Costs + (acct % of per × per op costs) ÷ (1 - (per % of Acct × Acct % of per)) = cost from acct costs from per × assm-per % = cost from per to assm costs from acct × assm-acct% = cost from acct to assm cost from per to assm + cost from acct to assm = total cost alloc to assm Diff: 3 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

76) Grey's Medical operates three support departments and two operating units, Surgery and ER. The support departments are allocated based on the hours used. The cost of operating the accounting (acct), administration (admin), and human resources (HR) departments is $260,000, $150,000, and $60,000, respectively. Information on the hours used are as follows: Acct Hours in Acct Hours in Admin Hours in HR

16 8

Admin 20 4

HR 48 8

Surgery 360 120 65

ER 220 80 130

What amount of costs would be allocated from the accounting department to the other support departments (admin and HR) using the reciprocal method to allocate costs? A) $0 B) $27,284 C) $28,620 D) $28,833

Answer: D Explanation: 20 + 48 + 360 + 220 = 648 16 + 8 + 120 + 80 = 224 8 + 4 + 65 + 130 = 207 20 ÷ 648 = 3% 48 ÷ 648 = 7% 16 ÷ 224 = 7% 8 ÷ 224 = 4% 8 ÷ 207 = 4% 4 ÷ 207 = 2%

Hrs in acct admin + hrs in acct hr + hrs in acct surg + hrs in acct ER = Total hrs in acct Hrs in admin acct + hrs in admin hr + hrs in admin surg + hrs in admin ER = Total hrs in admin Hrs in hr acct + hrs in hr admin + hrs in hr surg + hrs in hr ER = Total hrs in hr Hrs in acct admin ÷ Total hrs in acct = % of hrs in acct admin Hrs in acct hr ÷ Total hrs in acct = % of hrs in acct hr Hrs in admin acct ÷ Total hrs in admin = % of hrs in admin acct Hrs in admin hr ÷ Total hrs in admin = % of hrs in admin hr Hrs in hr acct ÷ Total hrs in hr = % of hrs in hr acct Hrs in hr admin ÷ Total hrs in hr = % of hrs in hr admin Use excel with iterations on for remaining calculations

Diff: 3 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

77) Grey's Medical operates three support departments and two operating units, Surgery and ER. The support departments are allocated based on the hours used. The cost of operating the accounting (acct), administration (admin), and human resources (HR) departments is $260,000, $150,000, and $60,000, respectively. Information on the hours used are as follows: Acct Hours in Acct Hours in Admin Hours in HR

16 8

Admin 20 4

HR 48 8

Surgery 360 120 65

ER 220 80 130

What amount of costs would be allocated from the administrative department to the other support departments (Acct and HR) using the reciprocal method to allocate costs? A) $0 B) $15,741 C) $16,511 D) $17,158

Answer: D Explanation: 20 + 48 + 360 + 220 = 648 16 + 8 + 120 + 80 = 224 8 + 4 + 65 + 130 = 207 20 ÷ 648 = 3% 48 ÷ 648 = 7% 16 ÷ 224 = 7% 8 ÷ 224 = 4% 8 ÷ 207 = 4% 4 ÷ 207 = 2%

Diff: 3 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

78) Grey's Medical operates three support departments and two operating units, Surgery and ER. The support departments are allocated based on the hours used. The cost of operating the accounting (acct), administration (admin), and human resources (HR) departments is $260,000, $150,000, and $60,000, respectively. Information on the hours used are as follows: Acct Hours in Acct Hours in Admin Hours in HR

16 8

Admin 20 4

HR 48 8

Surgery 360 120 65

ER 220 80 130

What amount of costs would be allocated from the HR department to the other support departments (Acct and Admin) using the reciprocal method to allocate costs? A) $0 B) $4,990 C) $6,296 D) $6,605

Answer: B Explanation: 20 + 48 + 360 + 220 = 648 16 + 8 + 120 + 80 = 224 8 + 4 + 65 + 130 = 207 20 ÷ 648 = 3% 48 ÷ 648 = 7% 16 ÷ 224 = 7% 8 ÷ 224 = 4% 8 ÷ 207 = 4% 4 ÷ 207 = 2%

Diff: 3 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

79) Grey's Medical operates three support departments and two operating units, Surgery and ER. The support departments are allocated based on the hours used. The cost of operating the accounting (acct), administration (admin), and human resources (HR) departments is $260,000, $150,000, and $60,000, respectively. Information on the hours used are as follows: Acct Hours in Acct Hours in Admin Hours in HR

16 8

Admin 20 4

HR 48 8

Surgery 360 120 65

ER 220 80 130

What are the total costs allocated from the accounting department to the operating units? A) $0 B) $265,789 C) $274,765 D) $276,511

Answer: C Explanation: 20 + 48 + 360 + 220 = 648 16 + 8 + 120 + 80 = 224 8 + 4 + 65 + 130 = 207 20 ÷ 648 = 3% 48 ÷ 648 = 7% 16 ÷ 224 = 7% 8 ÷ 224 = 4% 8 ÷ 207 = 4% 4 ÷ 207 = 2%

Diff: 3 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

80) Grey's Medical operates three support departments and two operating units, Surgery and ER. The support departments are allocated based on the hours used. The cost of operating the accounting (acct), administration (admin), and human resources (HR) departments is $260,000, $150,000, and $60,000, respectively. Information on the hours used are as follows: Acct Hours in Acct Hours in Admin Hours in HR

16 8

Admin 20 4

HR 48 8

Surgery 360 120 65

ER 220 80 130

What are the total costs allocated from the administrative department to the operating units? A) $0 B) $160,144 C) $160,168 D) $170,890

Answer: B Explanation: 20 + 48 + 360 + 220 = 648 16 + 8 + 120 + 80 = 224 8 + 4 + 65 + 130 = 207 20 ÷ 648 = 3% 48 ÷ 648 = 7% 16 ÷ 224 = 7% 8 ÷ 224 = 4% 8 ÷ 207 = 4% 4 ÷ 207 = 2%

Diff: 3 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

81) Grey's Medical operates three support departments and two operating units, Surgery and ER. The support departments are allocated based on the hours used. The cost of operating the accounting (acct), administration (admin), and human resources (HR) departments is $260,000, $150,000, and $60,000, respectively. Information on the hours used are as follows: Acct Hours in Acct Hours in Admin Hours in HR

16 8

Admin 20 4

HR 48 8

Surgery 360 120 65

What are the total costs allocated from the HR department to the operating units? A) $0 B) 78,164 C) $81,402 D) $86,072

ER 220 80 130

Answer: D Explanation: 20 + 48 + 360 + 220 = 648 16 + 8 + 120 + 80 = 224 8 + 4 + 65 + 130 = 207 20 ÷ 648 = 3% 48 ÷ 648 = 7% 16 ÷ 224 = 7% 8 ÷ 224 = 4% 8 ÷ 207 = 4% 4 ÷ 207 = 2%

Diff: 3 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

82) Grey's Medical operates three support departments and two operating units, Surgery and ER. The support departments are allocated based on the hours used. The cost of operating the accounting (acct), administration (admin), and human resources (HR) departments is $260,000, $150,000, and $60,000, respectively. Information on the hours used are as follows: Acct Hours in Acct Hours in Admin Hours in HR

16 8

Admin 20 4

HR 48 8

Surgery 360 120 65

ER 220 80 130

What are the total costs allocated to the surgery department from the supporting departments? A) $0 B) $243,642 C) $265,466 D) $267,642

Answer: C Explanation: 20 + 48 + 360 + 220 = 648 16 + 8 + 120 + 80 = 224 8 + 4 + 65 + 130 = 207 20 ÷ 648 = 3% 48 ÷ 648 = 7% 16 ÷ 224 = 7% 8 ÷ 224 = 4% 8 ÷ 207 = 4% 4 ÷ 207 = 2%

Diff: 3 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

83) Grey's Medical operates three support departments and two operating units, Surgery and ER. The support departments are allocated based on the hours used. The cost of operating the accounting (acct), administration (admin), and human resources (HR) departments is $260,000, $150,000, and $60,000, respectively. Information on the hours used are as follows: Acct Hours in Acct Hours in Admin Hours in HR

16 8

Admin 20 4

HR 48 8

Surgery 360 120 65

ER 220 80 130

What are the total costs allocated to the ER department from the supporting departments? A) $0 B) $179,524 C) $192,466 D) $204,534

Answer: D Explanation: 20 + 48 + 360 + 220 = 648 16 + 8 + 120 + 80 = 224 8 + 4 + 65 + 130 = 207 20 ÷ 648 = 3% 48 ÷ 648 = 7% 16 ÷ 224 = 7% 8 ÷ 224 = 4% 8 ÷ 207 = 4% 4 ÷ 207 = 2%

Diff: 3 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management. 84) A common cost occurs when A) different resources are used to produce one business unit. B) a resource is used by two or more companies. C) only one product or service is benefited. D) the same resource is used for two or more business units. Answer: D Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management.

85) All of the following would be considered common costs except A) a pool in a hotel. B) utilities in a college dorm. C) advertising expenses shared between two business units in the same city. D) direct materials for a manufacturing company. Answer: D Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 86) Which methods are acceptable ways to allocate common costs? A) Stand-alone cost allocation method B) Stand-alone cost allocation method and incremental cost allocation method C) Incremental cost allocation method D) Stand-alone cost allocation method and direct costing allocation method Answer: B Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 87) When allocating common costs, which method allocates the cost based on the percentage paid? A) Stand-alone cost allocation method B) Step cost allocation method C) Incremental cost allocation method D) Direct costing allocation method Answer: A Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management.

88) When allocating common costs, which method ranks the users of the cost to determine who is most responsible? A) Stand-alone cost allocation method B) None of the listed methods is correct C) Incremental cost allocation method D) Direct costing allocation method Answer: C Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 89) When allocating common costs, which method allocates costs equally to all users? A) Stand-alone cost allocation method B) None of the listed methods is correct C) Incremental cost allocation method D) Direct costing allocation method Answer: B Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management.

90) Guadalupe and Jose share an apartment. Both have separate cell phone plans. The costs are $65 and $85, respectively. They would like to save money and combine it into one plan that costs $120. Using the stand-alone cost allocation, how much of the cost should be allocated to each? A) Guadalupe - $60; Jose - $60 B) Guadalupe - $52; Jose - $68 C) Guadalupe - $65; Jose - $55 D) Guadalupe - $35; Jose - $85 Answer: B Explanation: $65 + $85 = $150 $65 ÷ $150 × $120 = $52 $85 ÷ $150 × $120 = $68 Guad cost + Jose cost = total cost Guad ÷ total cost × com cost = Guad share Jose ÷ total cost × com cost = Jose share Diff: 2 LO: 3 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management. 91) Guadalupe and Jose share an apartment. Both have separate cell phone plans. The costs are $65 and $85, respectively. They would like to save money and combine it into one plan that costs $120. Using the incremental cost allocation, how much of the cost should be allocated to each? A) Guadalupe - $60; Jose - $60 B) Guadalupe - $52; Jose - $68 C) Guadalupe - $65; Jose - $55 D) Guadalupe - $35; Jose - $85 Answer: D Explanation: $120 - $85 = $35 Com cost - Jose cost (higher ranked) = Guad cost Diff: 2 LO: 3 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

92) Just for Kix dance studio has decided they need extra space to hold their classes but do not need the facility full-time. They found the ideal location, and a local photographer has decided they would go in and share the cost of the facility. The cost of the facility is $2,000 per month. Both the dance studio and photographer rent a similar space. The photographer pays $1,200 per month, and the dance studio pays $1,800 per month. Using the stand-alone cost allocation, how much of the cost should be allocated to each? A) Dance Studio - $1,200; Photographer - $800 B) Dance Studio - $1,000; Photographer - $1,000 C) Dance Studio - $1,800; Photographer - $200 D) Dance Studio - $800; Photographer - $1,200 Answer: A Explanation: $1,800 + $1,200 = $3,000 $1,800 ÷ $2,000 × $3,000 = $1,200 $1,200 ÷ $2,000 × $3,000 = $800 Dance cost + Photo cost = total cost Dance ÷ total cost × com cost = Dance share Photo ÷ total cost × com cost = Photo share Diff: 2 LO: 3 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management. 93) Just for Kix dance studio has decided they need extra space to hold their classes but do not need the facility full-time. They found the ideal location, and a local photographer has decided they would go in and share the cost of the facility. The cost of the facility is $2,000 per month. Both the dance studio and photographer rent a similar space. The photographer pays $1,200 per month, and the dance studio pays $1,800 per month. Using the incremental cost allocation, how much of the cost should be allocated to each? A) Dance Studio - $1,200; Photographer - $800 B) Dance Studio - $1,000; Photographer - $1,000 C) Dance Studio - $1,800; Photographer - $200 D) Dance Studio - $800; Photographer - $1,200 Answer: C Explanation: $2,000 - $1,800 = $200 Com costs - dance cost (higher ranked) = photo cost Diff: 2 LO: 3 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

94) Currently, Fire Station 51 and Fire Station 81 operate separate EMS trucks. Station 51 has operating costs of $46,000 per year. Station 81 reports operating cost of $42,000 per year. Station 51 utilizes its truck about 65% of the time, and Station 81 has an operating efficiency of about 40%. The fire stations are trying to determine the benefits of only operating one EMS truck that they will share. Based on the extended needs, the newer EMS truck will cost $80,000. How much of the new EMS truck should be allocated to each fire station using the stand-alone cost allocation? A) Station 51 - $44,000; Station 81 - $44,000 B) Station 51 - $41,818; Station 81 - $38,182 C) Station 51 - $38,182; Station 81 - $41,818 D) Station 51 - $46,000; Station 81 - $34,000 Answer: B Explanation: $46,000 + $42,000 = $88,000 $46,000 ÷ $88,000 × $80,000 = $41,818 $42,000 ÷ $88,000 × $80,000 = $38,182 station 51 cost + station 81 cost = total cost station 51÷ total cost × com cost = station 51 share station 81 ÷ total cost × com cost = station 81 share Diff: 2 LO: 3 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management. 95) Currently, Fire Station 51 and Fire Station 81 operate separate EMS trucks. Station 51 has operating costs of $46,000 per year. Station 81 reports operating cost of $42,000 per year. Station 51 utilizes its truck about 65% of the time, and Station 81 has an operating efficiency of about 40%. The fire stations are trying to determine the benefits of only operating one EMS truck that they will share. Based on the extended needs, the newer EMS truck will cost $80,000. Using the incremental cost allocation, how much of the new EMS truck should be allocated to each fire station? A) Station 51 - $44,000; Station 81 - $44,000 B) Station 51 - $41,818; Station 81 - $31,182 C) Station 51 - $34,000; Station 81 - $46,000 D) Station 51 - $46,000; Station 81 - $34,000 Answer: D Explanation: $80,000 - $46,000 = $34,000 Com costs - station 51 cost (higher ranked) = station 81 cost Diff: 2 LO: 3 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

96) The sale of bundled products/services consist of A) grouping several products together with like attributes, i.e. two bottles of pop or buy one get one free option on shoes. B) grouping several products together that share one common cost. C) grouping several products together that share one transaction price. D) grouping several products together that are used for the same purpose, i.e. cleaning supplies or building materials. Answer: C Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 97) All the following are true regarding the sale of bundled products/services except A) bundled services consist of grouping several services together for one price. B) they can only be allocated using the stand-alone or incremental methods. C) there are several ways to allocate the transaction price of the sale of bundled products. D) the transaction price of bundled services must be allocated amongst the component parts. Answer: B Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management.

98) Burger Queen offers a lunch meal deal for its customers. The customer will get a burger, fry, soft drink, and ice cream for $5. If the customer were to buy each item individually, the cost would be broken down as follows: Burger Fry Soft Drink Ice Cream

$2.50 $1.25 $1.00 $1.50

Using the stand-alone cost allocation, how must of the transaction price should be allocated to the burger? (do not round intermediary calculations) A) $2.00 B) $2.50 C) $2.10 D) $2.40 Answer: A Explanation: $2.50 + $1.25 + $1 + $1.50 = $6.25 $2.50 ÷ $6.25 × $5.00 = $2.00 Burger cost + fry cost + drink cost + ice cost = total cost Burger cost ÷ total cost × trans price = burger alloc price Diff: 2 LO: 3 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

99) Burger Queen offers a lunch meal deal for its customers. The customer will get a burger, fry, soft drink, and ice cream for $5. If the customer were to buy each item individually, the cost would be broken down as follows: Burger Fry Soft Drink Ice Cream

$2.50 $1.25 $1.00 $1.50

Using the incremental cost allocation, how must of the transaction price should be allocated to the burger? (do not round intermediary calculations) A) $2.08 B) $2.50 C) $2.10 D) $2.48 Answer: B Explanation: $2.50 (higher ranked so 100% of price) Diff: 2 LO: 3 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

100) Burger Queen offers a lunch meal deal for its customers. The customer will get a burger, fry, soft drink, and ice cream for $5. If the customer were to buy each item individually, the cost would be broken down as follows: Burger Fry Soft Drink Ice Cream

$2.50 $1.25 $1.00 $1.50

Using the stand-alone cost allocation, how must of the transaction price should be allocated to the fry, soft drink, and ice cream? (do not round intermediary calculations) A) $1.25 $1.00 $1.50 B) $1.00 zero $1.50 C) $1.00 $0.80 $1.20 D) $0.50 zero $1.50 Answer: C Explanation: $2.50 + $1.25 + $1 + $1.50 = $6.25 $1.25 ÷ $6.25 × $5.00 = $1 $1 ÷ $6.25 × $5.00 = $.80 $1.50 ÷ $6.25 × $5.00 = $1.20 Burger cost + fry cost + drink cost + ice cost = total cost Fry ÷ total cost × trans price = fry alloc price Drink ÷ total cost × trans price = drink alloc price Ice cream ÷ total cost × trans price = ice cream alloc price Diff: 2 LO: 3 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

101) Burger Queen offers a lunch meal deal for its customers. The customer will get a burger, fry, soft drink, and ice cream for $5. If the customer were to buy each item individually, the cost would be broken down as follows: Burger Fry Soft Drink Ice Cream

$2.50 $1.25 $1.00 $1.50

Using the incremental cost allocation, how must of the transaction price should be allocated to the fry, soft drink, and ice cream? (do not round intermediary calculations) A) $1.25 $1.00 $1.50 B) $1.00 zero $1.50 C) $1.00 $0.80 $1.20 D) $0.50 zero $1.50 Answer: B Explanation: Burger, highest ranked, $2.50 Second ranked Ice cream $1.50 Third ranked, fry $5 - $2.50 - $1.50 = $1.00 Last, Drink, $0 ($5 - $2.50 - $1.50 - $1.00) Diff: 2 LO: 3 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

102) The following are typical support departments found within companies: Cafeteria Personnel Maintenance Purchasing Accounting For each of the support departments above, indicate one base that could be used to allocate costs. Answer: Cafeteria: Number of employees in each department Number of employees in each department that use the cafeteria Personnel Number of employees Number of new hires Number of layoffs/fired employees Direct labor hours Direct labor cost Maintenance Number of machine hours Maintenance hours Number of repair orders Purchasing Cost of orders Number of orders placed Accounting Number of personnel Hours worked for each department Number of transactions. Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement IMA: Cost Management. 103) Describe the differences between a support department and an operating unit. Provide three examples of each. Answer: Support departments provide essential support services for the operating units. However, they don't earn revenue. Instead, these departments are indirectly connected with an organization's services or products. Examples: Maintenance, Grounds, Engineering, Housekeeping, Human Resource, Accounting, Advertising, Design, and Personnel. Operating Units are directly responsible for creating the products or services sold to customers. Examples: Fabrication, Cutting, Mixing, Grinding, Assembly, Finishing, and Cooking. Diff: 2 LO: 1 Bloom: AN AACSB: Analytic AICPA: FC: Measurement IMA: Cost Management. 76

104) There are three methods to allocate support departments' costs. Name the three methods and describe the differences between the methods. Answer: Direct Method - allocates support department costs only to producing departments; no consideration is made of the interaction of the support departments. It is the simplest and most straightforward method. However, the degree of interaction between support departments may affect the results using this method. Step Method - interaction among the support departments is recognized. Cost allocations are performed in a step-down manner, following a predetermined ranking procedure. First, the highest-ranking support department is allocated to all the remaining support departments and production departments. Then the following highest-ranking support department is allocated to all the remaining departments. This continues until all support departments have been allocated. This method does not fully recognize support department interaction. Reciprocal Method - recognizes all support department interactions. The usage of one support department by another is used to determine the total cost of each support department. The reciprocal method may theoretically be the most accurate. Still, if results do not differ significantly from the results achieved using other methods, it may not be worth the extra cost and effort. Diff: 2 LO: 2 Bloom: C AACSB: Analytic AICPA: FC: Measurement IMA: Cost Management. 105) Describe the process to allocate support department costs using the step method. Answer: First, rank the support departments using whatever measure the company allocates its support costs. Some examples would include: most services provided to other support departments and operating units or the highest costs to run the support department. Second, Allocate costs from the highest-ranked support department to the other support departments and operating units. Third, "step down" to the next-in-line support department, which will have a new, higher cost. Then, allocate those costs to any remaining support departments and operating units. As a note, costs will not be allocated back to the highest-ranked support department. Finally, continue stepping down to the next-in-line support department until all support departments have assigned their costs to operating units. Diff: 2 LO: 2 Bloom: K AACSB: Analytic AICPA: FC: Measurement IMA: Cost Management. 77

106) Explain the two ways to allocate common costs. Answer: Stand-alone cost allocation method - identifies the cost each entity would have to pay if it bore the cost alone. Then common costs are allocated based on the percentage each party would have paid had the common costs not been shared. Common costs are shared proportionally based on use. Incremental cost allocation method - identifies and ranks the users of a cost to determine who is most responsible for its incurrence. This method assigns the stand-alone cost to the user who is most responsible for the cost, and any additional amount is assigned to the next user until all costs have been assigned. Diff: 2 LO: 3 Bloom: K AACSB: Analytic AICPA: FC: Measurement IMA: Cost Management. 107) Name the FASB standard that outlines ways to allocate the transaction price of a bundled sale and name two of the methods that can be used, and explain the only circumstances they would be used. Answer: FASB ASC 606-10-65-1 The same methods that apply to allocating common costs can also be used to allocate the transaction price of a bundled sale. However, these two methods should only be used for internal decision-making purposes and/or there isn't anyone available to interpret and implement the FASB standard. Stand-alone cost allocation method - identifies the cost each entity would have to pay if it bore the cost alone. Then common costs are allocated based on the percentage each party would have paid had the common costs not been shared. Common costs are shared proportionally based on use. Incremental cost allocation method - identifies and ranks the users of a cost to determine who is most responsible for its incurrence. This method assigns the stand-alone cost to the user who is most responsible for the cost, and any additional amount is assigned to the next user until all costs have been assigned. Diff: 2 LO: 3 Bloom: C AACSB: Analytic AICPA: FC: Measurement IMA: Cost Management.

108) For each of the support department costs listed below, name an appropriate cost allocation base: a) Building rental cost b) Payroll department salaries c) Company cafeteria cost d) Human resources department e) Accounting department f) Computer equipment depreciation g) Insurance costs on computer equipment h) Depreciation on a company airplane i) Factory manager j) Cost to clean company uniforms k) Costs of a corporate daycare facility l) Equipment maintenance m) Cost of corporate workout facility n) Building insurance o) Cost of a delivery truck for a moving company Answer: a) Square footage; space occupied b) Number of employees c) Number of meals served d) Number of employees e) Number of documents f) Hours of use g) Hours of use h) Hours of use; miles traveled i) Number of employees j) Number of uniforms; the weight of laundry processed k) Number of employees l) Number of machines; hours of use m) Number of employees n) Square footage; space occupied o) Miles driven Diff: 2 LO: 1 Bloom: C AACSB: Analytic AICPA: FC: Measurement IMA: Cost Management.

109) Hamilton Communication is determining how to allocate costs to its carpet and tile divisions. The company also has two support departments that assist the divisions. The Maintenance department has costs of $60,000 and spends approximately 65% of its time with the carpet division. The Personnel department has costs of $35,000 ad spends approximately 55% of its time with the tile division. If the carpet and tile division incur costs of $180,000 and $360,000, respectively, what are the total costs for each division if the company uses the direct cost method to allocate common costs? (Do not round intermediary calculations, round your final answer to the nearest whole dollar) Answer: Carpet Division $234,750 Tile Division $400,250 Solution: Carpet = $180,000 + 65% × $60,000 + 45% × $35,000 = $234,750 Tile = $360,000 + 35% × $60,000 + 55% × $35,000 = $400,250 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement IMA: Cost Management.

110) Credit Management Solutions provides two types of credit reports: Individual and Business. They vary based on the amount of background information and data collection required. The Business reports use more skilled personnel because of the additional information that needs to be verified. Total support services costs to be allocated are $960,000. The following information is also provided: Allocation base Data purchased Interview hours Number of reports

Individual $25,000 2,000 26,000

Business $100,000 12,000 2,000

For each potential allocation base, determine the support department cost allocated to each type of report using the direct method. (Do not round intermediary calculations, round your final answer to the nearest whole dollar.) Answer: Data Purchased Individual $192,000 Business $768,000 Interview Hours Individual $137,143 Business $822,857 Number of Reports Individual $891,429 Business $68,571 Solution: Total Data Purchased = $25,000 + $100,000 = $125,000 Individual $25,000 ÷ $125,000 × $960,000 = $192,000 Business $100,000 ÷ $125,000 × $960,000 = $768,000 Total Interview Hours = 2,000 + 12,000 = 14,000 Individual 2,000 ÷ 14,000 × $960,000 = $137,143 Business 12,000 ÷ 14,000 × $960,000 = $822,857 Total Number of Reports = 26,000 + 2,000 = 28,000 Individual 26,000 ÷ 28,000 × $960,000 = $891,429 Business 2,000 ÷ 28,000 × $960,000 = $68,571 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement IMA: Cost Management.

111) Sloane Memorial operates two support departments and two operating units. Information on the operations is as follows:

Support Departments Laundry Housekeeping

Costs $60,000 40,000

Square Feet 500 250

Pounds of Laundry 1,200 12,000

Operating Unit Surgery ICU

250,000 600,000

1,000 2,000

52,000 26,000

Housekeeping is based on the number of square footage, and laundry is allocated based on the pounds of laundry. Using the step method, allocate the support department costs to the operating units if laundry is ranked first. (Do not round intermediary calculations, round your final answer to the nearest whole dollar.) Answer: Surgery - $50,667 ICU - $49,333 Solution: Total pounds of laundry = 12,000 + 52,000 + 26,000 = 90,000 Note - laundry pounds are excluded in the calculation since it's allocated first Total square feet = 1,000 + 2,000 = 3,000 Note - costs are not allocated up, so only the square feet of the operating unit are included

Laundry (a)

Laundry Housekeeping Surgery 60,000 40,000 (60,000) 8,000 34,667

Housekeeping (b)

(48,000) -

12,000 ÷ 90,000 × $60,000 = $8,000 52,000 ÷ 90,000 × $60,000 = $34,667 26,000 ÷ 90,000 × $60,000 = $17,333

$40,000 + $8,000 = $48,000 1,000 ÷ 3,000 × $48,000 = $16,000 2,000 ÷ 3,000 × $48,000 = $32,000 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement IMA: Cost Management.

16,000 50,667

ICU 17,333 32,000 49,333

112) Bennet Company has three support departments and two operating units. Information on the departments is as follows: Percentage of Use Support Departments Maintenance Accounting Human Resources

Costs $320,000 600,000 210,000

Operating Unit Cutting Assembly

620,000 480.000

Maint

Acct

10%

HR 15%

Cutting Assembly 65% 20% 45% 35% 70% 30%

Using the step method, allocate the support department costs to the operating units. (Do not round intermediary calculations, round your final answer to the nearest whole dollar) Answer: Cutting $749,208 Assembly $385,518 Solution:

Cost Maint (b) Acct (a)

Maint 320,000 (380,000) 60,000

Acct 600,000 (600,000)

HR 210,000 57,000 60,000

HR (c)

600,000 × 10% = 60,000 600,000 × 45% = 270,000 600,000 × 35% = 210,000

320,000 + 60,000 = 380,000 380,000 × 15% = 57,000 380,000 × 65% = 247,000 380,000 × 20% = 76,000

Assembly

247,000 270,000

76,000 210,000

(327,000)

228,900

98,100

745,900

384,100

210,000 + 57,000 + 60,000 = $327,000 327,000 × 70% = 228,900 327,000 × 30% = 98,100 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 83

Cutting

113) Vincik Computer Concepts has three operational units and two support units. Information on the departments is as follows: Support Departments Facilities Information Systems

Costs $20,000 75,000

Hours Used 400

Operating Unit Consulting Software Training

90,000 65,000 110,000

600 300 3,000

Sq Feet 100,000

200,000 400,000 600,000

Dean Moore, in the accounting department, has been asked to determine the total cost of each operating unit. The information systems department allocates costs based on the hours used. At the same time, facilities allocate costs based on the square footage. The company currently uses the reciprocal method to allocate support department costs. (Do not round intermediary calculations, round your final answer to the nearest whole dollar.) Answer: Consulting $104,937 Software $78,739 Training $176,324

Solution: Total Hours = 400 + 600 + 300 + 3,000 = 4,300 Total Square Feet = 100,000 + 200,000 + 400,000 + 600,000 = 1,300,000

Percentages were calculated by taking the hours/square feet per department divided by the total hours/ Square feet. (e.g.: 400 ÷ 4,300)

Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

114) Fauscett Industries has two support departments - industry support and facilities management, and two operating units - cutting and shipping. The costs and distribution of each support department efforts to the other departments are as follows Operating Support Facilities Costs Support 0% 15% $200,000 Facilities 35% 0% 450,000 Cutting 20% 40% 980,000 Shipping 45% 45% 225,000 Allocate the support department costs to the operating units using the reciprocal method. (Do not round intermediary calculations, round your final answer to the nearest whole dollar.) Answer: Cutting $275,989 Shipping $374,011

Solution:

Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

115) As a sole proprietor, you constructed another small building for a home office on your property. Your lot is 80 ft × 80 ft, and the new building takes up 20 ft × 20 ft of the lot. Your property taxes were $2,800 prior to the construction of the building. This year, property taxes went up to $3,600 to account for the addition. You'd like to allocate your property taxes so the business portion can be deducted on your annual tax return. Using the stand-alone method to allocate the common costs, what is your personal share and what amount can be deducted on your annual tax return as a business expense? (Do not round intermediary calculations, round your final answer to the nearest whole dollar.) Answer: Personal $3,375 Business $225 Solution: Total lot square feet = 80 × 80 = 6,400 square feet Building square feet = 20 × 20 = 400 square feet Personal square feet = 6,400 - 400 = 6,000 Personal = 6,000 ÷ 6,400 × 3,600 = $3,375 Business = 400 ÷ 6,400 × 3,600 = $225 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 116) As a sole proprietor, you constructed another small building on your property to use as a home office. Your lot is 80 ft × 80 ft, and the new building takes up 20 ft × 20 ft of the lot. Your property taxes were $2,800 prior to the construction of the building. This year, property taxes went up to $3,600 to account for the addition. You'd like to allocate your property taxes so the business portion can be deducted on your annual tax return. Using the incremental method to allocate the common costs, what is your personal share and what amount can be deducted on your annual tax return as a business expense? (Do not round intermediary calculations, round your final answer to the nearest whole dollar.) Answer: Personal $2,800 Business $800 Solution: Personal = $2,800, previous property tax premium for lot and dwelling Business = $3,600 - $2,800 = $800, new property taxes less previous property taxes Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 88

117) Hruska Tax Consulting provides several services. A married couple can get their tax return prepared for $220. A child's tax return, under the age of 18, is prepared for $50. To have the tax returns e-filed will cost an additional $40 per tax return. Hruska provides a bundle to its clients. The parents can get their tax return prepared, with one child and two e-file fees for $300. Use the stand-alone method to allocate the transaction price to the separate services. (Do not round intermediary calculations, round your final answer to the nearest whole dollar.) Answer: Parent's Return = $189 Child's Return = $43 E-file Fees = $34 each (or times two $68) Solution: Total separate costs = $220 + $50 + $40 + $40 = $350 Parent's Return = $220 ÷ $350 × $300 = $189 Child's Return = $50 ÷ $350 × $300 = $43 Efile Fees =$40 ÷ $350 × $300 = $34 each Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 118) Hruska Tax Consulting provides several services. A married couple can get their tax return prepared for $220. A child's tax return under the age of 18 is prepared for $50. To have the tax returns e-filed will cost an additional $40 per tax return. Hruska provides a bundle to its clients. The parents can get their tax return prepared, with one child and two e-file fees for $300. Use the incremental method to allocate the transaction price to the separate services. (Do not round intermediary calculations, round your final answer to the nearest whole dollar.) Answer: Parent's Return = $220 Child's Return = $50 Total E-file Fees = $30 Solution: Parent's Return = $220, highest ranked cost Child's Return = $50, second highest rank cost Total E-file Fees = $30 ($300 - $220 - $50) Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

119) Raspberries R Us has two operating units (Jam and Jelly) and two support departments (HR and Accounting). The estimated operating costs and percentages of services used by these departments are as follows:

HR Accounting Jam Jelly

HR 0% 10% 60% 30%

Accounting 10% 0% 40% 50%

Operating Costs $9,000 13,500 40,000 35,000

Instructions a. Allocate the support department costs to the operating units using the direct method of allocating costs. b. Allocate the support department costs to the operating units using the step method of allocating costs. The departments are ranked based on the highest costs. c. Which of the two methods would you recommend for Raspberries R Us and why?

Answer: a. Jam = $12,000 Jelly = $10,500 b. Jam = $12,300 Jelly = $10,200 c. Direct Method - While the step method is more accurate than the direct method, the difference in costs between the two methods is minimal. Solution: a. HR total = .6 + .3 = .9 Acct Total = .4 + .5 = .9 Jam = ((.6 ÷ .9) × $9,000) + ((.4 ÷ .9) × $13,500) = $12,000 Jelly = ((.3 ÷ .9) × $9,000) + ((.5 ÷ .9) × $13,500) = $10,500 b. Cost HR (**) Acct (*)

HR 9,000 (10,350) 1,350 -

ACCT 13,500 (13,500) -

Jam 6,900 5,400 12,300

* $13,500 * 10% = 1,350 $13,500 × 40% = $5,400 $13,500 × 50% = $6,750 ** $9,000 + $1,350 = $10,350 .6 ÷ .9 × $10,350 = $6,900 .3 ÷ 9 × $10,350 = $3,450 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

Jelly 3,450 6,750 10,200

120) Eagle Distributing has three operating units and three support departments. Clint, the company manager, is trying to analyze the profitability of the three operating units. Clint has narrowed it down to using the step method of allocating costs. First, however, he is trying to figure out the best way to rank the support departments. Information for the company follows:

Cost Billable hours # of employees IT hours used

Support Departments Billing Acct IT $25,000 $80,000 $65,000 5 250

3 120

2 120

Shipping $630,000 2,600 20 600

Operating Units Packing Receiving $920,000 $360,000 1,600 6,000 16 5 900 200

Instructions a. Allocate the support department costs to the operating units using the step method of allocating costs if the departments are ranked based on the highest costs. b. Allocate the support department costs to the operating units using the step method of allocating costs if the support departments are ranked based on the percentage of services they provide to other support departments c. Revenue earned by the shipping, packing, and receiving operating units was $960,000, $1,300,000, and $620,000, respectively. Compute the gross margin, operating income, gross margin percentage, and profit margin percentage using the information calculated in parts (a) and (b). (round your percentages to the nearest whole percent)

Answer: a. Shipping $65,089 Packing $64,808 Receiving $40,103 b. Shipping $65,956 Packing $63,979 Receiving $40,065 c. part a

Shipping Packing Receiving

Gross Margin $330,000 $380,000 $260,000

Profit Margin $264,911 $315,192 $219,897

Gross Margin % 34% 29% 42%

Profit Margin % 28% 24% 35%

Shipping Packing Receiving

Gross Margin $330,000 $380,000 $260,000

Profit Margin $264,044 $316,021 $219,935

Gross Margin % 34% 29% 42%

Profit Margin % 28% 24% 35%

part b

Solution: a. Ranked by highest cost - Accounting, IT, Billing Total # of employees = 5 + 2 + 20 + 16 + 5 = 48 (not including acct department) Total IT hours = 250 + 600 + 900 + 200 = 1,950 (not including IT or Acct) Total billable hours = 2,600 + 1,600 + 6,000 = 10,200

Cost Billing (3) Acct (1) IT (2)

Billing $25,000 (42,094) 8,333

Acct $80,000 (80,000)

8,761 -

IT Shipping Packing Receiving $65,000 10,730 6,603 24,761 3,333 33,333 26,667 8,333 (68,333) 21,026 - $65,089

1. 5 ÷ 48 × $80,000 = $8,333 2 ÷ 48 × $80,000 = $3,333 20 ÷ 48 × $80,000 = $33,333 16 ÷ 48 × $80,000 = $26,667 5 ÷ 48 × $80,000 = $8,333 2. $65,000 + $3,333 = $68,333 250 ÷ 1,950 × $68,333 = $8,761 600 ÷ 1,950 × $68,333 = $21,026 900 ÷ 1,950 × $68,333 = $31,538 200 ÷ 1,950 × $68,333 = $7,009 3. $25,000 + $8,333 + $8,761 = $42,094 2,600 ÷ 10,200 × $42,094 = $10,730 1,600 ÷ 10,200 × $42,094 = $6,603 6,000 ÷ 10,200 × $42,094 = $24,761

31,538 $64,808

7,009 $40,103

b. Ranked by support depts to other support depts - IT, Acct, Billing Billing - no support to other depts Acct - (5 + 2) ÷ (5 + 2 +20 + 16 + 5) = 15% IT - (250 + 120) ÷ (250 + 120 + 600 + 900 + 200) = 18% Total # of employees = 5 + 20 + 16 + 5 = 46 (not including acct or IT department) Total IT hours = 250 + 120 + 600 + 900 + 200 = 2,070 (not including Acct) Total billable hours = 2,600 + 1,600 + 6,000 = 10,200

Cost Billing (3) Acct (2) IT (1)

Billing 25,000 (41,955) 9,105 7,850 -

Acct 80,000 (83,768) 3,768 -

IT Shipping Packing Receiving 65,000 10,694 6,581 24,679 36,421 29,137 9,105 (65,000) 18,841 28,261 6,280 - 65,956 63,979 40,065

1. 250 ÷ 2,070 × $65,000 = $7,850 120 ÷ 2,070 × $65,000 = $3,768 600 ÷ 2,070 × $65,000 = $18,841 900 ÷ 2,070 × $65,000 = $28,261 200 ÷ 2,070 × $65,000 = $6,280 2. $80,000 + $3,768 = $83,768 5 ÷ 46 × $83,7680 = $9,105 20 ÷ 46 × $83,7680 = $36,421 16 ÷ 46 × $83,7680 = $29,137 5 ÷ 46 × $83,7680 = $9,105 3. $25,000 + $9,105 + $7,850 = $41,955 2,600 ÷ 10,200 × $41,955 = $10,694 1,600 ÷ 10,200 × $41,955 = $6,581 6,000 ÷ 10,200 × $41,955 = $24,679

c. Part a Revenue Direct Cost Gross Margin Allocated Costs Operating Income

Shipping 960,000 630,000 330,000 65,089 264,911

Packing Receiving 1,300,000 620,000 920,000 360,000 380,000 260,000 64,808 40,103 315,192 219,897

Shipping $330,000 ÷ $960,000 = 34% $264,911 ÷ $960,000 = 28% Packing $380,000 ÷ $1,300,000 = 29% $315,192 ÷ $1,300,000 = 24% Receiving $260,000 ÷ $620,000 = 42% $219,897 ÷ $620,000 = 35% Part b

Revenue Direct Cost Gross Margin Allocated Costs Operating Income

Shipping 960,000 630,000 330,000 65,956 264,044

Shipping $330,000 ÷ $960,000 = 34% $264,044 ÷ $960,000 = 28% Packing $380,000 ÷ $1,300,000 = 29% $316,021 ÷ $1,300,000 = 24% Receiving $260,000 ÷ $620,000 = 42% $219,935 ÷ $620,000 = 35% Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

Packing Receiving 1,300,000 620,000 920,000 360,000 380,000 260,000 63,979 40,065 316,021 219,935

121) Aim Industries manufactures framers for large trucks within three operating units (T2, T4, and T6). Maintenance and facilities are considered the support departments. Maintenance is allocated base on maintenance hours and facilities is allocated base on square footage. Information is as follows:

Cost Maint hours Square Feet

Support Departments Maintenance Facilities $16,000 $35,000 400 600

T2 $145,000 800 400

Operating Units T4 T6 $185,000 $409,000 1,200 1,600 1,200 1,800

Instructions a. Allocate the support department costs to the operating units using the direct method. b. Allocate the support department costs to the operating units using the reciprocal method. c. What is the total cost (allocated and direct) that will be reported for each operating unit under the (1) direct method, (2) reciprocal method?

Answer: a. T2 = $7,673 T4 = $17,686 T6 = $25,641 b. T2 = $8,030 T4 = $17,619 T6 = $25,350 c. (1) T2 = $152,673 T4 = $202,686 T6 = $434,641 c. (2) T2 = $153,030 T4 = $202,619 T6 = $434,350

Solution: a. Total maintenance Hours = 800 + 1,200 + 1,600 = 3,600 Total Square Feet = 400 + 1,200 + 1,800 = 3,400 T2 = ((800 ÷ 3,600) × $16,000) + ((400 ÷ 3,400) × $35,000) = $7,673 T4 = ((1,200 ÷ 3,600) × $16,000) + ((1,200 ÷ 3,400) × $35,000) = $17,686 T6 = ((1,600 ÷ 3,600) × $16,000) + ((1,800 ÷ 3,400) × $35,000) = $25,641 b. Total maintenance Hours = 400 + 800 + 1,200 + 1,600 = 4,000 Total Square Feet = 600 + 400 + 1,200 + 1,800 = 4,000 *Percentages were calculated by taking the individual amounts divided by the total amounts (e.g.: 400 ÷ 4,000 = 10%)

c. (1) T2 = $145,000 + $7,673 = $152,673 T4 = $185,000 + $17,686 = $202,686 T6 = $409,000 + $25,641 = $434,641 c. (2) T2 = 145,000 + $8,030 = $153,030 T4 = $185,000 + $17,619 = $202,619 T6 = $409,000 + $25,350 = $434,350 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

100

122) Becky Hansen is the manager of American Autos. American Autos provides three types of services, Sales, Repairs, and Rebuilds. Becky needs to provide a profit analysis to the CEO at the end of the current fiscal year so the pricing and marketing strategies can be adjusted as needed. She has gathered the following information for the company.

Cost # of employees Maint Hours HR Hours

Support Departments Marketing Maintenance HR $210,000 $315,000 $50,000 5 7 2 50 300 25 100 25 180

Revenue

Sales $990,000

Repairs $1,300,000

Sales $360,000 12 800 1,200

Operating Units Repairs Rebuilds $860,000 $1,100,000 16 6 1,900 2,600 850 800 Rebuilds $2,100,000

Instructions a. Allocate the support department costs to the operating units using the reciprocal method. b. Calculate gross margin, operating income, and profit margin percentage for each operating unit after accounting for allocated costs. c. Your local competitor, Wheels N More, is reporting a profit margin of 20% for its Repairs department. How much would American Auto's need to increase its total sales in the repair department to meet its competitor's profit margin?

101

Answer: a. Sales $137,137 Repairs $221,660 Rebuilds $216,203 b.

Sales Repairs Rebuilds

Gross Margin $630,000 $440,000 $1,000,000

Operating Income $492,863 $218,340 $783,797

c. Increase Sales by $52,075

102

Profit Margin % 50% 17% 37%

Solution: a. Total # of employees = 7 + 2 + 12 + 16 + 6 = 43 Total Maint hours = 50 + 25 + 800 + 1,900 + 2,600 = 5,375 Total HR Hours = 100 + 25 + 1,200 + 850 + 800 = 2,975 *Percentages were calculated by taking the individual amounts divided by the total amounts (e.g. 7 ÷ 43 = 16%)

103

b. Sales 990,000 360,000 630,000 137,137 492,863

Revenue Direct Cost Gross Margin Allocated Costs Operating Income Sales, $492,863 ÷ $990,000 = 50% Repairs, $218,340 ÷ $1,300,000 = 17% Rebuilds, $783,797 ÷ $2,100,000 = 37%

c. 20% = (Revenues - (860,000 + 221,660)) ÷ Revenues Revenues $1,352,075 Current Revenues 1,300,000 Difference $ 52,075 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

104

Repairs Rebuilds 1,300,000 2,100,000 860,000 1,100,000 440,000 1,000,000 221,660 216,203 218,340 783,797

123) Carpet Plus has outgrown its current building and needs to find additional storage space. The company currently operates three divisions, Carpet, Tile, and Vinyl. The needs of each division are as follows.

Square Footage Needs

Carpet 1,500

Tile 900

Vinyl 1,200

Each division tried to separately find their own rental space. The carpet division found what it needed for $600 per month, the tile division's quote came in at $500 per month, and the Vinyl division found a space for $900 per month. The company manager feels it would be more beneficial for the company to find one space that all three divisions can share. The larger facility came in at $1,500 per month, and the manager chose to rent that space. Now he needs to decide how to allocate the common costs to all three divisions. Instructions a. Determine how much cost will be allocated to each division if the manager uses the standalone method. b. Determine how much cost will be allocated to each division if the manager uses the incremental method. c. Which method should the manager use and why? d. Are there any other methods the manager could use to allocate the costs?

105

Answer: a. Carpet $450 Tile $375 Vinyl $675 b. Carpet $600 Tile $0 Vinyl $900 c. The stand-alone method appears to allocate the costs more proportionally than the incremental cost allocation method. If the incremental method is used, the tile division would have no allocated costs. Since the tile division does also use the space, it should have some allocated cost. d. The manager could divide the costs equally (1/3 each) or allocate the cost based on square footage required for each division. Solution: a. Total separate costs = $600 + $500 + $900 = $2,000 Carpet ($600 ÷ $2,000) × $1,500 = $450 Tile ($500 ÷ $2,000) × $1,500 = $375 Vinyl ($900 ÷ $2,000) × $1,500 = $675 b. Carpet $600 (Second Ranked User) Tile $$1,500 - 900 - 600 = 0 Vinyl $900 (First Ranked User) Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

106

124) The Medina Street Vault is a little coffee shop in downtown Cairo. They offer coffee, lunch, and a variety of sweet treats. They also host large groups and do some small catering events. The manager has segregated the coffee shop into three areas. Most customers come in for just coffee and a sweet treat, and it would cost about $400 per month if that is all the shop offered. The lunch group takes a bit more space, as most customers use the dining area to relax while enjoying their food. This part of the business would cost about $1,100 if it needed its separate facility. The coffee shop currently pays $1,200 per month on its current building. The Medina Street Vault's accountant is trying to analyze the profitability of the two separate areas. Instructions a. If the accountant uses the incremental method to allocate the common costs, rank the areas, and determine how much would be allocated to each area of the coffee shop? b. If the accountant uses the stand-alone method instead to allocate the common costs, how much would be allocated to each area of the coffee shop? c. Which of the methods would be fair and why? Answer: a. Lunch $1,100 Coffee and Treats $100 b. Coffee and Treats $320 Lunch $880 c. The stand-alone method appears to allocate the costs more proportionally than the incremental cost allocation method. Solution: a. Lunch $1,100 (First Ranked) Coffee and Treats $100 ($1,200 - $1,100) b. Total separate costs = $400 + $1,100 = $1,500 Coffee and Treats ($400 ÷ $1,500) × $1,200 = $320 Lunch ($1,100 ÷ $1,500) × $1,200 = $880 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement IMA: Cost Management.

107

125) The local meat locker processes a variety of different cuts of meat. A typical steak would cost about $15, while ribs would be closer to $18. They also sell ground beef, roasts and tri-tips. The meat locker charges approximately $5 for the ground beef, $12 for the roast, and $20 for the tri-tips. The manager of the meat locker would like to offer a special promotion to attract more customers. He wants to offer one package of each (steak, ribs, ground beef, roast, and tri-tips) for $60. Instructions a. To sort out the revenues from the promotion, the manager decides to use the incremental method to allocate the transaction price. Rank the products and determine what portion should be allocated to each product. b. If the manager uses the stand-alone method instead, how much revenue would be recorded for each product? (Do not round intermediary calculations. Round the final answers to the nearest cent.) c. Determine the difference between the two methods.

108

Answer: a. Tri -Tips $20 Ribs $ $18 Steak $15 Roast $7 Ground Beef $0 b. Steak $12.86 Ribs $15.43 Ground Beef $4.29 Roasts $10.29 Tri-tips $17.14 c. Steak $2.14 Ribs $2.57 Ground Beef $(4.29) Roasts $(3.29) Tri-tips $2.86 Solution: a. Ranked in Order Tri -Tips $20 Ribs $ $18 Steak $15 Roast $7 ($60 - $20 - $18 - $15) Ground Beef $0 ($60 - $20 - $18 - $15 - $7) b. Total separate prices = $15 + $18 + $5 + $12 + $20 = $70 Steak ($15 ÷ $70) × $60 = $12.86 Ribs ($18 ÷ $70) × $60 = $15.43 Ground Beef ($5 ÷ $70) × $60 = $4.29 Roasts ($12 ÷ $70) × $60 = $10.29 Tri-tips ($20 ÷ $70) × $60 = $17.14 c.

Incremental Stand-Alone Difference

Steak 15.00 12.86 2.14

Ribs 18.00 15.43 2.57

Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement IMA: Cost Management.

109

Ground Beef 4.29 (4.29)

Roasts Tri-Tips 7.00 20.00 10.29 17.14 (3.29) 2.86

126) Steph just started a hair salon business and is working on providing specials for her customers. She offers various services and would like to package some of the services and products she provides at a special bundled price. She is considering two options: • Option one would allow customers to get their hair colored, cut, styled, and purchase a shampoo and conditioner for $150. • Option two would provide customers with highlights, a cut, style, shampoo, conditioner, and two styling products of their choosing for $200. The normal prices that Steph charges a customer, for each product or service, is as follows: Highlights Color Cut Style Shampoo Conditioner Styling Products (Average price)

$110 90 25 20 18 15 12

Instructions a. Calculate the allocated price, using the stand-alone method, for option 1 to each service or product provided. (Do not round intermediary calculations. Round the final answers to the nearest cent.) b. Calculate the allocated price, using the stand-alone method, for option 2 to each service or product provided. (Do not round intermediary calculations. Round the final answers to the nearest cent.) c. Which option do you feel provides the best discount to the customers and why?

110

Answer: a. Color $80.36 Cut $22.32 Style $17.86 Shampoo $16.07 Conditioner $13.39 b. Highlight $103.77 Cut $23.58 Style $18.87 Shampoo $16.98 Conditioner $14.15 Styling Products, $11.32 each or ($22.64) c. While Option 2 offers more benefits for the price, Option 1 provides a bigger discount ($18 versus $12) than Option 2. Therefore, option 1 would provide a larger discount for the customers. Solution: a. Total transaction price = $90 + $25 + $20 + $18 + $15 = $168 Color ($90 ÷ $168) × $150 = $80.36 Cut ($25 ÷ $168) × $150 = $22.32 Style ($20 ÷ $168) × $150 = $17.86 Shampoo ($18 ÷ $168) × $150 = $16.07 Conditioner ($15 ÷ $168) × $150 = $13.39 b. Total transaction price = $110 + $25 + $20 + $18 + $15 + $12 + $12 = $212 Highlight $110 ÷ $212 × $200 = $103.77 Cut ($110 ÷ $212) × $200 = $23.58 Style ($25 ÷ $212) × $200 = $18.87 Shampoo ($20 ÷ $212) × $200 = $16.98 Conditioner ($18 ÷ $212) × $200 = $14.15 Styling Products ($12 ÷ $212) × $200 = $11.32 each or ($22.64, $11.32 × 2) c. Option 1 Total transaction Price $168 Option 1 Bundled transaction price 150 Option 1 Discount Provided $18 Option 2 Total transaction Price Option 2 Bundled transaction price Option 2 Discount Provided Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement IMA: Cost Management.

$212 200 $12

111

127) Olsson Consulting Services has three divisions and four support departments. The divisions (operating units) include Surveying, Engineering, and Testing. They provide a variety of services to their clients, and at the end of each fiscal year, the operating units are evaluated for profitability, and bonuses are given out to managers and employees of each division. The support department managers and employees are also given bonuses based on how well each division does and how much support they give to each division. The support departments include Administration (Admin), Human Resources (HR), Technology (IT), and Accounting (Acct). Each support department's costs are allocated based on how many hours each department provides to the other support departments and divisions. Information on the four support departments is as follows:

Operating Costs Admin hours used HR hours used IT hours used Acct hours used

Admin $320,000

HR $230,000 880

220 1,760 1,848

IT $680,000 1,320 352

2,640 1,716

Acct $420,000 990 132 3,168

396

Information on the divisions is as follows:

Revenue Operating Costs Admin hours used HR hours used IT hours used Acct hours used

Surveying $1,220,000 $623,000 2,750 1,584 4,576 3,432

Engineering $1,885,000 $1,156,000 3,300 1,100 2,288 4,448

Testing $972,000 $412,000 1,760 1,012 3,168 1,320

The company is trying to determine which divisions should get bonuses. To earn a bonus, the division must earn a profit margin of at least 8%. The bonuses will then be paid the amount earned over the minimum profit margin percent. In your calculations, do not round any intermediary calculations and round your final answer to the nearest dollar.

112

Instructions a. If Olsson uses the direct method to allocate support costs, how much support costs would be allocated to each division? b. Rank the divisions in order of operating costs and then use the step method to allocate support costs. How much support costs would be allocated to each division? c. Rank the divisions in order of the largest percentage of support provided to other support departments and then use the step method to allocate support costs. How much support costs would be allocated to each division? d. If Olsson uses the reciprocal method to allocate support costs, how much support costs would be allocated to each division? e. Which divisions would receive bonuses based on (1) direct method, (2) step method - ranked by operating costs, (3) step method - ranked by support percentages, (4) reciprocal method? Prove your results with calculations. f. Which method do you believe Olsson should use to allocate the support costs and why?

113

Answer: a. Surveying Engineering Testing

$678,101 $561,812 $410,087

b. Ranked by Operating Costs - IT, Acct, Admin, HR Surveying Engineering Testing

$664,062 $589,152 $396,787

c. Ranked by Support percentage - IT, Acct, Admin, HR Surveying Engineering Testing

$664,062 $589,152 $396,787

d. Surveying Engineering Testing

$667,728 $585,807 $396,465

e. 1. Engineering (9%) and Testing (15%) (Surveying had a loss with a -7% profit margin) 2. Testing only (17%) (Engineering had a 7% profit margin and Engineering and Surveying had a loss with a -5% profit margin) 3. Testing only (17%) (Engineering had a 7% profit margin and Engineering and Surveying had a loss with a -5% profit margin) 4. Engineering (17%) and Testing (8%) (Surveying had a loss with a -6% profit margin) f. Because the method used will affect bonuses, the reciprocal method should be used as it is the most accurate in allocating support costs.

114

Solution: a. Total Admin Hours used = 2,750 + 3,330 + 1,760 = 7,810 Total HR hours used = 1,584 + 1,100 + 1,012 = 3,696 Total IT hours used = 4,576 + 2,288 + 3,168 = 10,032 Total Acct hours used = 3,432 + 4,448 + 1,320 = 9,200

Division hours Used ÷ total Admin hours used × Admin operating costs = allocated Admin costs to division

Surveying 2,750 7,810 $320,000 $112,676

Engineering 3,330 7,810 $320,000 $135,211

Testing 1,760 7,810 $320,000 $72,113

Division hours Used ÷ total HR hours used × HR operating costs = allocated HR costs to division

Surveying 1,584 3,696 $230,000 $98,571

Engineering 1,110 3,696 $230,000 $68,452

Testing 1,012 3,696 $230,000 $62,976

Division hours Used ÷ total IT hours used × IT operating costs = allocated IT costs to division

Surveying 4,576 10,032 $680,000 $310,175

Engineering 2,288 10,032 $680,000 $155,088

Testing 3,168 10,032 $680,000 $214,737

Division hours Used ÷ total Acct hours used × Acct operating costs = allocated Acct costs to division

Surveying 3,432 9,200 $420,000 $156,678

Engineering 4,448 9,200 $420,000 $203,061

Testing 1,320 9,200 $420,000 $410,087

Admin allocated costs HR allocated costs IR allocated costs HR allocated costs Total support costs

Surveying $112,676 98,571 310,175 156,678 $678,101

Engineering $135,211 68,452 155,088 203,061 $561,812

Testing $72,113 62,976 214,737 60,261 $410,087

115

b. Calculation of hours used based on rank Admin Admin Hrs used HR hrs used IT hrs used Acct hrs used

HR 880

1,760 2,640 1,848 1,716

Acct Surveying Engineering Testing Total 2,750 3,300 1,760 8,690 1,584 1,100 1,012 3,696 3,168 4,576 2,288 3,168 17,600 3,432 4,448 1,320 12,764

Calculation of percentages based on total hours and hours used Admin Admin Hrs used 0% HR hrs used 0% IT hrs used 10% Acct hrs used 14%

HR 10% 0% 15% 13%

Acct Surveying 0% 32% 0% 43% 18% 26% 0% 27%

Engineering 38% 30% 13% 35%

Testing 20% 27% 18% 10%

Percentages were calculated by taking the hours used divided by the total hours (e.g., 880 ÷ 8,690 = 10%) Allocated costs Admin HR IT Acct Surveying Engineering Testing Operating Costs 320,000 230,000 680,000 420,000 Admin allocated costs^ (466,530) 47,244 147,636 177,163 94,487 HR allocated costs ^^ (452,164) 193,785 134,573 123,807 IT allocated costs * 68,000 102,000 (680,000) 122,400 176,800 88,400 122,400 Acct allocation costs ** 78,530 72,921 - (542,400) 145,841 189,016 56,093 - 664,062 589,152 396,787 * 680,000 × the percentages per IT department (i.e. 680,000 × 10% = $68,000) ** $420,000 + $122,400 = $542,400 Other allocations, $542,400 × the percentage used per acct department (i.e. $542,400 × 14% = $78,350) ^ $320,000 + $68,000 + $78,530 = $ $466,530 Other allocations, $466,530 × the percentage used per acct department (i.e. $466,530 × 10% = $47,244) ^^ $230,000 + $47,244 + $102,000 + $72,921 = $452,164 Other allocations, $452,164 × the percentage used per acct department (i.e. $452,164 × 143% = $$193,785) Note - as the percentages are rounded, the values will be approximate. 116

c. Calculation of Rank: Admin = (880 + 1,320 + 900) ÷ (880 + 1,320 + 900 + 2,750 + 3,300 + 1,760) = 28% HR = (220 + 352 + 132) ÷ (220 + 352 + 132 + 1,584 + 1,100 + 1,012) = 16% IT = (1,760 + 2,640 + 3,168) ÷ (1,760 + 2,640 + 3,168 + 4,576 + 2,288 + 3,168) = 43% ACCT = (1,848 + 1,716 + 396) ÷ (1,848 + 1,716 + 396 + 3,432 + 4,448 + 1,320) = 30% Because the rank stayed the same, all calculations from part b are still applicable. d.

117

e. 1. Revenues Direct Costs Alloc Operating Costs Operating Income ÷ Revenues Profit Margin

Surveying 1,220,000 623,000 678,101 (81,101) 1,220,000 -7%

Engineering 1,885,000 1,156,000 561,812 167,188 1,885,000 9%

Testing 972,000 412,000 410,087 149,913 972,000 15%

Surveying 1,220,000 623,000 664,062 (67,062) 1,220,000 -5%

Engineering Testing 1,885,000 972,000 1,156,000 412,000 589,152 396,787 139,848 163,213 1,885,000 972,000 7% 17%

Revenues Direct Costs Alloc Operating Costs Operating Income ÷ Revenues Profit Margin

3. Because the allocation did not change from 2, the solutions will be the same

118

4. Revenues Direct Costs Alloc Operating Costs Operating Income ÷ Revenues Profit Margin Diff: 3 LO: 1, 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement IMA: Cost Management.

Surveying 1,220,000 623,000 667,728 (70,728) 1,220,000 -6%

119

Engineering 1,885,000 1,156,000 585,807 143,193 1,885,000 8%

Testing 972,000 412,000 396,465 163,535 972,000 17%

128) Thelma and Louise operate businesses in downtown Lincoln. Three joint businesses share one building. Thelma operates a bakery. Her current rent is $2,200 per month, and she sells a variety of baked goods that are divided into three divisions. Cakes, Cookies, and Pastries. The breakout of the average revenue per one unit is Cakes - $45, 1 Dozen Cookies - $12, 6 Pastries - $18. Louise operates a card and gift shop. Her current rent is $1,500 per month, and she has broken her business into three divisions as well: Cards, Ceramics, and Frames. She typically sells a package of cards for $5, an average ceramic sells for $25, and the average frame sells for $15. Currently, Thelma rents the left section, and Louise rents the right section. Both sections are equal in square footage. The middle section just became available, and the ladies are considering renting it and sharing it to expand their current operations. The middle section is quite a bit larger and would rent for $3,000 per month. In your calculations, do not round any intermediary calculations and round your final answer to the nearest dollar for the rent and nearest cent for the revenue. Instructions a. If Thelma and Louise rent the middle section and divide the cost using the stand-alone method, how much cost would be allocated to each? b. If Thelma and Louise rent the middle section and divide the cost using the incremental method, how much cost would be allocated to each? (rank the cost by who currently pays the most rent) c. Calculate the differences in allocated cost between the stand-alone method and the incremental method. d. Which method would you suggest to Thelma and Louise to allocate the additional cost of renting the middle section? e. Thelma and Louise decided to put together a few options for bundled deals for the customers. 1. The customer would receive a dozen cookies, a package of cards, and a frame for $30. 2. The customer would receive a cake and a ceramic for $60. 3. The customer would receive a six-pack of pastries, a dozen cookies, and a package of cards for $30. Using the stand-alone method of allocating the transaction price of the bundles, how much revenue will Thelma receive, and how much revenue will Louise receive? f. Using the same options as part (e), recalculate the division of revenues to Thelma and Louise, using the incremental method. Rank the products based on individual selling prices. g. Which method would more accurately represent a fair division of revenue for Thelma and Louise.

120

Answer: a. Thelma Louise

$1,784 $1,216

b. Thelma Louise

$2,200 $800

Thelma Louise

$(416) $416

d. While Louise would prefer the incremental method, the stand-alone method appears to calculate the shared cost more proportionally. e. 1.

Thelma Louise

$11.25 $18.75

Thelma Louise

$38.57 $21.43

Thelma Louise

$25.71 $4.29

Thelma Louise

$12.00 $18.00

Thelma Louise

$45.00 $15.00

Thelma Louise

$30.00 $0.00

g. The stand-alone method proportionally allocates the bundled transaction price to each owner.

121

Solution: a. Thelma Louise

(2,200 ÷ 3,700) × $3,000 = $1,784 (1,500 ÷ 3,700) × $3,000 = $1,216

b. Thelma $2,200 Ranked First Louise $800 ($3,000 - $2,200) c. Stand-Alone Incremental Difference

Thelma 1,784 2,200 (416)

Louise 1,216 800 416

e. Total separate transaction price = $12 + $5 + $15 = $32 1. Total transaction price = $12 + $5 + $15 = $32 Thelma = ($12 ÷ $32) × $30 = $11.25 Louise = ($5 ÷ $32) × $30 + $15 ÷ $32 × $30 = $18.75 2. Total transaction price = $45 + $25 = $70 Thelma = ($45 ÷ $70) × $60 = $38.57 Louise = ($25 ÷ $70) × $60 = $21.43 3. Total transaction price = $12 + $5 + $15 = $32 Thelma = (($12 ÷ $35) × $30) + (($18 ÷ $35) × $30) = $25.71 Louise = ($5 ÷ $35) × $30 = $4.29

122

f. 1. Products Ranked = Frame ($15), Cookies ($12), Cards ($5) Frames = $15 Cookies = $12 Cards = $3 ($30 - $15 - $12) Thelma = $12 Louise = $15 + $3 = $18 2. Products Ranked = Cake ($45), Ceramic ($25) Thelma = $45 Louise = $15 ($60 - $45) 3. Products Ranked = Pastries ($18), Cookies ($12), Cards ($5) Frames = $18 Cookies = $12 Cards = $0 ($30 - $18 - $12) Thelma = $30 ($18 + $12) Louise = $0 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Measurement IMA: Cost Management.

123

Cost Accounting, 1e (Farmer) Chapter 15 Joint Costs and Decision-Making 1) A common cost A) uses a common set of production costs, used in one common production process, to produce one product. B) uses a common set of production costs used in one common production process to yield two products simultaneously. C) uses a multiple set of production costs, used in one common production process to yield more than one product simultaneously. D) uses a common set of production costs used in one common production process to yield more than one product simultaneously. Answer: D Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 2) Products with a substantial value produced simultaneously by the same process up to a splitoff point are called A) by-products. B) joint products. C) separable products. D) either by-products or joint products. Answer: B Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 3) The split-off point is A) the point in the process the products become separate and identifiable. B) the point in the process, the company determines which product to process further. C) the point in the production process where no further processing is needed. D) the point in the process the product is ready to sell. Answer: A Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 1

4) A secondary product recovered in producing a primary product during the joint process that has future use is called A) scrap. B) waste. C) a by-product. D) a joint product. Answer: C Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 5) All of the following statements about joint costs are true except A) allocation is not necessary when costs are incurred using a joint process. B) joint costs are the costs incurred jointly in the production of two or more products. C) the costs cannot be directly assigned to any one product involved. D) joint costs are incurred when making multiple products. Answer: A Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 6) The cost of fertilizing and harvesting sunflowers is an example of A) joint products. B) by-products C) joint costs. D) cost allocation. Answer: C Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management.

7) Molasses would be considered what type of unintended output from refining sugar? A) Joint product B) Scrap C) Waste D) By-product Answer: D Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 8) Harvesting of corn produces corn husks. In a joint process, what type of unintended output are corn husks? A) Joint product B) Scrap C) Waste D) By-product Answer: B Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 9) In a joint process, waste would be considered all of the following except A) waste is an unintended output. B) waste has economic value. C) waste is disposed of. D) waste is a by-product. Answer: B Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management.

10) Once a company classifies an unintended output of the joint process as a by-product, waste, or scrap, A) the company will continue that classification until it no longer produces the product. B) the company will evaluate the classifications yearly. C) the classifications will remain fluid and can change as the usefulness of the products changes. D) the classifications will change based on the profitability of the product. Answer: C Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 11) The following costs are included in joint costs A) direct materials. B) direct labor. C) direct material and direct labor. D) direct material, direct labor, and manufacturing overhead. Answer: D Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 12) Separable costs are also known as A) by-products. B) joint costs. C) further processing costs. D) common costs. Answer: C Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management.

13) Further processing costs are costs that A) are incurred within the joint process. B) are incurred to sell the product as is. C) are incurred to create a by-product. D) are incurred to process the product further. Answer: D Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 14) All of the following statements about joint products are true, except A) all joint products can be sold at the split-off point. B) a product that is processed further should be sold for a higher price. C) management must make a decision at split-off to process further or sell the product. D) there is no economic value attached to some products at the split-off point. Answer: A Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 15) Xander incurs costs of $20,000 for direct materials, $15,000 for direct labor, and $10,000 for manufacturing overhead. The costs incurred resulted in a single process that resulted in two products, Bugs, and Rugs. Bugs can be sold at split-off for $60,000 or be processed further at a cost of $15,000. The new product, Dubs, can be sold for $105,000. How much are Xander's joint costs? A) $30,000 B) $35,000 C) $45,000 D) $60,000 Answer: C Explanation: $20,000 + $15,000 + $10,000 = $45,000. DM + DL + MOH (Before split-off) Diff: 2 LO: 1 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

16) When manufacturing a wooden chair, sawdust would be an example of A) joint product. B) scrap. C) waste. D) by-product. Answer: D Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 17) Which of the following is a by-product? A) Whole milk B) Lumber C) Honey D) Fertilizer Answer: D Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 18) Which of the following statements best describes a by-product? A) A product that has a selling price similar to that of the main product. B) A product that is created along with the main product and the sales value does not cover its cost of production. C) A product that is produced from material that would otherwise be scrapped. D) A product that has a lower unit selling price than the main product. Answer: C Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management.

19) Which of the following are identifiable as different individual products before split-off for cost accumulate purposes? Option By-products Joint products A No No B Yes No C Yes Yes D No Yes A) A B) B C) C D) D Answer: A Diff: 2 LO: 1 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 20) Joint costs are A) separable costs. B) allocated on the basis of cause-and-effect relationships. C) further processing costs. D) allocated arbitrarily. Answer: B Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 21) The ________ method of allocating joint costs uses pounds of product produced. A) sales value at split-off B) net realizable value C) physical quantities D) weighted average Answer: C Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management.

22) The method of allocating joint costs that would assign the same amount of cost per unit to two joint products that sell for $5 and $15, respectively, is the A) sales value at split-off method. B) net realizable value method. C) physical quantities method. D) direct allocation method. Answer: C Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 23) When there is no ready market price available for an individual product at the split-off point, which method of allocation should be used? A) Sales value at split-off method B) Net realizable value method C) Physical quantities method D) Direct allocation method Answer: B Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 24) The sales value at split-off method allocates joint costs of production using the A) prospective sales values of the process's total production and the relative proportion of each product's sales value to the total. B) relative proportion of each product's sales value to the total. C) final sales value less further processing costs after the split-off point. D) prospective sales values of the process's total production. Answer: A Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management.

25) Which allocation method recognizes that costs incurred after the split-off point are part of the cost total on which profit is expected to be earned? A) Sales value at split-off method B) Net realizable value method C) Physical quantities method D) Direct allocation method Answer: B Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 26) Which of the following statements is true regarding the consideration of allocation costs at split-off? A) Allocating joint costs using the average costs is the quickest and most accurate process. B) The sales value at the split-off method is the only true way to allocate joint costs to joint products. C) There are three methods that can be used to allocate costs. D) If there are two products equal in value at the split-off point, it would make the most sense to use an even allocation of costs. Answer: C Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 27) The sales price at split-off is used to allocate Option Cost Beyond Split-Off A No B Yes C Yes D No A) A B) B C) C D) D Answer: D Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 9

Joint Costs No No Yes Yes

28) The net realizable value (NRV) of a product is the A) final sales value less additional processing costs and allocated joint costs. B) final sales value less additional processing costs. C) sales at split-off less additional process costs. D) sales at split-off less additional processing costs and allocated joint costs. Answer: B Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 29) If the sales price at the split-off point is available and reliable, the best method of allocating joint product costs is the A) sales value at split-off method. B) net realizable value method. C) physical quantities method. D) direct allocation method. Answer: A Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 30) If the sales price at the split-off point is not available, but the net realizable value is available and reliable, the best method of allocating joint product costs is the A) sales value at split-off method. B) net realizable value method. C) physical quantities method. D) direct allocation method. Answer: B Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management.

31) If the sales price at the split-off point and the net realizable value is not available, the best method of allocating joint product costs is the A) sales value at split-off method. B) net realizable value method. C) physical quantities method. D) direct allocation method. Answer: C Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 32) If the necessary information is available, which method is preferred when allocating joint costs? A) Sales value at split-off method B) Net realizable value method C) Physical quantities method D) Direct allocation method Answer: A Diff: 1 LO: 2 Bloom: K AACSB: None AICPA: FN: Measurement IMA: Cost Management. 33) The sales value at split-off method is preferred. All the following are true regarding the reasons, except A) sales prices at the split-off point are objective. B) the sales value at split-off method measures the true economic value of a company. C) the sales value at split-off method measures benefits returned to the company. D) the ROI (return on investment) is accurately measured and the point of being in business. Answer: B Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management.

34) The biggest challenge of the physical quantities method is A) the economic value returned to the company is accurately measured. B) the significant variability in end prices. C) no common denominator. D) companies will fully expense joint costs in the periods they are incurred. Answer: C Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 35) If a company has no estimates to allocate joint product costs, a company will typically A) use the sales value at split-off method. B) use the net realizable value method. C) use the physical quantities method. D) fully expense the joint costs in the period they are incurred. Answer: C Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management. 36) Which of the following would not be considered a physical measure to allocate joint costs using the physical quantities method? A) Feet of lumber B) Dollars of labor C) Ounces of gold D) Tons of steel Answer: B Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: FN: Measurement IMA: Cost Management.

37) Cisco Company manufactures three products, A, B & C. These three products are created through a joint process that costs $26,000. The following data is provided for the three products: Sales Value Product Units Produced at Split-off A 6,000 $2,500 B 10,000 5,000 C 8,000 3,000 What is the amount of joint costs assigned to Product A using the sales-value-at-split-off method? (Round to the nearest whole dollar.) A) $1,010 B) $6,190 C) $6,500 D) $14,857 Answer: B Explanation: $2,500 ÷ ($2,500 + $5,000 + $3,000) × $26,000 = $6,190. A sales value. ÷ (A sales value. + B Sales value. + C sales value.) × joint costs Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management. 38) Cisco Company manufactures three products, A, B & C. These three products are created through a joint process that costs $26,000. The following data is provided for the three products: Sales Value Product Units Produced at Split-off A 6,000 $2,500 B 10,000 5,000 C 8,000 3,000 What is the amount of joint costs assigned to Product B using the sales-value-at-split-off method? (Round to the nearest whole dollar.) A) $2,019 B) $10,833 C) $12,381 D) $24,762 Answer: C Explanation: $5,000 ÷ ($2,500 + $5,000 + $3,000) × $26,000 = $12,381. B sales value. ÷ (A sales value. + B Sales value. + C sales value.) × joint costs Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management. 13

39) Cisco Company manufactures three products, A, B & C. These three products are created through a joint process that costs $26,000. The following data is provided for the three products: Sales Value Product Units Produced at Split-off A 6,000 $2,500 B 10,000 5,000 C 8,000 3,000 What is the amount of joint costs assigned to Product C using the sales-value-at-split-off method? (Round to the nearest whole dollar.) A) $1,212 B) $7,429 C) $8,667 D) $19,810 Answer: B Explanation: $3,000 ÷ ($2,500 + $5,000 + $3,000) × $26,000 = $7,429. C sales value. ÷ (A sales value. + B Sales value. + C sales value.) × joint costs Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

40) Tober Inc. operates a lumber yard. Tober purchases the raw materials for $50,000 and incurs additional processing costs of $35,000 to obtain three observable joint products. Further processing and final sales values for the products are as follows:

Product 25 ft board 30 ft board 50 ft board

Further Processing Costs $10,000 12,000 18,000

Final Sales Value $50,000 55,000 62,000

What is the amount of joint costs assigned to the 25 ft board using the net realizable value (NRV) method? (Round to the nearest whole dollar.) A) $40,000 B) $21,250 C) $25,449 D) $26,772 Answer: D Explanation: ($50,000 - $10,000) + ($55,000 - $12,000) + ($62,000 - $18,000) = $127,000 ($50,000 - $10,000) ÷ $127,000 × ($50,000 + $35,000) = $26,772. (25 ft sales value - 25 ft costs) + (30 ft sales value - 30 ft costs) + (50 ft sales value - 50 ft costs) = total NRV (25 ft sales value - 25 ft costs) ÷ total NRV × (raw mat. + additional processing costs) Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

41) Tober Inc. operates a lumber yard. Tober purchases the raw materials for $50,000 and incurs additional processing costs of $35,000 to obtain three observable joint products. Further processing and final sales values for the products are as follows:

Product 25 ft board 30 ft board 50 ft board

Further Processing Costs $10,000 12,000 18,000

Final Sales Value $50,000 55,000 62,000

What is the amount of joint costs assigned to the 30 ft board using the net realizable value (NRV) method? (Round to the nearest whole dollar.) A) $43,000 B) $25,500 C) $27,994 D) $28,780 Answer: D Explanation: ($50,000 - $10,000) + ($55,000 - $12,000) + ($62,000 - $18,000) = $127,000 ($55,000 - $12,000) ÷ $127,000 × ($50,000 + $35,000) = $28,780. (25 ft sales value - 25 ft costs) + (30 ft sales value - 30 ft costs) + (50 ft sales value - 50 ft costs) = total NRV (30 ft sales value - 30 ft costs) ÷ total NRV × (raw mat. + additional processing costs) Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

42) Tober Inc. operates a lumber yard. Tober purchases the raw materials for $50,000 and incurs additional processing costs of $35,000 to obtain three observable joint products. Further processing and final sales values for the products are as follows:

Product 25 ft board 30 ft board 50 ft board

Further Processing Costs $10,000 12,000 18,000

Final Sales Value $50,000 55,000 62,000

What is the amount of joint costs assigned to the 50 ft board using the net realizable value (NRV) method? (Round to the nearest whole dollar.) A) $44,000 B) $29,449 C) $31,557 D) $38,250 Answer: B Explanation: ($50,000 - $10,000) + ($55,000 - $12,000) + ($62,000 - $18,000) = $127,000 ($62,000 - $18,000) ÷ $127,000 × ($50,000 + $35,000) = $29,449. (25 ft sales value - 25 ft costs) + (30 ft sales value - 30 ft costs) + (50 ft sales value - 50 ft costs) = total NRV (50 ft sales value - 50 ft costs) ÷ total NRV × (raw mat. + additional processing costs) Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

43) Tober Inc. operates a lumber yard. Tober purchases the raw materials for $50,000 and incurs additional processing costs of $35,000 to obtain three observable joint products. Further processing and final sales values for the products are as follows:

Product 25 ft board 30 ft board 50 ft board

Further Processing Costs $10,000 12,000 18,000

Final Sales Value $50,000 55,000 62,000

What is the gross margin for the 25 ft board using the net realizable value (NRV) method to allocate joint costs? (Round to the nearest whole dollar.) A) $40,000 B) $50,000 C) $13,228 D) $26,772 Answer: C Explanation: ($50,000 - $10,000) + ($55,000 - $12,000) + ($62,000 - $18,000) = $127,000 ($50,000 - $10,000) ÷ $127,000 × ($50,000 + $35,000) = $26,772. $50,000 - $10,000 - $26,772 = $13,228 (25 ft sales value - 25 ft costs) + (30 ft sales value - 30 ft costs) + (50 ft sales value - 50 ft costs) = total NRV (25 ft sales value - 25 ft costs) ÷ total NRV × (raw mat. + additional processing costs) = joint costs Sales value - further processing costs- joint costs Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

44) Tober Inc. operates a lumber yard. Tober purchases the raw materials for $50,000 and incurs additional processing costs of $35,000 to obtain three observable joint products. Further processing and final sales values for the products are as follows:

Product 25 ft board 30 ft board 50 ft board

Further Processing Costs $10,000 12,000 18,000

Final Sales Value $50,000 55,000 62,000

What is the gross margin for the 30 ft board using the net realizable value (NRV) method to allocate joint costs? (Round to the nearest whole dollar.) A) $43,000 B) $55,000 C) $14,220 D) $28,780 Answer: C Explanation: ($50,000 - $10,000) + ($55,000 - $12,000) + ($62,000 - $18,000) = $127,000 ($55,000 - $12,000) ÷ $127,000 × ($50,000 + $35,000) = $28,780. $55,000 - $12,000 - $28,780 = $14,220 (25 ft sales value - 25 ft costs) + (30 ft sales value - 30 ft costs) + (50 ft sales value - 50 ft costs) = total NRV (30 ft sales value - 30 ft costs) ÷ total NRV × (raw mat. + additional processing costs) Sales value - further processing costs- joint costs Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

45) Tober Inc. operates a lumber yard. Tober purchases the raw materials for $50,000 and incurs additional processing costs of $35,000 to obtain three observable joint products. Further processing and final sales values for the products are as follows:

Product 25 ft board 30 ft board 50 ft board

Further Processing Costs $10,000 12,000 18,000

Final Sales Value $50,000 55,000 62,000

What is the gross margin for the 50 ft board using the net realizable value (NRV) method to allocate joint costs? (Round to the nearest whole dollar) A) $44,000 B) $62,000 C) $14,551 D) $29,449 Answer: C Explanation: ($50,000 - $10,000) + ($55,000 - $12,000) + ($62,000 - $18,000) = $127,000 ($62,000 - $18,000) ÷ $127,000 × ($50,000 + $35,000) = $29,449. $62,000 - $18,000 - $29,449 = $14,551 (25 ft sales value - 25 ft costs) + (30 ft sales value - 30 ft costs) + (50 ft sales value - 50 ft costs) = total NRV (50 ft sales value - 50 ft costs) ÷ total NRV × (raw mat. + additional processing costs) Sales value - further processing costs- joint costs Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

46) Expo manufacturing produces four different drinks. The joint process incurs costs of $250,000. The following information is related to the four products. Weight Selling Price Product Units Produced per Unit per Unit Beatle 5,000 8 oz $1.10 Grasshopper 3,750 12 oz 1.50 Locust 2,500 16 oz 1.95 Buggy 1,250 24 oz 2.50 Using the physical quantities methods of allocating joint costs, how much joint costs would be allocated to Beatle? (Round to the nearest whole dollar.) A) $33,333 B) $39,007 C) $70,362 D) $100,000 Answer: A Explanation: 8 + 12 + 16 + 24 = 60 total oz 8 ÷ 60 × $250,000 = $33,333. beat oz + grass oz + loc oz + bug oz = total oz beat oz ÷ total oz × joint costs Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

47) Expo manufacturing produces four different drinks. The joint process incurs costs of $250,000. The following information is related to the four products. Weight Selling Price Product Units Produced per Unit per Unit Beatle 5,000 8 oz $1.10 Grasshopper 3,750 12 oz 1.50 Locust 2,500 16 oz 1.95 Buggy 1,250 24 oz 2.50 Using the physical quantities methods of allocating joint costs, how much joint costs would be allocated to Grasshopper? (Round to the nearest whole dollar.) A) $50,000 B) $53,191 C) $63,966 D) $75,000 Answer: A Explanation: 8 + 12 + 16 + 24 = 60 total oz 12 ÷ 60 × $250,000 = $50,000. beat oz + grass oz + loc oz + bug oz = total oz grass oz ÷ total oz × joint costs Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

48) Expo manufacturing produces four different drinks. The joint process incurs costs of $250,000. The following information is related to the four products.

Product Beatle Grasshopper Locust Buggy

Weight per Unit 8 oz 12 oz 16 oz 24 oz

Units Produced 5,000 3,750 2,500 1,250

Selling Price per Unit $1.10 1.50 1.95 2.50

Using the physical quantities methods of allocating joint costs, how much joint costs would be allocated to Locust? (Round to the nearest whole dollar) A) $50,000 B) $62,367 C) $66,667 D) $69,149 Answer: C Explanation: 8 + 12 + 16 + 24 = 60 total oz 16 ÷ 60 × $250,000 = $66,667. beat oz + grass oz + loc oz + bug oz = total oz loc oz ÷ total oz × joint costs Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

49) Expo manufacturing produces four different drinks. The joint process incurs costs of $250,000. The following information is related to the four products. Weight Selling Price Product Units Produced per Unit per Unit Beatle 5,000 8 oz $1.10 Grasshopper 3,750 12 oz 1.50 Locust 2,500 16 oz 1.95 Buggy 1,250 24 oz 2.50 Using the physical quantities methods of allocating joint costs, how much joint costs would be allocated to Buggy? (Round to the nearest whole dollar.) A) $25,000 B) $53,305 C) $88,652 D) $100,000 Answer: D Explanation: 8 + 12 + 16 + 24 = 60 total oz 24 ÷ 60 × $250,000 = $100,000. beat oz + grass oz + loc oz + bug oz = total oz bug oz ÷ total oz × joint costs Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: FN: Measurement IMA: Cost Management.

50) Sky airlines produces two different aircrafts. The joint process incurs costs of $10 million. Both aircrafts can be sold at split-off or processed further to increase the final sales value. The following information is related to the two products. (all costs are recorded in millions)

Product B752 B797

Units 15 25

Weight per Unit (lbs) 90,000 110,000

Final Sales Value $420 480

Further Sales Value Processing Costs at Split-Off $200 $230 260 310

If the sales price at split-off provided is reliable, what are the joint costs allocated to B752, using the appropriate method of allocation? A) $4.26 million B) $4.50 million C) $4.67 million D) $5 million Answer: A Explanation: $230 + $310 = $540 $230 ÷ $540 × $10 = $4.26 B752 sale at split-off + B797 sale at split-off = total sale at split-off B752 sale at split-off ÷ total sale at split-off × joint process costs Diff: 2 LO: 2 Bloom: AN AACSB: None AICPA: FN: Measurement IMA: Cost Management.

51) Sky airlines produces two different aircrafts. The joint process incurs costs of $10 million. Both aircrafts can be sold at split-off or processed further to increase the final sales value. The following information is related to the two products. (all costs are recorded in millions)

Product B752 B797

Units 15 25

Weight per Unit (lbs) 90,000 110,000

Final Sales Value $420 480

Further Sales Value Processing Costs at Split-Off $200 $230 260 310

If the sales price at split-off provided is reliable, what is the gross margin for B752, using the appropriate method of allocation? A) $215 million B) $215.5 million C) $215.74 million D) $220 million Answer: C Explanation: $230 + $310 = $540 $230 ÷ $540 × $10 = $4.26 $420 - $200 - $4.26 = $215.74 B752 sale at split-off + B797 sale at split-off = total sale at split-off B752 sale at split-off ÷ total sale at split-off × joint process costs = B752 joint cost B752 final sales- B752 further processing cost - B752 joint cost Diff: 2 LO: 2 Bloom: AN AACSB: None AICPA: FN: Measurement IMA: Cost Management.

52) Sky airlines produces two different aircrafts. The joint process incurs costs of $10 million. Both aircrafts can be sold at split-off or processed further to increase the final sales value. The following information is related to the two products. (all costs are recorded in millions)

Product B752 B797

Units 15 25

Weight per Unit (lbs) 90,000 110,000

Final Sales Value $420 480

Further Sales Value Processing Costs at Split-Off $200 $230 260 310

If the sales price at split-off provided is reliable, what is the joint costs allocated to B797, using the appropriate method of allocation? A) $5 million B) $5.33 million C) $5.50 million D) $5.74 million Answer: D Explanation: $230 + $310 = $540 $310 ÷ $540 × $10 = $5.74 B752 sale at split-off + B797 sale at split-off = total sale at split-off B797 sale at split-off ÷ total sale at split-off × joint process costs Diff: 3 LO: 2 Bloom: AN AACSB: None AICPA: FN: Measurement IMA: Cost Management.

53) Sky airlines produces two different aircrafts. The joint process incurs costs of $10 million. Both aircrafts can be sold at split-off or processed further to increase the final sales value. The following information is related to the two products. (all costs are recorded in millions)

Product B752 B797

Units 15 25

Weight per Unit (lbs) 90,000 110,000

Final Sales Value $420 480

Further Sales Value Processing Costs at Split-Off $200 $230 260 310

If the sales price at split-off provided is reliable, what is the gross margin for B797, using the appropriate method of allocation? A) $214.26 million B) $214.50 million C) $215 million D) $220 million Answer: A Explanation: $230 + $310 = $540 $310 ÷ $540 × $10 = $5.74 $480 - $260 - $5.74 = $214.26 B752 sale at split-off + B797 sale at split-off = total sale at split-off B797 sale at split-off ÷ total sale at split-off × joint process costs = B797 joint cost B797 final sales- B797 further processing cost - B797 joint cost Diff: 3 LO: 2 Bloom: AN AACSB: None AICPA: FN: Measurement IMA: Cost Management.

54) Sky airlines produces two different aircrafts. The joint process incurs costs of $10 million. Both aircrafts can be sold at split-off or processed further to increase the final sales value. The following information is related to the two products. (all costs are recorded in millions)

Product B752 B797

Units 15 25

Weight per Unit (lbs) 90,000 110,000

Final Sales Value $420 480

Further Sales Value Processing Costs at Split-Off $200 $230 260 310

If the sales price at split-off provided is not reliable, but the final sales value and further processing costs are reliable, what is the joint costs allocated to B752 using the appropriate method of allocation? A) $4.26 million B) $4.50 million C) $4.67 million D) $5 million Answer: D Explanation: ($420 - $200) + ($480 - $260) = $440 ($420 - $200) ÷ $440 × $10 = $5 (B752 final sales- B752 further processing cost) + (B797 final sales- B797 further processing cost) = total NRV (B752 final sales- B752 further processing cost) ÷ total NRV × joint process costs Diff: 3 LO: 2 Bloom: AN AACSB: None AICPA: FN: Measurement IMA: Cost Management.

55) Sky airlines produces two different aircrafts. The joint process incurs costs of $10 million. Both aircrafts can be sold at split-off or processed further to increase the final sales value. The following information is related to the two products. (all costs are recorded in millions)

Product B752 B797

Units 15 25

Weight per Unit (lbs) 90,000 110,000

Final Sales Value $420 480

Further Sales Value Processing Costs at Split-Off $200 $230 260 310

If the sales price at split-off provided is not reliable, but the final sales value and further processing costs are reliable, what is the gross margin for B752 using the appropriate method of allocation? A) $215 million B) $215.5 million C) $215.74 million D) $220 million Answer: A Explanation: ($420 - $200) + ($480 - $260) = $440 ($420 - $200) ÷ $440 × $10 = $5 $420 - $200 - $5 = $215 (B752 final sales- B752 further processing cost) + (B797 final sales- B797 further processing cost) = total NRV (B752 final sales- B752 further processing cost) ÷ total NRV × joint process costs = B752 joint process cost B752 final sales- B752 further processing cost - B752 joint process cost Diff: 3 LO: 2 Bloom: AN AACSB: None AICPA: FN: Measurement IMA: Cost Management.

56) Sky airlines produces two different aircrafts. The joint process incurs costs of $10 million. Both aircrafts can be sold at split-off or processed further to increase the final sales value. The following information is related to the two products. (all costs are recorded in millions)

Product B752 B797

Units 15 25

Weight per Unit (lbs) 90,000 110,000

Final Sales Value $420 480

Further Sales Value Processing Costs at Split-Off $200 $230 260 310

If the sales price at split-off provided is not reliable, but the final sales value and further processing costs are reliable, what is the joint costs allocated to B797 using the appropriate method of allocation? A) $5 million B) $5.33 million C) $5.50 million D) $5.74 million Answer: A Explanation: ($420 - $200) + ($480 - $260) = $440 ($480 - $260) ÷ $440 × $10 = $5 (B752 final sales- B752 further processing cost) + (B797 final sales- B797 further processing cost) = total NRV (B797 final sales- B797 further processing cost) ÷ total NRV × joint process costs Diff: 3 LO: 2 Bloom: AN AACSB: None AICPA: FN: Measurement IMA: Cost Management.

57) Sky airlines produces two different aircrafts. The joint process incurs costs of $10 million. Both aircrafts can be sold at split-off or processed further to increase the final sales value. The following information is related to the two products. (all costs are recorded in millions)

Product B752 B797

Units 15 25

Weight per Unit (lbs) 90,000 110,000

Final Sales Value $420 480

Further Sales Value Processing Costs at Split-Off $200 $230 260 310

If the sales price at split-off provided is not reliable, but the final sales value and further processing costs are reliable, what is the gross margin for B797 using the appropriate method of allocation? A) $214.26 million B) $214.50 million C) $215 million D) $220 million Answer: C Explanation: ($420 - $200) + ($480 - $260) = $440 ($480 - $260) ÷ $440 × $10 = $5 $480 - $260 - $5 = $215 (B752 final sales- B752 further processing cost) + (B797 final sales- B797 further processing cost) = total NRV (B797 final sales- B797 further processing cost) ÷ total NRV × joint process costs = B797 joint process cost B797 final sales- B797 further processing cost - B797 joint process cost Diff: 3 LO: 2 Bloom: AN AACSB: None AICPA: FN: Measurement IMA: Cost Management.

58) Sky airlines produces two different aircrafts. The joint process incurs costs of $10 million. Both aircrafts can be sold at split-off or processed further to increase the final sales value. The following information is related to the two products. (all costs are recorded in millions)

Product B752 B797

Units 15 25

Weight per Unit (lbs) 90,000 110,000

Final Sales Value $420 480

Further Sales Value Processing Costs at Split-Off $200 $230 260 310

If the sales price at split-off and the final sales values provided are not reliable, what is the joint costs allocated to B752 using the appropriate method of allocation? A) $4.26 million B) $4.50 million C) $4.67 million D) $5 million Answer: B Explanation: 90,000 + 110,000 = 200,000 90,000 ÷ 200,000 × 10 = 4.5 B752 lbs + B797 lbs = total lbs B752 lbs ÷ total lbs × joint cost = B752 joint cost Diff: 3 LO: 2 Bloom: AN AACSB: None AICPA: FN: Measurement IMA: Cost Management.

59) Sky airlines produces two different aircrafts. The joint process incurs costs of $10 million. Both aircrafts can be sold at split-off or processed further to increase the final sales value. The following information is related to the two products. (all costs are recorded in millions)

Product B752 B797

Units 15 25

Weight per Unit (lbs) 90,000 110,000

Final Sales Value $420 480

Further Sales Value Processing Costs at Split-Off $200 $230 260 310

If the sales price at split-off and the final sales values provided are not reliable, what is the gross margin for B752 using the appropriate method of allocation? A) $215 million B) $215.5 million C) $215.74 million D) $220 million Answer: B Explanation: 90,000 + 110,000 = 200,000 90,000 ÷ 200,000 × 10 = 4.5 $420 - $200 - $4.5 = $215.5 B752 lbs + B797 lbs = total lbs B752 lbs ÷ total lbs × joint cost = B752 joint cost B752 final sales- B752 further processing cost - B752 joint process cost Diff: 3 LO: 2 Bloom: AN AACSB: None AICPA: FN: Measurement IMA: Cost Management.

60) Sky airlines produces two different aircrafts. The joint process incurs costs of $10 million. Both aircrafts can be sold at split-off or processed further to increase the final sales value. The following information is related to the two products. (all costs are recorded in millions)

Product B752 B797

Units 15 25

Weight per Unit (lbs) 90,000 110,000

Final Sales Value $420 480

Further Sales Value Processing Costs at Split-Off $200 $230 260 310

If the sales price at split-off and the final sales values provided are not reliable, what is the joint costs allocated to B797 using the appropriate method of allocation? A) $5 million B) $5.33 million C) $5.50 million D) $5.74 million Answer: C Explanation: 90,000 + 110,000 = 200,000 110,000 ÷ 200,000 × 10 = 5.5 B752 lbs + B797 lbs = total lbs B797 lbs ÷ total lbs × joint cost = B797 joint cost Diff: 3 LO: 2 Bloom: AN AACSB: None AICPA: FN: Measurement IMA: Cost Management.

61) Sky airlines produces two different aircrafts. The joint process incurs costs of $10 million. Both aircrafts can be sold at split-off or processed further to increase the final sales value. The following information is related to the two products. (all costs are recorded in millions)

Product B752 B797

Units 15 25

Weight per Unit (lbs) 90,000 110,000

Final Sales Value $420 480

Further Sales Value Processing Costs at Split-Off $200 $230 260 310

If the sales price at split-off and the final sales values provided are not reliable, what is the gross margin for B797 using the appropriate method of allocation? A) $214.26 million B) $214.50 million C) $215 million D) $220 million Answer: B Explanation: 90,000 + 110,000 = 200,000 110,000 ÷ 200,000 × 10 = 5.5 $480 - $260 - $5.5 = $214.5 B752 lbs + B797 lbs = total lbs B797 lbs ÷ total lbs × joint cost = B797 joint cost B797 final sales- B797 further processing cost - B797 joint process cost Diff: 3 LO: 2 Bloom: AN AACSB: None AICPA: FN: Measurement IMA: Cost Management. 62) When deciding the point at which a product should be sold to maximize profits in a joint product costing and analysis, which one of the following costs is relevant? A) Separable costs after the split-off point B) Sales salaries for the period when the units were produced C) Joint costs to the split-off point D) Purchase costs of the materials required for the joint products Answer: A Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

63) When considering whether to sell or process a product further, joint costs A) are essential the decision-making process. B) are considered sunk costs. C) will change depending on which decision is made. D) are considered opportunity costs. Answer: B Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management. 64) Another term for joint costs is A) future costs. B) opportunity costs. C) incremental costs D) sunk costs. Answer: D Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management. 65) Joint costs are only relevant A) when deciding whether to sell or process further. B) when considering the opportunity costs. C) at the split-off point. D) when producing the final product(s). Answer: C Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

66) When deciding whether to sell or process further, companies will use A) joint costs. B) separable costs. C) the net realizable value. D) the incremental costs. Answer: C Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management. 67) Which of the following statements is false regarding an incremental analysis? A) If the sales value at split-off is greater than the NRV, sell after further processing. B) If the sales value at split-off is less than the NRV, sell after further processing. C) If the sales value at split-off is greater than the NRV, sell it without further processing. D) The sales value at split-off and the NRV need to be analyzed to determine whether to sell or process further. Answer: A Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management. 68) When a company is deciding whether to sell at split-off or process further, all the following assumptions are made except A) the marketplace has been assessed, and there is sufficient demand to meet the company's target income. B) the decision is aligned with the organizational objectives. C) the company has the capacity and capability to process the product further. D) the decision will lead the company towards minimizing profits. Answer: D Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

69) FlyDucks is deciding whether to sell its current model as is or process it further to create an enhanced model. The unit cost of the current model is $24 and would sell for $52. The company would incur further processing costs of $17 per unit and would sell for $68. What should FlyDucks do? A) Process further, the company will make an additional $23 per unit. B) Process further, the company will make an additional $11 per unit. C) Sell the current model, the company will show an increased profit of $1 per unit. D) Sell the current model, the company will show an increased profit of $16 per unit. Answer: C Explanation: $52 - $24 = $28; $68 - $24 - $17 = $27; $28 - $27 = $1 (sell current model) (current model selling price - cost of current model) - (enhanced model selling price - enhanced model additional cost) = sell current model Diff: 2 LO: 3 Bloom: AN AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management. 70) Coyote Company spent $8,000 to produce its new device. This new device can be sold as-is for $10,000 or processed further at an additional cost of $3,000 and will then be sold for $14,000. Which amounts are relevant to the decision about the new device? A) $8,000, $10,000, $3,000 and $14,000 B) $10,000, $3,000 and $14,000 C) $8,000, $3,000 and $14,000 D) $8,000, $10,000, and $14,000 Answer: B Diff: 2 LO: 3 Bloom: AN AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

71) Stars Unlimited produces four products through a joint process that incurs costs of $150,000. Information for these products is as follows:

Product Gemini Taurus Leo Virgo

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

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

If Processed Further Final Further Sales Value Processing Costs $15,000 $2,500 35,000 3,000 25,000 4,000 45,000 6,000

Which, if any, products should be processed further? A) All products should be processed further. B) Gemini and Taurus should be processed further. C) Gemini, Virgo, and Leo should be processed further. D) Gemini, Taurus, and Leo should be processed further. Answer: D Explanation: Gemini - $15,000 - $10,000 - $2,500 = $2,500 increase (process further) Taurus - $35,000 - $30,000 - $3,000 = $2,000 increase (process further) Leo - $25,000 - $20,000 - $4,000 = $1,000 increase (process further) Virgo - $45,000 - $40,000 - $6,000 = $1,000 decrease (sell as is) final sales value - sales at split-off - further processing costs = increase (decrease) Diff: 2 LO: 3 Bloom: AN AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

72) Stars Unlimited produces four products through a joint process that incurs costs of $150,000. Information for these products is as follows:

Product Gemini Taurus Leo Virgo

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

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

If Processed Further Final Further Sales Value Processing Costs $15,000 $2,500 35,000 3,000 25,000 4,000 45,000 6,000

If Gemini is processed further, profits will A) increase by $2,500. B) decrease by $2,500. C) increase by $12,500. D) increase by $10,000. Answer: A Explanation: $15,000 - $10,000 - $2,500 = $2,500 increase final sales value - sales at split-off - further processing costs = increase (decrease) Diff: 2 LO: 3 Bloom: AP AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

73) Stars Unlimited produces four products through a joint process that incurs costs of $150,000. Information for these products is as follows:

Product Gemini Taurus Leo Virgo

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

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

If Processed Further Final Further Sales Value Processing Costs $15,000 $2,500 35,000 3,000 25,000 4,000 45,000 6,000

If Taurus is processed further, profits will A) increase by $2,000. B) decrease by $2,000. C) increase by $32,000. D) increase by $30,000. Answer: A Explanation: $35,000 - $30,000 - $3,000 = $2,000 increase final sales value - sales at split-off - further processing costs = increase (decrease) Diff: 2 LO: 3 Bloom: AP AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

74) Stars Unlimited produces four products through a joint process that incurs costs of $150,000. Information for these products is as follows:

Product Gemini Taurus Leo Virgo

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

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

If Processed Further Final Further Sales Value Processing Costs $15,000 $2,500 35,000 3,000 25,000 4,000 45,000 6,000

If Leo is processed further, profits will A) increase by $1,000. B) decrease by $1,000. C) increase by $21,000. D) increase by $20,000. Answer: A Explanation: $25,000 - $20,000 - $4,000 = $1,000 increase final sales value - sales at split-off - further processing costs = increase (decrease) Diff: 2 LO: 3 Bloom: AP AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

75) Stars Unlimited produces four products through a joint process that incurs costs of $150,000. Information for these products is as follows:

Product Gemini Taurus Leo Virgo

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

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

If Processed Further Final Further Sales Value Processing Costs $15,000 $2,500 35,000 3,000 25,000 4,000 45,000 6,000

If Virgo is processed further, profits will A) increase by $1,000. B) decrease by $1,000. C) increase by $39,000. D) increase by $40,000. Answer: B Explanation: $45,000 - $40,000 - $6,000 = $1,000 decrease final sales value - sales at split-off - further processing costs = increase (decrease) Diff: 2 LO: 3 Bloom: AP AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

76) The Sweete Shoppe produces a variety of sweet treats. Several treats can be sold at split-off or further processed to produce a different type of treat. The following three treats are all produced in a joint processing operation at a cost of $63,000. The costs are allocated based on pounds produced. Information for these treats is as follows:

Product Berry Delight Chocolate Wonder Caramel Chip

Pounds (lb) Produced 63,000 113,000 38,000

Price per lb at at Split-Off $8.00 10.00 5.00

If Processed Further Final price Further per unit Processing Costs $10.00 $88,000 10.50 43,000 5.60 33,000

Which, if any, products should be processed further? A) Berry Delight only B) Berry Delight and Chocolate Wonder C) Caramel Chip only D) Berry Delight and Caramel Chip Answer: B Explanation: Berry Delight - ($10 - $8) × 63,000 - $88,000 = $38,000 increase (process further) Chocolate Wonder - ($10.50 - $10) × 113,000 - $43,000 = $13,500 increase (process further) Caramel Chip - ($5.60 - 5) × 38,000 - $33,000 = $10,200 decrease (sell as is) (final price per unit - price per unit at split-off) × lbs produced - further processing costs = increase (decrease) Diff: 2 LO: 3 Bloom: AN AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

77) The Sweete Shoppe produces a variety of sweet treats. Several treats can be sold at split-off or further processed to produce a different type of treat. The following three treats are all produced in a joint processing operation at a cost of $63,000. The costs are allocated based on pounds produced. Information for these treats is as follows:

Product Berry Delight Chocolate Wonder Caramel Chip

Pounds (lb) Produced 63,000 113,000 38,000

Price per lb at at Split-Off $8.00 10.00 5.00

If Processed Further Final price Further per unit Processing Costs $10.00 $88,000 10.50 43,000 5.60 33,000

The net increase or decrease in profits of processing all the treats further is A) an increase of $41,300. B) a decrease of $41,300. C) an increase of $21,700. D) a decrease of $21,700. Answer: A Explanation: Berry Delight - ($10 - $8) × 63,000 - $88,000 = $38,000 increase Chocolate Wonder - ($10.50 - $10) × 113,000 - $43,000 = $13,500 increase Caramel Chip - ($5.60 - 5) × 38,000 - $33,000 = $10,200 decrease $38,000 + $13,500 - $10,200 = $41,300 increase (final price per unit - price per unit at split-off) × lbs produced - further processing costs = increase (decrease) Berry delight increase + chocolate wonder increase - caramel chip decrease = net increase (decrease) Diff: 2 LO: 3 Bloom: AN AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

78) The Sweete Shoppe produces a variety of sweet treats. Several treats can be sold at split-off or further processed to produce a different type of treat. The following three treats are all produced in a joint processing operation at a cost of $63,000. The costs are allocated based on pounds produced. Information for these treats is as follows:

Product Berry Delight Chocolate Wonder Caramel Chip

Pounds (lb) Produced 63,000 113,000 38,000

Price per lb at at Split-Off $8.00 10.00 5.00

If Processed Further Final price Further per unit Processing Costs $10.00 $88,000 10.50 43,000 5.60 33,000

Assuming the company correctly identifies which product(s) to process further, what will be the company's increase in profits by further processing the identified product(s)? A) $41,300 B) $51,500 C) $19,453 D) $39,220 Answer: B Explanation: Berry Delight - ($10 - $8) × 63,000 - $88,000 = $38,000 increase Chocolate Wonder - ($10.50 - $10) × 113,000 - $43,000 = $13,500 increase $38,000 + $13,500 = $51,500 increase (final price per unit - price per unit at split-off) × lbs produced - further processing costs = increase (decrease) Berry delight increase + chocolate wonder increase = net increase Diff: 3 LO: 3 Bloom: AN AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

79) The Sweete Shoppe produces a variety of sweet treats. Several treats can be sold at split-off or further processed to produce a different type of treat. The following three treats are all produced in a joint processing operation at a cost of $63,000. The costs are allocated based on pounds produced. Information for these treats is as follows:

Product Berry Delight Chocolate Wonder Caramel Chip

Pounds (lb) Produced 63,000 113,000 38,000

Price per lb at at Split-Off $8.00 10.00 5.00

If Processed Further Final price Further per unit Processing Costs $10.00 $88,000 10.50 43,000 5.60 33,000

The net increase or decrease in profits of processing Berry Delight further is A) an increase of $38,000. B) a decrease of $38,000. C) an increase of $19,453. D) a decrease of $19,453. Answer: A Explanation: Berry Delight - ($10 - $8) × 63,000 - $88,000 = $38,000 increase (final price per unit - price per unit at split-off) × lbs produced - further processing costs = increase (decrease) Diff: 2 LO: 3 Bloom: AN AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

80) The Sweete Shoppe produces a variety of sweet treats. Several treats can be sold at split-off or further processed to produce a different type of treat. The following three treats are all produced in a joint processing operation at a cost of $63,000. The costs are allocated based on pounds produced. Information for these treats is as follows:

Product Berry Delight Chocolate Wonder Caramel Chip

Pounds (lb) Produced 63,000 113,000 38,000

Price per lb at at Split-Off $8.00 10.00 5.00

If Processed Further Final price Further per unit Processing Costs $10.00 $88,000 10.50 43,000 5.60 33,000

The net increase or decrease in profits of processing Chocolate Wonder further is A) an increase of $19,766. B) a decrease of $19,766. C) an increase of $13,500. D) a decrease of $13,500. Answer: C Explanation: Chocolate Wonder - ($10.50 - $10) × 113,000 - $43,000 = $13,500 increase (final price per unit - price per unit at split-off) × lbs produced - further processing costs = increase (decrease) Diff: 2 LO: 3 Bloom: AN AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

81) The Sweete Shoppe produces a variety of sweet treats. Several treats can be sold at split-off or further processed to produce a different type of treat. The following three treats are all produced in a joint processing operation at a cost of $63,000. The costs are allocated based on pounds produced. Information for these treats is as follows:

Product Berry Delight Chocolate Wonder Caramel Chip

Pounds (lb) Produced 63,000 113,000 38,000

Price per lb at at Split-Off $8.00 10.00 5.00

If Processed Further Final price Further per unit Processing Costs $10.00 $88,000 10.50 43,000 5.60 33,000

The net increase or decrease in profits of processing Caramel Chip further is A) an increase of $21,387. B) a decrease of $21,387. C) an increase of $10,200. D) a decrease of $10,200. Answer: D Explanation: Caramel Chip - ($5.60 - 5) × 38,000 - $33,000 = $10,200 decrease (final price per unit - price per unit at split-off) × lbs produced - further processing costs = increase (decrease) Diff: 2 LO: 3 Bloom: AN AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

82) The Sweete Shoppe produces a variety of sweet treats. Several treats can be sold at split-off or further processed to produce a different type of treat. The following three treats are all produced in a joint processing operation at a cost of $63,000. The costs are allocated based on pounds produced. Information for these treats is as follows:

Product Berry Delight Chocolate Wonder Caramel Chip

Pounds (lb) Produced 63,000 113,000 38,000

Price per lb at at Split-Off $8.00 10.00 5.00

If Processed Further Final price Further per unit Processing Costs $10.00 $88,000 10.50 43,000 5.60 33,000

The joint processing costs for these treats A) should be allocated to the treats to determine whether they should be sold at split-off or processed further. B) should be ignored in determining whether they should be sold at split-off or processed further. C) should be ignored in making all product decisions. D) are never included in the product costs and can mislead management in the decision-making process. Answer: B Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management. 83) All the following statements are true regarding the allocation of joint costs except A) joint costs are allocated to products to help managers effectively control their costs. B) joint costs are allocated to products to identify the total cost of production in producing various products. C) joint costs are allocated to products to be sure each manager is only responsible for their share of the costs. D) joint costs are allocated to products to help identify if the product should be processed further or sold as-is. Answer: D Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

84) When a company produces a by-product along with its primary product, as part of a joint process, the following method(s) may be used to account for the by-product transaction A) the production method only. B) the sales method only. C) the production and sales methods, either method is sufficient. D) the production and sales methods, in conjunction with one another. Answer: C Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management. 85) The production method of accounting for the costs of a by-product A) treats the by-product as nonexistent until the by-product is sold. B) recognizes only the NRV of the by-product. C) recognizes by-products as soon as they are produced. D) recognizes the by-product once it has been determined to be processed further. Answer: C Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management. 86) The sales method of accounting for the costs of a by-product A) treats the by-product as nonexistent until the by-product is sold. B) recognizes only the NRV of the by-product. C) recognizes by-products as soon as they are produced. D) recognizes the by-product once it has been determined to be processed further. Answer: A Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

87) Using the production method to account for by-products, by-products are accounted for A) in Work-in-Process Inventory (WIP) and then in Finished Good Inventory. B) only in Work-in-Process Inventory (WIP). C) only in Finished Good Inventory. D) are only expensed to Cost of Goods Sold. Answer: C Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management. 88) Using the production method to account for by-products, joint costs A) are allocated to the by-products along with the primary joint products. B) are not allocated to the by-products. C) are allocated to the by-product based on its NRV. D) are only expensed to Cost of Goods Sold. Answer: C Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

89) Coconuts N More produces two joint products, Coconut Milk and Coconut Meat. The company uses the leftover Coconut Skin as a by-product. All three are produced from joint costs of $75,000: direct materials amounting to $50,000 and another $25,000 for direct labor and manufacturing overhead. Beginning inventory for all three products is zero. Information for production of the product is as follows:

Product Coconut Milk Coconut Meat Coconut Skin

Units Produced in lbs 21,000 12,200 2,250

Units Sold in lbs 19,500 10,300 2,000

Sales price per lb $1.30 6.20 1.00

How much in joint costs should be allocated to the by-product, using the production method? A) $2,000 B) $1,604 C) $0 D) $2,250 Answer: D Explanation: 2,250 lbs × $1 = $2,250 (NRV) Coconut skin units produced in tons × Coconut skin sales per lb = NRV Diff: 2 LO: 4 Bloom: AP AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

90) Coconuts N More produces two joint products, Coconut Milk and Coconut Meat. The company uses the leftover Coconut Skin as a by-product. All three are produced from joint costs of $75,000: direct materials amounting to $50,000 and another $25,000 for direct labor and manufacturing overhead. Beginning inventory for all three products is zero. Information for production of the product is as follows:

Product Coconut Milk Coconut Meat Coconut Skin

Units Produced in lbs 21,000 12,200 2,250

Units Sold in lbs 19,500 10,300 2,000

Sales price per lb $1.30 6.20 1.00

The correct journal entry to transfer the joint production costs from WIP to FG, using the production method is A) FG Inventory - Coconut Milk 19,465 FG Inventory - Coconut Meat 53,931 FG Inventory - Coconut Skin 1,604 WIP Inventory 75,000 B) FG Inventory - Coconut Milk 19,294 FG Inventory - Coconut Meat 53,456 FG Inventory - Coconut Skin 2,250 WIP Inventory 75,000 C) FG Inventory - Coconut Skin 2,250 WIP Inventory 2,250 D) FG Inventory - Coconut Milk 19,890 FG Inventory - Coconut Meat 55,110 WIP Inventory 75,000

Answer: B Explanation: 2,250 lbs × $1 = $2,250 (NRV) $75,000 - $2,250 = $72,750 (remaining joint costs) Coconut milk - 21,000 × 1.30 = $27,300 (sales value at split off) Coconut meat - 12,200 × 6.20 = $75,640 (sales value at split off) $27,300 + $75,640 = $102,940 (total sales value at split off of primary products) $27,300 ÷ $102,940 × $72,750 = $19,294 $75,640 ÷ $102,940 × $72,750 = $53,456 lbs of coconut skin × coconut skin sales price per unit = NRV of coconut skin Total joint costs - NRV of coconut skin = remaining joint costs Coconut milk - units produced × sales price per unit = coconut milk sales value at split off Coconut meat - units produced × sales price per unit = coconut meat sales value at split off coconut milk sales value at split off + coconut meat sales value at split off = total sales value at split off of primary products coconut milk sales value at split off ÷ total sales value at split off of primary products × remaining joint costs = coconut milk allocated joint costs coconut meat sales value at split off ÷ total sales value at split off of primary products × remaining joint costs = coconut meat allocated joint costs Diff: 2 LO: 4 Bloom: AN AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

91) Coconuts N More produces two joint products, Coconut Milk and Coconut Meat. The company uses the leftover Coconut Skin as a by-product. All three are produced from joint costs of $75,000: direct materials amounting to $50,000 and another $25,000 for direct labor and manufacturing overhead. Beginning inventory for all three products is zero. Information for production of the product is as follows:

Product Coconut Milk Coconut Meat Coconut Skin

Units Produced in lbs 21,000 12,200 2,250

Units Sold in lbs 19,500 10,300 2,000

Sales price per lb $1.30 6.20 1.00

How much in total sales would be recorded for the products sold under the production method? A) $89,210 B) $91,210 C) $102,940 D) $105,190 Answer: A Explanation: (19,500 × $1.30) + (10,300 × $6.20) = $89,210 (Coconut milk units sold × Coconut milk sales price per lb) + (Coconut meat units sold × Coconut meat sales price per lb) Diff: 2 LO: 4 Bloom: AP AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

92) Coconuts N More produces two joint products, Coconut Milk and Coconut Meat. The company uses the leftover Coconut Skin as a by-product. All three are produced from joint costs of $75,000: direct materials amounting to $50,000 and another $25,000 for direct labor and manufacturing overhead. Beginning inventory for all three products is zero. Information for production of the product is as follows:

Product Coconut Milk Coconut Meat Coconut Skin

Units Produced in lbs 21,000 12,200 2,250

Units Sold in lbs 19,500 10,300 2,000

Sales price per lb $1.30 6.20 1.00

How much in total cost of goods sold would be recorded for the products sold under the production method? A) $89,210 B) $64,996 C) $65,297 D) $63,047

Answer: D Explanation: 2,250 lbs × $1 = $2,250 (NRV) $75,000 - $2,250 = $72,750 (remaining joint costs) Coconut milk - 21,000 × 1.30 = $27,300 (sales value at split off) Coconut meat - 12,200 × 6.20 = $75,640 (sales value at split off) $27,300 + $75,640 = $102,940 (total sales value at split off of primary products) $27,300 ÷ $102,940 × $72,750 = $19,294 (Coconut Milk - allocated joint costs) $75,640 ÷ $102,940 × $72,750 = $53,456 (Coconut Meat - allocated joint costs) $19,294 ÷ 21,000 × 19,500 = $17,915 (Coconut Milk - cogs) $53,456 ÷ 12,200 × 10,300 = $45,131 (Coconut Meat - cogs) $17,915 + $45,131 = $63,047 (total cogs) lbs of coconut skin × coconut skin sales price per unit = NRV of coconut skin Total joint costs - NRV of coconut skin = remaining joint costs Coconut milk - units produced × sales price per unit = coconut milk sales value at split off Coconut meat - units produced × sales price per unit = coconut meat sales value at split off coconut milk sales value at split off + coconut meat sales value at split off = total sales value at split off of primary products coconut milk sales value at split off ÷ total sales value at split off of primary products × remaining joint costs = coconut milk allocated joint costs coconut meat sales value at split off ÷ total sales value at split off of primary products × remaining joint costs = coconut meat allocated joint costs Coconut Milk - allocated joint costs ÷ coconut milk units produced × coconut milk units sold = coconut milk cogs Coconut Meat- allocated joint costs ÷ coconut meat units produced × coconut meat units sold = coconut meat cogs coconut milk cogs + coconut meat cogs = total cogs Diff: 3 LO: 4 Bloom: AP AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

93) Coconuts N More produces two joint products, Coconut Milk and Coconut Meat. The company uses the leftover Coconut Skin as a by-product. All three are produced from joint costs of $75,000: direct materials amounting to $50,000 and another $25,000 for direct labor and manufacturing overhead. Beginning inventory for all three products is zero. Information for production of the product is as follows:

Product Coconut Milk Coconut Meat Coconut Skin

Units Produced in lbs 21,000 12,200 2,250

Units Sold in lbs 19,500 10,300 2,000

Sales price per lb $1.30 6.20 1.00

How much in sales and cost of goods sold will be assigned to the Coconut Skin, respectively, using the production method? A) $0, $0 B) $2,000, $2,250 C) $2,250, $2,000 D) $2,000, $0 Answer: A Explanation: $0, $0 - by-products are not assigned to sales or COGS. Diff: 2 LO: 4 Bloom: AP AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

94) Coconuts N More produces two joint products, Coconut Milk and Coconut Meat. The company uses the leftover Coconut Skin as a by-product. All three are produced from joint costs of $75,000: direct materials amounting to $50,000 and another $25,000 for direct labor and manufacturing overhead. Beginning inventory for all three products is zero. Information for production of the product is as follows:

Product Coconut Milk Coconut Meat Coconut Skin

Units Produced in lbs 21,000 12,200 2,250

Units Sold in lbs 19,500 10,300 2,000

Sales price per lb $1.30 6.20 1.00

The journal entry to sell the coconut milk, using the production method, will include a credit to A) Cash or Accounts receivable. B) WIP - Inventory. C) FG - Inventory. D) Sales. Answer: C Diff: 2 LO: 4 Bloom: AP AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management. 95) The income statement is ________ impacted by the sale of a by-product, using the production method. A) positively B) negatively C) not D) substantially Answer: A Diff: 2 LO: 4 Bloom: C AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

96) Using the production method, scrap is A) transferred from finished goods to cost of goods sold. B) expensed as incurred. C) treated in the same manner as the by-product. D) treated in the same manner as the primary product. Answer: C Diff: 2 LO: 4 Bloom: C AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management. 97) Coconuts N More produces two joint products, Coconut Milk and Coconut Meat. The company uses the leftover Coconut Skin as a by-product. All three are produced from joint costs of $75,000: direct materials amounting to $50,000 and another $25,000 for direct labor and manufacturing overhead. Beginning inventory for all three products is zero. Information for production of the product is as follows:

Product Coconut Milk Coconut Meat Coconut Skin

Units Produced in lbs 21,000 12,200 2,250

Units Sold in lbs 19,500 10,300 2,000

Sales price per lb $1.30 6.20 1.00

How much in joint costs should be allocated to the by-product, using the sales method? A) $2,000 B) $1,604 C) $0 D) $2,250 Answer: C Explanation: $0, all joint costs are allocated to the primary products. Diff: 2 LO: 4 Bloom: AP AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

98) Coconuts N More produces two joint products, Coconut Milk and Coconut Meat. The company uses the leftover Coconut Skin as a by-product. All three are produced from joint costs of $75,000: direct materials amounting to $50,000 and another $25,000 for direct labor and manufacturing overhead. Beginning inventory for all three products is zero. Information for production of the product is as follows:

Product Coconut Milk Coconut Meat Coconut Skin

Units Produced in lbs 21,000 12,200 2,250

Units Sold in lbs 19,500 10,300 2,000

Sales price per lb $1.30 6.20 1.00

The correct journal entry to transfer the joint production costs from WIP to FG, using the sales method is A) FG Inventory - Coconut Milk 19,465 FG Inventory - Coconut Meat 53,931 FG Inventory - Coconut Skin 1,604 WIP Inventory 75,000 B) FG Inventory - Coconut Milk 19,294 FG Inventory - Coconut Meat 53,456 FG Inventory - Coconut Skin 2,250 WIP Inventory 75,000 C) FG Inventory - Coconut Skin 2,250 WIP Inventory 2,250 D) FG Inventory - Coconut Milk 19,890 FG Inventory - Coconut Meat 55,110 WIP Inventory 75,000

Answer: D Explanation: Coconut milk - 21,000 × 1.30 = $27,300 (sales value at split off) Coconut meat - 12,200 × 6.20 = $75,640 (sales value at split off) $27,300 + $75,640 = $102,940 (total sales value at split off of primary products) $27,300 ÷ $102,940 × $75,000 = $19,890 $75,640 ÷ $102,940 × $75,000 = $55,110 Coconut milk - units produced × sales price per unit = coconut milk sales value at split-off Coconut meat - units produced × sales price per unit = coconut meat sales value at split-off coconut milk sales value at split-off + coconut meat sales value at split off = total sales value at split off of primary products coconut milk sales value at split off ÷ total sales value at split off of primary products × joint costs = coconut milk allocated joint costs coconut meat sales value at split off ÷ total sales value at split off of primary products × joint costs = coconut meat allocated joint costs Diff: 2 LO: 4 Bloom: AN AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

99) Coconuts N More produces two joint products, Coconut Milk and Coconut Meat. The company uses the leftover Coconut Skin as a by-product. All three are produced from joint costs of $75,000: direct materials amounting to $50,000 and another $25,000 for direct labor and manufacturing overhead. Beginning inventory for all three products is zero. Information for production of the product is as follows:

Product Coconut Milk Coconut Meat Coconut Skin

Units Produced in lbs 21,000 12,200 2,250

Units Sold in lbs 19,500 10,300 2,000

Sales price per lb $1.30 6.20 1.00

How much in total sales would be recorded for the products sold under the sales method? A) $89,210 B) $91,210 C) $102,940 D) $105,190 Answer: A Explanation: (19,500 × $1.30) + (10,300 × $6.20) = $89,210 (Coconut milk units sold × Coconut milk sales price per lb) + (Coconut meat units sold × Coconut meat sales price per lb) Diff: 2 LO: 4 Bloom: AP AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

100) Coconuts N More produces two joint products, Coconut Milk and Coconut Meat. The company uses the leftover Coconut Skin as a by-product. All three are produced from joint costs of $75,000: direct materials amounting to $50,000 and another $25,000 for direct labor and manufacturing overhead. Beginning inventory for all three products is zero. Information for production of the product is as follows:

Product Coconut Milk Coconut Meat Coconut Skin

Units Produced in lbs 21,000 12,200 2,250

Units Sold in lbs 19,500 10,300 2,000

Sales price per lb $1.30 6.20 1.00

How much in total cost of goods sold would be recorded for the products sold, under the sales method? A) $89,210 B) $64,996 C) $65,297 D) $63,047 Answer: B Explanation: Coconut milk - 21,000 × 1.30 = $27,300 (sales value at split off) Coconut meat - 12,200 × 6.20 = $75,640 (sales value at split off) $27,300 + $75,640 = $102,940 (total sales value at split off of primary products) $27,300 ÷ $102,940 × $75,000 = $19,890 (Coconut Milk - allocated joint costs) $75,640 ÷ $102,940 × $75,000 = $55,110 (Coconut Meat - allocated joint costs) $19,890 ÷ 21,000 × 19,500 = $18,469 (Coconut Milk - cogs) $55,110 ÷ 12,200 × 10,300 = $46,527 (Coconut Meat - cogs) $18,469 + $46,527 = $64,996 (total cogs) Coconut milk - units produced × sales price per unit = coconut milk sales value at split off Coconut meat - units produced × sales price per unit = coconut meat sales value at split off coconut milk sales value at split off + coconut meat sales value at split off = total sales value at split off of primary products coconut milk sales value at split off ÷ total sales value at split off of primary products × joint costs = coconut milk allocated joint costs coconut meat sales value at split off ÷ total sales value at split off of primary products × joint costs = coconut meat allocated joint costs Coconut Milk - allocated joint costs ÷ coconut milk units produced × coconut milk units sold = coconut milk cogs Coconut Meat- allocated joint costs ÷ coconut meat units produced × coconut meat units sold = coconut meat cogs coconut milk cogs + coconut meat cogs = total cogs Diff: 3 LO: 4 Bloom: AP AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management. 66

101) Coconuts N More produces two joint products, Coconut Milk and Coconut Meat. The company uses the leftover Coconut Skin as a by-product. All three are produced from joint costs of $75,000: direct materials amounting to $50,000 and another $25,000 for direct labor and manufacturing overhead. Beginning inventory for all three products is zero. Information for production of the product is as follows:

Product Coconut Milk Coconut Meat Coconut Skin

Units Produced in lbs 21,000 12,200 2,250

Units Sold in lbs 19,500 10,300 2,000

Sales price per lb $1.30 6.20 1.00

How much in sales and cost of goods sold will be assigned to the Coconut Skin, respectively, using the sales method? A) $0, $0 B) $2,000, $2,250 C) $2,250, $0 D) $2,000, $0 Answer: D Explanation: Sales - 2,000 × $1.00 = $2,000, $0 - by-products are not assigned to sales or COGS Lbs sold × price per lb Diff: 2 LO: 4 Bloom: AP AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

102) Coconuts N More produces two joint products, Coconut Milk and Coconut Meat. The company uses the leftover Coconut Skin as a by-product. All three are produced from joint costs of $75,000: direct materials amounting to $50,000 and another $25,000 for direct labor and manufacturing overhead. Beginning inventory for all three products is zero. Information for production of the product is as follows:

Product Coconut Milk Coconut Meat Coconut Skin

Units Produced in lbs 21,000 12,200 2,250

Units Sold in lbs 19,500 10,300 2,000

Sales price per lb $1.30 6.20 1.00

The journal entry to sell the coconut milk, using the sales method, will include a credit to A) Cash or Accounts receivable. B) WIP - Inventory. C) FG - Inventory. D) Sales. Answer: D Diff: 2 LO: 4 Bloom: AP AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management. 103) The income statement is ________ impacted by the sale of a by-product, using the sales method. A) positively B) negatively C) not D) substantially Answer: A Diff: 2 LO: 4 Bloom: C AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

104) Using the sales method, scrap is A) transferred from finished goods to cost of goods sold. B) expensed as incurred. C) treated in the same manner as the by-product. D) treated in the same manner as the primary product. Answer: C Diff: 2 LO: 4 Bloom: C AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management. 105) Which of the following statements is true, in regard to the production method versus the sales method? A) The sales method is preferred because it recognizes the sale of the by-product and scrap at the point of sale. B) The production method is preferred because it recognizes the sale of the by-product and scrap at the point of production. C) Either method can be chosen because the overall effect of the by-product and scrap transactions should be incidental to a company's primary business. D) Either method can be chosen because the overall effect of the by-product and scrap transactions is material to the decision-making process. Answer: C Diff: 2 LO: 4 Bloom: C AACSB: None AICPA: FN: Decision Modeling IMA: Cost Management.

106) A joint process is used to turn milk into butter, cream, and cheese. The cream is further processed into heaving whipping cream and half & half. The butter and cheese are sold as-is. In addition to these products, buttermilk is also produced as an unintended output. What name(s) would you call these products? Describe the difference between these types of products. Answer: Butter, cream, and cheese would be the joint products. Butter, heavy whipping cream, half & half, and cheese would be considered the final products. Buttermilk is considered a by-product. Joint products are the primary products and can be sold or processed further to become final products. These products are the reason a company is in business and are considered the main component of sales revenue. By-products are the unintended output of creating the primary products but still have a future use or economic value. These products can be sold, but the sale of them is usually not material to the income statement. Diff: 1 LO: 1 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 107) There are three methods of allocating joint costs. List each method and discuss when the allocation methods should be chosen. Answer: Sales Value at Split-Off Method. Allocates joint costs using the future sales value of the process's total production of joint products and the relative proportion of each product's sales value to the total. This method should be selected when the sales prices at the split-off point are available and reliable. Net Realizable Value (NRV) Method. The NRV method allocates joint costs based on the product's share of the total NRV. NRV is calculated by taking the final sales value less further processing costs. The NRV method should be chosen when the sales price at the split-off point is unavailable or unreliable, but the NRV information is available and reliable. Physical Quantities Method. This method allocates joint costs based on the product's share of a reasonable measurement basis for the joint products. For example, it could be based on volume, weight, length, or height. This method should only be used if the sales prices at the split-off point and the NRV information are unavailable or unreliable. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

108) Dairy Cream Company uses a joint process to create heavy cream and light cream. When first produced, there was no market for the two products, so both were processed further into final products. However, the company has now realized there is a market for both the heavy and light cream immediately after they are produced. What information should Dairy Cream consider when deciding whether to sell the products as is or continue to process them further? Answer: Dairy Cream Company should consider the NRV (Sales value of final product less further processing costs) and the sales value at split-off. If the sales value at split-off is greater than the NRV, the product should be sold as-is. Otherwise, the products should be processed further. Each product should be separately analyzed. The company should also be sure they have adequate capacity and capability, there is sufficient demand for the product(s), and the decision will maximize its profits. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Decision Modeling IMA: Cost Management. 109) NE Crossing Company produces two main products and a by-product during a joint process. The company uses the sales method to account for by-products, and the sales value at the split-off method is used to assign joint costs to the joint products. Describe the process of assigning joint costs and what happens when the product is sold. Answer: When a company uses the sales method to account for by-products, joint costs are not assigned to the by-product, and all costs are assigned to the two main products. When the byproduct is later sold, the company will record the sale by debiting cash and crediting Sales. As a result, there will be no cost recognized on the by-product, and the sale of the product will not affect inventory. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Decision Modeling IMA: Cost Management.

110) NE Crossing Company produces two main products and a by-product during a joint process. The company uses the production method to account for by-products, and the sales value at the split-off method is used to assign joint costs to the joint products. Describe the process of assigning joint costs and what happens when the product is sold. Answer: When a company uses the production method to account for by-products, joint costs are assigned to the by-product equal to its net realizable value (NRV.) If there are no further processing costs, the by-product's NRV will equal its sales value at split-off. When the byproduct is later sold, the company will record the sale by debiting cash and crediting Finished Goods Inventory - By-Product. There will be no gross margin recognized on the by-product, and the sale of the product will not affect the income statement. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Decision Modeling IMA: Cost Management. 111) Menkes Production Company manufactures two products from a joint process. The joint process costs $20,000. Both products must be processed past the split-off point to be marketable. White sugar produces 500 units or 20,000 lbs., incurs separable costs of $5 per unit, and has a market price of $25. Brown sugar produces 2,000 units or 50,000 lbs., incurs separable costs of $10 per unit, and has a market price of $20. Using the physical quantities method to allocate joint costs, how much joint costs will be allocated to each product? (round to the nearest whole dollar) Answer: White Sugar = $5,714 Brown Sugar = $14,286 Solution: 20,000 + 50,000 = 70,000 total lbs White Sugar = 20,000 ÷ 70,000 × $20,000 = $5,714 Brown Sugar = 50,000 ÷ 70,000 × $20,000 = $14,286 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

112) Menkes Production Company manufactures two products from a joint process. The joint process costs $20,000. Both products must be processed past the split-off point to be marketable. White sugar produces 500 units or 20,000 lbs., incurs separable costs of $5 per unit, and has a market price of $25. Brown sugar produces 2,000 units or 50,000 lbs., incurs separable costs of $10 per unit, and has a market price of $20. Using the sales value at split-off method to allocate joint costs, how much joint costs will be allocated to each product? (round to the nearest whole dollar) Answer: White Sugar = $4,762 Brown Sugar = $15,238 Solution: White Sugar total Sales = 500 × $25 = $12,500 Brown Sugar Total Sales = 2,000 × $20 = $40,000 Total Sales = $12,500 + $40,000 = $52,500 White Sugar = $12,500 ÷ $52,500 × $20,000 = $4,762 Brown Sugar = $40,000 ÷ $52,500 × $20,000 = $15,238 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 113) Menkes Production Company manufactures two products from a joint process. The joint process costs $20,000. Both products must be processed past the split-off point to be marketable. White sugar produces 500 units or 20,000 lbs., incurs separable costs of $5 per unit, and has a market price of $25. Brown sugar produces 2,000 units or 50,000 lbs., incurs separable costs of $10 per unit, and has a market price of $20. Using the NRV method to allocate joint costs, how much joint costs will be allocated to each product? (round to the nearest whole dollar) Answer: White Sugar = $6,667 Brown Sugar = $13,333 Solution: White Sugar NRV = 500 × ($25 - $5) = $10,000 Brown Sugar NRV = 2,000 × ($20 - $10) = $20,000 Total NRV = $10,000 + $20,000 = $30,000 White Sugar = $10,000 ÷ $30,000 × $20,000 = $6,667 Brown Sugar = $20,000 ÷ $30,000 × $20,000 = $13,333 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management. 73

114) Dolls R Us produces four different dolls that use a joint process. Each product may be sold at split-off or processed further. Joint processing costs for the products are $200,000. Other relevant information for the dolls is as follows:

Product Cry Baby Diaper Baby Feeding Baby Take Along Baby

If Processed Further Final Further Sales Value Processing Costs $70,000 $24,000 20,000 10,000 48,000 10,000 36,000 16,000

Sales Value at Split-Off $40,000 16,000 20,000 24,000

Suppose joint costs are allocated based on the sales value at split-off, which products should be processed further? Show all calculations. Answer: Cry Baby and Feeding Baby should be processed further as processing both products further will increase overall profits by $24,000. Solution: Cry Baby = $70,000 - $24,000 - $40,000 = $6,000 Diaper Baby — $20,000 - $10,000 - $16,000 = -$6,000 Feeding Baby — $48,000 - $10,000 - $20,000 = $18,000 Take Along Baby — $36,000 - $16,000 - $24,000 = -$4,000 Total increase for Cry Baby and Feeding Baby = $6,000 + $18,000 = $24,000 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Decision Modeling IMA: Cost Management.

115) Dolls R Us produces four different dolls that use a joint process. Each product may be sold at split-off or processed further. Joint processing costs for the products are $200,000. Other relevant information for the dolls is as follows:

Product Cry Baby Diaper Baby Feeding Baby Take Along Baby

If Processed Further Final Further Sales Value Processing Costs $70,000 $24,000 20,000 10,000 48,000 10,000 36,000 16,000

Sales Value at Split-Off $40,000 16,000 20,000 24,000

If joint costs are allocated based on the sales value at split-off, determine how processing each product further will affect profits. Answer: Cry Baby — increase $6,000 Diaper Baby — Decrease $6,000 Feeding Baby — Increase $18,000 Take Along Baby — Decrease $4,000 Total overall affect = Increase $14,000 Solution: Cry Baby = $70,000 - $24,000 - $40,000 = $6,000 Diaper Baby — $20,000 - $10,000 - $16,000 = -$6,000 Feeding Baby — $48,000 - $10,000 - $20,000 = $18,000 Take Along Baby — $36,000 - $16,000 - $24,000 = -$4,000 Total overall affect = $6,000 - $6,000 + $18,000 - $4,000 = $14,000 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Decision Modeling IMA: Cost Management.

116) Whitehead Corporation manufactures three different tires that use the same joint process. Each tire can be sold as is or processed further to create an upgraded tire. The joint process costs $30,000. Information for the three products is as follows:

Product P225/70R P265/65R P275/65R

Units Produced 5,600 10,000 2,500

Price per unit at Split-Off $70 $90 $120

If Processed Further Final price Further per unit Processing Costs $80 $15 $120 $20 $145 $22

If joint costs are allocated based on the NRV, which tire, or tires, should be processed further and which ones should be sold at split-off. Show all supporting calculations. (round to the nearest whole dollar) Answer: P265/65R & P275/65R should be processed further. P265/65R — increase of profit of $100,000 or $10 per unit P275/65R — an increase of profit of $7,500 or $3 per unit Solution: P225/70R = (($80 - $15) - $70) = -$5 × 5,600 = -$28,000 P265/65R = (($120 - $20) - $90) = $10 × 10,000 = $100,000 P275/65R = (($145 - $22) - $120) = $3 × 2,500 = $7,500 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Decision Modeling IMA: Cost Management. 117) Lana can process both of her products using a joint process. She can further process both products beyond split-off and increase her profits by $9,000 beyond what she can sell them for at split-off. The final sales value of these products after further processing is $42,000. If the products can be sold for $25,000 at split-off, how much additional processing costs would Lana have incurred to generate a higher final sales value? Answer: $8,000 Solution: $42,000 - $25,000 - $9,000 = $8,000 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: FC: Decision Modeling IMA: Cost Management.

118) Lastotal produces ice cream from his home. He creates two main products from a joint process, chocolate and vanilla, and one by-product, twists. The twists result from the excess liquid of both the chocolate and vanilla. The chocolate can be sold for $8,000, and the vanilla can be sold for $6,000. The twists will be sold for $900. If Lastotal uses the production method to account for by-products, how much of the joint process costs of $7,500 will be allocated to each product? (Round to the nearest whole dollar) Answer: Chocolate - $3,771 Vanilla - $2,829 Twists - $900 Solution: $900 — allocated to Twists (NRV) $7,500 - $900 = $6,600 to chocolate and vanilla $8,000 + $6,000 = $14,000, total sales of main products Chocolate, $8,000 ÷ $14,000 × $6,600 = $3,771 Vanilla, $6,000 ÷ $14,000 × $6,600 = $2,829 Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Decision Modeling IMA: Cost Management. 119) Lastotal produces ice cream from his home. He creates two main products from a joint process, chocolate and vanilla, and one by-product, twists. The twists result from the excess liquid of both the chocolate and vanilla. The chocolate can be sold for $8,000, and the vanilla can be sold for $6,000. The twists will be sold for $900. If Lastotal uses the sales method to account for by-products, how much of the joint process costs of $7,500 will be allocated to each product? (Round to the nearest whole dollar) Answer: Chocolate - $4,286 Vanilla - $3,214 Twists - $0 Solution: Twists - $0 $8,000 + $6,000 = $14,000, total sales of main products Chocolate, $8,000 ÷ $14,000 × $7,500 = $4,286 Vanilla, $6,000 ÷ $14,000 × $7,500 = $3,214 Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Decision Modeling IMA: Cost Management.

120) Kreider Farms produces three products and one by-product: Whole Wheat Flour, Bleached Flour, All-Purpose Flour, and Bran (by-product). Bran can be sold for $1,200. Joint process costs for the products are $12,200. If the other three products can be sold for $23,000, how much revenue will Kreider Farms record for the Bran if they use the sales method to account for byproducts? How much revenue will they record if they use the production method to account for by-products? Answer: Sales Method - $24,200 Production Method - $23,000 Solution: Sales Method — $23,000 + $1,200 Production Method — $23,000 Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Decision Modeling IMA: Cost Management. 121) Kreider Farms produces three products and one by-product: Whole Wheat Flour, Bleached Flour, All-Purpose Flour, and Bran (by-product). Bran can be sold for $1,200. Joint process costs for the products are $12,200. If the other three products can be sold for $23,000, prepare the journal entry for the sale of the Bran if the company uses the sales method to account for byproducts? Prepare the journal entry for the sale of the Bran if the company uses the production method to account for by-products? Answer: Sales Method: Cash $1,200 Sales — Bran $1,200 Production Method: Cash FG Inventory — Bran Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Decision Modeling IMA: Cost Management.

$1,200 $1,200

122) Gene started a business that retrieves golf balls from lakes and surrounding areas at the local greens. The recovered balls are cleaned and then assessed based on quality and priced to sell to the local sporting goods store. Birdie golf balls are sold for $5 per dozen, Bogey golf balls are sold at $4 a dozen, and Duffer golf balls are sold at $3 per dozen. Costs incurred last month amounted to $8,000 and produced (in dozens) 1,000 Birdie, 3,000 Bogey, and 2,000 Duffer. A dozen golf balls (no matter the quality) weigh 2lbs. Instructions a. If Gene uses the sales value at split-off method, how much in joint costs will be allocated to each product? b. If Gene uses the physical quantities method, how much in joint costs will be allocated to each product? c. Using the sales value at split-off method, how much will Gene recognize as gross profit for each product? d. Using the physical quantities method, how much will Gene recognize as gross profit for each product? Answer: a. Birdie - $1,739 Bogey - $4,174 Duffer - $2,087 b. Birdie - $1,333 Bogey - $4,000 Duffer - $2,667 c. Birdie - $3,261 Bogey - $7,826 Duffer - $3,913 d. Birdie - $3,667 Bogey - $8,000 Duffer - $3,333

Solution: a. Sales Units Price Produced Total Joint Allocated Product Per Unit (in dozens) Sales Costs Costs Birdie 5 × 1,000 = 5,000 ÷ 23,000 × 8,000 1,739 Bogey 4 × 3,000 = 12,000 ÷ 23,000 × 8,000 4,174 Duffer 3 × 2,000 = 6,000 ÷ 23,000 × 8,000 2,087 Total

23,000

$8,000

b. Units Produced lb per Product (in dozens) dozen Birdie 1,000 × 2 Bogey 3,000 × 2 Duffer 2,000 × 2 Total

= = =

Total Lbs 2,000 ÷ 6,000 ÷ 4,000 ÷ 12,000

12,000 × 12,000 × 12,000 ×

c. Sales Costs Gross Margin

Birdie 5,000 1,739 3,261

Bogey Duffer 12,000 6,000 4,174 2,087 7,826 3,913

Birdie 5,000 1,333 3,667

Bogey Duffer 12,000 6,000 4,000 2,667 8,000 3,333

d. Sales Costs Gross Margin

Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

Joint Allocated Costs Costs 8,000 1,333 8,000 4,000 8,000 2,667 $8,000

123) Blender Corporation produces two products, cheese, and butter, in a single process. In the month of January, the joint costs related to the process amounted to $96,000. In addition, 5,000 pounds of cheese and 4,000 pounds of butter were produced. The sales value at the point of separation was $13 for cheese and $14 for butter. Separable processing costs beyond the split-off point were: cheese, $18,000; butter, $18,000. Cheese sells for $17 per pound; butter sells for $18 per pound. Instructions a. If Blender uses the sales-value at split-off method, how much in joint costs will be allocated to each product? b. If Blender uses the NRV method, how much in joint costs will be allocated to each product? c. Which method will be a better allocation for Blender Corporation if the sales value at splitoff is reliable? Answer: a. Cheese - $51,570 Butter - $44,430 b. Cheese - $53,157 Butter - $42,843 c. Because the sales value at split-off is reliable, it is the preferred method for Blender Corporation.

Solution: a. Sales Price Product Per Unit

Lbs. Produced

Total Sales

Joint Allocated Costs Costs

Cheese

$13

5,000

65,000

÷ 121,000 × 96,000

51,570

Butter Total

4,000

56,000 121,000

÷ 121,000 × 96,000

44,430

Product Cheese Butter Total

Market Price Lbs. Per Unit Produced $17 × 5,000 18 × 4,000

NRV 67,000 ÷ 54,000 ÷ 121,000

121,000 121,000

Further Processing Cost 18,000 18,000

= =

Final Sales 85,000 72,000

× ×

Joint Allocated Costs Costs 96,000 = 53,157 96,000 = 42,843

Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Cost Management.

NRV 67,000 54,000

124) Payton Company uses a joint process to produce two products. The production results in 500 units for Product I and 2,000 units for Product II. The joint process costs are $20,000. Both products must be processed past the split-off point, incurring separable costs of $5 per unit for Product I and $10 per unit for Product II. The market price is $25 and $20 per unit of Products I and II, respectively. Product I has a weight of 20oz per unit, and Product II weighs 25oz per unit. Instructions a. Allocate the joint costs to each product using the NRV method. b. Allocate the joint costs to each product using the physical quantities method. c. Calculate the difference in allocated costs between the two methods. Which method would you recommend and why? Answer: a. Product I - $6,667 Product II - $13,333 b. Product I - $3,333 Product II - $16,667 c. Product I Difference $3,333 Product II Difference ($3,333) If the NRV information is available and reliable, the NRV method should be used.

Solution: a. Market Price Per Product Unit Product I $25 Product II 20

Product Product I Product II Total

Further Processing Cost per Unit -

Total NRV 10,000 ÷ 20,000 ÷ 30,000

5 10

NRV Units per Unit Produced = 20 × 500 = 10 × 2,000

30,000 30,000

Joint Allocated Costs Costs × 20,000 = 6,667 × 20,000 = 13,333

Total NRV = 10,000 = 20,000

Product

Units Produced

oz per unit

Total ozs

Joint Costs

Allocated Costs

Product I

500 ×

20 = 10,000 ÷ 60,000 × 20,000 =

3,333

Product II Total

2,000 ×

25 = 50,000 ÷ 60,000 × 20,000 = 60,000

16,667

c. NRV Method Physical Quantities Method Difference

Product I Product II $6,667 $13,333 3,333 16,667 3,333 (3,333)

Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: FC: Decision Modeling IMA: Cost Management.

125) Napa Productions produces Salsa and Spaghetti Sauce from fresh tomatoes grown in its local greenhouse. The process is a joint process that produces juice and then is separated and two identifiable products are created. The joint cost to produce the products is $90,000 and results in the following data:

Product Spaghetti Sauce Salsa

Gallons Produced 6,000 15,000

Final Sales Value $130,000 20,000

Instructions a. Allocate the joint costs to each product using the NRV method. b. Napa has identified a new marketable product by further processing the salsa. With an additional cost of $4,000, he can modify the salsa to create different spices. The gallons produced will not change, and the final sales value of the new product will be 26,000. Given this new information, reallocate the joint costs to each product using the NRV method. c. Based on your calculations in part a, if Napa could sell the juice as is without processing it further into Spaghetti Sauce and Salsa with a marketable value of $$135,000, would you recommend the juice be sold as is or processed further? Answer: a. Spaghetti Sauce - $78,000 Salsa - $12,000 b. Spaghetti Sauce - $76,974 Salsa - $13,026 c. Yes, Napa should process the juice into spaghetti sauce and Salsa because it will increase profits by $15,000.

Solution: a. Final Sales Value

Product Spaghetti Sauce 130,000 Salsa Total

20,000 -

Further Processing Cost per Unit

Total NRV

Joint Costs

Allocated Costs

- = 130,000 ÷ 150,000 × 90,000 =

78,000

- =

12,000

20,000 ÷ 150,000 × 90,000 = 150,000

b. Final Sales Value

Further Processing Cost per Unit

Total NRV

Joint Costs

Product Spaghetti Sauce 130,000 - = 130,000 ÷ 152,000 × 90,000 = Salsa 26,000 4,000 = 22,000 ÷ 152,000 × 90,000 = Total 152,000 c. Total NRV (from part a) $150,000 Total Value before processing 135,000 Profit change 15,000 Diff: 2 LO: 2, 3 Bloom: AP AACSB: Analytic AICPA: FC: Decision Modeling IMA: Cost Management.

Allocated Costs 76,974 13,026

126) Concrete Mixtures created cement lawn ornaments for its customers. The joint process costs $165,000 and creates two identifiable products, XS and M. The company has determined M can be sold as-is or processed further into product XL for an additional cost of $325,000. Information for the products is: Product XS Quantity Product M Quantity Product XL Quantity XS Sales value at split-off M Sales value at split-off XL Final sales value

25,000 cubic yards 45,000 cubic yards 80,000 cubic yards $3 per cubic yard $5 per cubic yard $9 per cubic yard

Instructions a. Allocate the joint costs to each product using the sales value at split-off method, assuming XS and M are sold as-is with no further processing. b. Calculate the gross margin for products XS and M, assuming they are sold at split-off, and the sales value at split-off method is used to allocate joint costs. c. If product M is further processed into Product XL, allocate the joint costs using the NRV method and calculate the gross margin for Product XL. d. Should Product M be further processed into Product XL? Report the profit increase or decrease if Product M is processed further. Answer: a. Product XS $41,250 Product M $123,750 b. Product XS Product M

$33,750 $101,250

Joint Costs $26,330 $138,670

Product XS Product M d. Yes, overall profits will increase by $170,000

Gross Margin $48,670 $256,330

Solution: a.

Product XS M Total

Price Per Cubic Yard 3 5

Cubic Sales at Yards Split-off × 25,000 = 75,000 ÷ 300,000 × × 45,000 = 225,000 ÷ 300,000 × 300,000

Joint Allocated Costs Costs 165,000 = 41,250 165,000 = 123,750

b. Product XS 75,000 41,250 33,750

Sales Costs Gross Margin

Product M 225,000 123,750 101,250

Product XS XL Total

Sales Costs Gross Margin

Price Per Cubic Yard 3 9

× ×

Cubic Yards 25,000 = 80,000 =

NRV 75,000 ÷ 470,000 × 395,000 ÷ 470,000 × 470,000

Further Sales Processing Value Cost 75,000 0 = 720,000 325,000 =

Joint Allocated Costs Costs 165,000 = 26,330 165,000 = 138,670

Product XS 75,000 26,330 48,670

Product XL 395,000 138,670 256,330

NRV 75,000 395,000

d. Product XL NRV Product M sales value Difference Diff: 2 LO: 2, 3 Bloom: AP AACSB: Analytic AICPA: FC: Decision Modeling IMA: Cost Management.

$395,000 225,000 $170,000

127) Creekside Winery produces three types of wine, Dry, Sweet, and Fruity, using a joint process costing $150,000. The company uses the NRV method to allocate joint costs. Each type of wine can be sold as is or processed further. The information on the products is as follows:

Product Dry Sweet Fruity

Sales Value at Split-off $140,000 116,000 124,000

Additional Processing Costs $22,000 13,000 16,000

Sales Value of Final Product $170,000 120,000 136,000

Instructions a. If Creekside does not process any of the products further, what will the company report for a total gross margin? b. If Creekside processes all the wines further, what will the company report for a total gross margin? c. Which wine or wines should the company process further? Support your conclusion with calculations. d. If the company proceeds with your recommendation in part c, what will the company report for a total gross margin? Answer: a. $230,000 b. $225,000 c. Only Dry should be processed further. It will increase profits by $8,000. The sweet and fruity wines will decrease profits by $9,000 and $4,000, respectively. d. $238,000

Solution: a. Product

Allocated Costs

NRV

Dry

140,000 ÷

380,000 ×

150,000 =

55,263

Sweet

116,000 ÷

380,000 ×

150,000 =

45,789

Fruity

124,000 ÷ 80,000

380,000 ×

50,000 =

48,947

Dry 140,000 55,263 84,737

Sales Cost Gross Margin

Sweet Fruity 116,000 124,000 45,789 48,947 70,211 75,053

Total 380,000 150,000 230,000

b. Sales Value of Final Product Product

Additional Processing Costs

Allocated Costs

NRV

Dry

170,000 - 22,000

= 148,000÷

375,000 × 150,000 =

59,200

Sweet

120,000 - 13,000

= 107,000÷

375,000 × 150,000 =

42,800

Fruity

136,000 - 16,000

= 120,000÷ 375,000

375,000 × 150,000 =

48,000

Dry 170,000 81,200 88,800

Sales Cost Gross Margin c.

Product

Sales Value of Final Product

Sweet Fruity 120,000 136,000 55,800 64,000 64,200 72,000

Sales Value at Split-off

Total 426,000 201,000 225,000

Additional Processing Costs

Inc (Dec) In Profits

Dry

170,000

140,000

22,000

8,000

Sweet

120,000

116,000

13,000

(9,000)

Fruity

136,000

124,000

16,000

(4,000)

d. Sales Value of Final Product Product

Additional Processing Costs

Dry

170,000

22,000 = 148,000 ÷ 388,000 × 150,000 =

57,216

Sweet

116,000

= 116,000 ÷ 388,000 × 150,000 =

44,845

Fruity

124,000

= 124,000 ÷ 388,000 × 150,000 = 388,000

47,938

Sales Cost Gross Margin

Allocated Costs

NRV

Dry Sweet Fruity Total 170,000 116,000 124,000 410,000 79,216 44,845 47,938 172,000 90,784 71,155 76,062 238,000

Diff: 3 LO: 2, 3 Bloom: AP AACSB: Analytic AICPA: FC: Decision Modeling IMA: Cost Management.

128) Carpets N More produces carpet for commercial use. In the process of creating the carpet and sizing it for its customers, a by-product is created. These scraps are sold to other companies to be used in small projects such as dog houses or decorative designs. The revenue of these scraps is minimal compared to the overall sales of the company. The joint process to create both products is $65,000. The carpet produces 16,000 yards at $15 per yard. The scraps produce 3,000 yards and are sold at $1 per yard. Both products are sold at split-off and not processed further. Instructions a. If the companies use the production method to account for the by-product, record the journal entries for the following transactions: 1. The completion of all products. (carpet and scrap) 2. The sale of the carpet, assuming all yards produced were sold. 3. The sale of the scraps, assuming all yards produced were sold. b. Repeat the steps of part a, if the company accounts for by-products using the sales method. c. If 15% of the production for both products is unsold at year-end, how much inventory cost would remain on the balance sheet under the (1) production method, (2) sales method? Answer: a. 1. FG Inventory — Carpet (65,000 - 3,000) $62,000 FG Inventory — Scraps (3,000 × $1) 3,000 WIP Inventory $65,000 2.

b. 1.

Cash (or Accounts Receivable) (16,000 × 15) Sales - Carpet

240,000

Cost of Goods Sold FG Inventory — Carpet

62,000

Cash (or Accounts Receivable) FG Inventory — Scraps

3,000

240,000

62,000

3,000

FG Inventory — Carpet WIP Inventory

$65,000

Cash (or Accounts Receivable) (16,000 × 15) Sales - Carpet

240,000

Cost of Goods Sold FG Inventory — Carpet

65,000

Cash (or Accounts Receivable) (3,000 × $1) Sales - Scraps

3,000

c. Production Method Sale Method

$65,000

240,000

65,000

$9,750 $9,750 93

3,000

Solution: c. Ending Inventory in Units: Carpet, 16,000 Yards × 15% = 2,400 yards Scraps, 3,000 yards × 15% = 450 yards Production Method

Product Carpet Scraps

Allocated Costs 62,000 ÷ 3,000 ÷

Units Produced 16,000 × 3,000 ×

Units Remaining 2,400 = 450 =

Allocated Costs 65,000 ÷

Units Produced 16,000 ×

Units Remaining 2,400 =

Value in Ending Inventory 9,300 450 9,750

Sales Method

Product Carpet

Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Decision Modeling IMA: Cost Management.

Value in Ending Inventory 9,750

129) Honey Bees produces pure honey and distributes it in 8 oz bottles. While harvesting and packaging the honey, pollen is collected and sold to another distributor that uses it to make Bee Bread. The honey is sold for $7 per bottle, and the pollen is sold for $1.50 per pound. Honey Bees produced 20,000 lbs of honey and 2,000 lbs of pollen. Instructions a. Assuming Honey Bees uses the production method to account for by-products, record the journal entry to record the sale of the pollen. b. Assuming Honey Bees uses the sales method to account for by-products, record the journal entry to record the sale of the pollen. c. Explain how the by-product benefits the company's income in each of the above methods. Answer: a. Cash (or Accounts Receivable) 3,000 FG Inventory — Pollen (2,000 × $1.50) 3,000 b. Cash (or Accounts Receivable) Sales — Pollen

3,000 3,000

c. Under the production method, the effect comes through a lower COGS and higher total gross margin for the main product. Using the sales method, the benefit is higher sales and a higher gross margin. Both methods will have the same effect on net income if all by-products that are produced are sold in the same period. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: FC: Decision Modeling IMA: Cost Management.

130) Wooly Productions is a cotton mill that produces a variety of products. The Yarn and Fibers are produced using a joint process that costs $80,000. Lint is also produced as part of the joint process but is produced in a small quantity and not part of the general sale of the company but more of an after-thought with a marketable value. The Yarn and Fibers can be produced further into Woven Fabric and Tight-Knitted Fabric. The cost to process these further is 120,000 (Yarn to Woven Fabric) and 140,000 (Fibers to Tight-Knitted Fabric). Wooly has identified a market for all the products they produce but determined that the Yarn and Fibers would be processed further as the income appears to be greater. You have been asked to run some analysis and prepare some journal entries to assist Wooly in achieving the highest net income based on the products it produces. The following information has been provided to assist with your analysis.

Product Yarn Fibers Woven Fabric Tight-Knitted Fabric Lint

Pounds Produced 20,000 60,000 24,000 66,000 5,000

Pounds Sold

24,000 60,000 5,000

Sales Value Per Pound $4 6 8 10 2

Instructions a. Wooly uses the NRV to allocate joint costs and the production method to account for byproducts. 1. Allocate the joint costs to each product. 2. Calculate the gross margin for each product. 3. Prepare the journal entry to record the completion of the products. 4. Prepare the journal entry to record the sale of the primary products. 5. Prepare the journal entry to record the sale of the by-product. b. Wooly uses the NRV to allocate joint costs and the sales method to account for by-products. 1. Allocate the joint costs to each product. 2. Calculate the gross margin for each product. 3. Prepare the journal entry to record the completion of the products. 4. Prepare the journal entry to record the sale of the primary products. 5. Prepare the journal entry to record the sale of the by-product. c. Since not all the Tight-Knitted Fabric produced was sold, calculate the ending inventory of the Finished Goods Inventory account. 1. using the production method to account for by-products. 2. using the sales method to account for by-products d. Is Wooly making a good decision to process both products further? (Assume all Yarn and Fibers produced could also be sold) Support your answer with calculations.

Answer: a. 1. Woven Fabric $8,514 Tight-Knitted Fabric $61,486 Lint $10,000 2. Woven Fabric $63,486 Tight-Knitted Fabric $416,830 Lint $0 3. FG Inventory — Woven Fabric (8,514 + 120,000) FG Inventory — Tight-Knitted Fabric (61,486 + 140,000) FG Inventory — Lint WIP Inventory

$128,514 201,486 10,000

4. Cash (or Accounts Receivable) Sales - Woven Fabric Sales - Tight-Knitted Fabric (60,000 × $10)

792,000

Cost of Goods Sold FG Inventory — Woven Fabric FG Inventory - Tight-Knitted Fabric

311,684

5. Cash (or Accounts Receivable) FG Inventory — Lint

$340,000

192,000 600,000

128,514 183,170 10,000 10,000

b. 1.

Woven Fabric $9,730 Tight-Knitted Fabric $70,270 Woven Fabric $62,270 Tight-Knitted Fabric $408,845 Lint $10,000

3. FG Inventory — Woven Fabric (9,730 + 120,000) FG Inventory — Tight-Knitted Fabric (70,270 + 140,000) WIP Inventory

$129,730 210,270

4. Cash (or Accounts Receivable) Sales — Woven Fabric Sales — Tight-Knitted Fabric

792,000

$340,000

192,000 600,000

Cost of Goods Sold FG Inventory — Woven Fabric FG Inventory — Tight-Knitted Fabric 5. Cash (or Accounts Receivable) Sales — Lint

320,885 129,730 191,155 10,000 10,000

c. Production method — $18,316 Sales Method — $19,115 d. No, the Yarn should not be further into Woven Fabric. It is decreasing profits by $8,000. The Fibers should be further processed into Tight-Knitted Fabric. It is increasing profits by $160,000.

Solution: a. Lint Sales = 5,000 × $2 = $10,000 Joint Costs $ 80,000 Less: Lint Sales 10,000 70,000 1. Sales Price Pounds Per Product Produced Pound Woven 24,000 × 8 Tight-Knitted 66,000 × 10

Product NRV Woven 72,000 ÷ Tight-Knitted 520,000 ÷

Total NRV 592,000 592,000

Additional Costs to Total Process Sales Further = 192,000 - 120,000 = = 660,000 - 140,000 =

Joint Costs 70,000 70,000

× ×

NRV 72,000 520,000

Allocated Joint Costs = 8,514 = 61,486

592,000 2. Tight-Knitted Costs Sold $61,486 ÷ 66,000 × 60,000 = $55,897 $140,000 ÷ 66,000 × 60,000 = $127,273

Sales Joint Costs Further Processing Costs Gross Margin

Woven Fabric $192,000 8,514 _ 120,000

Tight-Knitted Fabric $600,000 55,897 127,273

Lint $10,000 10,000 -

Total $802,000 4,410 247,273

$63,486

$416,830

$480,317

b. 1.

Pounds Produced

Product

Sales Price Per Pound

Total Sales

Additional Costs to Process Further

NRV

Woven

24,000 ×

192,000 -

120,000

72,000

Tight-Knitted

66,000 ×

660,000 -

140,000

520,000

Total NRV 592,000 × 592,000 ×

Joint Costs 80,000 = 80,000 =

Allocated Joint Costs 9,730 70,270

Product Woven Tight-Knitted

NRV 72,000 ÷ 520,000 ÷ 592,000

2. Tight-Knitted Costs Sold $70,270 ÷ 66,000 × 60,000 = $63,882 $140,000 ÷ 66,000 × 60,000 = $127,273 Woven Fabric Sales Joint Costs Further Processing Costs Gross Margin

Tight-Knitted Fabric

$192,000 9,730

$600,000 63,882

120,000 $62,270

127,273 $408,845

100

Lint $10,000 -

$10,000

Total $802,000 73,612 247,273 $481,115

c. 1. Production Method Costs transferred to FG Inventory Costs transferred to COG Costs in FG Inventory

201,486 183,170 18,316

from part a3 from part a4

210,270 191,155 19,115

from part a3 from part a4

2. Sales Method Costs transferred to FG Inventory Costs transferred to COGS Costs in FG Inventory d.

Product Woven Fabric Tight-Knitted Fabric

Final Sales Value

Additional Costs to Process Further

Sales Value Before Split-Off

Inc (Dec) in Profits

192,000 - 120,000

- 80,000

= (8,000)

660,000 - 140,000

- 360,000

= 160,000

Diff: 3 LO: 1, 2, 3, 4 Bloom: AN AACSB: Analytic AICPA: FC: Decision Modeling IMA: Cost Management.

101

131) Red Hot manufactures a variety of red products. Each product has a market and can be sold as-is or processed further. Four of the products use a joint process costing $25,000. Red Hots can be sold for $2 per pound or processed further for $21,000 and sold for $2.50 per pound. Smokin Reds can be sold for $3.50 per pound or processed further for $18,500 and sold for $5 per pound. Little Reds can be sold for $5 per pound or processed further for $23,000 and sold for $6 per pound. Red Peppers can be sold for $8 per pound or processed further for $15,000 and sold for $10.50 per pound. The following table shows how many pounds were produced of each product. Even if the products are processed further, the pounds produced will remain the same.

Product Red Hots Smokin Reds Little Reds Red Peppers

Pounds Produced 30,000 25,000 21,000 12,000

Instructions a. Red Hot does not plan to process any of the products further. Allocate the joint costs using the sales at split-off method and calculate the gross margin for each product. b. Red Hot does not plan to process any of the products further. Allocate the joint costs using the sales at physical quantities method and calculate the gross margin for each product. c. Red Hot plans to process all of products further. Allocate the joint costs using the sales at NRV method and calculate the gross margin for each product. d. If Red Hots does not plan to process any of the products further and the current sales value per pound is accurate, which method should the company use to allocate joint costs? e. If Red Hots plans to produce all the products further, which method should the company use to allocate joint costs? f. Which product or products should the company process further and which product or products should the company sell as-is? Be sure to justify your answer with calculations. g. If the company takes your suggestions in part f, calculate the new gross margin of the company if the company uses the NRV method to allocate joint costs, and only the product or products recommended in part f are processed further. h. What is the overall effect on gross margin by only processing further the products identified in part f versus not processing any of the products further. i. What is the overall effect on gross margin by only processing further the products identified in part f versus processing all of the products further?

102

Answer: a. Red Hots — $55,696 Smoking Reds — $81,223 Little Reds — $97,468 Red Peppers — $89,113 b. Red Hots — $51,447 Smoking Reds — $80,398 Little Reds — $99,034 Red Peppers — $92,591 c. Red Hots — $50,395 Smoking Reds — $99,391 Little Reds — $96,124 Red Peppers — $103,590 d. The company should use the sales value at split-off method. e. The company should use the NRV method. f. Smokin Reds and Red Peppers should be processed further. They will increase profits by $19,000 and $15,000 respectively. The other two products will decrease profits, Red Hots and Little Reds, by $6,000 and $2,000, respectively. g. Red Hots — $56,078 Smoking Reds — $99,539 Little Reds — $98,137 Red Peppers — $103,745 h. Increase of $34,000 i. Decrease of $8,000

103

Solution: a. Product Red Hots Smokin Reds Little Reds Red Peppers

Product Red Hots Smokin Reds Little Reds Red Peppers

Pounds Produced 30,000 25,000 21,000 12,000

× × × ×

Totals Sales at Split-off 60,000 ÷ 87,500 ÷ 105,000 ÷ 96,000 ÷ 348,500

Sales Price Per Pound 2.00 3.50 5.00 8.00

= = = =

348,500 348,500 348,500 348,500

Joint Costs 25,000 25,000 25,000 25,000

× × × ×

Little Reds

Totals Sales at Split-off 60,000 87,500 105,000 96,000

= = = =

Allocated Costs 4,304 6,277 7,532 6,887

Red Peppers

Total

Red Hots

Smokin Red

Sales

60,000

87,500

105,000

96,000

348,500

Costs

4,304

6,277

7,532

6,887

25,000

Gross Margin

55,696

81,223

97,468

89,113

323,500

Product Red Hots Smokin Reds Little Reds Red Peppers

Pounds Produced 30,000 ÷ 25,000 ÷ 21,000 ÷ 12,000 ÷ 88,000

Red Hots Sales 60,000 Costs 8,523 Gross Margin 51,477

Smokin Red 87,500 7,102 80,398

88,000 × 88,000 × 88,000 × 88,000 ×

Joint Costs 25,000 25,000 25,000 25,000

Little Reds 105,000 5,966 99,034

104

= = = =

Allocated Costs 8,523 7,102 5,966 3,409

Red Peppers 96,000 3,409 92,591

Total 348,500 25,000 323,500

c. Sales Price Per Pound

Additional Costs to Process Further

Final Sales Value

Product

Pounds Produced

Red Hots

30,000

2.50

= 75,000

- 21,000

Smokin Reds 25,000

5.00

= 125,000

- 18,500

= 106,500

Little Reds

6.00

= 126,000

- 23,000

= 103,000

× 10.50

= 126,000

- 15,000

= 111,000

21,000

Red Peppers 12,000

Product Red Hots Smokin Reds Little Reds Red Peppers

NRV 54,000 106,500 103,000 111,000 374,500

Red Hots

÷ ÷ ÷ ÷

374,500 374,500 374,500 374,500

Joint Costs 25,000 25,000 25,000 25,000

× × × ×

Smokin Red

Little Reds

NRV 54,000

Allocated Costs 3,605 7,109 6,876 7,410

= = = =

Red Peppers

Total

Sales

75,000

125,000

126,000

452,000

Costs Gross Margin

24,605

25,609

29,876

22,410

102,500

50,395

99,391

96,124

103,590

349,500

Product Red Hots Smokin Reds Little Reds Red Peppers

Final Sales Value * 75,000 125,000 126,000 126,000

Totals Sales at Split-off ** 60,000 87,500 105,000 96,000

* From part a ** From part c

105

Additional Costs to Process Further 21,000 18,500 23,000 15,000

= = = =

Net Increase (Decrease) (6,000) 19,000 (2,000) 15,000 26,000

g. Sales Price Per Pound

Additional Costs to Process Further

Final Sales Value

Product

Pounds Produced

Red Hots

30,000

2.00

60,000

Smokin Reds 25,000

5.00

= 125,000

18,500 =

106,500

Little Reds

21,000

5.00

= 105,000

105,000

Red Peppers 12,000

10.50

= 126,000

15,000 =

111,000

Product Red Hots Smokin Reds Little Reds Red Peppers

Sales Costs Gross Margin

NRV 60,000 ÷ 106,500 ÷ 105,000 ÷ 111,000 ÷ 382,500

Red Hots 60,000 3,922 56,078

Smokin Red 125,000 25,461 99,539

382,500 382,500 382,500 382,500

× × × ×

Little Reds 105,000 6,863 98,137

106

Joint Costs 25,000 25,000 25,000 25,000

Red Peppers 126,000 22,255 103,745

= = = =

NRV

Allocated Costs 3,922 6,961 6,863 7,255

Total 416,000 58,500 357,500

h. Gross Margin (from part g) Gross Margin (from part a) Difference

$357,500 323,500 34,000

i. Gross Margin (from part g) Gross Margin (from part c) Difference Diff: 2 LO: 2, 3 Bloom: AN AACSB: Analytic AICPA: FC: Decision Modeling IMA: Cost Management.

$357,500 349,500 8,000

107

Cost Accounting, 1e (Farmer) Chapter 16 The Art and Science of Pricing to Optimize Revenue 1) Which of the following statements is correct regarding the relationship between a product's cost, price, and profit? A) Price a product too low, customers will always purchase a product because the price is lower than the competitor. B) Price a product too high, customers will most likely continue to buy if they have purchased the product in the past. C) Price a product too high or too low can result in lost sales to competitors. D) There is no direct correlation between a product's cost, price and profit since a company can charge whatever it desires for a product. Answer: C Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 2) The point at which the number of units supplied intersects with the number of units demanded is called the A) break-even point. B) equilibrium point. C) optimum capacity point. D) preferred performance point. Answer: B Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 3) Price takers A) must accept the prevailing market price and sell each unit at that given price. B) are found in non-competitive markets. C) have the power to influence the market price. D) enjoy pricing power since they can set their own product prices. Answer: A Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 1

4) Companies that have the power to influence the market price, and thus, enjoy pricing power are referred to as price A) takers. B) gougers. C) makers. D) analysts. Answer: C Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 5) Which of the following are found in competitive markets? A) Price makers B) Price takers C) Market makers D) Speculative takers Answer: B Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 6) The primary decision to sell a product or service is whether a firm A) can control the costs associated with the product/service being provided. B) has significant competition in the market for the specific product/service. C) can afford to produce or provide the product/service. D) can sell the product/service at a profit. Answer: D Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

7) Which of the following is NOT a characteristic of price takers? A) Customers see little difference in the product/service being offered with other firms. B) Customers see real or perceived differentiated quality/innovation in the product or service. C) Product/service costs must be carefully controlled by the provider since the price cannot be adjusted easily. D) Much competition exists in the market for comparable products/services with each firm working toward being a market leader. Answer: B Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 8) Which of the following is a characteristic of price makers? A) Customers see real or perceived differentiated quality/innovation in the product/service. B) Firms must carefully control costs of the product/services since the price cannot be easily adjusted. C) Competition exists in the market for comparable product/service with firms striving for market leadership. D) Customers see little differentiation in the product/service being offered. Answer: A Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 9) Which of the following statements is correct regarding price, products, and competitors? A) A product or service only has to appeal to the customer in terms of price, not in terms of quality or characteristics. B) It is only necessary to know pricing and product strategies, and not competitor strategies. C) It is important to know not only pricing and product strategies, but also to know your competitors' strategies for controlling costs and knowing customers. D) If a product is priced too low, sales will increase dramatically. Answer: C Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

10) Magnum Beverages sells it premium champagne at $55 per bottle. It current costs $40 per bottle to produce each bottle of champagne. Magnum has overhead costs of $1,800 per month. If Magnum produced and sold 100 bottles of champagne last month, has the company adequately priced each bottle of champagne to make a positive monthly operating income? A) Yes, since the revenues from the sales exceeds the total costs incurred. B) No, because the revenues from the sales just equals the total costs incurred. C) No, because the revenues from the sales is less than the total costs incurred. D) This cannot be determined due to lack of sufficient information. Answer: C Explanation: Total Revenues - Total Costs = Operating Income (Loss); (100 × $55) - (100 × $40) - $1,800 = $5,500 - $4,000 - $1,800 = ($300) Operating Loss. Diff: 2 LO: 1 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 11) Magnum Beverages sells bottles of premium champagne. It currently costs $40 per bottle to produce each bottle of champagne. Magnum has overhead costs of $1,800 per month, and expects to incur this amount each month. Magnum produced and sold 100 bottles of champagne last month and expects to continue this production and sales pattern for the rest of this current year. Its closest competitor currently sells its bottles of champagne at $65 per bottle. What is the lowest price that Magnum could sell each bottle of champagne for and to make a monthly operating profit? A) $55.01 B) $58.01 C) $65.00 D) $68.00 Answer: B Explanation: Total Revenues - Total Costs = Operating Profit (Loss); (100 × $58.01) - (100 × $40) - $1,800 = $5,801 - $4,000 - $1,800 = $1 Operating Profit Diff: 2 LO: 1 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

12) Which of the following would NOT affect the determination of the price of a product or service? A) Supply and demand B) Competition C) Product or service costs D) Market share Answer: D Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 13) You are presented with the following three scenarios for Sing Company: #1 #2 #3 Revenue (15 units × $5) $75 Revenue (10 units × $15)$150 Revenue (12 units × $10)$120 Less: COGS (15 units × $3) 45 Less: COGS (10 units × $3)30 Less: COGS (12 units × $3)36 Gross Margin 30 Gross Margin 120 Gross Margin 84 Less: SG&A Exp. 50 Less: SG&A Exp. 50 Less: SG&A Exp. 50 Operating Income (Loss) ($20) Operating Income $70 Operating Income $34 With regards to Sing's price, cost, and product, what can be concluded from Scenario #2? A) Sing Company has a profit because it is not charging a high enough price to cover the costs incurred. B) Sing Company should have incurred a loss because its sales in units are lower in this scenario than any other option. C) Sing Company can make a profit by increasing its unit selling price, but the unit sales are normally going to decrease, and may result in the company being driven out of the market due to competitors having lower unit selling prices. D) Sing Company can raise its price to become profitable without having to worry about unit sales declining or other competitors with lower selling prices driving it out of the market. Answer: C Diff: 2 LO: 1 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

14) You are presented with the following three scenarios for Yeng Company: #1 #2 #3 Revenue (15 units × $5) $75 Revenue (10 units × $15) $ 150 Revenue (12 units × $10) $120 Less: COGS (15 units × $3) 45 Less: COGS (10 units × $3) 30 Less: COGS (12 units × $3) 36 Gross Margin 30 Gross Margin 120 Gross Margin 84 Less: SG&A Exp. 50 Less: SG&A Exp. 50 Less: SG&A Exp. 50 Operating Income (Loss) ($20) Operating Income $ 70 Operating Income $ 34 With regards to Yeng's price, cost, and product, what can be concluded from Scenario #1? A) Yeng Company has incurred a loss because it is not charging a high enough price to cover the costs incurred. B) Yeng Company has incurred a loss because its sales in units are lower and cannot cover its costs incurred. C) Yeng Company could make a profit if it produces and sells three more products. D) Yeng Company can raise its price to become profitable without having to worry about other competitors with lower selling prices driving it out of the market. Answer: A Diff: 2 LO: 1 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 15) Why is the concept of pricing so important to the profitability of a company? A) Pricing a product or service too high for the market may result in lost sales to competitors. B) Pricing a product too low may result in lost sales due to the customer perception of lower quality. C) Prices must adequately cover all costs for the company to show operating income. D) All of these impact pricing and its impact on the profitability of a company. Answer: D Diff: 1 LO: 1 Bloom: C AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

16) When implementing pricing strategies, companies should focus on A) just the short-term pricing strategies. B) just the long-term pricing strategies. C) both short-term and long-term pricing strategies at the same time, but for different reasons. D) neither short-term nor long-term pricing strategies, but average-term pricing strategies. Answer: C Diff: 1 LO: 1 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 17) Special orders are evaluated for acceptance A) in the long-term. B) in the short-term. C) by only comparing the costs of the two options. D) by only comparing the unit selling price of the special order with the regular unit selling price. Answer: B Diff: 2 LO: 2 Bloom: K AACSB: None AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 18) The primary decision for special orders is determining whether A) the lower price will cause problems with normal customers. B) special order customers are long-term or short-term customers. C) all relevant costs can be adequately identified for decision-making. D) the differential revenue is greater than the differential costs associated with the order. Answer: D Diff: 2 LO: 2 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

19) In considering a special order in the short-run, managers can typically make a decision after comparing A) contribution margins of the two options since fixed costs remain fixed in the short-run. B) unit variable costs of the two options since these are the only costs that vary between the two options. C) fixed costs of the two options since these costs remain constant with the two options. D) operating incomes since fixed costs will change in the short-run, but remain constant in the long-run. Answer: A Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 20) In a special-order scenario, if a company would need to expand capacity in order to fulfill a special order, then selection of whether to accept the special order should be based on A) contribution margins of the two options since the fixed costs will not change. B) operating incomes since fixed costs will change. C) the amount of additional fixed costs to be incurred for the special order. D) the variable costs of the special order incurred since only variable costs change. Answer: B Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 21) A company should A) not accept a special order for its product for less than its regular unit selling price. B) not accept a special order if it must incur additional fixed costs. C) determine if the differential revenues are greater than the differential costs in order to accept the special order, even if the special-order price is lower than its regular unit selling price. D) always exclude fixed costs in determining whether to accept or reject a special order since they are not relevant and do not change. Answer: C Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

22) Gadgets Inc. produces a product which has a unit variable cost of $12 and a unit fixed cost of $8. The company currently sells its products to customers at a unit selling price of $40. A regional wholesaler has offered to purchase 1,000 units of Gadgets' product at a unit selling price of $20. Due to the current economic situation, Gadgets has sufficient capacity to produce and sell the special-order units without incurring additional fixed costs. Should this Gadgets Inc. accept or reject this special order and why? A) Reject because the special-order price is only half of the original unit selling price. B) Reject because the special-order price is the same as the total unit cost to produce. C) Accept even though the selling price per unit equals the total cost per unit. D) Accept because the contribution margin per unit to be recognized will be $8. Answer: D Explanation: Unit Contribution Margin = Unit Selling Price (Special Order) - Unit Variable Cost = $20 - $12 = $8 Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 23) Maxim Company produces a designer wall clock which has a unit variable cost of $15 and a unit fixed cost of $9. The company currently sells its products to customers at a unit selling price of $50. A regional company has offered to purchase 500 of Maxim's clocks at a unit selling price of $24 but would like to have the clocks customized with its company logo. The customization will cost an additional $5 per clock. Due to the current economic situation, Maxim has sufficient excess capacity to produce and sell the special-order units without incurring additional fixed costs. Should this Maxim accept or reject this special order and why? A) Reject because the special-order price is less than the normal unit selling price. B) Reject because the special-order price is the same as the total unit cost to produce. C) Reject because the total per unit cost to produce the special-order exceeds the special-order unit selling price. D) Accept because the differential revenue exceeds the differential costs. Answer: D Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

24) Which of the following statements is correct if a company accepts a special order without having to add capacity or affecting current sales? A) Operating income will not be impacted. B) Operating income will decrease if the special-order unit selling price is less than the total unit cost. C) Operating income will increase if the special-order unit selling price is greater than the unit variable cost. D) Fixed costs will increase. Answer: C Diff: 2 LO: 2 Bloom: C AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 25) Palm Furniture manufactures outdoor patio sets with the following unit selling price and unit costs at capacity of 5,000 units: Unit selling price Direct materials Direct labor Variable overhead Fixed overhead

$1,300 400 320 150 80

A wholesale outlet has offered to purchase 200 outdoor patio sets but is not willing to pay the retail price of $1,300. What is the lowest price that Palm Furniture should accept if it is currently operating at only 80% capacity? A) $720 B) $870 C) $950 D) $1,300 Answer: B Explanation: Lowest acceptable price (excess capacity available) = Total Unit Variable Costs = Direct Materials + Direct Labor + Variable Overhead = $400 + $320 + $150 = $870. Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

26) Palm Furniture manufactures outdoor patio sets with the following unit selling price and unit costs at capacity of 5,000 units: Unit selling price Direct materials Direct labor Variable overhead Fixed overhead

$1,300 400 320 150 80

A wholesale outlet has offered to purchase 300 outdoor patio sets but is not willing to pay the retail price of $1,300. What is the lowest price that Palm Furniture should accept if it is currently operating at full capacity and is unable to add additional capacity? A) $720 B) $870 C) $950 D) $1,300 Answer: D Explanation: Lowest acceptable price (no excess capacity available) = Current Unit Selling Price to outside customers = $1,300. Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 27) Which of the following costs is NOT relevant in a special-order decision when a company has sufficient operating capacity to accept the order? A) Direct labor B) Direct materials C) Fixed overhead D) Variable overhead Answer: C Diff: 1 LO: 2 Bloom: C AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

28) Canine Creations produces treats for dogs called "bark-bites." It currently sells the treats nationally at a price of $15 per bag, with a unit variable cost of $4 and total fixed costs of $2,200 per month. A local organic pet store has requested a special order of 250 "bark-bites" treat bags but would like them to be gluten-free. The flour that would be required to make the special-order treats would add an additional $1 to each bag of treats. Since the company is currently operating at full capacity, it would have to add production capacity which would add $500 to the current fixed costs. What is the minimum special-order price that Canine Creations would be willing to accept for a bag of "bark-bites?" A) $5.00 B) $7.00 C) $13.80 D) $15.00 Answer: B Explanation: Lowest acceptable price (no excess capacity available) = Total Unit Variable Costs + Additional Unit Fixed Cost = Original Unit Variable Cost + Additional Unit Variable Unit Cost + Additional Unit Fixed Cost = $4 + $1 + $500/250 bags = $7.00. Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 29) If a company has the opportunity for a special order, but is currently operating at full capacity and is unable to add additional production capacity to fulfill the special order, A) the company should reject the special-order request. B) the company should accept the special order if the company requesting the special order is willing to at least offer a unit selling price that covers the unit variable costs. C) the company should accept the special order if the company requesting the special order is willing to pay the current unit selling price. D) the company should accept the special order if the company requesting the special order is willing to at least offer a unit selling price that covers the unit fixed costs. Answer: C Diff: 1 LO: 2 Bloom: C AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

30) Winters Company is considering accepting a special order. Based on 10,000 units, the following costs are incurred by Winters: direct materials of $5, direct labor of $10, variable overhead of $8, and fixed overhead of $6. The wholesaler requesting the special order wants to only pay $25 for 2,000 units when the normal retail unit selling price is $50. If Winters accepts the special order, assuming it has sufficient capacity to fill the order, what amount of differential operating income (loss) would it recognize? A) ($6,000) B) $4,000 C) $20,000 D) $24,000 Answer: B Explanation: Operating Income = Differential Revenue - Differential Costs = (2,000 special order units × $25 special order unit selling price) - [($5 + $10 + $8) × 2,000 special order units] = $50,000 - $46,000 = $4,000; or Unit Selling Price (Special Order) - Unit Variable Costs (Special Order) = Unit Contribution Margin (Special Order) = $25 - ($5 + $10 + $8) = $2 Unit Contribution margin × Special Order Units, 2,000 = $4,000 Diff: 2 LO: 2 Bloom: AP AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 31) The "plus" in the cost-plus pricing method represents the A) fixed cost per unit. B) selling and administrative cost per unit. C) markup or profit per unit. D) overhead cost per unit. Answer: C Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

32) The cost-plus method for pricing is a(n) A) cost-based method. B) market-based method. C) income-based method. D) price-based method. Answer: A Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 33) The cost-plus method for pricing a company's products is used in markets where A) products are not differentiated from those of competitors. B) products are differentiated from those of competitors. C) competition is high, with no one producer dictating the price. D) price takers prevail in setting prices. Answer: B Diff: 1 LO: 3 Bloom: C AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 34) In applying the cost-plus method of pricing, full cost refers to A) product cost. B) both variable production and variable selling and administrative costs. C) total production and selling and administrative costs. D) total fixed production and selling and administrative costs. Answer: C Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

35) Which of the following statements is correct regarding pricing for a company's product or service? A) Decision-makers must be very inflexible in making and managing prices. B) Selling goods/services involve a value proposition offer which is usually perceived the same way by the company offering them and the customers buying them. C) Price calculations are the end point, not the starting point. D) Companies must be flexible in making and managing prices. Answer: D Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 36) In setting a target profit, companies set the target rate of return A) using the same bases. B) to cover only internal benchmarks. C) to cover only external benchmarks. D) to cover both internal and external benchmarks. Answer: D Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 37) Synergy Technologies produces wireless keyboards for computers. The costs associated with production of 10,000 units are variable costs of $80,000 and fixed costs of $30,000. The budgeted operating income at 10,000 units is $200,000. What is the expected unit selling price if Synergy uses a cost-plus method based on full cost? A) $11.00 B) $20.00 C) $28.00 D) $31.00 Answer: D Explanation: (Total Variable Cost + Total Fixed Cost) ÷ Units produced = Full Cost per Unit; ($80,000 + $30,000) ÷ 10,000 units = $11 per Unit; Profit per Unit = Operating Income ÷ Units Produced = $200,000 ÷ 10,000 units = $20 Profit per Unit; Unit Selling Price = Full Cost per Unit + Profit per Unit = $11 + $20 = $31. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 15

38) Sansom Industries manufactures car radios to be installed in Ford automobiles. The unit variable cost is $25 and the unit fixed cost is $7. The desired return on investment (ROI) per unit is $8. What is the markup percentage that Sansom Industries uses to determine the price for each radio produced using a cost-plus pricing method? A) 15% B) 20% C) 25% D) 32% Answer: C Explanation: Unit Variable Cost + Unit Fixed Cost = Total Unit Cost; $25 + $7 + $32; ROI Markup = Unit ROI/ Total Unit Cost = $8/$32 = 25% Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 39) Massano Motors expects to produce 10,000 motors during the upcoming year. It has budgeted for the following: net income of $200,000; variable costs of $500,000; and fixed costs of $300,000. The company has invested assets of $1,000,000 and a budgeted return on investment (ROI) of 20%. What is the budgeted markup percentage used in pricing each motor using a cost-plus method of pricing? A) 15% B) 20% C) 25% D) 30% Answer: C Explanation: ROI per unit = (ROI percentage × Invested Assets) ÷ Estimated Production Units = (20% × $1,000,000) ÷ 10,000 units = $20 per unit; Total Cost per Unit = (Total Variable Costs + Total Fixed Costs) ÷ Estimated Production Units = ($500,000 + $300,000) ÷ 10,000 units = $80; Markup Percentage = ROI per unit ÷ Total Unit Cost = $20 ÷ $80 = 25% Diff: 2 LO: 3 Bloom: AP AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

40) Nguyen Corporation has collected the following data concerning one of its products: Unit selling price Total sales Total Unit cost Total assets investment

$150 20,000 units $120 $2,000,000

What is the return on investment (ROI) percentage for Nguyen Corporation for its product? A) 20.0% B) 22.5% C) 25.0% D) 30.0% Answer: D Explanation: (Total investment × ROI percentage (X) = ROI); $2,000,000 * X = [($150 - $120) × 20,000] ÷ $2,000,000; X = $600,000 ÷ $2,000,000 = .30 or 30% Diff: 2 LO: 3 Bloom: AP AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 41) When using the cost-plus pricing method, if the actual units produced and sold differ from expected when the unit selling price was set, which per unit amount will remain the same? A) Total unit cost B) Fixed cost C) Variable cost D) Return on investment (ROI) per unit Answer: C Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

42) When the actual units sold are lower than what was used to set the original price, why should the unit selling price be increased? A) Unit variable cost and fixed cost increase because of fewer units. B) Unit fixed cost and desired ROI per unit increase because of fewer units. C) Unit variable cost and desired ROI per unit decrease because of fewer units. D) Only unit fixed cost increases because of fewer units. Answer: B Diff: 2 LO: 3 Bloom: C AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 43) The unit selling price is computed in the cost-plus method for pricing as A) fixed cost per unit + desired ROI per unit. B) variable cost per unit + desired ROI per unit. C) variable overhead cost per unit + fixed overhead cost per unit + desired ROI per unit. D) variable cost per unit + fixed cost per unit + ROI per unit. Answer: D Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 44) In the cost-plus method of pricing, a markup percentage is computed by dividing the per unit return on investment (ROI) by the A) variable cost per unit. B) fixed cost per unit. C) total manufacturing overhead cost per unit. D) total cost per unit. Answer: D Diff: 1 LO: 3 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

45) Ixtapa Company. has determined the following per unit amounts: Direct materials Direct labor Return on Investment (ROI) Variable overhead

$40 36 27 24

Fixed selling and administrative $50 Fixed overhead 35 Variable selling and administrative 15

The unit selling price using the cost-plus method is A) $142. B) $162. C) $215. D) $227. Answer: D Explanation: Direct materials + Direct labor + Variable overhead + Variable selling and administrative + Fixed overhead + Fixed selling and administrative + Desired ROI = Unit Selling Price; $40 + $36 + $24 + $15 + $35 + $50 + $27 = $227 Diff: 2 LO: 3 Bloom: AP AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 46) Target costing for target pricing A) starts with the price and then subtracts the plus, or markup, to determine the target cost per unit. B) starts with the cost per unit and adds the plus, or markup, to determine the unit selling price. C) is used for products and services where a competitive market does not exist. D) is used when products are unique in nature and firms can influence price-setting. Answer: A Diff: 2 LO: 4 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

47) The formula used to compute a Target Cost per Unit is A) Target price per unit + Budgeted profit per unit. B) Full cost per unit + Unit markup on cost. C) Target price per unit - Budgeted profit per unit. D) Full cost per unit - Unit markup on cost. Answer: C Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 48) If the existing unit cost is above a target cost per unit, then A) the unit selling price is adjusted upward to cover the unit cost. B) cost analysis is performed to identify which components of the product/service can be targeted for cost reduction. C) the company should not manufacture and sell this particular product/service. D) the company should recompute the cost per unit only using the variable unit costs. Answer: B Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 49) In a competitive market, where target costing is used, the price per unit is established by A) management. B) the marketplace. C) sales representatives. D) managerial accountants. Answer: B Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

50) In a target costing pricing approach, the desired profit per unit is A) added to the total cost per unit. B) added to the variable cost per unit. C) deducted from the market selling price per unit. D) deducted from the total cost per unit. Answer: C Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 51) To achieve a target unit cost, management usually undertakes a business process called A) breakeven analysis. B) differential analysis. C) capital budgeting. D) value engineering Answer: D Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 52) Which of the following statements is NOT true regarding value engineering? A) Value engineering involves communication and collaboration between people form business functions that make up the value chain. B) The process of value engineering is simple and inexpensive. C) A cross-functional team reviews steps in the company's value chain to identify where costs can be cut. D) If an activity within a business process drives up the cost, then the activity can be rethought or perhaps eliminated. Answer: B Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

53) Target costing is used for products and services sold A) in competitive markets. B) that are unique, with distinguishing characteristics. C) where customers lack good information on the market. D) where specific firms can influence prices. Answer: A Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 54) Target costing for target pricing is A) a cost-based approach. B) a market-based approach. C) similar to the cost-plus pricing method. D) used where products are distinct, and companies set their own prices. Answer: B Diff: 1 LO: 4 Bloom: K AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 55) In highly competitive markets, players are A) price takers. B) price makers. C) price negotiators. D) price leaders. Answer: A Diff: 1 LO: 4 Bloom: K AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

56) Recently, Shasta Corporation has decided to play a more-active role in the soda beverage industry. It is aware that the current market price for a can of soda is $2.00. Shasta plans to sell 100,000 cans of soda in its first year and would like to generate an ROI of 20% on its invested assets of $600,000. Using the target costing for target pricing approach, what will Shasta's target cost per unit be? A) $0.80 B) $1.20 C) $2.00 D) $3.20 Answer: A Explanation: Budgeted operating income = ROI × Invested Assets = $600,000 × 20% = $120,000; Budgeted Profit per Unit = $120,000/100,000 units = $1.20. Target Unit Cost = (Market Unit SP - Profit per Unit) = $2.00 - $1.20 = $0.80. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 57) Revco, Inc. is using the target costing for target pricing approach for its new product. If its expected annual sales for this product are 200,000 units, its total target cost is $170,000, and its ROI is 10% on $500,000 of invested assets, what is the expected selling price per unit? A) $0.25 B) $0.60 C) $0.85 D) $1.10 Answer: D Explanation: Target cost per unit = Total target cost ÷ Expected annual unit sales = $170,000 ÷ 200,000 units = $0.85; Budgeted profit per unit = Budgeted profit ÷ Expected annual unit sales = (ROI × Invested Assets) ÷ Expected annual unit sales = (10% × $500,000) ÷ 200,000 units = $0.25; Expected unit selling price = Target cost per unit + Budgeted profit per unit = $0.85 + $0.25 = $1.10. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

58) The first step in the target costing for target pricing approach is A) calculating a target cost per unit. B) using the prevailing market price per unit as a price ceiling. C) computing the budgeted profit per unit. D) determining the total cost per unit. Answer: B Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 59) The last step in the target costing for target pricing approach is A) calculating a target cost per unit. B) setting the unit selling price by using the prevailing market price per unit as a price ceiling. C) performing value engineering to achieve the target cost per unit. D) applying cost analysis to determine which parts of the service/product cost can be targeted for reduction or control. Answer: C Diff: 1 LO: 4 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 60) If a company that has opted to use target costing for target pricing computes a unit production cost that exceeds the target unit cost, then the company should A) not manufacture and sell the product. B) use lower quality materials which cost less to make the product. C) perform cost analysis and value engineering to achieve a target unit cost. D) increase the unit selling price so that the unit target cost will increase. Answer: D Diff: 2 LO: 4 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

61) The act of charging different prices to different customers for the same product or service is called A) price fixing. B) price discrimination. C) price gouging. D) predatory pricing. Answer: B Diff: 1 LO: 5 Bloom: K AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 62) When a business charges exorbitant prices for necessities, typically in the aftermath of a natural disaster or pandemic, it is referred to as A) predatory pricing. B) price fixing. C) price gouging. D) price discrimination. Answer: C Diff: 1 LO: 5 Bloom: K AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 63) Although formulas can be used to compute unit selling prices, which of the following is a key factor in determining product/service pricing and is very hard to measure? A) Company supply of products B) Customer demand for products C) Perceived value D) Overall state of the economy Answer: C Diff: 2 LO: 5 Bloom: K AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

64) When one company makes a deal with another company to set a price at a given level for a product or service, which is usually higher than the equilibrium price in competitive markets, this act is called A) price gouging. B) price fixing. C) predatory pricing. D) price discrimination. Answer: B Diff: 1 LO: 5 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 65) If a company sets its product or service price too high, it might cause A) the demand to increase for the product. B) customers to not purchase the product. C) supply of the product or service to decline. D) the market share of a competitor to decrease. Answer: B Diff: 2 LO: 5 Bloom: C AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 66) Price-dumping happens when A) a U.S. firm unloads its products in a non-U.S. country for a significantly reduced price. B) a smaller company sets it selling price lower than a competitor's selling price in order to enter the market or increase its market share. C) a foreign country sells a product in a U.S. domestic market at a price substantially below the domestic market price for the same product. D) a U.S. company imports goods from a foreign country at a higher unit price than what it can obtain from a local, domestic distributor. Answer: C Diff: 2 LO: 5 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

67) If a company sets its price too low for a product or service, or reduces its unit selling price, A) customers may not purchase the product or service due to perceived decrease in value. B) demand and thus, sales of the product or service will increase immediately. C) customers will most likely not be affected by a change in the unit selling price. D) customers will purchase the product or service immediately assuming that the unit selling price cannot decline any further. Answer: A Diff: 2 LO: 5 Bloom: C AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 68) Which of the following pricing behaviors is considered a criminal violation under the Sherman Antitrust Act? A) Price fixing B) Price discrimination C) Peak-load pricing D) Negotiated pricing Answer: A Diff: 2 LO: 5 Bloom: K AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 69) Price fixing happens when A) two or more companies collude to sell a product or provide a service for price higher than what is expected in the market. B) a company decides to set its price to match its competitor's price. C) a company determines that in order to sell more of its product, it should lower its selling price. D) demand exceeds supply for a company's product, and the company in turn, increases its selling price. Answer: A Diff: 2 LO: 5 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

70) Exelon charges its customers a higher rate for electricity during the day-time peak usage period than in the evening. This pricing practice is referred to as A) price discrimination. B) predatory pricing. C) peak-load pricing. D) price gouging. Answer: C Diff: 2 LO: 5 Bloom: C AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 71) Peak-load pricing occurs when a higher price is charged as A) demand approaches the physical limit of the capacity to produce a product or provide a service. B) supply approaches the physical limit of the capacity to produce a product or provide a service. C) supply of a product or service exceeds the demand for the product or service. D) demand is less than the supply of the product or service. Answer: A Diff: 2 LO: 5 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 72) Pfizer Inc., Meridian Medical Technologies Inc., and King Pharmaceuticals LLC worked together in a 10-year period to increase the price of a single Epipen from $100 to over $600. This is an example of what pricing practice? A) Price discrimination B) Price fixing C) Predatory pricing D) Peak-load pricing Answer: B Diff: 2 LO: 5 Bloom: C AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

73) Ford offers a special $1,000 incentive to its loyal customers to be used toward the purchase or lease of any new Ford vehicle. This is an example of A) price discrimination. B) price fixing. C) predatory pricing. D) price gouging. Answer: A Diff: 2 LO: 5 Bloom: C AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 74) Which of the following statements is true regarding price discrimination? A) Differential pricing due to race, religion, disability, or gender is legal. B) Price discrimination that causes a competitive injury to another company is not illegal. C) Price discrimination segments the market based on customers' willingness to pay. D) A company will most likely decrease its profits by having different prices. Answer: C Diff: 2 LO: 5 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 75) Collusive pricing is the same as A) price gouging. B) price fixing. C) predatory pricing. D) price discrimination. Answer: B Diff: 2 LO: 5 Bloom: K AACSB: None AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

76) Match the term listed on the left with the appropriate definition on the right. ________ 1. Equilibrium point

a. comprised of many buyers and sellers and undifferentiated products ________ 2. Price takers b. have the power to influence the market price and enjoy pricing power ________ 3. Price makers c. intersection of units supplied and units demanded which shows the corresponding price ________ 4. Competitive markets d. accept the prevailing market price and sell each unit at that given market price Answer: 1. c 2. d 3. b 4. a Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 77) You are given the scenarios below. Select the appropriate effect based on the relationship between a product's cost, price, and profit. ________ 1. Charging too little ________ 2. Charging too much

________ 3. Charging market equilibrium

a. All costs are covered and volume sold is at a sustainable level b. Only the cost of goods sold is covered, but since there is not enough gross margin to cover SG & A costs, the company will recognize a net operating loss. c. All costs are covered for now, but the volume sold is the lowest, indicating that competitors with more reasonable pricing might drive company out of the market.

Answer: 1. b 2. c 3. a Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 30

78) Kringle Company produces holiday ornaments that it sells to its regular customers for $12 per unit. The cost to produce each unit is $9, of which $6 is variable per unit and $3 is fixed per unit. A local charity has asked Kringle Company to produce 1,000 ornaments for its annual charity fund raising event as a gift for each donation. The charity is asking for a special pricing offer at $8 per unit instead of the normal $12 per unit. The ornaments will not require any customization, and Kringle Company currently has sufficient excess operating capacity to manufacture the 1,000 special order ornaments. Should Kringle Company accept the specialorder proposal from the local charity. (Show all computations to support your decision.) Answer: Kringle Company should accept the special order since it will generate $2,000 ($2/ornament × 1,000 special order units) of operating income. Solution: Differential revenue: Revenue per ornament Differential cost: Variable manufacturing costs Differential income per unit from accepting special order Special Order Units Total Differential Income from special order

$8 6 $2 1,000 $2,000

Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

79) Stocks Cake Factory normally sells their specialty pound cake for $25. A special order to buy 100 pound cakes for $20 per pound cake was made by an organization hosting a charity event in Philadelphia. The variable cost per cake is $12 and the fixed cost per cake is $3. Assuming Stocks Cake Factory has sufficient excess capacity to fill the special order, determine the differential income or loss per cake from selling the pound cakes if Stocks were to accept this special order. Answer: Differential Income = $800 Solution: Differential revenue: Revenue per cake Differential cost: Variable manufacturing costs Differential income from accepting special order Special Order Units Total Differential Income from special order

$20 12 $8 100 $800

Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

80) Khan Manufacturing Company has the following unit manufacturing cost for products currently sold to outside customers: Variable Cost Fixed Cost

$60 $20

A special order for 3,000 units has been received from a foreign company. The unit price requested is $65. The normal unit price is $90. If the order is accepted, unit variable costs will increase by $2 for additional shipping costs. The company currently has excess operating capacity. If the order is accepted, what will the differential operating income or loss be? Answer: Differential Income = $9,000 Solution: Differential revenue: Revenue per unit Differential cost: Variable manufacturing costs Additional Shipping Costs — Special Order Total Differential Costs Differential income from accepting special order Special Order Units Total Differential Income from special order

$65 $60 2 $62 $3 3,000 $9,000

Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

81) Ghangi Manufacturing Company has the following unit manufacturing cost for products currently sold to outside customers: Variable Cost Fixed Cost

$60 $20

A special order for 3,000 units has been received from a foreign company. The unit price requested is $65. The normal unit price is $90. If the order is accepted, unit variable costs will increase by $2 for additional shipping costs and since the company currently does not have sufficient excess operating capacity, an additional fixed cost of $10,000 would have to be incurred to lease additional production space without affecting present sales to outside customers. If the order is accepted, what will the differential operating income or loss be? Answer: Differential Loss = $(1,000) Solution: Differential revenue: Revenue per unit ($65 × 3,000) Differential cost: Variable manufacturing costs ($60 × 3,000) Additional Shipping Costs — Special Order ($2 × 3,000) Additional Fixed Costs — Leased Space for Special Order Total Differential Costs Differential loss from accepting special order

$195,000 $180,000 6,000 10,000 $196,000 $ (1,000)

Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

82) Millennial Manufacturing incurs $38 of variable costs and $22 of allocated fixed costs in the production of an ergonomic backpack that normally sells for $90. A buyer in Canada offers to purchase 5,000 units at $56 each. Millennial Manufacturing has excess capacity and can handle the additional production. What effect will acceptance of this offer have on the company's operating income? Answer: Differential Income = $90,000 Solution: Differential revenue: Revenue per unit Differential cost: Variable manufacturing costs Differential income from accepting special order Special Order Units Total Differential Income from special order

$56 $38 $18 5,000 $90,000

Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 83) Sustainable Solutions, LLC makes bracelets from recycled plastic. Each bracelet costs $6 to produce, of which $4 is variable and $2 is fixed. If Sustainable Solutions applies a 30% markup to each bracelet, what is the selling price for a single bracelet? Answer: $7.80 Solution: Selling Price = Unit Cost + Markup = Unit Cost + (Unit Cost × Markup %) = $6 + ($6 × 30%) = $6 + $1.80 = $7.80 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

84) Gizmos and Gadgets, Inc. produces and sells a mechanical model car kit that challenges young children to create a motorized model car. The cost associated with the parts for the car kit include variable costs of $18 and fixed costs of $7. If the company expects to recognize a profit based on a markup of 40%, what is the expected selling price for each car kit? Answer: $35.00 Solution: Selling Price = Unit Cost + Markup = Unit Cost + (Unit Cost × Markup %) = [($18 + $7) + {($18 + $7) × 40%}] = $25 + $10 = $35 Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 85) Lumina Industries produces and sells outdoor solar lighting fixtures. A solar spotlight has a total cost of $40 per unit, of which $30 is variable cost and $10 is fixed cost. The desired profit is $10 per unit. Determine the markup percentage on total cost. Answer: 25% Solution: Desired Profit per Unit/ Total Unit Cost = Markup Percentage on Total Cost; $10/$40 = 25% Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

86) Pignatello Products has a new product coming to market next year. The following projections for production and sales are for the upcoming year at given below. Variable costs Fixed costs ROI Investment in assets Sales

$200,000 $500,000 15% $2,000,000 200,000 units

Using a cost-plus pricing approach, what is the expected selling price per unit? Answer: $5.00 Solution: (Investment in assets × ROI % = Desired $ ROI; Desired $ ROI / Sales units = Desired ROI per unit; (Variable Costs + Fixed Costs) / Sales = Cost per unit; Desired ROI per unit + Cost per unit = Expected Selling Price per Unit; $2,000,000 × 15% = $300,000; $300,000 ÷ 200,000 units = $1.50 per unit; ($200,000 + $500,000) ÷ 200,000 units = $3.50; $1.50 + $3.50 = $5.00. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 87) Holiday Hosting Company has the following per unit information available for its new product: Desired ROI $ 20 Fixed cost $ 40 Variable cost $ 60 Total cost $100 Selling price $140 What would Holiday Hosting Company's markup percentage be using a cost-plus pricing approach on total cost? Answer: Markup Percentage = 40% Solution: Selling Price - Total Cost = Profit per Unit; $140 - $100 = $40 Profit per Unit; Markup Percentage = Profit per Unit ÷ Total Cost = $40 ÷ $100 = 40% Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

88) Juanita Company sells a product in a competitive marketplace. Market analysis indicates that its product would probably sell at $46 per unit. Juanita Company management has budgeted for operating income of $4 per unit at a volume of 10,000 units. Their current full cost per unit for the product is $43 per unit. What is the target cost of the Juanita Company's product? Answer: Target Cost Per Unit = $42 Solution: Target Cost Per Unit = Target Price per Unit - Budgeted Profit per Unit = $46 - $4 = $42. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 89) Crescent Computers produces a combination wireless computer keyboard and mouse. The market for this product combination is very competitive. The current market price for a wireless computer keyboard and mouse is $30. If Crescent Computers desires to make a profit of $9 per unit of the wireless computer keyboard and mouse, what is the target cost to manufacture the wireless computer keyboard and mouse? Answer: Target Cost Per Unit = $21 Solution: Target Cost Per Unit = Target Price per Unit - Budgeted Profit per Unit = $30 - $9 = $21. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 90) Kissimee Corporation manufactures a high-performance product. It expects to produce and sell 50,000 of these products in the upcoming year. It has invested $15,000,000 to make these products and has a desired return on investment (ROI) of 20%. If the current market price for similar high-performance products is $500, what is Kissimee Corporation's target cost for the product? Answer: Target Cost Per Unit = $440 Solution: ROI per Unit = (Invested Assets × ROI %) ÷ Sales Volume = ($15,000,000 × 20%) ÷ 50,000 = $60; Target Cost Per Unit = Target Price per Unit - ROI per Unit = $500 - $60 = $440. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

91) Nissan uses target costing. Assume that the company expects the market selling price for a compact sedan model is going to be $27,000 for the upcoming year and expects to sell 5,000 of this model. If Nissan has invested assets of $100,000,000 with a ROI required of 12%, what is the target cost for a Nissan compact sedan model for the upcoming year? Answer: Target Cost Per Unit = $24,600 Solution: ROI per Unit = (Invested Assets × ROI %) ÷ Sales Volume = ($100,000,000 × 12%) ÷ 5,000 = $2,400; Target Cost Per Unit = Target Price per Unit - ROI per Unit = $27,000 - $2,400 = $24,600. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 92) Sports Fanatics, Inc. is interested in selling Tampa Bay Buccaneers NFL logo key rings. Market research indicates that that 10,000 units can be sold if the price is no more than $8 per key ring, due to its Superbowl win last year. If Sports Fanatics, Inc. decides to produce the key rings, it will need to invest $200,000 in new production equipment. If Sports Fanatics, Inc. desires to earn a minimum rate of return of 15%, what is the target cost for each key ring? Answer: Target Cost Per Unit = $5 Solution: ROI per Unit = (Invested Assets × ROI %) ÷ Sales Volume = ($200,000 × 15%) ÷ 10,000 = $3; Target Cost Per Unit = Target Price per Unit - ROI per Unit = $8 - $3 = $5. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

93) Given below are business practices related to pricing situations: ________ 1. Taking advantage of consumers in need by charging them excessively high prices for necessities or basic items. ________ 2. Selling products at a lower price internationally than in the home country. ________ 3. Charging a higher price for a product/service when there is limited availability of the product/service (demand is greater than supply) ________ 4. Intentionally selling products at prices that are lower than their costs to drive out competition. ________ 5. Charging a different price to different consumer segments for the same product/service. ________ 6. When two or more competitors agree to set prices at a given level, usually higher than the equilibrium price. Instructions: Match the descriptions given above with the appropriate pricing term by writing the letter of the term on the line before each description. a. Price discrimination d. Price fixing b. Peak-load pricing e. Dumping c. Price gouging f. Predatory pricing Answer: 1. c 2. e 3. b 4. f 5. a 6. d Diff: 2 LO: 5 Bloom: C AACSB: Knowledge AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

94) MEX Company manufactures a product with a cost of $52 per unit ($30 variable and $22 fixed). This product normally sells to customers for $60 per unit. Ixtapa Industries, a foreign company, offers to purchase 5,000 units at $42 each. MEX Company would incur $4 of special packaging and shipping costs if the order is accepted. MEX Company has sufficient unused capacity to produce the 5,000 special-order units. If the special order is accepted, what will the effect be on MEX Company's income? Answer: Differential revenue from accepting offer: Revenue from sale of 5,000 additional units at $42.00 $210,000 Differential cost of accepting offer: Variable costs and expenses of 5,000 units at $30.00 150,000 Additional Shipping Costs of 5,000 units at $4.00 20,000 Differential income from accepting offer $40,000 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 95) Canine Creations Company produces dog toys with a cost of $9 per unit ($6 variable and $3 fixed). This product normally sells to customers for $13 per unit. Chihuahua Inc., a foreign company, offers to purchase 3,000 units at $7 each. Canine Creations Company would incur $1.50 of special packaging and shipping costs if the order is accepted. Canine Creations Company has sufficient unused capacity to produce the 3,000 special-order units. If the special order is accepted, what will the effect be on the company's income? Answer: Differential revenue from accepting offer: Revenue from sale of 3,000 additional units at $7.00 $21,000 Differential cost of accepting offer: Variable costs and expenses of 3,000 units at $6.00 18,000 Additional Shipping Costs of 3,000 units at $1.50 4,500 Differential loss from accepting offer $(1,500) Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

96) Philly Pretzels produces specialty pretzels which it normally sells as a box of a dozen pretzels. The cost per box of 12 pretzels is normally $6, of which $4.50 is variable and $1.50 is fixed. A local charity has requested to purchase 500 boxes at $4 per box. Philly Pretzels has sufficient unused capacity to produce the 500 special-order units. If the special order is accepted, what will the effect be on the income of Philly Pretzels? Answer: Differential revenue from accepting offer: Revenue from sale of 500 additional units at $4.00 $2,000 Differential cost of accepting offer: Variable costs and expenses of 500 units at $4.50 2,250 Differential loss from accepting offer $(250) Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 97) Darjeeling Co. produces a single product. Its normal selling price is $32.00 per unit. The variable costs are $21.00 per unit. Fixed costs are $25,000 for a normal production run of 5,000 units per month. The company has received a request for a special order that would not interfere with normal sales. The order is for 1,500 units and a special price of $19.00 per unit. Darjeeling Co. has the capacity to handle the special order and, for this order, a variable selling cost of $1.00 per unit would be eliminated. If the special order is accepted, what will the effect be on Darjeeling Co.'s income? Answer: Differential revenue from accepting offer: Revenue from sale of 1,500 additional units at $19.00 $28,500 Differential cost of accepting offer: Variable costs and expenses of 1,500 units at ($21.00 - $1.00) 30,000 Differential loss from accepting offer $(1,500) Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

98) Magnacom Inc. produces a product, with a normal selling price of $35.00 per unit. The variable costs are $22.00 per unit. Fixed costs are $40,000 for a normal production run of 10,000 units per month. The company has received a request for a special order that would not interfere with normal sales. The order is for 3,500 units and a special price of $24.00 per unit. Magnacom Inc. has the capacity to handle the special order and, for this order, a variable selling cost of $2.00 per unit would be eliminated. If the special order is accepted, what will the effect be on Magnacom Inc.'s income? Answer: Differential revenue from accepting offer: Revenue from sale of 3,500 additional units at $24.00 $84,000 Differential cost of accepting offer: Variable costs and expenses of 3,500 units at ($22.00 - $2.00) 70,000 Differential income from accepting offer $14,000 Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

99) Cannon Corporation uses a cost-plus pricing model based on full cost. Below is cost information for the production and sale of 50,000 units of its sole product. Variable direct materials cost per unit Variable direct labor cost per unit Variable MOH cost per unit Variable SG&A cost per unit Fixed MOH cost Fixed SG&A costs

$5.00 $1.50 $1.80 $4.70 $35,000 $10,000

Cannon desires a profit equal to a 20% return on invested assets of $700,000. a. What is the total cost per unit per unit for the company's product? b. What is the ROI or desired profit per unit for the company's product? c. What is the markup percentage for this product? (round to 2 decimal places) d. What is the expected selling price for the company's product? Answer: a. $13.90 b. $2.80 c. 20.14% d. $16.70 Solution: a. Total cost per unit per unit = Variable Unit Costs + Fixed Unit Costs = ($5.00 + $1.50 + $1.80 + $4.70) + ($35,000 + $10,000)/50,000 units = $13.90 b. ROI or desired profit per unit = Investment in assets × ROI % = Desired $ ROI; Desired $ ROI / Sales units = Desired ROI per unit; ($700,000 × 20%)/50,000 units = $2.80 c. Markup percentage = ROI per unit/Unit Selling Price = $2.80/$13.90 = 20.14% d. Expected selling price = Desired ROI per unit + Cost per unit; $13.90 + $2.80 = $16.70; or Cost per Unit + (Cost per Unit × Markup percentage) = $13.90 + ($13.90 × 20.14%) = $16.70 Diff: 3 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

100) Tetrus Corporation uses a cost-plus pricing model based on full cost. The following cost information is available for the production and sale of 10,000 units of its sole product: Variable direct materials cost per unit Variable direct labor cost per unit Variable factory overhead cost per unit Variable selling and administrative cost per unit Fixed factory overhead cost Fixed selling and administrative costs

$2.30 $1.25 $1.75 $2.70 $12,000 $2,000

Tetrus desires a profit equal to a 30% return on invested assets of $20,000. a. What is the total cost per unit per unit for the company's product? b. What is the ROI or desired profit per unit for the company's product? c. What is the markup percentage for this product? (round to 2 decimal places) d. What is the expected selling price for the company's product? Answer: a. $9.40 b. $0.60 c. 6.38% d. $10.00 Solution: a. Total cost per unit per unit = Variable Unit Costs + Fixed Unit Costs = ($2.30 + $1.25 + $1.75 + $2.70) + ($12,000 + $2,000)/10,000 units = $9.40 b. ROI or desired profit per unit = Investment in assets × ROI % = Desired $ ROI; Desired $ ROI / Sales units = Desired ROI per unit; ($20,000 × 30%)/10,000 units = $0.60 c. Markup percentage = ROI per unit/Unit Selling Price = $0.60/$9.40 = 6.38% d. Expected selling price = Desired ROI per unit + Cost per unit; $9.40 + $0.60 = $10.00; or Cost per Unit + (Cost per Unit × Markup percentage) = $9.40 + ($9.40 × 6.38%) = $10.00 Diff: 3 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

101) Tri-Valley Corporation uses a cost-plus pricing model based on full cost. Below is cost information for the production and sale of 20,000 units of its sole product. Variable direct materials cost per unit Variable direct labor cost per unit Variable factory overhead cost per unit Variable selling and administrative cost per unit Fixed factory overhead cost Fixed selling and administrative costs

$10.00 $5.50 $2.80 $5.70 $42,000 58,000

a. What is the total cost per unit per unit for the company's product? b. If the company's markup percentage is 25%, what is the ROI or desired profit per unit? c. What is the expected selling price for the company's product? d. If Tri-Valley decides to increase its markup percentage to 30%, what is the new expected selling price for the company's product? Answer: a. $29.00 b. $7.25 c. $36.25 d. $37.70 Solution: a. Total cost per unit per unit = Variable Unit Costs + Fixed Unit Costs = ($10.00 + $5.50 + $2.80 + $5.70) + ($42,000 + $58,000)/20,000 units = $29.00 b. ROI or desired profit per unit = Total cost per unit × Markup percentage = $29.00 × 25% = $7.25 c. Expected selling price = Cost per unit + Desired ROI per unit; $29.00 + $7.25 = $36.25 d. Expected selling price = Cost per unit + Desired ROI per unit = Cost per Unit + (Cost per Unit × Markup percentage) = $29.00 + ($29.00 × 30%) = $29.00 + $8.70 = $37.70 Diff: 3 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

102) Kiddie City is studying the costs of its most popular toy for the upcoming holiday season. It currently costs $50 to purchase from a supplier and sells for $75. The company is contemplating adding another toy which is very similar to the most popular one, but it will cost Kiddie City $65 from the supplier. The cost per toy is expected to decrease after the holiday season and will be more in line with the most popular toy at $50 in January. Regardless of which toy it sells, Kiddie City incurs variable selling and administrative costs of $5 per toy. a. What is the current markup percentage that Kiddie City is using for its most popular toy? b. If the company uses the same markup percentage for the new toy as it is using for the current popular toy, what is the expected selling price, markup in dollars and as a percentage? c. Assume that the operating assets attributable to the most popular toy product line amount to $50,000 and that the company's target ROI is 20%. Will Kiddie City meet the target ROI goal if it plans to sell 1,000 toys for this holiday season? Answer: a. $50% b. $97.50; $32.50; 50% c. ROI = $10 per toy Solution: a. Current markup percentage = (Unit selling price - Unit cost)/Unit cost = ($75 - $50)/$50 = $25/$50 = 50% b. Expected selling price (new product) = $65 + ($65 × 50%) = $65 + $32.50 = $97.50; Markup in dollars = $65 × 50% = $32.50; Markup percentage = $32.50/$65 = 50% c. ROI = (Invested Assets × ROI %)/Sales Volume = ($50,000 × 20%)/1,000 toys = $10 per toy. Kiddie City will meet the target ROI since it currently makes $25 per toy for the most popular toy and expects to make $32.50 per toy with the newer toy. Diff: 3 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

103) Xavier Company sells a product in a competitive marketplace. Market analysis indicates that their product would probably sell at $50 per unit. Xavier Company management desires a 18% profit margin on sales. Their current full cost per unit for the product is $44 per unit. a. What is the desired profit per unit for Agway Company? b. What is the expected selling price for Agway Company using a target costing approach? c. What is the target cost per unit for Agway Company? Answer: a. $9 per unit b. $50 per unit c. $21 per unit Solution: a. Desired profit per unit = Unit Selling Price × Profit Margin % = $50 × 18% = $9 per unit b. Expected selling price = Market Price = $50 per unit c. Target cost per unit = Expected (Market) Selling Price - Desired Profit per Unit = $50 $9 = $41 per unit Diff: 3 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

104) Summer Splash wants to produce and sell a new fruit-flavored soda. To enter the market, the soda will have to sell at $1.75 per 12 oz. can. The data below has been collected. Expected annual sales Projected selling and administrative costs Desired profit

50,000 $9,000 $60,000

a. What is the target cost per can of soda? b. If expected annual sales were to decrease from 50,000 to 48,000 cans, what would the new target cost be? Answer: a. $0.55 per unit b. $0.50 per unit Solution: a. Desired profit ÷ Expected annual sales = $60,000 ÷ 50,000 units = $1.20 per unit; Target cost = Market price - Desired profit per unit = $1.75 - $1.20 = $0.55 per unit b. Desired profit ÷ Expected annual sales = $60,000 ÷ 48,000 units = $1.25 per unit; Target cost = Market price - Desired profit per unit = $1.75 - $1.25 = $0.50 per unit Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

105) Quigley, Inc. is introducing a new product. Since the market for this product is very competitive, the company plans to use a target cost approach. Projected sales revenue is $950,000 ($95 per unit) and target costs are $700,000. a. What is the desired profit per unit? b. What is the target cost for the product? Answer: a. $25 per unit b. $70 per unit Solution: a. Desired profit per unit = (Projected Sales Revenue - Target Costs) / (Projected Sales Revenue ÷ Unit Selling Price) = ($950,000 - $700,000) / ($950,000 ÷ $95 per unit) = $250,000 / 10,000 units = $25 per unit b. Target cost per unit = Target costs / (Projected Sales Revenue ÷ Unit Selling Price) = $700,000 / ($950,000 ÷ $95 per unit) = $700,000 / 10,000 units = $70 per unit; or Expected Unit Selling Price - Desired profit per unit (per a) = $95 - $25 = $70 per unit Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

106) Agway Company sells a product in a competitive marketplace. Market analysis indicates that their product would probably sell at $28.00 per unit. Agway Company management desires a profit equal to a 25% rate of return on invested assets of $1,400,000. They anticipate selling 50,000 units. Its current full cost per unit for the product is $25 per unit. a. What is the desired profit per unit for Agway Company? b. What is the expected selling price for Agway Company using a target costing approach? c. What is the target cost per unit for Agway Company? Answer: a. $7 per unit b. $28 per unit c. $21 per unit Solution: a. Desired profit per unit = (Invested Assets × ROI %)/Sales Volume = ($1,400,000 × 25%)/50,000 units = $7 per unit b. Expected selling price = Market Price = $28 per unit c. Target cost per unit = Expected (Market) Selling Price - Desired Profit per Unit = $28 - $7 = $21 per unit Diff: 3 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 107) Two competitors, Sirius Satellite Radio and XM Satellite Radio own the market for satellite radio. They are constantly trying to one-up the other by creating new listening options for users. Recently, some newcomers to the market are eroding their combined market share. Despite their differences, these two companies feel that they could be stronger if they worked together on a project. The decide to set subscription prices for their services extremely low while still offering all options that customers have come to appreciate. What pricing tactic are these two companies employing? Answer: Price fixing or collusive pricing Diff: 2 LO: 5 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

108) Omar just purchased his first fully-electric automobile. He installed a level-2 charger in his home to charge the battery daily for the new auto. When he contacted his electricity provider, he was informed of a program where he could be charged a lower rate per KWH if he charges the auto overnight instead of during the daytime. What pricing tactic is being used in this situation? Answer: Peak load pricing Diff: 2 LO: 5 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 109) Mambo Manufacturing Company has a normal production capacity of 40,000 units per month. Because of an excess amount of inventory on hand, it expects to produce only 30,000 units in July. Monthly fixed costs and expenses are $120,000 ($3 per unit at normal plant capacity) and variable costs and expenses are $8.75 per unit. The present selling price is $14.75 per unit. The company has an opportunity to sell 8,500 additional units at $9.50 per unit to a company who plans to market the product under its own brand name in a foreign market. The additional business will not affect the regular selling price or quantity of sales of Mambo Manufacturing Company. Prepare a differential analysis for the proposal to sell at the special price. Answer: Differential revenue from accepting offer: Revenue from sale of 8,500 additional units at $9.50 $80,750 Differential cost of accepting offer: Variable costs and expenses of 8,500 additional units at $8.75 74,375 Differential income from accepting offer $6,375 Diff: 3 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

110) Time After Time, Inc. produces several models of clocks. Each clock consists of $10 of variable costs and $3 of fixed costs, and currently sells for $20. A foreign wholesaler offers to buy 5,000 clocks at $11 each, which Time After Time has the sufficient capacity to produce without affecting its current production and sales within the domestic market. Time after Time, however, would incur an additional $2 of shipping costs per clock to ship overseas. Instructions: a. Determine the incremental income or loss that Time After Time would realize by accepting this special order. b. What is the lowest acceptable special-order price that Time After Time would be willing to accept in order to accept the special order? Answer: a. Differential revenue from accepting offer: Revenue from sale of 5,000 additional units at $11.00 $55,000 Differential cost of accepting offer: Variable costs and expenses of 5,000 units at $10.00 50,000 Additional Shipping Costs of 5,000 units at $2.00 10,000 Differential income from accepting offer $(5,000) b. The lowest acceptable price that Time After Time would be willing to accept is equal to the total variable cost per unit for the special order, which is the $10 + $2 = $12. Any price in equal to or greater than the $12 per unit would be acceptable in the short-term for this special order. Diff: 3 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

111) ESG Manufacturing Company has a normal plant capacity of 27,000 units per month. Because of an excess quantity of inventory on hand, it expects to produce only 20,000 units in October. Monthly fixed costs and expenses are $108,000 ($4 per unit at normal plant capacity) and variable costs and expenses are $12.00 per unit. The present selling price is $28.00 per unit. Consider each of the following independent assumptions and prepare a differential analysis for each to determine if the special order should be accepted. a. The company has an opportunity to sell 7,000 additional units at $20.00 per unit to a business that plans to market the product under its own brand in a foreign market. Determine the incremental income or loss ESG Manufacturing could realize by accepting this special order. b. Now assume that the company has an opportunity to sell 7,000 additional units at $20.00 per unit to a business that plans to market the product under its own brand in a foreign market. Now, though, the special-order request includes customization which will add $3 of variable costs per unit. Determine the incremental income or loss ESG Manufacturing could realize by accepting this special order. c. Assume that the company has an opportunity to sell 6,000 additional units at $15.00 per unit to a business that plans to market the product under its own brand in a foreign market. Now, though, the special-order request includes additional shipping overseas which will add $4.50 of variable costs per unit. Determine the incremental income or loss ESG Manufacturing could realize by accepting this special order.

Answer: a. Differential revenue from accepting offer: Revenue from sale of 7,000 additional units at $20.00 Differential cost of accepting offer: Variable costs and expenses of 7,000 additional units at $12.00 Differential income from accepting offer b. Differential revenue from accepting offer: Revenue from sale of 7,000 additional units at $20.00 Differential cost of accepting offer: Variable costs and expenses of 7,000 additional units at $12.00 Variable customization costs of 7,000 additional units at $3.00 Differential income from accepting offer c. Differential revenue from accepting offer: Revenue from sale of 6,000 additional units at $15.00 Differential cost of accepting offer: Variable costs and expenses of 6,000 additional units at $12.00 Variable customization costs of 6,000 additional units at $4.50 Differential loss from accepting offer

$140,000 84,000 $56,000

$140,000 84,000 21,000 $35,000

$90,000 72,000 27,000 $(9,000)

Diff: 3 LO: 2 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

112) Timberland Boot Company has the following information concerning its work-boots: Variable manufacturing costs Variable selling and administrative costs Fixed manufacturing costs Fixed selling and administrative costs Investment ROI Planned production and sales

$140,000 $ 80,000 $150,000 $130,000 $1,500,000 15% 10,000 units

a. What is the total cost per pair of work boots? b. What is the ROI per pair of work boots? c. What is the markup percentage per pair of work boots? d. What is the selling price per pair of work boots assuming Timberland uses a cost-plus pricing model? e. If the current market price per pair of work boots is $70, what is the target cost for Timberland Boot Company? Answer: a. Total cost per pair of work boots = Variable manufacturing costs $140,000 ÷ 10,000 units = $14 Variable selling and administrative costs $ 80,000 ÷ 10,000 units = $8 Fixed manufacturing costs $150,000 ÷ 10,000 units = $15 Fixed selling and administrative costs $130,000 ÷ 10,000 units = $13 Total Cost per unit (pair of boots) $50 b. ROI per pair of work boots = (Investment × ROI) ÷ Planned production/sales = ($1,500,000 × 15%) ÷ 10,000 units = $22.50 c. Markup percentage per pair of work boots = ROI per pair of work boots ÷ Total Cost per unit (pair of boots) = $22.50 ÷ $50 = 45% d. Selling price per pair of works boot (cost-plus pricing) = Total Cost per unit (pair of boots), $50 + ROI per pair of work-boots, $22.50 = $72.50; or Total Cost per unit (pair of boots), $50 + Markup (Total Cost per unit, $50 × Markup percentage, 45%) = $50 + $22.50 = $72.50. e. Target Cost = Current market price per pair of work boots, $70, - ROI per pair of work-boots, $22.50 = $47.50. Diff: 3 LO: 3, 4 Bloom: AP AACSB: Analytic AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

113) Mandela Corporation has collected the following data concerning one of its products: Unit sales price Total sales Unit cost Total investment

$145 20,000 units $125 $2,000,000

a. What is the ROI percentage for Mandela Corporation? b. What is the markup percentage per unit for Mandela Corporation? c. If the current market price per unit is $140, what is the target cost for Mandela Corporation? Answer: a. ROI percentage per unit = (Investment × ROI) ÷ Planned production/sales = [($145 - $125) × 20,000 units] ÷ $2,000,000 = 20% b. Markup percentage unit = Profit Per Unit ÷ Total Cost per Unit = ($145 - $125) = $20 Profit per Unit; $20 ÷ $125 = 16% c. Target cost = Current market price - ROI (Profit) per unit = $140 - $20 = $120 Diff: 3 LO: 3, 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

114) Sylvia Strohm has decided to open her own dog grooming service, Puppy Scrub. She is trying to decide whether she wants to offer services doing mobile grooming or have a set location for the dog grooming business. She has analyzed cost and pricing information for both options and has arrived at the following financial data: Mobile Option $5 $12 $9 $7,200 per year $2 $2,400 per year 800 $70,000 25% $70

Direct Material Costs Direct Labor Costs Variable MOH Fixed MOH Variable Selling & Admin. Costs Fixed Selling & Admin. Costs Expected Annual Sales Volume Invested Assets Desired ROI on Invested Assets Current Price Per Unit (Grooming per dog)

Set Location Option $5 $20 $11 $9,600 $2 $8,000 per year 1,600 $200,000 25% $65

Instructions: Students should prepare responses for the following questions: a. What is the total cost per dog-grooming service under the Mobile Option? b. What is the total cost per dog-grooming service under the Set Location Option? c. What is the ROI per dog-grooming service under the Mobile Option? d. What is the ROI per dog-grooming service under the Set Location Option? e. What is the markup percentage per dog-grooming service under the Mobile Option? f. What is the markup percentage per dog-grooming service under the Set Location Option? g. What is the selling price per dog-grooming service under the Mobile Option assuming Sylvia uses a cost-plus pricing model? h. What is the selling price per dog-grooming service under the Set Location Option assuming Sylvia uses a cost-plus pricing model? i. Using the current market price per dog-grooming service for the Mobile Option, what is the target cost for Puppy Scrub? j. Using the current market price per dog-grooming service for the Set Location Option, what is the target cost for Puppy Scrub? k. Which option would you recommend to Sylvia for opening her new dog-grooming business? Explain why.

Answer: Mobile Option Direct Material Costs Direct Labor Costs Variable MOH Fixed MOH Variable Selling & Admin. Costs Fixed Selling & Admin. Costs Total Cost Per Unit

Invested Assets × Desired ROI on Invested Assets $ ROI on Invested Assets ÷ Expected Annual Sales Volume ROI per Dog-Grooming Service Markup Percentage (ROI per Dog Grooming Service ÷ Total Cost Per Unit) Current Price (Cost-plus Pricing) Target Cost using Current Price Per Unit (Grooming per dog) = Current Price per Service - ROI per Service

($7,200 ÷ 800) ($2,400 ÷ 800) (a)

Set Location Option $5 $5 $12 $20 $9 $11 $9 ($9,600 ÷ 1,600) $6 $2 $2 $3 ($8,000 ÷ 1,600) $5 $40 (b) $49

$70,000 25% $17,500 800 (c) $21.88

$200,000 25% $50,000 1,600 (d) $31.25

(e) $21.88 ÷ $40 = 54.7% (g) $40 + $21.88 = $61.88

(f) $31.25 ÷ $49 = 63.8% (h) $49 + $31.25 = $80.25

(i) $70 - $21.88 = $48.12

(j) $65 - $31.25 = $33.75

(k) The only feasible option for Sylvia, in order to earn the desired profit, is the Mobile Grooming option since the total cost per unit falls below the target cost per unit. The price determined using the cost-plus pricing approach also falls below the current market price, whereas the Set Location price computed using the cost-plus pricing approach is greater than what the current market price is. Sylvia actually has some flexibility with pricing under the Mobile Grooming Option since the price that she would set would be $61.88 and the market is willing to accept up to $70 for the convenience of coming to the house to do the grooming service, so she could charge up to the $70 price per service. Diff: 3 LO: 3, 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

115) Diamond Corporation uses the total cost concept of product pricing. Cost information for the production and sale of 35,000 units of its single product is presented below. Diamond desires a profit equal to a 15% return on invested assets of $280,000. Variable direct materials cost per unit Variable direct labor cost per unit Variable MOH cost per unit Variable selling and administrative cost per unit Fixed MOH cost Fixed selling and administrative costs

$4.30 $5.25 $0.90 $0.75 $105,000 $ 35,000

Instructions: Students should compute the following items for Diamond Corporation: a. Total cost per unit b. ROI (profit) per unit c. Markup percentage (round to 2 decimal places) d. Expected selling price per unit Answer: a. Total cost per unit = $15.20 per unit b. ROI (profit) per unit = $1.20 per unit c. Markup percentage = 7.89% d. Expected selling price per unit = $16.40 Solution: a. Total cost per unit = Variable DM + Variable DL + Variable MOH + Variable SG&A + Fixed MOH + Fixed SG&A = $4.30 + $5.25 + $.90 + $.75 + ($105,000 ÷ 35,000 units) + ($35,000 ÷ 35,000 units) = $15.20 b. ROI (profit) per unit = (Invested assets × ROI %) ÷ Sales Volume = ($280,000 × 15%) ÷ 35,000 units = $1.20 per unit c. Markup percentage = ROI per unit ÷ Total Cost per Unit = $1.20 ÷ $15.20 = 7.89% d. Expected selling price per unit = Total Cost per Unit + ROI per Unit = $15.20 + $1.20 = $16.40; or Total Cost per Unit + Markup (Total Cost per Unit × Markup Percentage) = $15.20 + ($15.20 × 7.89%) = $16.40 Diff: 3 LO: 3, 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

116) Explain what a "price taker" is and how unit prices are determined for a price taker. Answer: A "price taker" is found in highly competitive markets, which are comprised of many buyers and sellers, have undifferentiated products, and no one producer dictates the operation of the market. The price is thus, determined by the market at the prevailing market price, and will only change based on the amount of the quantity supplied and demanded. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 117) What is a "price maker" and how are unit prices determined for a price maker? Answer: A "price maker," as opposed to a "price taker," normally sells a product which is perceived as distinct in the market, and therefore, determines its own unit price as a function of cost and desired profit. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 118) What four factors must management consider when making pricing decisions? Briefly discuss each factor. Answer: a. Context — are you a price taker in a competitive market where the market determines the price or are you a price maker where you can decide the price to charge for your product or service, typically using a cost-plus pricing model. b. Customers — understanding your customers motivations and to what kind of pricing they respond. Different pricing strategies might be used to attract different types of customers. c. Costs — cost structure and required profit must be accounted for since they are closely linked to pricing decisions. d. Competitors — your competition wants to attract and secure the same customers and market share as you, so it is important to do research of their products and strategies. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

119) How is a special order different from a regular order for a product or service? Answer: Special-order pricing decisions allow decision-makers to think in a short-term mindset, whereas regular-order pricing uses a long-term mindset. In order to consider a special order, management must address capacity and relevant cost information. Where normal orders typically are evaluated based on operating income, if sufficient excess capacity exists, a special order will be evaluated strictly on its variable costs. However, management must be aware that this approach could lead to underpricing in the long run since fixed costs are not included in the analysis. Diff: 2 LO: 2 Bloom: C AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 120) What costs and revenues are relevant in special-order decisions? Answer: The costs and revenues that are relevant in special-order decisions are the revenues associated with the special order (Special Order Unit Selling Price × Special Order Units) and the variable costs associated with the special order (Unit Variable Costs for Special Order × Special Order Units). This assumes that available capacity exists, and no additional fixed costs would need to be incurred to fulfill the special order. However, if the company does not have available capacity to fulfill the special order, and would need to incur additional fixed costs to meet the special order production, then the additional or incremental (differential) fixed costs incurred would also be relevant to the special-order decision. Diff: 2 LO: 2 Bloom: C AACSB: Communication AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

121) How is a special-order price determined for a product or service? Answer: A special-order price is determined in the short-term by first addressing whether the company has enough available capacity to produce the special-order units/services or whether it will need to incur additional costs in the production of the special order units/services. If sufficient capacity is available, and there are no additional fixed costs, the contribution margin of the special order is then computed (Special Order Unit Selling Price — Special Order Unit Variable Costs). If the contribution margin is positive, then consider qualitative factors before accepting the special order. If additional fixed costs will need to be incurred to fulfill the special order, then instead of using the contribution margin for the special order, then operating income of the special order will be computed. If it is positive, then consider qualitative factors before accepting the special order. Diff: 2 LO: 2 Bloom: C AACSB: Communication AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 122) When is the cost-plus pricing method used by a company? Explain. Answer: The cost-plus pricing method is used by a company where entities can set their own prices by differentiating their products or services. This is a cost-based approach instead of a market-based approach. Diff: 2 LO: 3 Bloom: C AACSB: Communication AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 123) How is an expected selling price determined in a cost-plus pricing approach? Answer: First, the business must determine the total per unit cost by adding together the per unit variable costs, and computing and adding the per unit fixed costs (total fixed costs divided by expected sales volume). Once the total cost is determined, a desired profit per unit is added to compute the expected unit selling price. The desired profit per unit may be computed by applying a markup percentage to the cost per unit. If the markup percentage is not given, then a desired ROI or profit per unit can be computed by multiplying the required ROI percentage by the invested assets for production and then dividing this result by the expected sales volume. Diff: 2 LO: 3 Bloom: C AACSB: Communication AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

124) Explain what is included in the total cost when using a full cost approach for the cost-plus pricing approach. Answer: Total cost means all costs in a company's value chain, not just product costs. It includes the costs associated with all business functions in the value chain including both variable and fixed costs for such things as research and development, design, supply, production, marketing, distribution, and customer service. Diff: 2 LO: 3 Bloom: C AACSB: Communication AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 125) Explain the difference between target costing and cost-plus pricing. Answer: In cost-plus pricing, an entity begins with a total per unit cost and then adds a desired profit per unit to arrive at an expected selling price. The company sets the price for the product. However, in a target costing approach, due to competition, the market establishes the unit selling price for the company's product. Using the market price, then the company deducts its desired profit per unit to arrive at its target cost per unit. Diff: 2 LO: 4 Bloom: C AACSB: Communication AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 126) What two questions does a company need to address when using a target costing approach? Answer: Companies should ask the following 2 questions when using target costing: 1. Since customers in competitive markets are price-sensitive, and the market-place has already set a price ceiling, what must target costs be to earn the required ROI? 2. If a company's current costs are higher than its target costs, how can current costs be reduced? Diff: 2 LO: 4 Bloom: C AACSB: Communication AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

127) What is value engineering as it relates to target costing? Answer: Value engineering is a systematic means of reviewing the identifiable processes within the value chain of a company to determine where unnecessary and non-value-added costs are being incurred. Ideally, the intent is not only to reduce costs, but to also make processes as efficient as possible, trimming all nonessential costs where possible, in order to achieve the desired target cost. Diff: 2 LO: 4 Bloom: C AACSB: Communication AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 128) Explain the following statement: "Pricing relies heavily on perception." Answer: Pricing is not simply a science that is subject to set formulas. For example, if a price is set high, many consumers may relate higher price to higher quality, and by perceiving that the product is of higher quality, the consumer is willing to pay the higher price. However, when a company reduces the product's price, the consumer may perceive the product to be inferior quality, defective or obsolete, and regardless of how low the price is, the customer may not wish to purchase the product due to inferior quality. Diff: 2 LO: 5 Bloom: C AACSB: Communication AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis. 129) Explain the method of peak-load pricing, how it differs from price discrimination, and provide an example of its use. Answer: This type of pricing result within natural supply and demand relationships when demand is greater than supply. It aims to reduce strain on a necessary resource, such as electricity. Price discrimination, on the other hand, segments a market based on customers' willingness to pay in an effort to maximize profits. An example of peak-load pricing relates to electric rates, where rates during the night tend to be lower per kilowatt hour (KWH) due to lower demand, and rates are higher during the daytime when the demand is higher. Diff: 2 LO: 5 Bloom: C AACSB: Communication AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

130) What is the difference between price gouging and price fixing (collusive pricing)? Answer: Price gouging occurs when a business charges exorbitant prices for necessities during a time of emergency. Price fixing on the other hand, is a deal made among business rivals to set or fix a price at a given level, usually higher than the equilibrium price in competitive markets (but it can be lower to capture additional market share or to discourage entry by new players in the market). Diff: 2 LO: 5 Bloom: C AACSB: Communication AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

Cost Accounting, 1e (Farmer) Chapter 17 Management Control Systems and Transfer Pricing 1) Management control systems can typically be placed into one of two broad categories: Centralized or Decentralized. While most businesses may start as centralized, they may shift towards a decentralized system over time. Which of the following would be considered a benefit of a decentralized system? A) Duplication of activities B) Faster decision-making C) Less responsiveness to local needs D) Less specialization Answer: B Explanation: This question requires familiarity with the general advantages and disadvantages of a decentralized management system. Choices A, C, and D all represent drawbacks or incorrect representations of the benefits of a decentralized system. Choice B is correct as faster decisionmaking is considered a benefit of a decentralized management system. Diff: 1 LO: 1 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis. 2) Management control systems can typically be placed into one of two broad categories: Centralized or Decentralized. While most businesses may start as centralized, they may shift towards a decentralized system over time. Which of the following would be considered a drawback of a decentralized system? A) Duplication of activities B) More specialization C) Optimal decision-making D) Slower decision-making Answer: A Explanation: This question requires familiarity with the general advantages and disadvantages of a decentralized management system. Choices B, C, and D all represent benefits or incorrect representations of drawbacks of a decentralized system. Choice A is correct as duplication of activities is considered a drawback of a decentralized management system. Diff: 1 LO: 1 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

3) In an effort to optimize decentralization, work towards accomplishing its mission, and achieve goal-congruence, an organization will strive to utilize a lot of planning in the design and implementation of their management system. Which of the following represents one of the four pillars of management control systems? A) Irresponsibility centers B) Performance measurement C) Production D) Unit pricing Answer: B Explanation: This question requires familiarity with the four pillars of management control systems. Choices A, C, and D represent incorrect choices as they are not included in the four pillars or do not exist at all. Choice B is the correct choice because performance measurement is one of the four pillars of management control systems. Diff: 1 LO: 1 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis. 4) As companies become established and shift from a centralized to a decentralized business model, employees start to become empowered to own and manage certain processes. While this comes with its own set of implementation challenges initially, it is usually considered worthwhile in the long run. Which of the following represents a benefit of decentralization? A) Certain activities are likely to be duplicated, and that can mean that money will be saved as the work gets completed faster. B) Increased levels of management mean the turnaround times for approvals will decrease. C) Managers will likely show more initiative when they have the authority to make decisions for their own business unit. D) The company increases its ability to place employees and managers in areas where they are not currently specialized. Answer: C Explanation: This question requires familiarity with the benefits of decentralized management systems. While some of the choices above appear to be correct, there is one aspect of three choices that makes the option either inaccurate or a drawback. Choice C is the only one of the four that represents a true benefit of a decentralized management system. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

5) As companies become established and shift from a centralized to a decentralized model, employees start to become empowered to own and manage certain processes. While this comes with its own set of implementation challenges initially, it is usually considered worthwhile in the long run. Even so, there could be some drawbacks to this type of management system. Which of the following represents a drawback of decentralization? A) Certain activities are likely to be duplicated across departments, and that can mean that money will be wasted. B) High-level managers find they have increased distance from day-to-day operations and now have greater freedom to think strategically. C) Managers will likely show less initiative when they are in control and have the authority to make decisions for their own business unit. D) The organization chart is likely to take on a wide but shallow appearance from top-to-bottom indicating increased bureaucracy. Answer: A Explanation: This question requires that familiarity with the drawbacks of decentralized management systems. While some of the choices above appear to be correct, there is one aspect of three choices that makes the option either inaccurate or not a drawback. Choice A is the only one of the four that represents a true drawback of a decentralized management system. Diff: 1 LO: 1 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

6) In a well-structured organization, management will strive to achieve goal congruence. While managers may find that they are being evaluated on the performance of their own business unit, the overall congruence of goals must be kept in mind when setting objectives for these managers. Which of the following represents an optimal outcome that is aligned with the company-wide objective of saving money for short and long-term future goals? A) Sanford, the plant manager, knows that a large machine needs to be replaced in order to get orders done on time, but Sanford chooses not to replace the machine as this is not in his budget for the year. B) Susan, a manager, makes her employees clock-out during the last fifteen minutes of their shifts, but they must stay and complete their work to help the company save on expenses. C) Teresa, an assembly line worker, has advocated for her department to hire an occupational therapist to evaluate repetitive work injuries and reduce sick time used to recover from these onthe-job injuries. D) Trent, a production employee, chooses to donate some of his unused sick time to a fellow employee so the company will not penalize the department for having to cover that employee's short-term leave. Answer: C Explanation: This question requires familiarity with goal congruence and how managers can set goals that either do or do not align with overall company objectives. Choice C is the only choice that presents an optimal outcome that is also aligned with the company-wide objective of saving money in an ethical manner. Although hiring an occupational therapist costs money, it will save money for the company as people are able to avoid injuries and not miss time at work or incur large medical expenses that would impact employee insurance rates for the organization. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

7) In a well-structured organization, management will strive to achieve goal congruence. While managers may find that they are being evaluated on the performance of their own business unit, the overall congruence of goals must be kept in mind when setting objectives for these managers. Which of the following represents a suboptimal outcome that is misaligned with the companywide objective of saving money? A) Sanford, the plant manager, knows that a large machine needs to be replaced in order to get orders done on time, but Sanford chooses not to replace the machine since this was not in his budget for the year. B) Susan, a manager, makes her employees clock-out during the last fifteen minutes of their shifts, but they must stay to complete their work to help the company save on expenses. C) Teresa, an assembly line worker, has advocated for her department to hire an occupational therapist to evaluate repetitive work injuries and reduce sick time used to recover from these onthe-job injuries. D) Trent, a production employee, chooses to donate some of his unused sick time to a fellow employee so that the company will not penalize the department for having to cover that employee's short-term leave. Answer: A Explanation: This question requires familiarity with goal congruence and how managers can set goals that either do or do not align with overall company objectives. Choice A is the only choice of the four that presents a suboptimal outcome that is misaligned with the company-wide objective of saving money. This choice is suboptimal, and it is unlikely to save the company any money. While some of the options are also suboptimal in their execution, they do align with the company goal of cutting expenses albeit unethically. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

8) When an organization wants to optimize decentralization, achieve goal-congruent outcomes, and accomplish its mission, management will look to implement a well-designed and wellplanned management control system. A system such as this will utilize the four pillars of management control systems to achieve a major impact on employee behavior. Which of the following is an example of the proper usage of one of the pillars? A) Allowing managers to spend money as it is needed as long as they have an accountable plan and submit their receipts and paperwork in a timely fashion B) Dividing up work and responsibilities for the company into smaller departments with their own assigned manager C) Encouraging a department to sell to another internal department at any price they feel is fair, even if it surpasses the current market rate D) Setting a performance goal for management of a 50% increase in sales when a 10% increase in sales has been realized historically Answer: B Explanation: This question requires familiarity with the four pillars of management and how they can be used to create a well-designed management control system. Choice B is the only choice of the four that appropriately uses one of the four pillars to improve their system. The other three options are likely to lead to a suboptimal outcome as they are not created to improve any existing operations. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

9) When an organization wants to optimize decentralization, achieve goal-congruent outcomes, and accomplish its mission, management will look to implement a well-designed and wellplanned management control system. A system such as this will utilize the four pillars of management control systems to achieve a major impact on employee behavior. Which of the following is an example of an improper usage of one of the pillars? A) Asking all new employees to do any physical labor-intensive work to give more senior employees a break, regardless of their department B) Asking management to create a formalized budget based on historical data for their department C) Creating a logical and methodical system for determining the transfer price between two internal departments D) Having yearly performance measurement for management based on department-specific benchmarks Answer: A Explanation: This question requires familiarity with the four pillars of management and how they can be used to create a well-designed management control system. Choice A is the only choice of the four above that improperly uses one of the four pillars to improve their system. By dividing up work by a class of people rather than implementing a logical division of work that does not target one specific group, this is an improper use of the pillars. The other three options are likely to lead to an optimal outcome as they are created to improve existing operations. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

10) A large public University has been undergoing some changes as it attempts to modernize and adopt a more online-friendly learning environment. The University has decided that one step that must be taken is to decentralize its operations. Previously, the President of the University was charged with making all decisions ranging from final say on supply purchases to hiring decisions. Which of the following examples shows a way that the University might successfully decentralize? A) Deans are assigned to each college and are permitted to make college-specific decisions. B) The Basketball Coach has been instructed to request final approval from the University Vice President after an initial selection of players is complete. C) The President is responsible for overseeing the administrative staff for the College of Fine Arts. D) The President will have the final say on all faculty hires rather than each College's Dean. Answer: A Explanation: This question requires familiarity with the concept of decentralization and how to apply it in a specific scenario. Choice A is the only choice of the four that shows the successful decentralization of this University. By allowing Deans who specialize in specific areas to run their own colleges, the University allows decisions to be made that will be in line with the overall goals of the organization. These disciplines can be nuanced and require someone who is intimately familiar to make these decisions. The other three choices are examples of centralization and will not achieve the goal of decentralization. Diff: 2 LO: 1 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

11) A large public University has been undergoing some changes as it attempts to modernize and adopt a more online-friendly learning environment. The University has decided that one step that must be taken is to decentralize its operations. Previously, the President of the University was charged with making all decisions ranging from final say on supply purchases to hiring decisions. Which of the following is an example of an unsuccessful attempt to decentralize? A) Central executives will be placed in charge of recruiting and hiring faculty for all colleges and disciplines. B) Faculty will be permitted to select teaching assistants for their courses. C) Newly created Dean positions allow for a person to make college-specific decisions without having to await approval from an executive. D) The football coach will make the final decision on which players make the team after initial tryouts. Answer: A Explanation: This question requires familiarity with the concept of decentralization and how to apply it in a specific scenario. Choice A is the only choice of the four that shows an unsuccessful attempt at implementing decentralization at this University. By allowing executives to make recruiting and hiring decisions of faculty for all colleges and disciplines, the needs of each discipline and the students at each college are not likely to be fully understood or taken into consideration. The other three choices are examples of successful decentralization. Diff: 2 LO: 1 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

12) Recently, a manager at a grocery store voiced concerns that the higher-ups have set completely unrealistic goals that the store can in no way achieve this year. This manager fears that the pressure of trying to succeed may lead some employees to make unethical decisions in order to achieve the unrealistic goals. Management and employees are evaluated on their abilities to meet these goals. Which of the following is an example that is indicative of unethical behavior that might be employed by someone to meet unrealistic goals? A) A cashier has been ringing up some items twice when checking a customer out even though one of those items was purchased by the customer. B) A manager has been working extra hours without clocking in to increase revenue and decrease labor costs. C) An employee noticed that a coworker has been taking bottled drinks without paying while on their break. D) Management has implemented a new membership program that costs $50 per year and would give some customers preferential treatment. Answer: A Explanation: This question requires familiarity with ways that setting unrealistic goals on which performance is measured is not a proper implementation of one of the four management pillars. Choice A is the only choice that is an unethical behavior that is also trying to achieve the goal of increasing sales. The other three choices are in some cases unethical, but they do not aim to increase sales or are ethical and try to increase revenue. Diff: 2 LO: 1 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

13) Recently, a manager at a grocery store voiced concerns that the higher-ups have set completely unrealistic goals that the store can in no way achieve this year. This manager fears that the pressure of trying to succeed may lead some employees to make unethical decisions in order to achieve the unrealistic goals. Management and employees are evaluated on their abilities to meet these goals. Which of the following is an example that is indicative of ethical behavior that might be employed by someone to meet sales goals? A) A cashier has been asking customers to round up their totals to give the excess funds to a charity. B) A manager has been asking the employees to work extra hours without clocking in to increase revenue and decrease labor costs. C) Cashiers have been encouraged to ask customers if they would like to sign up for a store credit card. D) Management has approved a new customer incentive program where customers will receive a discount coupon for a future visit by spending a certain amount today. Answer: D Explanation: This question requires familiarity with the way that setting unrealistic goals on which performance is measured is not a proper implementation of one of the four management pillars. Choice D is the only choice that is an ethical behavior that is also trying to achieve the goal of increasing revenue. The other three choices are in some cases ethical, but they do not aim to increase sales or are unethical and try to increase sales. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

14) As organizations grow and move towards a decentralized model, one goal will often be to empower employees. One way that this is accomplished is by creating responsibility centers and assigning managers to oversee the operations of their particular area of expertise. Which of the following best represents an accurate representation of a responsibility center? A) John is overseeing the production department at his job, and he must create a budget to implement for the upcoming year. B) Sarah has been promoted to manage the maintenance team at a local hotel, but she must get approval for all hiring through the company president. C) The CEO of the company has decided to oversee the customer service department since they do not trust the current manager of the department. D) The president of the organization will oversee all business units and delegate few tasks to managers. Answer: A Explanation: This question requires familiarity with the way that responsibility centers work and how they are set up. Choice A is the only choice of the four that describes an accurate representation of what a responsibility center should be. Choice A exemplifies a person who is assigned to run a business unit and is making decisions at their own discretion. The other three choices do not represent an appropriate use of a business unit where a manager is in charge of one area and can delegate tasks as needed. Diff: 2 LO: 2 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

15) As organizations grow and move towards a decentralized model, one goal will often be to empower employees. One way that this is accomplished is by creating responsibility centers and assigning managers to oversee the operations of a particular area of expertise. Which of the following represents an inaccurate representation of a responsibility center? A) Aliyah, an owner and president of a retail store, appoints John to be the manager of the garden center at the store. B) Arthur oversees the marketing department for a local sports bar, and he asks another employee to work on social media posts. C) Samantha, a manager, runs the payroll processing department and reports to a regional manager. D) The president of the organization will oversee all business units and delegate few tasks to managers. Answer: D Explanation: This question requires familiarity with the way that responsibility centers work and how they are set up. Choice D is the only choice of the four that describes an inaccurate representation of what a responsibility center should be. Choice D is more in line with what would be observed in a centralized management system where business units are not used. The other three choices represent an appropriate use of a business unit where a manager is in charge of one area and can delegate tasks as needed. Diff: 2 LO: 2 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis. 16) All business units are created with certain goals against which they are measured. Regardless of the type of business unit, evaluations are utilized to ensure that management is directing the team towards the achievement of goals that are congruent with the overall company goals set forth by the highest levels of management. Which of the following best represent metrics used to evaluate a profit center? A) Return on Investment, Sales Mix, Dollar Value of Sales B) Target Profit, Budget-to-Actual Profit Reports, Net Income C) Target Profit, Dollar Value of Sales, Return on Investment D) Year-to-Date Expenditures, Return on Sales, Residual Income Answer: B Explanation: This question requires familiarity with the evaluation of various responsibility centers. Choice B is the only choice of the four options that represent metrics that would be used to evaluate a profit center. The other choices are a mixture of metrics used to evaluate a profit center or other types of responsibility centers. Diff: 2 LO: 2 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis. 13

17) Decentralized organizations have the ability to create divisions of itself that are called responsibility centers. One of the features and advantages of this is that managers have decisionmaking independence and are empowered to run their own departments. Which of the following best represents the presence of authority, one of the three characteristics of a responsibility center? A) A company moves from a model where a department is able to set working hours for its employees to a company-wide policy for all employees. B) Carleigh, the divisional manager delegates analysis tasks to his employees and has the decision-making authority to purchase assets for his division. C) The company CEO insists that they must approve any new hires selected by the accounting department. D) The sales manager decides not to delegate paperwork to subordinates so that they can monitor all activity. Answer: B Explanation: This question requires familiarity with authority, one of the three characteristics of a responsibility center. Choice B is the only one of the four choices that accurately depicts the presence of authority by allowing a divisional manager to delegate tasks and make decisions that will immediately impact their department and eventually the company as well. The other three choices represent a lack of authority where higher-level executives have not allowed the department to have the authority or ability to make decisions independent of them. Diff: 2 LO: 2 Bloom: C AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

18) Decentralized organizations have the ability to create divisions of itself that are called responsibility centers. One of the features and advantages of this is that managers have decisionmaking independence and are empowered to run their own departments. Which of the following represents the lack of authority, one of the three characteristics of a responsibility center? A) A bank branch manager has delegated the task of signing off on new accounts to lower-level employees. B) A company moves from a model where there is a company-wide policy for set working hours to one where each department can determine what hours employees will work. C) A hospital CEO would like to oversee the hiring of all nursing staff since they believe the manager has allowed too much turnover. D) The sales manager has asked senior-level sales staff to take charge of the inventory count beginning next month. Answer: C Explanation: This question requires familiarity with authority, one of the three characteristics of a responsibility center. Choice C is the only one of the four choices that accurately depicts the lack of authority by allowing the CEO to make a hiring decision for a specific department and not trusting in the manager to make this important decision. The other three choices represent the presence of authority where managers of a department have the authority or ability to make decisions independent of higher-level management. Diff: 2 LO: 2 Bloom: C AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

19) One of the largest differences between a centralized and decentralized organization is the division of power. In a decentralized organization, power is given to managers of individual departments or business units. Responsibility is one of the three characteristics of a responsibility center. Which of the following best represents the delegation of responsibility within a decentralized organization? A) Bobby is a sales associate who was just asked to assume responsibility for checking out guests but has not received any instruction regarding what needs to be done. B) Sharon, the manager of the research department, has tasked a research assistant with doing an equipment inventory count each month and takes timely updates to be sure task is done. C) The company CEO decides that they will continue to oversee the production department but places all responsibility for sales outcome on the department manager. D) The women's clothing manager of a retail store has assumed responsibility for overseeing the men's department, delegated folding to a sales associate, but has not requested an update. Answer: B Explanation: This question requires familiarity with responsibility, one of the three characteristics of a responsibility center. Choice B is the only one of the four choices that accurately depicts the implementation of responsibility since the manager has not only delegated a task but also taken steps to ensure that task is completed. The other three choices represent a lack of responsibility where higher-level executives and managers have not correctly or fully implemented responsibility. Diff: 2 LO: 2 Bloom: C AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

20) In a decentralized organization, business units are created to better achieve a sense of independence amongst management. In a business unit, management is responsible for ensuring that tasks in their department are being completed and for overseeing their subordinates. One of the three main characteristics of a decentralized organization is accountability, which means that one will have to answer for the job when it is done. Which of the following best represents the existence of accountability in an organization? A) A manager in charge of the product design team asked a lower-level associate to order supplies that are needed by the department to function. She is busy and did not follow up and ending up placing the order herself when supplies were about to run out. B) A new office assistant was asked to check the company voicemail in the morning but has neglected to do it, so messages were missed. C) A pharmaceutical sales representative does not submit a mileage report for the week and is denied a reimbursement by the manager for not following protocol. D) The maintenance person was asked in passing by a manager to hang updated workplace safety posters and forgot to follow up. Answer: C Explanation: This question requires familiarity with accountability, one of the three characteristics of a responsibility center. Choice C is the only one of the four choices that accurately depicts the existence of accountability since the sales representative was held accountable for not following the assigned protocol. This choice impacts their department and the company overall. The other three choices represent a lack of accountability from the managers for the subordinates. Diff: 2 LO: 2 Bloom: C AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

21) In a decentralized organization, business units are created to better achieve a sense of independence amongst management. In a business unit, management is responsible for ensuring that tasks in their department are being completed and for overseeing their subordinates. One of the three main characteristics of a decentralized organization is accountability, which means that one will have to answer for the job when it is done. Which of the following represents the nonexistence of accountability in an organization? A) A paralegal has been issued a warning after neglecting to file some documents with the courts that will delay the trial her manager is involved with. B) A receptionist was in charge of submitting the sales department timesheets and was reprimanded by a manager when this was not completed. C) A staff accountant was asked by their manager to come in over the weekend to complete the work the accountant had overlooked that had a deadline of the Friday before. D) The manager of the production department has decided to make the task of cleaning the employee bathroom a volunteer-based task rather than assigning it to one employee. Answer: D Explanation: This question requires familiarity with accountability, one of the three characteristics of a responsibility center. Choice D is the only one of the four choices that accurately depicts the non-existence of accountability since the task of cleaning the bathroom has not been assigned to anyone, leaving accountability for that task out of the picture. This choice impacts their department and the company overall. The other three choices represent the existence of accountability in the organization. Diff: 2 LO: 2 Bloom: C AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis. 22) A decentralized organization will have various responsibility centers including revenue centers, whose sole purpose is to generate revenue. These centers will also incur the cost of having employees work there, but their goal is to generate sales and hit targets set by management. Of the following examples, which best represents a revenue center? A) Housekeeping at a small hotel B) Payroll processing at a local bank C) Sales department at an HVAC company D) The pharmacy at a local grocery store Answer: C Explanation: This question requires familiarity with responsibility centers and how the types of centers differentiate from one another. A revenue center will incur costs but is measured on its ability to generate revenue and hit targets. Choice C is the only choice listed that is a true revenue center. Choices A, B, and D all represent other types of centers. Diff: 1 LO: 2 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis. 18

23) A large home improvement retail company is moving towards a decentralized management system from a centralized system after years in business. They are aware that this will entail generating various responsibility centers and placing the appropriate people in charge. Which of the following would be considered a profit center for the company? A) The garden center in the store B) The home projects consulting department C) The janitorial department D) The payroll department Answer: A Explanation: This question requires familiarity with responsibility centers and how the types of centers differentiate from one another. A profit center will make sales and incur costs and is measured on its ability to hit sales goals while also managing its expenses and achieving a certain amount of profit. Choice A is the only choice listed that is a true profit center. Choices B, C, and D all represent other types of centers. Diff: 1 LO: 2 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis. 24) A boutique hotel is in the process of upgrading all of its systems including its management control system. Since its inception, the hotel has employed a centralized system, but the hotel has grown enough to consider decentralization. Of the following units or departments, which would be considered a cost center for the boutique hotel? A) Food and beverages department B) The gift shop C) The hotel bar D) The housekeeping department Answer: D Explanation: This question requires familiarity with responsibility centers and how the types of centers are different from one another. A cost center will incur costs and is measured on its ability to manage its expenses while also controlling certain nonfinancial metrics. Choice D is the only choice listed that is a true cost center. Choices A, B, and C all represent other types of centers. Diff: 1 LO: 2 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

25) Some organizations choose a responsibility center to focus on selecting assets to reach a target return and then putting those profits back into the business or other assets. Certain organizations have done this to great success including Amazon, Netflix, and the New York Yankees. Which of the following best represents the most accurate responsibility center as described? A) Cost Center B) Investment Center C) Profit Center D) Revenue Center Answer: B Explanation: This question requires familiarity with responsibility centers and how the types of centers are different from one another. An investment center will focus on selecting assets to generate a target return that it will then reinvest with the goal of earning more. Choice B is the choice that correctly identifies an investment center as the kind of responsibility center described in the problem. Choices A, C, and D all represent other types of centers that do not fit this description. Diff: 1 LO: 2 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

26) One of the largest differences between a centralized and decentralized organization is the division of power. In a decentralized organization, power is given to managers of individual departments, or business units. Responsibility is one of the three characteristics of a responsibility center. Which of the following best represents the absence of delegation of responsibility within a decentralized organization? A) Laura, the night clerk at a hotel, has been covering all of the phones as instructed since the manager believes Laura is ready to learn some additional skills. B) The company CEO decides that they will continue to oversee the production department but places all responsibility for sales outcomes on the department manager. C) The company CEO implements a new policy where managers will be responsible for all departmental budget information for areas they oversee. D) The men's clothing manager of a retail store has delegated cash register duties to a new sales associate and has followed up to ensure the task is being completed. Answer: B Explanation: This question requires familiarity with responsibility, one of the three characteristics of a responsibility center. Choice B is the only one of the four choices that accurately depicts the absence of delegation of responsibility since the manager has not only delegated a task to Jeremy that he is not qualified to handle but also due to the reason this task was delegated. The other three choices represent a lack of responsibility where higher-level executives and managers have correctly and/or fully implemented responsibility. Diff: 2 LO: 2 Bloom: C AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

27) Turner Inc. is a factory that creates laptop bags that contain an added sleeve for increased protection. The sewing department is currently debating on the best way to proceed with sourcing the materials needed to create the end product. What is most likely to impact a potential price with an internal department? A) The maximum selling price established by the seller of the product B) The minimum price that would be established by the buyer of the product C) Whether the internal department has any idle capacity or not as this would impact the minimum acceptable transfer price D) Whether the managers of the departments have good peer-to-peer relationship Answer: C Explanation: This question requires familiarity with how internal transfer pricing could be established and what impact that would have on the potential price that is determined. Choice C is the best example of something that would be most likely to impact an internal price. When a department has idle capacity, they will establish a minimum acceptable transfer price that is different than a department that does not have idle capacity. The other choices are either less likely or unlikely to impact the price for an internal sale. Diff: 2 LO: 2 Bloom: C AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis. 28) Jones Enterprises is evaluating their divisions over the past few months to determine what department has done the most effective job at meeting or exceeding the Return on Investment (ROI) metric of 16% required by the company. They begin by looking at Sheila's division which purchased a new machine in the last year. This large piece of equipment cost $9,000, generated $3,420 of sales, and incurred $1,904 of operating expenses. Given this information, what is the profit margin of this new equipment, and was this a successful decision? A) No, this would not be considered successful with a negative return of $0.44. B) No, this would not be considered successful with a negative return of $0.80. C) Yes, this would be considered successful with a positive return of $0.44. D) Yes, this would be considered successful with a positive return of $0.80. Answer: C Explanation: This question requires familiarity with the formula for profit margin: Operating Income divided by Sales. In this question, the cost of the equipment is not relevant. To calculate the profit margin, first solve for Operating Income: Sales - Operating Expenses = $3,420 $1,904 = $1,516. Now, divide this number by Sales = $1,516/$3,420 = 0.4433 or $0.44 is left over as Operating Income or return. This would be considered successful as the purchase of new equipment generated a positive return (Choice C). Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 22

29) Jones Enterprises is evaluating their divisions over the past few months to determine what department has done the most effective job at meeting or exceeding the Return on Investment (ROI) metric of 16% required by the company. They begin by looking at Sheila's division, which purchased a new machine in the last year. This large piece of equipment cost $9,000, generated $3,420 of sales, and incurred $1,904 of operating expenses. Given this information, what is the ROI of this new equipment, and was this a good decision made by Sheila? A) No, this would not be considered a good decision with a negative return of 16.84%. B) Yes, this would be considered a good decision with a positive return of 16.84%. C) Yes, this would be considered a good decision with a positive return of 21.16%. D) Yes, this would be considered a good decision with a positive return of 28.63%. Answer: B Explanation: This question requires familiarity with the formula for ROI: (Operating Income/Sales) times (Sales/Investment). The Sales cancel out, leaving: Operating Income/Investment = ($3,420 - $1,904)/$9,000 = $1,516/$9,000 = 16.84%. The company requires at least a 16% ROI for each division, and it appears that Sheila made a good decision (Choice B). Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

30) The printing division at a small factory is in need of a new printer and is currently comparing their choices. They have narrowed it down to two options: Machine 1 Machine 2 $12,000 $9,500 $ 3,400 $2,200 $ 1,100 $ 800

Cost Estimated Sales Operating Expenses (including depreciation)

Which machine will have the higher investment turnover based on the information provided? (Do not round intermediate calculations.) A) Machine 1's investment turnover is higher than Machine 2's by 4.43%. B) Machine 1's investment turnover is higher than Machine 2's by 5.18%. C) Machine 2's investment turnover is higher than Machine 1's by 4.43%. D) Machine 2's investment turnover is higher than Machine 1's by 5.18%. Answer: B Explanation: This question requires familiarity with the formula for Investment Turnover: Sales/Investment. Machine 1: $3,400/$12,000 = 0.2833, and Machine 2: $2,200/$9,500 = 0.2316. Now, calculate the difference in investment turnover by subtracting the value for Machine 2 from the value from Machine 1 = 0.2833 - 0.2316 = 0.0518. Machine 1 has a higher Investment turnover by 0.0518 or 5.18% when compared to Machine 2 (Choice B). Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

31) The printing division at a small factory is in need of a new printer and is currently comparing their choices. They have narrowed it down to two options: Machine 1 Machine 2 $12,000 $9,500 $ 3,400 $2,200 $ 1,100 $ 800

Cost Estimated Sales Operating Expenses (including depreciation)

What is the difference in Return on Investment between the two machines based on the information provided? (Do not round intermediate calculations.) A) Machine 1 has an ROI that is 4.43% higher than Machine 2. B) Machine 1 has an ROI that is 4.43% lower than Machine 2. C) Machine 1 has an ROI that is 5.17% higher than Machine 2. D) Machine 1 has an ROI that is 5.17% lower than Machine 2. Answer: A Explanation: This question requires familiarity with the formula for ROI: (Operating Income/Sales) times (Sales/Investment). The sales will cancel out, leaving: Operating Income/Investment. Now, calculate this value for each machine. Machine 1: ($3,400 $1,100)/$12,000 = 19.17%, and Machine 2: ($2,200 - $800)/$9,500 = 14.74%. Now, find the difference between the two ROIs by subtracting Machine 2's value from Machine 1's value. 19.17% - 14.74% = 4.43% higher ROI for Machine 1 (Choice A). Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

32) A clothing company would like to purchase a new piece of equipment and has been debating the purchase of either (a) a new sewing machine that would improve the existing department or (b) an embellisher that would afford the company the opportunity to add new and unique clothing to their existing lines. They gathered the following prospective information: Sewing Machine Embellisher $3,420 $4,808 10 years 8 years $5,430 $6,280 $ 902 $1,176

Cost Useful Life Estimated Sales Operating Expenses (excluding depreciation)

Which machine choice yields the highest profit margin and by how much? (Do not round intermediate calculations.) A) The embellisher has a 2.12% higher profit margin than the sewing machine. B) The embellisher has a 5.39% higher profit margin than the sewing machine. C) The sewing machine has a 2.12% higher profit margin than the embellisher. D) The sewing machine has a 5.39% higher profit margin than the embellisher. Answer: D Explanation: This question requires the formula for calculating Profit Margin: Operating Income divided by Sales. After calculating this figure for each machine, compare them to determine which has the highest profit margin. The operating expenses for each are incomplete, so calculate the depreciation expense. Sewing Machine: $3,420/10 years = $342 per year. Total Operating Expenses = $902 + $342 = $1,244. Embellisher: $4,808/8 years = $601. Total Operating Expenses = $1,176 + $601 = $1,777. Now, calculate profit margin for each. Sewing Machine: ($5,430 - $1,244)/$5,430 = 0.7709. Embellisher: ($6,280 - $1,777)/$6,280 = 0.7170. Now, compare the two: 0.7709 - 0.7170. The sewing machine has a 0.0539 or 5.39% higher profit margin than the embellisher (Choice D). Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

33) A clothing company would like to purchase a new piece of equipment and has been debating the purchase of either (a) a new sewing machine that would improve the existing department or (b) an embellisher that would afford the company the opportunity of adding new and unique clothing to their existing lines. They have gathered the following prospective information: Sewing Machine Embellisher $3,420 $4,808 10 years 8 years $5,430 $6,280 $ 902 $1,176

Cost Useful Life Estimated Sales Operating Expenses (excluding depreciation)

What is the Return on Investment (ROI) for each choice? A) Sewing Machine: 93.66%, Embellisher: 122.4% B) Sewing Machine: 106.16%, Embellisher: 132.4% C) Sewing Machine: 122.40%, Embellisher: 93.66% D) Sewing Machine: 132.40%, Embellisher: 106.16% Answer: C Explanation: This question requires the formula for calculating Return on Investment: Operating Income divided by Investment. The operating expenses for each are incomplete, so calculate the depreciation expense. Sewing Machine: $3,420/10 years = $342 per year. Total operating expenses = $902 + $342 = $1,244. Embellisher: $4,808/8 years = $601 per year. Total operating expenses = $1,176 + $601 = $1,777. Now, calculate ROI for each. Sewing Machine: ($5,430 - $1,244)/$3,420 = 1.2240 or 122.40%. Embellisher: ($6,280 - $1,777)/$4,808 = 0.9366 or 93.66% (Choice C). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

34) Sacha works for an organization that follows a decentralized model. Erin, the production manager of her business unit has come to Sacha to discuss the possibility of purchasing a new piece of equipment. Erin indicated that this new equipment could generate $23,500 of sales, and the expenses (after depreciation) to support it would be 70% of the new sales. After speaking to a supplier, Erin learns that the new equipment can be purchased for $15,750. What are the Profit Margin and the Investment Turnover for the new equipment? A) Profit Margin: 0.30, Investment Turnover: 1.492 B) Profit Margin: 0.70, Investment Turnover: 1.044 C) Profit Margin: 1.044, Investment Turnover: 0.70 D) Profit Margin: 1.492, Investment Turnover: 0.30 Answer: A Explanation: To answer this question, calculate both the Profit Margin and the Investment Turnover. Profit Margin is: Operating Income/Sales. Operating Income = $23,500 - ($23,500 × 70%) = $23,500 - $16,450 = $7,050. Profit Margin = $7,050/$23,500 = 0.30. Investment Turnover = Sales/Investment = $23,500/$15,750 = 1.492 (Choice A). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 35) Sacha works for an organization that follows a decentralized model. Erin, the production manager of her business unit has come to Sacha to discuss the possibility of purchasing a new piece of equipment. Erin has indicated this new equipment could generate $23,500 of sales, and the expenses (after depreciation) to support it would be 70% of the new sales. After speaking to a supplier, Erin learns that the new equipment can be purchased for $15,750. What is the Return on Investment for the new equipment? A) 30.00% B) 44.76% C) 95.74% D) 104.44% Answer: B Explanation: To answer this question, use the Return on Investment (ROI) formula: Operating Income/Investment. It is important to note that Sales is a part of the DuPont method but cancels itself out, leaving the aforementioned formula. Operating Income = $23,500 - ($23,500 × 70%) = $23,500 - $16,450 = $7,050. Now, calculate the ROI: $7,050/$15,750 = 0.4476 or 44.76% (Choice B). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

36) The Riggs Company manufactures monogrammed t-shirts that are sold online. The manager of one of the business units would like to consider replacing their current embroidery machine and has a choice between buying either (a) a brand new one for $12,840 or (b) a refurbished model for $9,703. The new machine will incur $4,906 of expenses, and the refurbished machine will incur $4,677 of expenses. Both machines will have a Return on Investment (ROI) of 9%. How much Sales will the new machine generate? (Do not round calculations.) A) $1,155.60 B) $5,550.27 C) $5,832.60 D) $6,061.60 Answer: D Explanation: This formula requires knowledge of the formula for ROI: Operating Income/Investment. To begin, plug-in the information provided: 0.09 = (X - $4,906)/$12,840. Now, solve for X: $1,155.60 = X - $4,906, so X = $6,061.60. The new machine will generate $6,061.60 of Sales (Choice D). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 37) The Riggs Company manufactures monogrammed t-shirts that are sold online. The manager of one of the business units would like to consider replacing their current embroidery machine and has a choice of buying either (a) a brand new one for $12,840 or (b) a refurbished model for $9,703. The new machine will incur $4,906 of expenses, and the refurbished machine will incur $4,677 of expenses. Both machines will have a Return on Investment (ROI) of 9%. How much Sales will the refurbished machine generate? (Do not round calculations.) A) $873.27 B) $5,550.27 C) $5,779.27 D) $6,061.60 Answer: B Explanation: This formula requires knowledge of the formula for ROI: Operating Income/Investment. To begin, plug-in the information provided: 0.09 = (X - $4,677)/$9,703. Now, solve for X: $873.27 = X - $4,677, so X = $5,550.27. The refurbished machine will generate $5,550.27 of sales (Choice B). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

38) Residual Income represents an excess of income that is earned above a firm's Required Rate of Return on its investment. Businesses often find that any Residual Income is the preferred outcome for both managers and the company as a whole. Which of the following correctly identifies the formula for Residual Income? A) Operating Income - (Required Rate of Return × Investment) B) Operating Income - Investment C) Operating Income + (Required Rate of Return × Investment) D) Required Rate of Return × Investment Answer: A Explanation: This question requires familiarity with the formula for Residual Income. Choice A is the only choice that correctly identifies the formula: Operating Income - Target Return or Operating Income - (Required Rate of Return × Investment). Diff: 1 LO: 3 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis. 39) Economic Value Added (EVA) is a very well-received metric used to evaluate a company's success generating a return that exceeds the cost of capital. Some have claimed that a business should always strive to focus on and generate EVA. Which of the following correctly identifies the formula for Economic Value Added? A) After-tax Operating Income - (Weighted Average Cost of Capital × Invested Capital) B) After-tax Operating Income + (Weighted Average Cost of Capital/Invested Capital) C) Pre-tax Operating Income - (Weighted Average Cost of Capital/Invested Capital) D) Pre-tax Operating Income + (Weighted Average Cost of Capital × Invested Capital) Answer: A Explanation: This question requires familiarity with the formula for Economic Value Added. Choice A is the only choice that correctly identifies the formula: After-tax Operating Income (Weighted Average Cost of Capital × Invested Capital). Diff: 1 LO: 3 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

40) Jasmine Inc. is a small flower shop that is performing some analysis based on their most recent year. They have determined that their profit margin was 0.2876 and investment turnover was 0.2188. They had purchased a new piece of equipment for $3,000. Based upon this information, what was their Return on Investment (ROI)? A) 0.0629 B) 0.0688 C) 0.5064 D) 0.7608 Answer: A Explanation: This question requires familiarity with the formula for ROI: Profit Margin × Investment Turnover. The cost of the equipment is not relevant to the answer for this question as it has already been factored into the investment turnover. To solve for ROI, multiply 0.2876 by 0.2188 to arrive at 0.0629 (Choice A). Diff: 1 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 41) A publishing company is finalizing data for their most recently completed year. The production department spent $5,000 on a new printer and $3,000 on a new supercomputer. The Operating Income tied to the new printer is expected to be $556 while the supercomputer is expected to have an Operating Income of $337. The company's Required Rate of Return is 6%. Management would like to know how much Residual Income to expect from the new printer. A) $219 B) $256 C) $300 D) $556 Answer: B Explanation: This question requires the formula for Residual Income and knowledge about how to apply it. The formula is Operating Income - (Required Rate of Return × Investment). For the printer, do the following: $556 - (0.06 × $5,000) = $556 - $300 = $256 (Choice B). Diff: 1 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

42) A publishing company is finalizing data for their most recently completed year. The production department spent $5,000 on a new printer and $3,000 on a new supercomputer. The Operating Income tied to the new printer is expected to be $556 while the supercomputer is expected to have an Operating Income of $337. The company's Required Rate of Return is 6%. Management would like to know how much Residual Income to expect from the supercomputer. A) $157 B) $180 C) $219 D) $337 Answer: A Explanation: This question requires the formula for Residual Income and knowledge about how to apply it. The formula is Operating Income - (Required Rate of Return × Investment). For the supercomputer, do the following: $337 - (0.06 × $3,000) = $337 - $180 = $157 (Choice A). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 43) A small paper producer is considering the purchase of a new machine to add to their assembly line. This machine would afford them the opportunity to increase their production by 15%. They are currently gathering pricing information from vendors and are trying to figure out what they would want to invest. They have gathered the following information: Expected operating income specifically tied to the new machine Residual Income

$1,342 $ 58

If the company has a Required Rate of Return of 8%, then what amount would they want to spend on the new machine? A) $102.72 B) $1,342.00 C) $8,560.00 D) $16,050.00 Answer: D Explanation: This question requires familiarity with the formula for Residual Income: Operating Income - (Required Rate of Return × Investment). This question provides some of the numbers. Solve for investment as follows: $58 = $1,342 - (0.08 × Investment). $58 + (0.08 × Investment) = $1,342. (0.08 × Investment) = $1,284. Lastly, divide each side by 0.08. Investment = $16,050.00 (Choice D). Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 32

44) A small paper producer is considering the purchase of a new machine to add to their assembly line. This machine would afford them the opportunity to increase their production by 15%. They are currently gathering pricing information from vendors and are trying to figure out what they would want to invest. They have gathered the following information: Expected operating income specifically tied to the new machine Residual Income

$1,342 $ 58

If the company has a Required Rate of Return of 6.3%, then what is the amount they would want to spend on the new machine? A) $84.55 B) $1,400.00 C) $8,560.00 D) $20,380.95 Answer: D Explanation: This question requires familiarity with the formula for Residual Income: Operating Income - (Required Rate of Return × Investment). This question provides some of these numbers. Solve for investment as follows: $58 = $1,342 - (0.063 × Investment). $58 + (0.063 × Investment) = $1,342. (0.063 × Investment) = $1,284. Lastly, divide each side by 0.063. Investment = $20,380.95 (Choice D). Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

45) A bicycle manufacturer is in talks to invest in some new equipment for their production department, and they are exploring different options. The first option is equipment that will cost $13,000, have Operating Income of $999, and have Residual Income of $18. The second option will cost them $11,400, have Operating Income of $918, and have Residual Income of $37. If the company selects the first option, what is their Required Rate of Return? (Round the percentage to two decimal places.) A) 0.14% B) 7.55% C) 7.68% D) 8.61% Answer: B Explanation: This question requires familiarity with the formula for Residual Income: Operating Income - (Required Rate of Return × Investment). This question provides some of these numbers. Solve for the Required Rate of Return as follows: $18 = $999 - (Required Rate of Return × $13,000). $18 + (Required Rate of Return × $13,000) = $999. (Required Rate of Return × $13,000) = $981. Next, divide each side by $13,000. Required Rate of Return = 0.0755 or 7.55% (Choice B). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 46) A bicycle manufacturer is in talks to investment in some new equipment for their production department, and they are exploring different options. The first option is equipment that will cost $13,000, have Operating Income of $999, and have Residual Income of $18. The second option will cost them $11,400, have Operating Income of $918, and have Residual Income of $37. If the company selects the second option, what is their required rate of return? (Round to the percentage to two decimal places.) A) 0.32% B) 6.78% C) 7.73% D) 8.05% Answer: C Explanation: This question requires familiarity with the formula for Residual Income: Operating Income - (Required Rate of Return × Investment). This question provides some of these numbers. Solve for the Required Rate of Return as follows: $37 = $918 - (Required Rate of Return × $11,400). $37 + (Required Rate of Return × $11,400) = $918. (Required Rate of Return × $11,400) = $881. Next, divide each side by $11,400. Required Rate of Return = 0.0773 or 7.73% (Choice C). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 34

47) A small surveying company has decided they would like to move their accounting in-house and will be training a new employee. In anticipation of this new development, they have decided to purchase a new accounting software package that should service all of their needs. Bob, a manager, has put together the following information:

Cost Residual Income Required Rate of Return

Software 1 $6,233 $ 88 7.20%

Software 2 $6,899 $ 104 7.20%

If the company selects Software 1, then how much Operating Income should they expect it to generate? A) $88.00 B) $442.44 C) $448.78 D) $536.78 Answer: D Explanation: This question requires familiarity with the formula for Residual Income: Operating Income - (Required Rate of Return × Investment). This question provides some of these numbers. Solve for Operating Income as follows: $88 = Operating Income - (0.072 × $6,233). $88 = Operating Income - $448.78. Therefore, Operating Income = $536.78 (Choice D). Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

48) A small surveying company has decided they would like to move their accounting in-house and will be training a new employee. In anticipation of this new development, they have decided to purchase a new accounting software package that should service all of their needs. Bob, a manager, has put together the following information:

Cost Residual Income Required Rate of Return

Software 1 $6,233 $ 88 7.20%

Software 2 $6,899 $ 104 7.20%

If the company selects Software 2, then how much Operating Income should they expect it to generate? A) $104.00 B) $489.24 C) $496.73 D) $600.73 Answer: D Explanation: This question requires familiarity with the formula for Residual Income: Operating Income - (Required Rate of Return × Investment). This question provides some of these numbers. Solve for Operating Income as follows: $104 = Operating Income - (0.072 × $6,899). $104 = Operating Income - $496.73. Operating Income = $600.73 (Choice D). Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

49) Kit works for a company that creates brochures for travel agencies to distribute to their clients. The company's printer has recently broken down and will need to be replaced immediately so they can meet several upcoming client deadlines. A manager has found a vendor that has a model available for sale and has compiled the following information and estimates: Cost of Investment Estimates: Sales Operating Expenses

$18,844 $18,965 $17,303

If the company has a Required Rate of Return of 8.25%, then what is the amount of Residual Income that they should anticipate after installing the new printer? A) $107.37 B) $137.12 C) $1,662.00 D) $17,289.37 Answer: A Explanation: This question requires familiarity with the formula for Residual Income: Operating Income - (Required Rate of Return × Investment). Operating Income is not given, so solve for it using the following formula: Sales - Operating Expenses = $18,965 - $17,303 = $1,662. Now, solve for Residual Income. Residual Income = $1,662.00 - (0.0825 × $18,844). Residual Income = $1,662.00 - $1,554.63. Residual Income = $107.37 (Choice A). Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

50) Kit works for a company that creates brochures for travel agencies to distribute to their clients. The company's printer has recently broken down and will need to be replaced immediately so that they can meet several client deadlines. A manager has found a vendor that has a model available for sale and has compiled the following information and estimates: Cost of Investment Estimates: Sales Operating Expenses

$18,844 $18,965 $17,303

If the company has a Required Rate of Return of 7.75%, then what is the amount of Residual Income that they should anticipate after installing the new printer? A) $121.00 B) $201.59 C) $1,460.41 D) $17,504.59 Answer: B Explanation: This question requires familiarity with the formula for Residual Income: Operating Income - (Required Rate of Return × Investment). Operating Income is not given, so solve for it using the following formula: Sales - Operating Expenses = $18,965 - $17,303 = $1,662. Now, solve for Residual Income. Residual Income = $1,662.00 - (0.0775 × $18,844). Residual Income = $1,662.00 - $1,460.41. Residual Income = $201.59 (Choice B). Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

51) Crosby Inc. creates handmade silk neckties that it then sells on their website through a monthly subscription service. In an effort to increase membership, Crosby has promised their customers a one-day turnaround time on all orders. The largest bottleneck Crosby experiences is the cutting department due to the delicate nature of the material. To improve this process, Crosby has decided to buy a new cutting machine that would cost $12,400 with a useful life of 5 years. They estimated that this machine would generate $17,500 of sales and incur $8,788 of assetspecific expenses (excluding depreciation). If the company has a Required Rate of Return of 9.5%, then what is the Residual Income of this investment? A) $5,054.00 B) $6,168.00 C) $6,232.00 D) $17,500.00 Answer: A Explanation: This question requires familiarity with the formula for Residual Income: Operating Income - (Required Rate of Return × Investment). While expenses are given, calculate depreciation to include with the other expenses. $12,400/5 years = $2,480 per year. Total Expenses will equal $8,788 + $2,480 = $11,268. Operating Income is not given, so solve for it using the following formula: Sales - Operating Expenses = $17,500 - $11,268 = $6,232. Now, solve for Residual Income. Residual Income = $6,232 - (0.095 × $12,400). Residual Income = $6,232.00 - $1,178.00. Residual Income = $5,054.00 (Choice A). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

52) Crosby Inc. creates handmade silk neckties that it then sells on their website through a monthly subscription service. In an effort to increase membership, Crosby has promised their customers a one-day turnaround time on all orders. The largest bottleneck Crosby experiences is the cutting department due to the delicate nature of the material. To improve this process, Crosby has decided to buy a new cutting machine that would cost $12,400 with a useful life of 5 years. They estimated that this machine would generate $17,500 of sales and incur $8,788 of assetspecific expenses (excluding depreciation). If the company has a Required Rate of Return of 7.3%, then what is their Residual Income? A) $5,100.00 B) $5,326.80 C) $6,232.00 D) $17,500.00 Answer: B Explanation: This question requires familiarity with the formula for Residual Income: Operating Income - (Required Rate of Return × Investment). While expenses are given, calculate depreciation to include with the other expenses. $12,400/5 years = $2,480 per year. Total expenses will equal $8,788 + $2,480 = $11,268. Operating Income is not given, so solve for it using the following formula: Sales - Operating Expenses = $17,500 - $11,268 = $6,232. Now, solve for Residual Income. Residual Income = $6,232 - (0.073 × $12,400). Residual Income = $6,232.00 - $905.20. Residual Income = $5,326.80 (Choice B). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

53) Esther is the manager of the sales department for a local appliance store. The employees have been voicing their concerns over the current Point-of-Sale (POS) system they use for various aspects of their job. A new machine would afford them the opportunity to better service customers, including real-time pricing and an on-the-spot checkout process. The new POS system would cost $31,828 and would generate $7,442 of Operating Income. The company has a Required Rate of Return of 8% and their tax rate is 23%. If the Weighted Average Cost of Capital (WACC) is 6.7%, then what would their Economic Value Added (EVA) be? (Do not round intermediate calculations.) A) $3,184.10 B) $3,597.86 C) $4,895.76 D) $5,309.52 Answer: B Explanation: This question requires familiarity with the formula for EVA: After-tax Operating Income - (WACC × Invested Capital). This question includes a required rate of return, but that information is not needed for this question. EVA = ($7,442.00 × (1 - 0.23)) - (0.067 × $31,828.00) = $5,730.34 - $2,132.48 = $3,597.86 (Choice B). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 54) Esther is the manager of the sales department for a local appliance store. The employees have been voicing their concerns over the current Point-of-Sale (POS) system they use for various aspects of their job. A new machine would afford them the opportunity to better service customers, including real-time pricing and an on-the-spot checkout process. The new POS system would cost $31,828 and would generate $7,442 of Operating Income. The company has a Required Rate of Return of 8% and their tax rate is 23%. If the Weighted Average Cost of Capital (WACC) is 7.7%, then what would their Economic Value Added (EVA) be? A) $3,184.10 B) $3,279.58 C) $4,895.76 D) $4,991.24 Answer: B Explanation: This question requires familiarity with the formula for EVA: After-tax Operating Income - (WACC × Invested Capital). This question includes a required rate of return, but that information is not needed for this question. EVA = ($7,442.00 × (1 - 0.23)) - (0.077 × $31,828.00) = $5,730.34 - $2,450.76 = $3,279.58 (Choice B). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 41

55) A company is debating replacing the GPS system in a company vehicle that is used every day of the work week. By replacing the current older model GPS system in the vehicle, the company anticipates being able to add an additional $1,324 of Operating Income this year that will ultimately result in an Economic Value Added (EVA) of $806.43. If the company has a tax rate of 24% and a Weighted Average Cost of Capital (WACC) of 6%, then what is the cost of the new investment? A) $60.37 B) $1,812.67 C) $3,330.17 D) $13,440.50 Answer: C Explanation: This question requires familiarity with the formula for EVA: After-tax Operating Income - (WACC × Invested Capital). In this case, solve for investment using the other variables provided. $806.43 = ($1,324 × (1 - 0.24)) - (0.06 × Investment). $806.43 = $1,006.24 - (0.06 × Investment). (0.06 × Investment) = $199.81. Lastly, divide each side by 0.06. Investment = $3,330.17 (Choice C). Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 56) A company is debating replacing the GPS system in a company vehicle that is used every day of the work week. By replacing the current older model GPS system in the vehicle, the company anticipates being able to add an additional $1,324 of Operating Income this year that will ultimately result in an Economic Value Added (EVA) of $806.43. If the company has a tax rate of 22% and a Weighted Average Cost of Capital (WACC) of 7.5%, then what is the cost of the new investment? A) $2,130.43 B) $3,017.20 C) $10,752.40 D) $13,769.60 Answer: B Explanation: This question requires familiarity with the formula for EVA: After-tax Operating Income - (WACC × Invested Capital). In this case, solve for investment using the other variables provided. $806.43 = ($1,324 × (1 - 0.22)) - (0.075 × Investment). $806.43 = $1,032.72 - (0.075 × Investment). (0.075 × Investment) = $226.29. Lastly, divide each side by 0.075. Investment = $3,017.20 (Choice B). Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

57) Brown Bag, Inc. is a company that manufactures colorful lunch bags made from compostable paper. Management would like to increase production and knows the only way to do this would be to add an additional industrial cutting machine. Brown Bag has a Required Rate of Return of 8.2%, a Weighted Average Cost of Capital (WACC) of 6.3%, and a tax rate of 25%. The cutting machine will cost $22,407 and has a useful life of 15 years. How much Operating Income (before tax) must be generated to achieve an Economic Value Added (EVA) of $1,356.00? (Do not round intermediate calculations.) A) $55.64 B) $2,767.64 C) $3,690.19 D) $4,257.83 Answer: C Explanation: This question requires familiarity with the formula for EVA: After-tax Operating Income - (WACC × Invested Capital). In this case, solve for Operating Income using the other variables provided. $1,356.00 = (Operating Income × (1 - 0.25)) - (0.063 × $22,407.00). $1,356.00 = (Operating Income × 0.75) - $1,411.64. $2,767.64 = (Operating Income × 0.75). Lastly, divide each side by 0.75. Operating Income = $3,690.19 (Choice C). Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 58) Brown Bag, Inc. is a company that manufactures colorful lunch bags made from compostable paper. Management would like to increase production and knows the only way to do this would be to add an additional industrial cutting machine. Brown Bag has a required rate of return of 8.2%, a Weighted Average Cost of Capital (WACC) of 6.3%, and a tax rate of 25%. The cutting machine will cost $22,407 and has a useful life of 15 years. How much Operating Income (before tax) must be generated to achieve an Economic Value Added (EVA) of $551.43? (Do not round intermediate calculations.) A) $1,882.19 B) $1,963.07 C) $2,617.43 D) $3,185.07 Answer: C Explanation: This question requires familiarity with the formula for EVA: After-Tax Operating Income - (WACC × Invested Capital). In this case, solve for Operating Income using the other variables provided. $551.43 = (Operating Income × (1 - 0.25)) - (0.063 × $22,407.00). $551.43 = (Operating Income × 0.75) - $1,411.64. $1,963.07 = Operating Income × 0.75. Lastly, divide each side by 0.75. Operating Income = $2,617.43 (Choice C). Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 43

59) Cordelia is a machine operator for Forever Twenty-Five and specifically works on handbags. Forever Twenty-Five would like to begin offering tie-dyed backpacks. In addition to a new product, Forever Twenty-Five will also need to purchase a piece of equipment that is able to stretch and then tie-dye the fabric for the backpack. Cordelia has priced out two different machines. The first will cost $5,674, generate $1,560 of sales, and will incur $992 of operating expenses. The second will cost $6,782, generate $1,733 of sales, and will incur $1,020 of operating expenses. The company has Weighted Average Cost of Capital (WACC) of 6.1% and a Required Rate of Return of 7.2%. Forever Twenty-Five has a current tax rate of 22%. What will the Economic Value Added (EVA) be for the first machine? (Do not round intermediate calculations.) A) $96.93 B) $346.11 C) $443.04 D) $568.00 Answer: A Explanation: This question requires familiarity with the formula for EVA: After-tax Operating Income - (WACC × Invested Capital). This question includes a required rate of return, but that information is not needed for this solution. Before solving for EVA, solve for Operating Income by subtracting operating expenses from sales: $1,560 - $992 = $568.00. EVA = ($568.00 × (1 0.22)) - (0.061 × $5,674.00). EVA = $443.04 - $346.11 = $96.93 (Choice A). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

60) Cordelia is a machine operator for Forever Twenty-Five and specifically works on handbags. Forever Twenty-Five would like to begin offering tie-dyed backpacks. In addition to a new product, Forever Twenty-Five will also need to purchase a piece of equipment that is able to stretch and then tie-dye the fabric for the backpack. Cordelia has priced out two different machines. The first will cost $5,674, generate $1,560 of sales, and will incur $992 of operating expenses. The second will cost $6,782, generate $1,733 of sales, and will incur $1,020 of operating expenses. The company has Weighted Average Cost of Capital (WACC) of 6.1% and a Required Rate of Return of 7.2%. Forever Twenty-Five has a current tax rate of 22%. What will the Economic Value Added (EVA) be for the second machine? (Do not round intermediate calculations.) A) $96.93 B) $142.44 C) $299.30 D) $413.70 Answer: B Explanation: This question requires familiarity with the formula for EVA: After-tax Operating Income - (WACC × Invested Capital). This question includes a required rate of return, but that information is not needed for this solution. Before solving for EVA, solve for Operating Income by subtracting operating expenses from sales: $1,733 - $1,020 = $713.00. EVA = ($713.00 × (1 0.22)) - (0.061 × $6,782.00). EVA = $556.14 - $413.70 = $142.44 (Choice B). Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

61) A company has gathered the following information about a potential fixed asset purchase: Cost of asset Useful life Operating Income (Net of all expenses except depreciation) Company's required rate of return

$15,000 10 years $4,677 8.2%

If the company has a 20% tax rate and their Economic Value Added (EVA) is $112.00, then what is their Weighted Average Cost of Capital (WACC)? A) 8.2% B) 16.20% C) 16.94% D) 21.18% Answer: B Explanation: This question requires familiarity with the formula for EVA: After-tax Operating Income - (WACC × Invested Capital). Before solving for EVA, solve for the Operating Income after depreciation by subtracting depreciation. $15,000/10 years = $1,500 in depreciation expenses per year. Operating Income = $4,677 - $1,500 = $3,177. $112.00 = ($3,177.00 × (1 0.20)) - (WACC × $15,000.00). $112.00 = $2,541.60 - (WACC × $15,000.00). (WACC × $15,000.00) = $2,541.60 - $112.00. WACC × $15,000.00 = $2,429.60. Now, divide each side by $15,000 to solve for WACC. WACC = 16.20% (Choice B). Diff: 2 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

62) A company has gathered the following information about a potential fixed asset purchase: Cost of asset Useful life Operating Income (Net of all expenses except depreciation) Company's required rate of return

$15,000 10 years $4,677 8.2%

If the company has a 24% tax rate and their Economic Value Added (EVA) is $246.00, then what is their Weighted Average Cost of Capital (WACC)? A) 14.46% B) 16.10% C) 17.74% D) 21.28% Answer: A Explanation: This question requires familiarity with the formula for EVA: After-tax Operating Income - (WACC × Invested Capital). Before solving for EVA, solve for the Operating Income after depreciation by subtracting depreciation. $15,000/10 years = $1,500 in depreciation expenses per year. Operating Income = $4,677 - $1,500 = $3,177. $246.00 = ($3,177.00 × (1 0.24)) - (WACC × $15,000.00). $246.00 = $2,414.52 - (WACC × $15,000.00). (WACC × $15,000.00) = $2,414.52 - $246.00. WACC × $15,000.00 = $2,168.52. Now, divide each side by $15,000 to solve for WACC. WACC = 14.46% (Choice A). Diff: 3 LO: 3 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

63) Oscar is the manager of the component division for a small manufacturing company, and his department is evaluated using various metrics each year including their Return on Investment (ROI). Oscar is debating whether he should purchase a new machine for his department. Oscar is determined to have an ROI of at least 7%. He is considering the purchase of Machine A with a return on sales of 0.3877, sales of $2,349, and a 10-year useful life or Machine B with a return on sales of 0.3994, sales of $2,560, and a 9-year useful life. Each machine would be depreciated using straight-line method. What is the yearly Depreciation Expense for Machine A? (Do not round intermediate calculations.) A) $1,301.01 B) $1,310.64 C) $1,417.50 D) $1,445.18 Answer: A Explanation: This question requires the use of multiple steps in order to calculate the amount of yearly depreciation. The first step is to use the formula for ROI to determine the cost of the investment for Machine A. ROI = Return on Sales × Investment Turnover. 0.07 = 0.3877 × Investment Turnover. Investment Turnover = 0.1806. Now, use the formula for Investment Turnover to calculate the cost of the investment. Investment Turnover = Sales/Investment. 0.1806 = $2,349/Investment. Investment × 0.1806 = $2,349. Investment = $13,010.10. Lastly, divide this total by the machine's useful life to calculate its yearly depreciation. $13,010.10/10 years = $1,301.01 (Choice A). Diff: 3 LO: 1, 3 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

64) Oscar is the manager of the component division for a small manufacturing company, and his department is evaluated using various metrics each year including Return on Investment (ROI). Oscar is debating whether he should purchase a new machine for his department. Oscar is determined to have an ROI of at least 7%. He is considering the purchase of Machine A with a return on sales of 0.3877, sales of $2,349, and a 10-year useful life or Machine B with a return on sales of 0.3994, sales of $2,560, and a 9-year useful life. Each machine would be depreciated using straight-line machine. What is the yearly Depreciation Expense for Machine B? (Do not round intermediate calculations.) A) $1,339.99 B) $1,460.35 C) $1,488.88 D) $1,622.96 Answer: D Explanation: This question requires the use of multiple steps in order to calculate the amount of yearly depreciation. The first step is to use the formula for ROI to determine the cost of the investment for Machine B. ROI = Return on Sales × Investment Turnover. 0.07 = 0.3994 × Investment Turnover. Investment Turnover = 0.1753. Now, use the formula for Investment Turnover to calculate the cost of the investment. Investment Turnover = Sales/Investment. 0.1753 = $2,560/Investment. Investment × 0.1753 = $2,560. Investment = $14,606.63. Lastly, divide this total by the machine's useful life to calculate its yearly depreciation. $14,606.63/9 years = $1,622.96 (Choice D). Diff: 3 LO: 1, 3 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

65) Smith Industries is in desperate need of a new press machine for their production department. The manager has been asked to select the most favorable option while keeping in mind that any decision made may also impact their department's evaluation. Given this, the manager knows that performing a thorough analysis is crucial. A machine could be purchased from Grove Inc. for a total cost of $9,677 and would generate Operating Income of $3,705. A different machine could be purchased from Forest Inc. for a total cost of $9,003 and would generate Operating Income of $3,432. The company has provided the following information: Required Rate of Return Cost of Debt Cost of Equity Proportion of Debt Proportion of Equity Economic Value Added (EVA)

8.12% 6.5% 8.3% 65% 35% $2,558

What is the tax rate for the press machine from Grove? Assume the company uses an effective tax rate that is rounded to the four places. (Do not round intermediate calculations.) A) 12.34% B) 14.66% C) 17.84% D) 18.62% Answer: A Explanation: In order to solve for the tax rate, the formula for EVA must be used, but first, solve for the Weighted Average Cost of Capital (WACC). WACC = (Cost of Debt × Proportion of Capital Financed with Debt) + (Cost of Equity × Proportion of Capital Financed with Equity). WACC = (0.065 × 0.65) + (0.083 × 0.35) = 0.04225 + 0.02905 = 0.0713. Now, the EVA formula can be used to calculate the tax rate. EVA = After-Tax Operating Income - (WACC × Investment). $2,558 = ($3,705 × (1 - Tax Rate)) - (0.0713 × $9,677). $2,558 = ($3,705 × (1 - Tax Rate)) - $689.97. $3,247.97 = $3,705 × (1 - Tax Rate). So, the tax rate to four places is 0.1234. As a percentage, the tax rate is therefore 12.34% (Choice A). Diff: 3 LO: 1, 3 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

66) Smith Industries is in desperate need of a new press machine for their production department. The manager has been asked to select the most favorable option while keeping in mind that any decision made may also impact their department's evaluation. Given this, the manager knows that performing a thorough analysis is crucial. A machine could be purchased from Grove Inc. for a total cost of $9,677 and would generate Operating Income of $3,705. A different machine could be purchased from Forest Inc. for a total cost of $9,003 and would generate Operating Income of $3,432. The company has provided the following information: Required Rate of Return Cost of Debt Cost of Equity Proportion of Debt Proportion of Equity Tax rate

8.12% 6.5% 8.3% 65% 35% 22%

What is the percentage difference in EVA for the press machine from Grove when compared to the press machine from Forest? (Do not round intermediate calculations.) A) The EVA of the press machine from Forest is 7.49% higher than the EVA of the press machine from Grove. B) The EVA of the press machine from Forest is 8.1% higher than the EVA of the press machine from Grove. C) The EVA of the press machine from Grove is 7.49% higher than the EVA of the press machine from Forest. D) The EVA of the press machine from Grove is 8.1% higher than the EVA of the press machine from Forest. Answer: D Explanation: In order to solve for the tax rate, the formula for EVA will eventually be used, but first, solve for the Weighted Average Cost of Capital (WACC). WACC = (Cost of Debt × Proportion of Capital Financed with Debt) + (Cost of Equity × Proportion of Capital Financed with Equity). WACC = (0.065 × 0.65) + (0.083 × 0.35) = 0.04225 + 0.02905 = 0.0713. Now, the EVA formula can be used to calculate the tax rate. EVA = After-Tax Operating Income (WACC × Investment). Grove Press Machine: EVA = ($3,705 × (1 - 0.22)) - (0.0713 × $9,677). EVA = $2,889.90 $689.97. EVA = $2,199.93. Forest Press Machine: EVA = ($3,432 × (1 - 0.22)) - (0.0713 × $9,003). EVA = $2,676.96 $641.91. EVA = $2,035.05. To calculate the percentage difference, use horizontal analysis. (Grove Machine EVA - Forest Machine EVA)/(Forest Machine EVA) = ($2,199.93 - $2,035.05)/$2,035.05 = $164.88/$2,035.05 = 0.0810. The Grove Press Machine has an EVA that is 8.1% higher than the Forest Press Machine (Choice D). Diff: 3 LO: 1, 3 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 51

67) Landry Corp. is evaluating one of its recent investments and the financial aspects of their investment. The Investment Center has provided the following data: Invested Capital Expected Annual Sales Expected Annual Expenses Tax Rate Required Rate of Return Economic Value Added (EVA) Proportion of Debt Cost of Debt Proportion of Equity Cost of Equity

$13,422 $29,870 $27,606 23% 8.6% $33.90 72% ? 28% 9%

Based on the information provided above, what is the company's Cost of Debt? (Do not round intermediate calculations.) A) 10.22% B) 12.74% C) 14.19% D) 24.20% Answer: C Explanation: This question involves multiple steps before arriving at the Cost of Debt. The first step is to use the formula for Economic Value Added (EVA) to determine the Weighted Average Cost of Capital (WACC). EVA = After-Tax Operating Income - (WACC × Investment). $33.90 = (($29,870 - $27,606) × (1 - 0.23)) - (WACC × $13,422). $33.90 = ($2,264 × 0.77) - (WACC × $13,422). $33.90 = $1,743.28 - (WACC × $13,422). -$1,709.38 = -WACC × $13,422. Next, divide each side by $13,422. -0.1274 = -WACC. Then, divide each side by -1 to find the WACC. WACC = 0.1274. Now, use the formula for WACC to calculate the Cost of Debt. WACC = (Cost of Debt × Proportion of Capital Financed with Debt) + (Cost of Equity × Proportion of Capital Financed with Equity). 0.1274 = (Cost of Debt × 0.72) + (0.09 × 0.28). 0.1274 = (Cost of Debt × 0.72) + 0.0252. 0.1022 = Cost of Debt × 0.72. Finally, divide each side by 0.72 to find the Cost of Debt. So, Cost of Debt = 0.1419 or 14.19% (Choice C). Diff: 3 LO: 2, 3 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

68) Landry Corp. is evaluating one of its recent investments and the financial aspects of their investment. The Investment Center has gathered the following data: Invested Capital Expected Annual Sales Expected Annual Expenses Tax Rate Required Rate of Return Economic Value Added (EVA) Proportion of Debt Cost of Debt Proportion of Equity Cost of Equity

$13,422 $29,870 $27,606 23% 8.6% $33.90 72% 6.4% 28% ?

Based on the information provided above, what is the company's Cost of Equity? (Do not round intermediate calculations.) A) 8.13% B) 12.74% C) 17.35% D) 29.03% Answer: D Explanation: This question involves multiple steps before arriving at the Cost of Debt. The first step will be to use the formula for Economic Value Added (EVA) to determine the Weighted Average Cost of Capital (WACC). EVA = After-tax Operating Income - (WACC × Investment). $33.90 = (($29,870 - $27,606) × (1 - 0.23)) - (WACC × $13,422). $33.90 = ($2,264 × 0.77) (WACC × $13,422). $33.90 = $1,743.28 - WACC × $13,422. -$1,709.38 = -WACC × $13,422. Next, divide each side by $13,422. -0.1274 = -WACC. Then, divide each side by -1 to find the WACC. WACC = 0.1274. Now, use the formula for WACC to calculate the Cost of Equity. WACC = (Cost of Debt × Proportion of Capital Financed with Debt) + (Cost of Equity × Proportion of Capital Financed with Equity). 0.1274 = (0.064 × 0.72) + (Cost of Equity × 0.28). 0.1274 = 0.0461 + (Cost of Equity × 0.28). 0.0813 = Cost of Equity × 0.28. Lastly, divide each side by 0.28 to find the Cost of Equity. So, Cost of Equity = 0.2903 or 29.03% (Choice D). Diff: 3 LO: 2, 3 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

69) All business units are created with certain goals against which they are measured. Regardless of the type of business unit, evaluations are utilized to ensure that management is directing the team towards the achievement of goals that are congruent with the overall company goals set forth by the highest levels of management. Which of the following best represent metrics used to evaluate an investment center? A) Profit Margin, Investment Turnover, Year-to-Date Expenditures B) Residual Income, Sales Order per Customer, Profit Margin C) Return on Investment, Residual Income, Investment Turnover D) Return on Investment, Target Profit, Economic Value Added Answer: C Explanation: This question requires familiarity with the evaluation of various responsibility centers. Choice C is the only choice of the four options that represent metrics that would be used to evaluate an investment center. The other choices are a mixture of metrics used to evaluate an investment center or other types of responsibility centers. Diff: 2 LO: 2, 3 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

70) The crinkle-cut division of a French fry company had the following results last year with all production sold to outside customers: $10,000 Sales (25,000 pounds of fries) Variable Expenses Contribution Margin Fixed Expenses Operating Income

4,000 $ 6,000 3,500 $ 2,500

The crinkle-cut division has a 30,000 pound of processing capacity. If the crinkle-cut division were to transfer the remaining capacity to an internal division or unit, what would the minimum acceptable transfer price be? A) $0.13 B) $0.14 C) $0.16 D) $0.40 Answer: C Explanation: This question requires familiarity with how transfer pricing is calculated when a company has excess capacity. In the given scenario, the minimum acceptable transfer price would be variable cost per unit, which is Variable Expenses/Number of Units Produced = $4,000/25,000 = $0.16 per pound (Choice C). Diff: 1 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

71) The crinkle-cut division for a French fry company had the following results last year with all production sold to outside customers: $10,000 Sales (25,000 pounds of fries) Variable Expenses Contribution Margin Fixed Expenses Operating Income

4,000 $ 6,000 3,500 $ 2,500

The crinkle-cut division has a 30,000-pound processing capacity. If the crinkle-cut division were to transfer the remaining capacity to an internal division or unit, what would the minimum additional amount of profit be? A) $0 B) $800 C) $4,000 D) $4,800 Answer: A Explanation: This question requires familiarity with how transfer pricing is calculated when a company has excess capacity and the additional profit this would create. To determine the minimum acceptable transfer price, calculate the variable cost per unit: Variable Expenses/Number of Units Produced = $4,000/25,000 = $0.16 per pound. Selling 5,000 pounds at $0.16 would bring additional sales of 5,000 × $.016 = $800 and variable costs of $800. The question asked how much profit would be generated, and the answer is $0 as the variable costs cancel out the additional sales (Choice A). Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

72) A marble factory has two divisions: Kiln Division and Painting Division. The Kiln Division had Sales of $33,000 and Variable Costs of $25,000 while the Painting Division had Sales of $30,000 and Variable Costs of $21,000. Production and sales for each division are 66,000 pounds. The Kiln Division sells its all-unpainted marble to the Painting Division and does not sell to anyone else. What is the current transfer price? A) $0.12 per pound B) $0.14 per pound C) $0.45 per pound D) $0.50 per pound Answer: D Explanation: This question requires familiarity with the way that transfer pricing is calculated by dividing sales by the number of units sold. For this question, focus on the numbers attributable to the Kiln Division since it is they who will be transferring the materials rather than selling them to an outside market. Current transfer price = $33,000/66,000 = $0.50 per pound (Choice D). Diff: 1 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

73) A jewelry company has several business units, including their Silver Processing unit and their Earrings unit. The Silver Processing unit typically sells all of its silver to external companies unless an internal division or business unit decides to use them as their supplier. The Earrings unit has decided to add a line of silver hoops to the line of gold hoops they have been selling for several years. Prior to this request, the Silver Processing unit reported the following numbers for the year: $318,528 Sales (14,400 ounces of silver) Variable expenses Contribution margin Fixed expenses Operating Income

182,448 $136,080 84,320 $ 51,760

The Silver Processing unit has a capacity of 15,000 ounces of silver, and the Earrings unit has expressed an interest in purchasing the remaining ounces in Silver's processing capacity. What is the minimum acceptable transfer price on the ounces of silver if the Earrings division purchases them? A) $3.59 per ounce B) $9.45 per ounce C) $12.67 per ounce D) $22.12 per ounce Answer: C Explanation: This question requires determination of the minimum acceptable transfer price if this sale takes the Silver Processing unit to capacity without surpassing that. In the given scenario, the minimum acceptable transfer price would be equal to the variable cost per unit. This is calculated by dividing the total variable expenses by the ounces of silver processed. $182,448/14,400 ounces = $12.67 per ounce. Since they are not exceeding capacity, there would not be a need to add any other costs (Choice C). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

74) A jewelry company has several business units, including their Silver Processing unit and their Earrings unit. The Silver Processing unit typically sells all of its silver to external companies unless an internal division or business unit decides to use them as their supplier. The Earrings unit has decided to add a line of silver hoops to the line of gold hoops they have been selling for several years. Prior to this request, the Silver Processing unit reported the following numbers for the year: $318,528 Sales (14,400 ounces of silver) Variable expenses Contribution margin Fixed expenses Operating Income

182,448 $136,080 84,320 $ 51,760

The Silver Processing unit has a capacity of 15,000 ounces of silver, and the Earrings unit has expressed an interest in purchasing 1,000 ounces from the Silver Processing unit. What is the total revenue generated on the ounces of silver sold to the Earrings unit? A) $8,848.00 B) $12,670.00 C) $16,450.00 D) $22,120.00 Answer: C Explanation: This question requires determination of the minimum acceptable transfer price if this sale takes the Silver Processing unit to capacity and surpasses it. That means there will be two acceptable prices. In order to calculate the minimum acceptable transfer price for the 600 (15,000 - 14,400) ounces in capacity, that would be equal to the variable cost per unit for those 600 ounces. This is calculated by dividing the variable expenses by the ounces of silver processed. $182,448/14,400 ounces = $12.67 per ounce. The remaining units in this order (if any), would have a minimum acceptable transfer price of the variable cost per unit plus the contribution margin per unit for the units that surpass the unit's capacity. This number would equal the market price per unit for those units. $12.67 + ($136,080/14,400 ounces) = $12.67 + $9.45 = $22.12 per ounce. The number of units at this price will be 1,000 - 600 = 400 ounces of silver. The total revenue will be (600 × $12.67) + (400 × $22.12) = $16,450.00 (Choice C). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

75) Sally is compiling some numbers for the factory where she works. This factory has many business units, and some sell to external customers only, some sell internally only, and some sell to both internal and external customers. She is specifically looking at Business Unit A which sells primarily to external customers but will also sell to other internal business units. Business Unit A currently has no idle capacity, $2.97 per unit of opportunity cost, and $189,650 in fixed costs. Determine the overall variable cost if business unit A had sales of 75,000 units for a total of $322,500. A) $33,100 B) $99,750 C) $222,750 D) $322,500 Answer: B Explanation: This question requires familiarity with the formula for the minimum acceptable transfer price when there is no idle capacity: variable cost per unit + opportunity cost per unit. And, the minimum acceptable transfer price in this case will be equal to the sales price per unit to external customers = $322,500/75,000 units = $4.30 per unit. Now, substitute these numbers into the formula after rearranging it: $4.30 (minimum acceptable transfer price) - $2.97 (opportunity cost per unit) = $1.33 (variable cost per unit). Lastly, multiply the variable cost per unit by the number of units sold externally: $1.33 × 75,000 = $99,750 (Choice B). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

76) Sally is compiling some numbers for the factory where she works. This factory has many business units, some sell to external customers only, some sell internally only, and some sell to both internal and external customers. She is specifically looking at Business Unit A which sells primarily to external customers but will also sell to other internal business units within the company. Business Unit A currently has no idle capacity, $2.97 per unit of opportunity cost, and $189,650 in fixed costs. Business Unit A had sales of 75,000 units for a total of $322,500. If an internal department wants to purchase 4,370 units, then what would Business Unit A's additional profit be? A) $0.00 B) $5,812.10 C) $12,978.90 D) $18,791.00 Answer: A Explanation: This question requires familiarity with the formula for the minimum acceptable transfer price when there is no idle capacity: variable cost per unit + opportunity cost per unit. The minimum acceptable transfer price in this case would be equal to the sales price per unit to external customers = $322,500/75,000 units = $4.30. The internal amount of the sale would be: 4,370 units × $4.30 = $18,791. Since the units are being sold to the internal entity for the same amount as they would be sold to an external party, the sale would result in additional profit of $0.00 (Choice A). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

77) The Happy Coffee Company manufactures coffee mugs and sells them to external vendors. They have several divisions that are involved in the process and sell to one another internally. The very last department involved in this process is the Distribution department who sells the final product to local coffee shops. The Distribution department purchases all their units internally from the Glazing department. The sales from the Distribution department to the external vendors amounted to 19,412 mugs for a total of $181,725.72. If the Operating Incomes per unit were as follows for each division: Distribution, $4.56; and Glazing, $1.90; then what is the Cost of Goods Sold (COGS) for the Glazing department? (Do not round your calculations.) A) $56,324.20 B) $88,518.72 C) $93,177.60 D) $181,725.72 Answer: A Explanation: This question requires understanding of how the overall Operating Income is calculated when total sales involve internal sales as well as sales of the end product to an external entity. If the sales value is divided by the number of mugs sold, then the per-unit selling price can be calculated: $181,725.72/19,412 = $9.36 per unit. Next, use the Operating Income formula to determine the COGS: Sales - COGS (cost to acquire from Glazing) = Operating Income, so $9.36 - COGS = $4.56, and COGS = $4.80 per unit. Now, calculate the COGS for the Glazing department by applying this same formula: Sales - COGS = Operating Income, so $4.80 - COGS = $1.90. COGS = $2.90 per coffee mug. Lastly, to calculate the total COGS, multiply this value by the number of mugs sold: $2.90 × 19,412 mugs = $56,324.20 (Choice A). Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

78) The Happy Coffee Company manufactures coffee mugs in-house that it then sells to external vendors. They have several divisions that are involved in the process and sell to one another internally. The very last department involved in this process is the Distribution department who sells the final product to local coffee shops. The Distribution department purchases all of their units internally from the Glazing department. The sales from the Distribution department to the external vendors amounted to 19,412 mugs for a total of $181,725.72. If the Operating Incomes per unit were as follows for each division: Distribution, $4.56; and Glazing, $1.90; then what is the Cost of Goods Sold (COGS) per unit for the Glazing department? A) $1.90 B) $2.90 C) $4.56 D) $4.80 Answer: B Explanation: This question requires understanding of how the overall Operating Income is calculated when sales involve internal sales as well as sales of the end product to an external entity. If the sales value is divided by the number of mugs sold, then the per-unit selling price can be calculated: $181,725.72/19,412 = $9.36 per unit. Sales - COGS (cost to acquire from glazing) = Operating Income, so $9.36 - COGS = $4.56, and COGS = $4.80 per unit. Lastly, calculate the COGS for the Glazing department by applying this same formula: Sales - COGS = Operating Income. $4.80 - COGS = $1.90. COGS = $2.90 per coffee mug (Choice B). Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

79) Most companies begin with a centralized organizational model and gradually move towards a decentralized model. As some companies grow, they acquire other companies in an effort to streamline operations and become more efficient. One result of these acquisitions is integration. Which of the following is an example of vertical integration? A) A company that manufactures coffee makers acquires their largest competitor in the market, making them the largest coffee maker manufacturers in the United States. B) A company that manufactures handbags acquires a company that manufactures wallets so that they can expand their customer offerings. C) A factory that manufactures furniture purchases a furniture marketing and distribution firm. D) A factory that produces tortilla chips acquires a company that produces salsa so they can begin to offer deals on both products when purchased at the same time. Answer: C Explanation: This question requires familiarity with integration, specifically vertical integration. This type of integration involves a company acquiring another company that exists within the same value chain. Choice C is the only choice listed that accurately depicts a situation where a company is buying another company within the same value chain. The other choices are forms of mergers and acquisitions but not vertical integration. Diff: 2 LO: 4 Bloom: C AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis. 80) Most companies begin with a centralized organizational model and gradually move towards a decentralized model. As some companies grow, they will acquire others in an effort to streamline operations and become more efficient. One result of these acquisitions is integration. Which of the following is an example of an integration type other than vertical integration? A) A factory that produces paint acquires a factory that produces dyes. B) A frozen pizza manufacturer acquires a factory that produces pizza sauce. C) A peanut butter producer buys a factory that manufactures jelly. D) An automobile manufacturer purchases a factory that produces tires. Answer: C Explanation: This question requires familiarity with integration, specifically vertical. A vertical type of integration involves a company acquiring another company that exists within the same value chain. Choice C is the only choice listed that accurately depicts a situation where a company is buying another company that is not within the same value chain, resulting in a different kind of merger. The other choices are examples of vertical integration. Diff: 2 LO: 4 Bloom: C AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

81) As companies expand and become more decentralized, they will often seek ways in which they can save money. Additionally, management will seek ways to increase efficiency, and that may include purchasing other companies. These acquisitions will involve an integration of the supply chain and will help the company better achieve long-term company goals. Which of the following is an example of backward vertical integration? A) A customer service company purchases their largest competitor, creating a marketdominating entity. B) A factory that produces handbags has purchased a company with a fleet of trucks so they can deliver their own goods. C) A hot dog producer purchases a company that creates hot dog buns. D) A toy company that designs all products in-house has acquired a company with a strong research and development department to assist in testing new products. Answer: D Explanation: This question requires familiarity with integration, specifically backward vertical. This type of integration involves a company acquiring another company that exists within the same value chain. Choice D is the only choice listed that accurately depicts a situation where a company is buying another company within the same value chain that is also backward vertical as it is moving upstream. The other choices are forms of integrations but not necessarily backward vertical. Diff: 2 LO: 4 Bloom: C AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

82) As companies expand and become more decentralized, they will often seek ways in which they can save money. Additionally, management will seek ways to increase efficiency, and that may include purchasing other companies. These acquisitions will involve an integration of the supply chain and will help the company better achieve long-term company goals. Which of the following is an example of an integration type other than backward vertical? A) A busy carrier freight company buys a company that produces cardboard boxes to take advantage of internal transfer pricing. B) A factory that produces handbags has purchased a company with a strong research and development department. C) A farm that grows soybeans purchases a company that can convert the beans into soy milk that will be available for resale. D) An auto mechanic at a small garage purchases the parts supply store next door to have quicker access to what they need to work efficiently. Answer: C Explanation: This question requires familiarity with integration, specifically backward vertical. This type of integration involves a company acquiring another company that exists within the same value chain. Choice C is the only choice listed that accurately depicts a situation where a company is buying another company within the same value chain that is an integration other than backward vertical. The other choices are forms of backward vertical integrations. Diff: 2 LO: 4 Bloom: C AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

83) After a company has decided to vertically integrate with another, they will have to seriously consider whether to move upstream or downstream within their value chain. Each direction has its advantages and disadvantages and plays a crucial role in the improved efficiency postacquisition. Which of the following is an example of forward vertical integration? A) A local café purchases a small local coffee roaster to source their coffee beans locally. B) A telecommunications company that manufactures cell phones acquires a marketing company to move the marketing process in-house. C) A telecommunications company that manufactures cell phones acquires a product design firm to move the product design process in-house. D) An auto mechanic at a small garage purchases the parts supply store next door to have quicker access to what they need to work efficiently. Answer: B Explanation: This question requires familiarity with integration, specifically forward vertical. This type of integration involves a company acquiring another company that exists within the same value chain. Choice B is the only choice listed that accurately depicts a situation where a company is buying another company within the same value chain that is also forward vertical as it is moving downstream. The other choices are forms of integrations but not necessarily forward vertical. Diff: 2 LO: 4 Bloom: C AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

84) After a company has decided to vertically integrate with another, they will have to seriously consider whether to move upstream or downstream within their value chain. Each direction has its advantages and disadvantages and plays a crucial role in the improved efficiency postacquisition. Which of the following is an example of an integration type other than forward vertical? A) A carrier freight company buys a company that produces cardboard boxes to take advantage of internal transfer pricing. B) A carrier freight company buys a customer service company to handle customer complaints. C) A company that specializes in the research and development of new flavor combinations purchases a candy bar factory. D) A farm that grows cocoa beans purchases a company that can refine the beans into cocoa powder that will be available for resale. Answer: A Explanation: This question requires familiarity with integration, specifically forward vertical. This type of integration involves a company acquiring another company that exists within the same value chain. Choice A is the only choice listed that accurately depicts a situation where a company is buying another company within the same value chain that is an integration other than forward vertical. The other choices are forms of forward vertical integrations. Diff: 2 LO: 4 Bloom: C AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

85) Once companies have decentralized, they find themselves in a position where they will be able to attempt to establish transfer pricing between internal departments. In order to best accomplish this, the objectives for the buyer and seller must be considered, even if they are not fully disclosed to the other party. Which of the following represents a potential transfer price objective from the perspective of the seller? A) A seller has no maximum selling price and has the desire to maximize profits. B) A seller should keep in mind that they will definitely have an alternative market for its products other than an internal buyer. C) The seller has a strong preference for selling to the internal buyer as opposed to an external, and potentially unfamiliar, vendor. D) The seller wants to have a selling price that covers variable and fixed manufacturing costs, at a minimum. Answer: A Explanation: This question requires familiarity with transfer pricing and the potential objectives from an internal seller's perspective. Choice A is the only choice that accurately depicts a potential transfer price objective from the perspective of the seller. The other three choices all contain incorrect portions of the objective and are not accurate as it pertains to a seller's objectives. Diff: 2 LO: 4 Bloom: C AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

86) Once companies have decentralized, they find themselves in a position where they will be able to attempt to establish transfer pricing between internal departments. In order to best accomplish this, the objectives for the buyer and seller must be considered, even if they are not fully disclosed to the other party. Which of the following represents a potential transfer price objective from the perspective of the buyer? A) The buyer does not have a maximum purchase price in mind and would be willing to spend more if it meant they could keep all business in-house. B) The buyer does not have a minimum purchase price in mind, but they would like to save as much money as possible. C) If there is an existing supplier in place, then they would prefer to stay with them even if the internal department offers better pricing. D) The buyer would be willing to pay more for an internal purchase than an external equivalent product. Answer: B Explanation: This question requires familiarity with transfer pricing and the potential objectives from an internal buyer's perspective. Choice B is the only choice that accurately depicts a potential transfer price objective from the perspective of the buyer. The other three choices all contain incorrect portions of the objective and are not accurate as it pertains to a buyer's objectives. Diff: 2 LO: 4 Bloom: C AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

87) Turner Inc. is a factory that creates laptop bags that contain an added sleeve for increased protection. The sewing department is currently debating on the best way to proceed with sourcing the materials needed to create the end product. As compared to purchasing internally, what is most likely to impact a potential price with an external vendor? A) High management turnover at the external vendor's location has caused labor costs to increase overall. B) The minimum selling price that the buyer is willing to pay would impact what the external vendor may charge. C) The negotiation abilities of the manager arranging the deal with the external vendor will have the greatest impact. D) Whether the internal department has any idle capacity or not would have the greatest impact on the minimum acceptable transfer price. Answer: C Explanation: This question requires familiarity with how external transfer pricing could be established and what impact the potential price that is determined. Choice C is the best choice of the four of something that would be most likely to impact a potential price with an external vendor. When a manager is good negotiator, they will likely have an impact on the price that is offered by the external vendor. The other choices are either less likely or unlikely to impact the price for an external sale. Diff: 2 LO: 4 Bloom: C AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis. 88) When companies become decentralized and have additional departments, these departments will often begin to sell their products internally to one another. A crucial step in the process of creating a meaningful and worthwhile business relationship is to establish appropriate transfer prices. Which of the following represents the possible negotiated transfer price? A) Fixed Manufacturing Costs plus Mark-Up B) Only Fixed Manufacturing Costs C) The minimum price as established by the buyer D) Variable Manufacturing Costs Answer: D Explanation: This question requires familiarity with the continuum of negotiated transfer prices. While all of the choices listed above seem like definite possibilities, it is only Choice D that is likely to be a possible negotiated transfer price as it appears on the continuum. The other choices contain elements of what could be included, but they are missing one or more crucial elements to make it complete. Diff: 2 LO: 4 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis. 71

89) One of the potential ways in which transfer pricing can be established is to use market-based prices, which is often considered an alternative to cost-based transfer prices. In market-based costing, internal transfer prices may be based upon the same pricing structure offered to external customers. Of the choices provided below, which is most likely to be indicative of a pricing system such as market-based transfer pricing? A) The minimum price as established by the seller B) Variable manufacturing cost C) Variable manufacturing cost plus fixed manufacturing cost D) Variable manufacturing cost plus fixed manufacturing cost plus mark-up Answer: D Explanation: This question requires familiarity with the continuum of market-based transfer prices. While all of the choices listed above seem like definite possibilities, it is only Choice D that is likely to be a possible market price as it appears on the continuum. The other choices contain elements of what could be included, but they are missing one or more crucial elements to make it complete. Diff: 2 LO: 4 Bloom: C AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis. 90) A company can choose not to set a particular transfer price policy and would instead prefer to empower business units to negotiate amongst themselves. When this occurs, this opens up the possibility of many options from the continuum of transfer prices to be an option for pricing. For this to be accurate, certain conditions exist. Which of the following best represents one of the conditions that must be present? A) The market price available to the buyer has to be lower than the variable manufacturing costs of the seller. B) The parties' relative cost structures must not align, and their objectives should vary. C) The selling unit has available capacity and is not currently selling all of its production to external customers. D) The selling unit is currently selling all of its production to external customers. Answer: C Explanation: This question requires familiarity with conditions that must be met in order to be able to negotiate a minimum transfer price. Choice C is the only choice of the four that represents one of the conditions that must be present in order to be able to establish a minimum acceptable transfer price. The other three choices are either entirely incorrect or at least contain parts that are incorrect. Diff: 2 LO: 4 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

91) Steven oversees the production department for a factory that makes plastic outdoor chairs. Currently department sells all of its production to external parties, and the department has an overall production capacity of 150,000 chairs. Their sales data is as follows: Sales (90,000 chairs) are $460,000, Variable Costs are $206,200, and Fixed Costs are $194,350. The internal Resale Division would like to purchase 26,700 chairs from the Production Department. They will be selling these to external retailers for $15.49 per chair. If the Resale Division negotiates a deal with the Production Department to purchase each chair for its absorption cost, then what is the amount of Operating Income the Resale Division would report for their sale of 26,700 chairs? Round per unit cost to nearest cents. A) $294,768 B) $352,440 C) $400,500 D) $413,583 Answer: A Explanation: This question requires calculation of negotiated prices and operating income. The first step will be to calculate the absorption cost per unit which will be the sum of per unit variable costs and per unit fixed costs. Variable Cost per Unit = $206,200/90,000 chairs = $2.29 per chair. Next, calculate the Fixed Cost per Unit = $194,350/90,000 chairs = $2.16 per chair. Now, combine these two costs to arrive at the absorption cost per unit = $2.29 + $2.16 = $4.45 per chair. Next, calculate the Operating Income per unit for the Resale Division = $15.49 - $4.45 = $11.04 per chair. Lastly, multiply the Operating Income per chair by the 26,700 chairs sold. $11.04 per chair times 26,700 = $294,768 (Choice A). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

92) Steven oversees the production department for a factory that makes plastic outdoor chairs. Currently department sells all of its production to external parties, and the department has an overall production capacity of 150,000 chairs. Their sales data is as follows: Sales (90,000 chairs) are $460,000, Variable Costs are $206,200, and Fixed Costs are $194,350. The internal Resale Division would like to purchase 26,700 chairs from the Production Department. They will be selling these to external retailers for $15.49 per chair. If the Resale Division negotiates a deal with the Production Department to purchase each chair for its absorption cost plus a 2.4% markup, then what is the amount of Operating Income the Resale Division would report for their sale of 26,700 chairs? Round per unit cost to nearest cents. A) $291,831 B) $293,433 C) $294,768 D) $351,105 Answer: A Explanation: This question requires calculation of Negotiated Prices and Operating Income. The first step will be to calculate the absorption cost per unit which will be the sum of per unit variable costs and per unit fixed costs. Variable Cost per Unit = $206,200/90,000 chairs = $2.29 per chair. Next, calculate the Fixed Cost per Unit = $194,350/90,000 = $2.16 per chair. Now, combine these two costs to arrive at the absorption cost per unit = $2.29 + $2.16 = $4.45 per chair. Now, add the 2.4% markup onto the sales price. $4.45 × 1.024 = $4.56 per chair. Next, calculate the Operating Income per unit for the Resale Division = $15.49 - $4.56 = $10.93 per unit. Lastly, multiply the Operating Income per chair by the 26,700 chairs sold. $10.93 per chair times 26,700 = $291,831 (Choice A). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

93) The assembly department of Mifflin Inc. has negotiated a deal with the distribution department (internal department) to sell them laser printers. The assembly department has operating capacity of 76,000 printers annually and has made the following external sales: Sales (76,000 units) Direct Materials Direct Labor Variable Overhead Fixed Overhead

$378,000 49,810 88,230 94,220 112,540

The negotiated deal will be to sell 19,804 printers to the distribution department for the minimum acceptable transfer price. If the distribution department would like to have an Operating Income of $32,680, then what is the overall amount of sales that they must have? Do not round intermediate calculations. A) $55,454.60 B) $65,745.88 C) $93,280.24 D) $131,178.84 Answer: D Explanation: This question requires calculation of the minimum acceptable transfer price and then use of the formula for Operating Income to be able to calculate desired sales. Since the assembly department is operating at full capacity, their minimum acceptable transfer price would be equal to market price or the sum of variable cost per unit and the contribution margin per unit. To calculate this, divide the dollar amount of sales by the number of units sold: $378,000/76,000 printers = $4.97 per unit. Next, calculate the desired sales. Sales - Cost (cost to acquire from assembly department) = $32,680. Sales - ($4.97 × 19,804) = $32,680. Sales - 98,498.84 = $32,680. Sales = $131,178.84 (Choice D). Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

94) The assembly department of Mifflin Inc. has negotiated a deal with the distribution department (internal department) to sell them laser printers. The assembly department has operating capacity of 76,000 printers annually and has made the following external sales: Sales (76,000 units) Direct Materials Direct Labor Variable Overhead Fixed Overhead

$378,000 49,810 88,230 94,220 112,540

The negotiated deal will be to sell 19,804 printers to the distribution department for the minimum acceptable transfer price. If the distribution department would like to have an Operating Income of $8,456, then what is the overall amount of sales that they must have? Do not round intermediate calculations. A) $98,425.88 B) $106,954.84 C) $127,751.44 D) $136,207.44 Answer: B Explanation: This question requires calculating the minimum acceptable transfer price and using the formula for Operating Income to be able to calculate desired sales. Since the assembly department is operating at full capacity, their minimum acceptable transfer price would be equal to market price or the sum of variable cost per unit and the contribution margin per unit. To calculate this, divide the dollar amount of sales by the number of units sold: $378,000/76,000 printers = $4.97 per unit. Now, calculate the desired sales. Sales - Cost (cost to acquire from assembly department) = $8,456. Sales - ($4.97 × 19,804) = $8,456. Sales - 98,498.84 = $8,456. Sales = $106,954.84 (Choice B). Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

95) The Production Department of Ollie Corp. has produced and sold 27,840 yards of fabric to local craft stores. The Sewing Department of Ollie Corp. would like to manufacture 12,300 scarves and needs fabric. Each scarf will require 1 yard of fabric and the Sewing Department has asked the Production Department for a quote. The Production Department's Sales were $35,360, with Variable Costs of $11,300, Fixed Costs of $16,540, and production capacity of 60,000 yards of fabric. The negotiated sales price from the Production Department is the absorption cost. What should the sales price per unit for the Sewing Department be if they would like to have an Operating Income of $4,940? A) $0.81 per yard B) $1.00 per yard C) $1.40 per yard D) $1.41 per yard Answer: C Explanation: This question requires calculating the minimum acceptable transfer price and then using the formula for Operating Income to be able to calculate desired sales and the per yard cost. The negotiated sales price will be the absorption cost which will be equal to the variable cost per yard plus the fixed cost per yard. Calculate the absorption cost per yard as: ($11,300 + $16,540)/27,840 yards = $27,840/27,840 = $1.00 per yard. Now, calculate the desired sales. Sales - Cost (cost to acquire from assembly) = $4,940. Sales - ($1.00 × 12,300 yards) = $4,940. Sales - $12,300 = $4,940. Sales = $17,240. Lastly, divide this by the number of yards sold = $17,240/12,300 yards = $1.40 per yard (Choice C). Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

96) The Production Department of Ollie Corp. has produced and sold 27,840 yards of fabric to local craft stores. The Sewing Department of Ollie Corp. would like to manufacture 12,300 scarves and needs fabric. Each scarf will require 1 yard of fabric and the Sewing Department has asked the Production Department for a quote. The Production Department's Sales were $35,360, with Variable Costs of $11,300, Fixed Costs of $16,540, and production capacity of 60,000 yards of fabric. The negotiated sales price from the Production Department is the absorption cost. What should the sales price per unit for the Sewing Department be if they would like to have an Operating Income of $13,502? A) $0.10 per yard B) $1.51 per yard C) $2.10 per yard D) $2.91 per yard Answer: C Explanation: This question requires calculating the minimum acceptable transfer price and then using the formula for Operating Income to be able to calculate desired sales and the per yard cost. The negotiated sales price will be the absorption cost which will be equal to the variable cost per yard plus the fixed cost per yard. Calculate the absorption cost per yard as: ($11,300 + $16,540)/27,840 yards = $27,840/27,840 = $1.00 per yard. Now, calculate the desired sales. Sales - Cost (cost to acquire from assembly) = $13,502 Sales - ($1.00 × 12,300 yards) = $13,502. Sales - $12,300 = $13,502. Sales = $25,802. Lastly, divide this by the number of yards sold = $25,802/12,300 yards = $2.10 per yard (Choice C). Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

97) The Saltine Cracker business unit of snack company called Salty Treatz, Inc. is selling all units produced to external customers. Salty Treatz has a processing capacity of 156,500 units for its saltine crackers. They have provided the following information: $70,800 Sales (118,000 units of saltines) Variable expenses Contribution margin Fixed expenses Operating income

34,400 $36,400 21,200 $15,200

98) The Saltine Cracker business unit of snack company called Salty Treatz, Inc. is selling all units produced to external customers. Salty Treatz has a processing capacity of 156,500 units for its saltine crackers. They have provided the following information: $70,800 Sales (118,000 units of saltines) Variable expenses Contribution margin Fixed expenses Operating income

34,400 $36,400 21,200 $15,200

Due to an increase in sales of Party Platter division, an internal business unit of Salty Treatz, Party Platter would like to purchase 38,500 of the Saltine Cracker's product. If Saltine Cracker does an internal transfer of all additional capacity in units to Party Platter for the minimum acceptable transfer price, how much profit could be generated from this sale? (Do not round intermediate calculation.) A) $0.00 B) $8,470.00 C) $11,165.00 D) $11,935.00 Answer: A Explanation: In order to calculate the additional profit, calculate the minimum acceptable transfer price. In the given scenario, minimum acceptable transfer price would be equal to its variable cost per unit. This will be calculated by dividing the variable expenses by the units of saltine units produced. $34,400/118,000 = $0.29 per unit. They have additional capacity of 38,500 units, and if they sold them at $0.29 per unit, then they would have an additional amount of (38,500 × $0.29) = $11,223.73. Their variable costs would also be $11,223.73, so their total profit would be $0.00. (Choice A). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

99) Pampered Pooches, Inc. is a factory that produces organic dog food and treats. The Oatmeal Biscuit business unit of Pampered Pooches made all sales of its product to external customers and is currently operating near their full capacity of 55,000 pounds. Oatmeal reported $42,350 of sales (50,000 pounds of biscuits), variable expenses of $26,809, and fixed expenses of $11,504. The Variety Box business unit of Pampered Pooches has asked if the Oatmeal Biscuit unit could sell them 8,700 pounds of biscuits to include with their upcoming run of new variety boxes. What will the minimum acceptable transfer price be if they do produce and sell the demanded pounds to Variety Box? A) Idle Capacity units - $0.08 per pound; No Idle Capacity units - $0.31 per pound B) Idle Capacity units - $0.31 per pound; No Idle Capacity units - $0.08 per pound C) Idle Capacity units - $0.54 per pound; No Idle Capacity units - $0.85 per pound D) Idle Capacity units - $0.85 per pound; No Idle Capacity units - $0.54 per pound Answer: C Explanation: This question requires familiarity with how to calculate the minimum acceptable transfer price if a seller has idle capacity and what the minimum acceptable transfer price would be if a seller has no idle capacity. When there is no idle capacity, the minimum acceptable transfer price would be equal to its variable cost per unit plus the contribution margin per unit on external sales. Or to simplify, it will be equal to the market price. This is calculated by dividing the sales by the pounds of biscuits sold. $42,350/50,000 pounds = $0.847 or $0.85 per pound. For units when there is idle capacity, the minimum acceptable transfer price would be the variable cost per unit: $26,809/50,000 pounds = $0.54 per pound (Choice C). Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

100) Pampered Pooches, Inc. is a factory that produces organic dog food and treats. The Oatmeal Biscuit business unit of Pampered Pooches made all sales of its product to external customers and is currently operating near their full capacity of 55,000 pounds. Oatmeal reported $42,350 of sales (50,000 pounds of biscuits), variable expenses of $26,809, and fixed expenses of $11,504. The Variety Box business unit of Pampered Pooches has asked if the Oatmeal Biscuit unit could sell them 8,700 pounds of biscuit to include with their upcoming run of new variety boxes. If Oatmeal Biscuit business unit uses the minimum acceptable transfer price to sell the required units to Variety Box, what would the total sales price be? (Do not round your calculations.) A) $702.00 B) $4,698.00 C) $5,814.80 D) $7,395.00 Answer: C Explanation: This question requires familiarity with how to calculate the minimum acceptable transfer price if a seller has idle capacity and what the minimum acceptable transfer price would be if a seller has no idle capacity. When there is no idle capacity, the minimum acceptable transfer price would be equal to the variable cost per unit plus the contribution margin per unit on external sales. Or to simplify, it will be equal to market price. This is calculated by dividing the sales by the pounds of biscuits sold. $42,350/50,000 pounds = $0.847 or $0.85 per pound. For units produced when a seller has idle capacity, the minimum acceptable transfer price would be the variable cost per unit. $26,809/50,000 pounds = $0.54 per pound. There are 5,000 idle capacity units and 3,700 no idle capacity units. (5,000 × $0.54) + (3,700 × $0.85) = $2,680.90 + $3,133.90 = $5,814.80 (Choice C). Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

101) Almond Delights is a farm that harvests almonds and sells them to both external customers and to some internal business units when the deal makes fiscal sense. Almond Delights' Farm business unit is having a very successful year and provided the following information: Sales (167,300 pounds of almonds) Direct Materials Direct Labor Variable Overhead Fixed expenses

$260,988 15,460 39,245 60,732 90,428

The Almond Milk business unit of Almond Delights would like to purchase 13,490 pounds of almonds from the Farm business unit. If the Farm business unit is operating at full capacity, then what will the minimum acceptable transfer price be? (Do not round your calculations.) A) $0.69 per pound B) $0.87 per pound C) $1.56 per pound D) $1.89 per pound Answer: C Explanation: This question requires familiarity with calculating the minimum acceptable transfer price. Since the factory is already at capacity, the minimum acceptable transfer price would be equal to its variable cost per unit plus the contribution margin per unit on external sales. Variable cost per unit = ($15,460 + $39,245 + $60,732)/167,300 pounds = $115,437/167,300 pounds = $0.69 per pound. Contribution margin per unit = ($260,988 $115,437)/167,300 pounds = $0.87 per pound. The minimum acceptable transfer price is $0.69 + $0.87 = $1.56 per pound (Choice C). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

102) Almond Delights is a farm that harvests almonds and then sells them to both external customers and to some internal business units when the deal makes fiscal sense. Almond Delights' Farm business unit is having a very successful year and provided the following information: Sales (167,300 pounds of almonds) Direct Materials Direct Labor Variable Overhead Fixed expenses

$260,988 15,460 39,245 60,732 90,428

The Almond Milk business unit of Almond Delights would like to purchase an additional 13,490 pounds of almonds from the Farm business unit. If Almond Delights Farm business unit is not operating at full capacity and has the ability to produce all of the additional units, then what will the minimum acceptable transfer price be to sell to the Almond Milk business unit? A) $0.33 per pound B) $0.69 per pound C) $0.87 per pound D) $1.56 per pound Answer: B Explanation: The minimum acceptable transfer price would be equal to its variable cost per unit. This will be calculated by dividing the variable expenses by the pounds of almonds harvested. Calculate the total variable costs which will be $15,460 + $39,245 + $60,732 = $115,437. Now, divide by the number of units sold externally. $115,437/167,300 pounds = $0.69 per pound. They could agree to sell for more, but this is the minimum amount needed to cover their expenses (Choice B). Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

103) The retail department of Dunder Corp. has been working out a deal with a new customer, Neal Inc. The Retail department will be selling ceramic houseplant pots created internally by the Molding department. The Retail department has agreed to sell 12,430 pots to Neal Inc. at a price of $157,115.20. The Molding department has been putting together an estimate and noted that its operating income is $2.64 per unit. If the company would like to see an overall operating income per unit of $3.98 for both the departments, then what is the sales price of the units supplied by the Molding department to the Retail department? A) $12,441.30 B) $32,815.20 C) $107,643.80 D) $140,459.00 Answer: D Explanation: This question requires understanding how the overall operating income is calculated when sales involve internal sales in addition to what the end product is sold for to an external entity. Overall operating income will equal operating income (of the molding Department) plus operating income (of the retail department). You can calculate the operating income of retail department from the given information: $3.98 = $2.64 + Operating income of retail department; Operating income of retail department = $3.98 - $2.64 = $1.34 per unit. Next, multiply the number of units expected to be sold by the per unit operating income to determine the total amount of operating income of the Retail department: 12,430 pots × $1.34 = $16,656.20. Now, subtract the operating income of the Retail department from the total amount of expected sales to determine the cost of goods sold for the retail department: $157,115.20 $16,656.20 = $140,459.00. Cost of goods sold for Retail department will be equal to the sales from the Molding department to the Retail department (Choice D). Diff: 3 LO: 4 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

104) The retail department of Dunder Corp. has been working out a deal with a new customer, Neal Inc. The Retail department will be selling ceramic houseplant pots created internally by the Molding department. The Retail department has agreed to sell 12,430 pots to Neal Inc. at a price of $157,115.20. The Molding department has been putting together an estimate and noted that its operating income is $2.64 per unit. If the company would like to see an overall operating income per unit of $11.47, then what is the sales price of the units supplied by the Molding department to the Retail department? A) $14,543.10 B) $32,815.20 C) $47,358.30 D) $157,115.20 Answer: C Explanation: This question requires understanding how the overall operating income is calculated when sales involve internal sales in addition to what the end product is sold for to an external entity. Overall operating income will equal operating income (of the Molding department) plus operating income (of the Retail department). Calculate the operating income of the Retail department from the given information: $11.47 = $2.64 + Operating income of retail department; Operating income of the Retail department = $11.47 - $2.64 = $8.83 per unit. Next, multiply the number of units expected to be sold by the per unit operating income to determine the total amount of operating income of the Retail department: 12,430 pots × $8.83 = $109,756.90. Now, subtract the operating income of Retail department from the total amount of expected sales to determine the cost of goods sold for the Retail department: $157,115.20 $109,756.90 = $47,358.30. Cost of goods sold for the Retail department will be equal to the sales from the Molding department to the Retail department (Choice C). Diff: 3 LO: 4 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

105) One of the potential ways that transfer pricing can be established is to use market-based prices. This is often considered an alternative to cost-based transfer prices. In market-based costing, internal transfer prices may be based upon the same pricing structure offered to external customers. Of the choices provided below, which is most likely to be indicative of a pricing system such as cost-based transfer pricing? A) Only fixed manufacturing costs B) The maximum price established by the buyer C) The minimum price established by the seller D) Fixed manufacturing costs plus mark-up Answer: C Explanation: This question requires familiarity with the continuum of cost-based transfer prices. While all of the choices listed above seem like definite possibilities, it is only Choice C that is likely to be a possible cost-based transfer pricing as it appears on the continuum. The other choices contain elements of things that could be included but are missing one or more crucial elements to make the responses complete. Diff: 2 LO: 4 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis. 106) Income taxes and the IRS present challenges for all businesses, and it is crucial to have accurate calculations at all times. This scrutiny increases as a company becomes more global. If a company has divisions in more than one country, then it is known as a multinational company. When one division crosses national borders, international tax implications arise. Which of the following represents a challenge that is unique for multinational corporations? A) Having inbound transactions that are originated by a U.S. based parent company B) Having outbound transactions that are originated by a foreign parent company C) Having to navigate the tax regulations of multiple countries as a buyer and seller D) Having to file corporate tax documents with the Internal Revenue Service Answer: C Explanation: This question requires that you be familiar with the special issues encountered by multinational companies that also have transfer pricing happening across country lines. Choice C is the only choice that is a challenge that is unique to these types of organizations. Choices A and B are reversed, and Choice D is a challenge that all corporations will have to deal with. Diff: 2 LO: 4 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

107) The Tortilla Chip business unit at Chipz Corp has reported the following results for years 1 and 2 of their operation:

Sales Variable expenses Contribution margin Fixed expenses Operating income

Year 1 $178,903 94,200 $84,703 50,732 $33,971

Year 2 $194,617 103,343 $91,274 55,892 $35,382

The Tortilla Chip business unit sold 69,870 bags in Year 1, and they sold 75,433 bags in Year 2. In the first year, they had an operating capacity of 75,000 bags and fulfilled a special order for an internal department of 12,465 bags. In the second year, they had an operating capacity of 80,000 bags and fulfilled a special order for an internal department of 14,788 bags. What is the difference in overall price for the special orders fulfilled for the internal department in years 1 and 2? (Round per unit cost to two decimal places.) A) Year 1 is $6,923.87 higher than Year 2 B) Year 1 is $7,592.58 higher than Year 2 C) Year 2 is $6,923.87 higher than Year 1 D) Year 2 is $7,592.58 higher than Year 1

Answer: C Explanation: This question requires calculation of the minimum acceptable price for both idle capacity and no idle capacity. This will result in two different minimum acceptable transfer prices. These calculations must be completed for both years. Year 1: To determine how many are subject to each price, subtract the sales from the high threshold of the capacity. 75,000 - 69,870 = 5,130 units can still be produced before hitting capacity. The minimum acceptable transfer price of the 5,130 units will be equal to the variable cost per unit, which is equal to $94,200/69,870 = $1.35 per unit. Any units produced with no idle capacity will have a minimum acceptable transfer price of the variable cost per unit plus the contribution margin per unit. Contribution margin = $84,703. Now, divide this by the units sold: $84,703/69,870 bags = $1.21 per unit. The minimum acceptable transfer price = $1.35 + $1.21 = $2.56 per unit. The number of units that will be charged at this price will be the total requested minus the units with idle capacity = 12,465 - 5,130 = 7,335 units. The total price that will be quoted is: (7,335 × $2.56) + (5,130 × $1.35) = $18,777.6 + $6,925.5 = $25,703.10. Year 2: To determine how many are subject to each price, subtract the sales from the high threshold of the capacity. 80,000 - 75,433 = 4,567 units can still be produced before hitting capacity. The minimum acceptable transfer price of the 4,567 units will be equal to the variable cost per unit, which is equal to $103,343/75,433 = $1.37 per unit. Any units produced with no idle capacity will have a minimum acceptable transfer price of the variable cost per unit plus the contribution margin per unit. Contribution margin = $91,274. Now, divide this by the units sold: $91,274/75,433 = $1.21 per unit. The minimum acceptable transfer price = $1.37 + $1.21 = $2.58 per unit. The number of units that will be charged at this price will be the total requested minus the units with idle capacity = 14,788 - 4,567 = 10,221 units. The total price that will be quoted is: (10,221 × $2.58) + (4,567 × $1.37) = $26,370.18 + $6,256.79 = $32,626.97. Overall price difference: $32,626.97 - $25,703.10 = $6,923.87 (Choice C). Diff: 3 LO: 4 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

108) The Tortilla Chip business unit at Chipz Corp has reported the following results for years 1 and 2 of their operation:

Sales Variable expenses Contribution margin Fixed expenses Operating income

Year 1 $178,903 94,200 $84,703 50,732 $33,971

Year 2 $194,617 103,343 $91,274 55,892 $35,382

The Tortilla Chip business unit sold 69,870 bags in year one, and they sold 75,433 bags in their second year. In the first year, they had operating capacity of 75,000 bags and fulfilled a special order for an internal department of 12,465 bags. In the second year, they had operating capacity of 80,000 bags and fulfilled a special order for an internal department of 14,788 bags. Which of the following is an accurate representation of the difference in minimum acceptable transfer price between the two years? (Round per unit cost to two decimal places.) A) With idle capacity, the unit transfer price is $0.02 higher in Year 1 than Year 2. B) With idle capacity, the unit transfer price is $0.02 higher in Year 2 than Year 1. C) With no idle capacity, the unit transfer price is $0.04 higher in Year 1 than Year 2. D) With no idle capacity, the unit transfer price is $0.04 higher in Year 2 than Year 1.

Answer: A Explanation: This question requires calculation of the minimum acceptable price for both idle capacity and no idle capacity. This will result in two different minimum acceptable transfer prices. These calculations must be completed for both years. These are needed to perform comparison calculations. Year 1: To determine how many are subject to each price, subtract the sales from the high threshold of the capacity. 75,000 - 69,870 = 5,130 units can still be produced before hitting capacity. The minimum acceptable transfer price of the 5,130 units will be equal to the variable cost per unit, which is equal to $94,200/69,870 = $1.35 per unit. Any units produced with no idle capacity will have a minimum acceptable transfer price of the variable cost per unit plus the contribution margin per unit. Contribution margin = $84,703. Now, divide this by the units sold: $84,703/69,870 = $1.21 per unit. The minimum acceptable transfer price = $1.35 + $1.21 = $2.56 per unit. Year 2: To determine how many are subject to each price, subtract the sales from the high threshold of the capacity. 80,000 - 75,433 = 4,567 units can still be produced before hitting capacity. The minimum acceptable transfer price of the 4,567 units will be equal to the variable cost per unit, which is equal to $103,343/75,433 = $1.37 per unit. Any units produced with no idle capacity will have a minimum acceptable transfer price of the variable cost per unit plus the contribution margin per unit. Contribution margin = $91,274. Now, divide this by the units sold: $91,274/75,433 = $1.21 per unit. The minimum acceptable transfer price = $1.37 + $1.21 = $2.58 per unit. Difference in minimum acceptable transfer price with no idle capacity: Year 2: $2.58 - Year 1: $2.56 = $0.02. Difference in minimum acceptable transfer price with idle capacity: Year 2: $1.37 - Year 1: $1.35 = $0.02. In both the scenarios, Year 2's minimum acceptable transfer price is $0.02 higher than Year 1 (Choice A). Diff: 3 LO: 4 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

109) A factory has several business units and is vertically integrated throughout most of its supply chain. One of the first ways the company moved in this direction was to purchase a Wholesale department where the Production department could directly sell its products. The Wholesale department purchases the final product from the Production department, packages the product, and then sells it to the external vendors. The results of this part of the operation are as follows:

Sales Variable expenses Contribution margin Fixed expenses Operating income

Production $56,000 28,600 $27,400 19,745 $7,655

Wholesale $111,040 62,479 $48,561 26,701 $21,860

There is currently no external market for the Production department to sell its products, so all sales are from the 80,000 units sold to the Wholesale department. The product created by the Production department is very unique, and the Wholesale department cannot acquire it from another vendor or supplier. Assuming that the Production department uses the minimum acceptable transfer price, how much total variable costs are they incurring per unit once the Wholesale department sells overall? A) $0.08 B) $0.44 C) $0.78 D) $1.14 Answer: B Explanation: This question requires familiarity with calculating results once you factor in that part of the sale and costs between two departments within the same organization. To calculate this, it is best to determine the per unit cost of each number that will be needed. The variable costs from the Production department are needed to calculate the overall variable cost per unit. $28,600/80,000 units = $0.36 per unit. To calculate the additional variable costs incurred by the Wholesale department, subtract the transfer price from the variable costs, and divide by units sold. ($62,479 - $56,000)/80,000 units = $6,479/80,000 units = $0.08 per unit. Total variable cost per unit would be: $0.36 + $0.08 = $0.44 (Choice B). Diff: 3 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

110) A factory has several business units and is vertically integrated throughout most of its supply chain. One of the first ways the company moved in this direction was to purchase a Wholesale department where Production could directly sell its products. The Wholesale department purchases the final product from the Production department, packages the product, and then sells it to the external vendors. The results of this part of the operations are as follows:

Sales Variable expenses Contribution margin Fixed expenses Operating income

Production $56,000 28,600 $27,400 19,745 $7,655

Wholesale $111,040 62,479 $48,561 26,701 $21,860

Currently, there is no intermediate market for the Production department to sell its products, so all of the sales are from the 80,000 units sold to the Wholesale department. The product created by the Production department is very unique, and the Wholesale department cannot acquire it from another vendor or supplier. Assume that the Production department finds an external vendor and can sell 40,000 units of its products for $0.72 per unit and that there was no change in the Production department's current transfer price. Then, what is the percentage change in operating income that they would see? A) 10.45% increase B) 17.29% decrease C) 17.29% increase D) 20.9% decrease Answer: A Explanation: Under the given conditions, the Production department is reporting operating income of $7,655 by selling all products to the internal Wholesale department. If they found themselves with an external customer that would receive $0.72 per unit for the order of 40,000 units, then this would create sales of 40,000 × $0.72 per unit = $28,800. Next, calculate the sale generated from the wholesale department: 40,000 × 0.70 per unit = $28,000. Now, calculate the new operating income: $28,800 + $28,000 - $28,600 - $19,745 = $8,455. The percentage change can be measured as follows: ($8,455 - $7,655)/$7,655 = 0.1045 or 10.45% increase (Choice A). Diff: 3 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

111) State the four pillars of a management control system, and indicate how each fits into the overall design of an effective system and why it is crucial that they all function together. Answer: The four pillars of a management control system are: Budgeting, Responsibility Centers, Transfer Pricing, and Performance Measurement. Each of the pillars contains its own unique attributes but must also work together to create a complete and comprehensive system designed to help a business achieve its goals. Budgeting strives to create numerical goals that will guide other processes such as staffing and production. Responsibility Centers divide tasks between various employees and departments to ensure that necessary work is being completed. Transfer Pricing is used as a means to coordinate activities between and within business units, and it aims to fulfill these business units' and the company's objectives. Performance Measurement reflects upon a process from start to finish and determines whether certain goals or metrics have been achieved. Management can then provide additional guidance to make effective changes moving forward based on the results of measured performance. A truly effective system will have all four pillars working with and building upon one another. It is crucial that they function together as they have special mechanisms to guide employee decision-making and therefore company goals. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis. 112) What is a responsibility center, and what are the four types? Discuss each in detail. Answer: A responsibility center is a unit within a business that is organized by its area of control. The four types of responsibility centers are: cost center, revenue center, profit center, and investment center. A cost center has the objective of managing costs while fulfilling its purpose within the value chain as defined by the company. A revenue center has the task of generating revenues for a company, and its sole purpose is to generate sales within the parameters set by the company. A profit center has a defined responsibility of earning a profit, which entails generating revenues and simultaneously maintaining expenses. Investment centers have the assigned task of generating a target return with selected assets and then reinvesting the subsequent returns. Each responsibility center has its own tasks but creates a well-balanced company and management system when all centers are functioning as designed. Diff: 2 LO: 2 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

113) What are the three characteristics of effective responsibility centers, and what does each entail? Why are these characteristics so important to the overall functioning of responsibility centers of decentralized organizations? Answer: The three characteristics of effective responsibility centers include authority, responsibility, and accountability. Authority initially resides at the top levels of a company before it is delegated to middle and lower levels of management in a decentralized organization. The goal of authority is to empower employees to make good decisions with consequences given by management when goals are not achieved. Responsibility entails being given ownership over a task or process where the responsibility of completion is shared by the owner of the task and the person that delegated it to them, typically a manager. Accountability is related to responsibility but is different in that accountability is needed to move responsibility from a suggestion to a real goal with enforceable consequences. These characteristics are integral to the overall functioning of responsibility centers of decentralized organizations because they all build upon one another and work in tandem. In a well-structured organization, these characteristics can flow upward and/or downward in support of goal congruence. Diff: 2 LO: 2 Bloom: AN AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis. 114) Company and employee performances are best measured through both quantitative and qualitative measures. Why are both components important to the overall picture of performance? Why are ratios the most fair and consistent means of comparing different organizations within the same industry? Answer: When it comes to measuring the performance of an organization, it is crucial that as much bias as possible be eliminated. If you were to only observe quantitative data, such as ratios, without also considering qualitative factors, then an incorrect conclusion might be drawn. For example, a manager may measure labor percentages and note that one department has exceptionally high numbers. Upon further inquiry, this manager might learn that employees have been working overtime to compensate for so many people being out sick which is costing the company time and extra overtime wages that are one and one-half times higher than the normal labor rate. When this is factored in, the managers might actually be performing well given the circumstances. The overall picture of performance is nuanced and should be approached as such. Ratios are the fairest and most consistent means of comparing different organizations within the same industry as they remove biases like size and create a level playing field for comparison. Diff: 2 LO: 3 Bloom: AN AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

115) What is vertical integration, and when is it present in a business? What are the different directions associated with vertical integration, and how does each impact your position in the value chain as it relates to the customer? Answer: Vertical integration often arises as a result of a merger of two companies or an acquisition where one company buys another with a focus on one company's value chain. Vertical integration typically results when a company finds value in taking direct ownership of various activities that either precede or follow the existing firm in the value chain. Vertical integration can be upstream when the company is before you in the value chain and therefore further away from the final customer. Vertical integration can also be downstream when the company that is after you is in the value chain and therefore closer to the final customer. Diff: 2 LO: 4 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis. 116) What is transfer pricing, and why is it necessary? What is required before negotiating an optimal transfer price range? Answer: Transfer pricing is the internal transaction price at which goods or services are exchanged between two business units within the same company. The need to establish a transfer price arises when two parties to a transaction are related business units within the same company. These related business units use transfer pricing as a means to allocate total profit between them. The process will still deem one party/business unit as the seller and the other party/business unit as the buyer even though the transaction occurs within the same company. Before being able to establish or negotiate an optimal transfer price range, establish the buyer's and seller's objectives while also determining the capacity constraints of each. Establishing objectives involves thinking of the perspective of each party and then determining if an acceptable price range can be established between both parties. Determining capacity constraints involves observing supply and demand in both the internal and external markets while also factoring in any intermediate markets that might exist. Diff: 2 LO: 4 Bloom: K AACSB: Communication AICPA: AC: Reporting IMA: Strategy, Planning & Performance: Decision Analysis.

117) Shannon is a manager for Smith Corp., a factory that manufactures cotton scarves in a variety of colors and patterns. Her division is in charge of dying the fabric, and she would like to explore the possibility of replacing one of their machines. The current machine is attributed with $4,500 of sales, has $1,404 of operating expenses, and has a repair cost of $4,600. A new machine is estimated to generate $5,400 of sales, to have $2,560 of operating expenses, and has a cost of $4,850. What is the Return on Investment in each scenario? Answer: Retain and Repair: 67.30%, Purchase New: 58.56% This question requires familiarity with the formula for Return on Investment: (Operating Income/Sales) × (Sales/Investment) where sales cancel one another out. To retain and repair the current machine: ($4,500 - $1,404)/$4,600 = 0.6730 or 67.30%. To purchase a new machine: ($5,400 - $2,560)/$4,850 = 0.5856 or 58.56%. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 118) Forager Ltd. is a company that creates various home décor items including faux houseplants, planters, and picture frames. All the items they produce are created using recycled materials, and that has been a major selling point for their customers. The manager of the planter division requested that they look into purchasing a new kiln that will reduce production time and costs while increasing output. The head accountant has compiled the following estimates pertaining to the new kiln: Sales, $4,675; Cost of Goods Manufactured, $1,844; and Operating Expenses (including depreciation), $1,408. The cost of the kiln is estimated to be $9,630. What are the Return on Sales and the Investment Turnover values for a new kiln? Answer: Return on Sales: 0.3044, Investment Turnover: 0.4855 This question requires calculation of both the Return on Sales and the Investment Turnover. Return on Sales is calculated as follows: Operating Income/Sales. Investment Turnover is calculated as follows: Sales/Investment. Begin with Return on Sales. Operating Income is calculated by subtracting Cost of Goods Manufactured and Operating Expenses from Sales. Operating Income = $4,675 - $1,844 - $1,408 = $1,423. Now, divide that value by Sales to calculate the Return on Sales $1,423/$4,675 = 0.3044. Then, calculate Investment Turnover, $4,675/$9,630 = 0.4855. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

119) Susan is considering the purchase of a new machine for her division at work. They had a busier year than expected, and that expedited wear and tear on the existing machine used by her division. She argued that purchasing a new machine instead of fixing the current machine would be the smarter investment for the company. Susan pulled together some information about the new machine (all figures listed are specifically tied to the new machine): Sales: $2,428 Operating Expenses: $1,870 Cost (new machine): $9,764 The company has a Required Rate of Return of 5%. What is the Residual Income that would be generated by the new machine? Answer: Residual Income: $69.80 This question requires calculation of Residual Income for an investment. The formula is as follows: Operating Income - (Required Rate of Return × Investment). The first step is to calculate the Operating Income: $2,428 - $1,870 = $558. Now, complete the rest of the formula. $558 - (5% × $9,764) = $558 - $488.20 = $69.80. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

120) Tate is the manager for the service division at Wilcox Inc., a company that provides a call center for various customer service organizations. They are in the process of analyzing some data for the current year and want to ensure that they are making wise choices. Their accountant has compiled the following information about certain financial statement balances: Current Assets = Total Assets = Current Liabilities = Total Liabilities =

$10,000 $35,000 $14,500 $18,000

Wilcox purchased a new phone system this year that cost them $6,700. They would like to calculate the Economic Value Added (EVA) but must first perform some sub-calculations. What is the invested capital value when calculating the EVA for the entire division? What about the new phone system? Answer: Entire Division: $20,500, New Phone System: $6,700 This question requires familiarity with the way that invested capital is calculated under different circumstances. For the entire division, the formula is Total Assets - Current Liabilities. Entire Division: $35,000 - $14,500 = $20,500. When EVA is calculated using a specific investment, such as a new phone system, use the cost of the investment. In this case, that amount is $6,700. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

121) Dottie is compiling some data for her boss who is interested in comparing last year to the current year. They will eventually work on calculating the Economic Value Added (EVA) by the new industrial assembly line conveyer belt added but must first determine their Weighted Average Cost of Capital (WACC). Dottie has gathered the following information:

Cost of Debt Cost of Equity Proportion of Debt Proportion of Equity

Current Year Previous Year 6.5% 6.00% 8.5% 8.25% 80.0% 78.00% 20.0% 22.00%

What is the WACC for the current year? What is the WACC of the previous year? (Do not round intermediate calculations.) Answer: Current Year: 6.90%, Previous Year: 6.50% In order to solve for the WACC, apply the following formula: (Cost of Debt × Proportion of Capital Financed with Debt) + (Cost of Equity × Proportion of Capital Financed with Equity). For the current year: (0.065 × 0.80) + (0.085 × 0.20) = 0.052 + 0.017 = 0.069, or 6.90%. For the previous year: (0.06 × 0.78) + (0.0825 × 0.22) = 0.04680 + 0.01815 = 0.06495, or 6.50%. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

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122) Jenna has decided to demonstrate to her manager that the new embroidery machine they purchased was a great investment for the company where they work. Management had originally wanted to repair the existing machine, but Jenna convinced them that acquiring a more modern machine would be a great fiscal decision. She is going to calculate the Economic Value Added (EVA) in the hopes that her prediction was correct. She has gathered the following data: Embroidery machine Expected Operating Income tied to the embroidery machine Tax rate Cost of Debt Proportion of Debt Cost of Equity Proportion of Equity

$8,650 $794 21% 7% 82% 7.8% 18%

Using the information above, what is the EVA that Jenna will be able to present to management? Answer: EVA = $9.30 This question requires the formula for EVA which is After-Tax Operating Income - (WACC × Investment). First, calculate WACC by using the following formula: (Cost of Debt × Proportion of Capital Financed with Debt) + (Cost of Equity × Proportion of Capital Financed with Equity). (0.07 × 0.82) + (0.078 × 0.18) = 0.0574 + 0.0140 = 0.0714. Now, complete the formula for EVA: (($794 × (1 - 0.21)) - (0.0714 × $8,650) = $627.26 - $617.956 = $9.30. Diff: 2 LO: 3 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

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123) Sarah is the production manager for Smith Corp., and she is working on some pricing proposals for internal and external customers. Sarah is in charge of the Red Business Unit who produces spools of red yarn. They currently supply many craft stores in the area, have had a very busy year, and are operating at capacity. The manager of the Scarf Division, an internal business unit for Smith Corp. has asked if Sarah could fill an order for 5,700 spools of red yarn for them. Sarah has collected the following information to determine how to proceed: Sales to external customers (32,900 spools): $156,780, Variable Costs: $109,570, and Fixed Costs: $33,662. If Sarah wants to provide a quote to the Scarf Division, what is the minimum acceptable transfer price? (Do not round intermediate calculations.) Answer: Minimum acceptable transfer price = $4.77 This question requires determining what amounts would factor into the minimum acceptable transfer price. Since Smith Corp. is currently operating at capacity and has no idle capacity, this means that internal buyers, including the Scarf Division, must pay the equivalent of the market price: variable cost per unit + contribution margin per unit on external sales. The latter part of this formula is also known as the opportunity cost, and that is how it is identified in this problem. To solve for the opportunity cost, subtract the variable costs from the sales and divide by the number of units sold externally: ($156,780 - $109,570)/32,900 = $47,210/32,900 = $1.43 contribution margin per unit. Variable cost per unit: $109,570/32,900 = $3.33. Therefore, the minimum acceptable transfer price = $3.33 + $1.43 = $4.77. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

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124) The Paper business unit of Home Supplies Inc. has had a busy year and has reported sales of 174,300 pounds of fully processed paper for $98,754. They also incurred $55,320 worth of variable expenses and are currently operating at capacity. The Plate division of Home Supplies Inc. would like to purchase 7,487 pounds of paper internally from the Paper business unit to continue making durable paper plates. The Paper division is considering taking on this order and has decided that a 12% markup would be needed to satisfy their own internal needs. The Plate division said that they won't pay more than $4,800 total for this deal. What is the minimum acceptable transfer price? Will this be a deal that the Paper division can proceed with? (Round all calculations to two decimal places.) Answer: Minimum Acceptable Transfer Price = $0.64 per pound; Yes, this is a deal that the Paper division would proceed with since the overall price they would charge of $4,791.68 is less than the $4,800.00 that the Plate division would pay. This question requires determination of the minimum acceptable sales price under the circumstances presented, calculation of the marked-up price, and a decision about whether or not this deal can come to fruition based on the limit placed on the overall price by the buyer. When the seller is at capacity, the minimum acceptable transfer price will be the variable cost per unit plus the contribution margin per unit on external sales. Variable Cost per Unit: Total Variable Costs/Units Sold Externally = $55,320/174,300 pounds = $0.32 per pound. Contribution Margin per Unit on External Sales = (Sales - Variable Costs)/Units Sold Externally = ($98,754 $55,320)/174,300 pounds = $43,434/174,300 pounds = $0.25 per pound. The minimum acceptable transfer price is ($0.32 + $0.25) × 1.12 = $0.57 × 1.12 = $0.64 per pound. The overall price of this sale would be $0.64 × 7,487 pounds = $4,791.68. At this price, the overall cost is less than the overall amount that the Plate Division stated they were willing to pay. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

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125) Stellar Notes is a factory that produces fun and colorful writing utensils marketed to students. Within the company, there are various business units including a Plastic Cap Division and a Pen Division. Tara, the production manager of the Pen division has been updating their production worksheets and realized that they will run out of caps before they have satisfied their current orders. They normally purchase their caps from a special supplier, but they are going to ask the internal Plastic Cap Division to see if they can assist with an order of 2,643 pen caps to meet the existing need. The Plastic Cap Division has a production capacity of 88,543 caps, and they have sold 87,433 caps to external customers resulting in external sales of $134,660. They had variable costs of $96,543. If the Plastic Cap Division provided a quote for the caps requested internally, what will the overall price quoted by Plastic Cap Division be for the 2,643 caps requested? Answer: Overall Price: $3,581.82 This problem requires familiarity with the formula for the minimum acceptable transfer price when a factory has both idle capacity and when it has no idle capacity. This will result in two different minimum acceptable transfer prices. To determine how many are subject to each price, you will subtract the current production from the highest threshold of their capacity. 88,543 87,433 = 1,110 caps can still be produced before hitting their capacity limit. The minimum acceptable transfer price of those 1,110 caps will be the Variable Cost per Unit: $96,543/87,433 caps = $1.10 per unit. The remaining units in this order will have a minimum acceptable transfer price of the variable cost per unit plus the contribution margin per unit. Contribution Margin = Sales - Variable Costs = $134,660 - $96,543 = $38,117. Now, divide this total by the number of units sold externally: $38,117/87,433 caps = $0.44 per unit. Therefore, the minimum acceptable transfer price will be $1.10 + $0.44 = $1.54 per unit. The number of units that will be charged at this price will be the total requested minus the units produced below their capacity threshold: 2,643 - 1,110 = 1,533 caps. Thus, the total price quoted is: (1,110 × $1.10) + (1,533 × $1.54) = $1,221.00 + $2,360.82 = $3,581.82. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

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126) The Assembly department of a factory has been asked to put together a sales quote for the Sales department, which is an internal division at the same company. The Assembly department has reported the following external sales information: Sales (14,300 units) Direct Labor Direct Materials Variable Overhead Fixed Overhead

$38,930 8,650 6,304 9,998 11,270

The Assembly department has an operating capacity of 14,300 units. The Sales department would like to purchase 5,000 units from the Assembly department. What is the minimum acceptable transfer price, and the absorption cost per unit? (Do not round intermediate calculations.) Answer: Minimum acceptable transfer price is $2.72 per unit; and Absorption cost per unit is $2.53. This question requires familiarity with calculating various costs for the same order from the perspective of the internal seller. Since the Assembly department is currently operating at capacity, the minimum acceptable transfer price would be equal to the market price: $38,930/14,300 units = $2.72. To determine the absorption cost per unit, first calculate the overall variable costs: $8,650 + $6,304 + $9,998 = $24,952. Now, divide by the units sold externally to arrive at the variable cost per unit: $24,952/14,300 units = $1.74 per unit. Next, determine the fixed cost per unit as = $11,270/14,300 units = $0.79 per unit. Now, add fixed cost per unit to the variable cost per unit to get the absorption cost per unit: $1.74 + $0.79 = $2.53. Diff: 2 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

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127) Janice is in charge of the Staining department of a local woodworking business. She is ramping up for what is likely to be her busiest year so far. She anticipates that the department will need 18,000 oak planks to meet their order fulfillment. The internal Materials department would be able to fulfill half of this order before it meets its capacity and has reported the following information about their external sales: Sales (21,000 planks) Variable Costs Fixed Costs

$114,206 42,840 57,600

The Materials department has agreed to a negotiated sales price of the minimum acceptable transfer price. An external vendor has also said it could fulfill the other half for $2.15 per plank, or they would agree to $2.10 if Janice bought all 18,000 planks from them. What is the difference in overall price if Janice purchases half internally and half externally versus purchasing all planks externally? Do not round intermediate calculations. Answer: Overall difference in price is $90 higher for the external-only order. This question requires familiarity with calculating the minimum acceptable transfer price and overall price in multiple situations. In this case, the Materials department has idle capacity so the minimum acceptable transfer price would be equal to the variable cost per unit. $42,840/21,000 planks = $2.04 per plank. The overall price for the half-internal and half-external order would be: (9,000 × $2.04) + (9,000 × $2.15) = $18,360 + $19,350 = $37,710. The overall total for the purchase with all 18,000 units coming from the external vendor would be: 18,000 × $2.10 = $37,800. The difference in price would be $37,800 - $37,710 = $90 higher for external only. Diff: 3 LO: 4 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

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128) After much consideration, Trina has decided sever ties with her current plastic bottle supplier due to consistent shipping delays and yearly price increases. She has put inquiries in with a different external vendor who has agreed to a pricing structure as follows: first 12,000 bottles at $0.82 per bottle, next 10,000 bottles at $0.80 per bottle, next 12,000 bottles at $0.77 per bottle, and any remaining bottles at $0.72 per bottle. They will also ask for a 10% surcharge to cover shipping and handling. The internal Materials department has also provided a quote to Trina for the bottles needed. The Materials department has reported the following external sales data for this year: Sales (of 203,450 bottles) at $181,070.50, Variable Costs of $140,380.50, and Fixed Costs of $22,640.50. The Materials department has an operating capacity of 250,000 bottles and has agreed to supply the bottles at the minimum acceptable transfer price. Trina's department needs 78,903 bottles in order to fulfill all of their upcoming orders. What is the average cost per unit under both the price quote from the external vendor and from the internal department? (Do not round intermediate calculations.) Answer: Average Cost per Unit for the External Supplier is $0.83, and for the Internal Department is $0.77. This question requires familiarity with the formula for the minimum acceptable transfer price in addition to calculating an average per unit costs under different circumstances. External Supplier: This overall cost must be calculated in layers: (12,000 × $0.82) + (10,000 × $0.80) + (12,000 × $0.77) + ((78,903 - 34,000) × $0.72) = $9,840 + $8,000 + $9,240 + $32,330.16 = $59,410.16 total cost. Now, add the surcharge: $59,410.16 × 1.10 = $65,351.18. Lastly, divide this number by the number of bottles needed to arrive at the average cost per unit: $65,351.18/78,903 bottles = $0.83 per bottle. Internal Department: This overall cost must be calculated in layers. Some units are produced with idle capacity, and some are not. The idle capacity units will have a minimum acceptable transfer cost of the variable cost per unit and the over idle capacity units will have a minimum acceptable transfer cost of the variable cost per unit plus the contribution margin per unit. Variable cost per unit = $140,380.50/203,450 bottles = $0.69 per bottle. Contribution margin per unit = ($181,070.50 - $140,380.50)/203,450 bottles = $0.20. Cost of idle capacity units = 250,000 - 203,450 = 46,550 × $0.69 = $32,119.50. Over idle capacity units = 78,903 - 46,550 = 32,353 × ($0.69 + $0.20) = $28,794.17. Now, calculate total cost: $32,119.50 + $28,794.17 = $60,913.67. Lastly, divide this number by the number of bottles needed to arrive at the average cost per unit: $60,913.67/78,903 bottles = $0.77 per bottle. Diff: 3 LO: 4 Bloom: AP AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

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129) Dot Co. is a paint company, and it just completed its second quarter and is performing some analysis so that it can evaluate its top two paint divisions: Latex and Oil-Based. In their third quarter, the company has decided that it can give one or both divisions $15,000 of cash for investments if the analysis support it. Dot has requested that their head accountant gather some financial statement data and analyze it before they move forward with any potential investments. The accountant has compiled the following condensed income statements and selected balance sheet information for the second quarter:

Sales COGS Gross Margin Operating Expenses Operating Income

Latex $776,450 402,300 $374,150 301,900 $72,250

Oil-Based $548,010 306,708 $241,302 198,650 $42,652

In the second quarter, each division purchased a new piece of mixing equipment that cost $286,000. The company's effective tax rate is 23%, it has a Required Rate of Return of 8.5%, and its Weighted Average Cost of Capital (WACC) is 7.6%. Use this information to answer the following questions. a. What are the Return on Investment (ROI), Residual Income (RI), and the Economic Value Added (EVA) for the Latex Division? b. What are the Return on Investment (ROI), Residual Income (RI), and the Economic Value Added (EVA) for the Oil-Based Division? c. Based on this initial analysis, will either department be granted money to pursue the additional investment?

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Answer: a. ROI = 25.26%, RI = $47,940.00, and EVA = $33,896.50 This question requires familiarity with three different formulas: ROI, which is operating income divided by Investment; RI, which is Operating Income - (Required Rate of Return × Investment); and EVA, which is After-Tax Operating Income - (WACC × Investment). ROI = $72,250/$286,000 = 0.2526 or 25.26%. RI = $72,250 - (0.085 × $286,000) = $72,250 - $24,310 = $47,940. EVA = ($72,250 × (1 - 0.23)) - (0.076 × $286,000) = $55,632.50 - $21,736 = $33,896.50. b. ROI = 14.91%, RI = $18,342.00, EVA = $11,106.04 This question requires familiarity with three different formulas: ROI, which is operating income divided by investment; RI, which is Operating Income - (Required Rate of Return × Investment); and EVA, which is After-Tax Operating Income - (WACC × Investment). ROI = $42,652/$286,000 = 0.1491 or 14.91%. RI = $42,652 - (0.085 × $286,000) = $42,652 - $24,310 = $18,342. EVA = ($42,652 × (1 - 0.23)) - (0.076 × $286,000) = $32,842.04 - $21,736.00 = $11,106.04. c. Based on this initial analysis, it would appear that both the Latex division and the Oil-Based division would be eligible to obtain the investment. This is because the Returns on Investment are 25.26% and 14.91%, respectively, both of which are higher than the required rate of return of 8.5%. Both divisions also have positive Residual Income and Economic Value Added, and that means that their metrics are strong enough to be allowed to have the additional funding offered by the company. Diff: 3 LO: 1, 3 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

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130) Jonathan is the manager of the equipment rental section of a large hardware store. Many customers have been requesting industrial wood floor sanders. Jonathan would be able to purchase one for the company for $3,675, but he knows that there are other costs and factors to consider. He believes that the sander would generate $1,342 of rental income in its first year and would incur $433 of expenses (not including depreciation). The sander has a 10-year useful life, and Jonathan suggests the use of straight-line depreciation. Jonathan is going to run some analysis prior to making a final suggestion to the store. (Do not round intermediate calculations.) a. What is the Return on Investment (ROI) for the industrial wood floor sander using the DuPont method? b. How much Residual Income (RI) will the sander generate if the Required Rate of Return is 8%? c. Jonathan's section earned 15% ROI last year. If his evaluation is based upon ROI, then would he be likely to pursue the purchase of this Industrial Wood Floor Sander? Please explain your rationale. Answer: a. ROI = 14.73% This question requires familiarity with the formula for calculating ROI using the DuPont method: Profit Margin × Investment Turnover. Profit margin = Operating Income/Sales. First, calculate the yearly depreciation to update expenses, and determine an accurate Operating Income. The company is using straight-line depreciation calculations. Annual depreciation is $3,675/10 years = $367.50. Operating Income = $1,342.00 - ($433.00 + $367.50) = $541.50. Now, calculate the profit margin. $541.50/$1,342.00 = 0.4035. Next, calculate Investment Turnover: Sales/Investment, or $1,342/$3,675 = 0.3652. Lastly, calculate the ROI: 0.4035 × 0.3652 = 0.1473 or 14.73%. b. Residual Income = $247.50 This question requires familiarity with the formula for Residual Income: Operating Income (Required Rate of Return × Investment). Operating Income was calculated for part a, so it can be used here as well. Residual Income = $541.50 - (0.08 × $3,675.00) = $541.50 - $294.00 = $247.50. c. No, Jonathan would likely not pursue the purchase of the Industrial Wood Floor Sander. Since the ROI was calculated at 14.73%, this is lower than what they were able to achieve last year. This decreased percentage would drag down the overall ROI and therefore lead to a less appealing evaluation of his section. Had the sander's ROI been at least 15% that would have been something, Jonathan would have seriously considered in an effort to continually increase the ROI for his section. Diff: 3 LO: 1, 3 Bloom: E AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

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131) The lawn and garden center of a local hardware store would like to find additional ways to attract customers. One idea the manager of this section had was to purchase a machine that would allow customers to fill a reusable container of their choosing with grass seed. The customers would then pay by the ounce and could return to the store as often as needed to obtain more grass seed. The company also views this as an opportunity to promote a more earthfriendly approach to lawn center by reducing plastic waste from disposable bags of grass seed. A new dispenser machine could be purchased and installed at the store for $4,702. There would be yearly maintenance fee of $186 and other annual expenses (excluding depreciation) of $563. The machine would have a useful life of 15 years, and the company would like to use a straight-line depreciation calculation. The manager believes yearly sales would be $1,942. Prior to moving forward with this purchase, the manager would like to analyze some data. (Do not round your calculations.) a. What is the Return on Sales or Profit Margin for the Dispenser? Discuss what this number means for the company. b. What is the Investment Turnover for the Dispenser? Discuss what this number means for the company. c. Should the manager seriously consider moving forward with this purchase if the ROI is 16% on average for the company? Would your answer change if the manager's evaluation was based upon ROI?

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Answer: a. Profit Margin = 0.4529. Profit margin of 0.4529 means that for every sales dollar, $0.45 is left over as Operating Income. This question requires familiarity with the formula for Return on Sales or Profit Margin: Operating Income/Sales. First, calculate Operating Income: Sales - Operating Expenses. The total for Operating Expenses is not provided, so it must be calculated and that will also include a calculation for depreciation. The company is using the straight-line method for depreciation calculation, so that calculation for annual depreciation is: $4,702/15 years = $313.47. Operating Expenses = $186 + $563 + $313.47 = $1,062.47. Now, calculate Operating Income: $1,942 $1,062.47 = $879.53. Lastly, calculate Profit Margin: $879.53/$1,942 = 0.4529. b. Investment Turnover = 0.4130. An investment turnover of 0.4130 means that the investment generates around 41% of its value in sales per year. This question requires familiarity with the formula for Investment Turnover: Sales/Investment. So, Investment Turnover = $1,942/$4,702 = 0.4130. c. In order to compare the ROI figures, calculate the ROI for this potential investment. This can be done by multiplying profit margin by investment turnover. 0.4529 × 0.4130 = 0.1871 or 18.71%. The manager should seriously consider the purchase of this dispenser since the ROI it achieves of 18.71% is higher than the company's normal ROI of 16%. A purchase like this one would serve to increase the overall return that the company sees by increasing the overall average return. In this instance, the answer would not change if the manager's evaluation was based on ROI, but the decision would be reinforced. If the ROI of the dispenser had been below 16%, then this would likely lead the manager to not pursue the purchase since the ROI would be lower than the company's past average. Diff: 3 LO: 1, 3 Bloom: E AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

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132) Sharon is the lead salesperson for U-Link, a telecommunications company. The company has been looking into ways that it can become more secure. One of the big decisions being considered by management is addressing the current security system they have in place at their corporate headquarters. In doing so, U-Link can expand its offerings to include on-site data storage. Sharon has narrowed the choices down to either fixing the existing system (Repair) or purchasing a replacement system (Replace). She has gathered pertinent information to perform some analysis:

Cost Useful Life Sales Operating Expenses (does not include depreciation)

Repair Replace $12,945 $15,774 8 years 10 years $ 5,334 $ 6,782 $ 3,002 $ 3,898

U-Link has been in business for a number of years and knows that something must change in order for their business to continue to grow. U-link has a Required Rate of Return of 8.2%, has a Weighted Average Cost of Capital (WACC) of 6.4%, a tax rate of 21%, and will use the straightline depreciation method. (Do not round your calculations.) a. What is the Return on Investment (ROI) for each option? Which would be the better choice if the decision was based upon ROI only? b. What is the Residual Income of each option? What is the Economic Value Added (EVA) of each option? c. Based upon all the percentages generated, how can all of this data be interpreted? Which choice is the better option for U-Link?

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Answer: a. For Repair, the ROI is 5.51%, and for Replace the ROI is 8.28%. If ROI were the only determining factor, then Replace would be the better choice. Not only does it result in a higher return than the repair, but it is also the only option that surpasses the company Required Rate of Return of 8.2%. These questions require familiarity with the formula for ROI: Operating Income/Investment. Both choices need to update their operating expenses to include depreciation expense prior to calculating Operating Income and ROI. Repair: Depreciation expense = $12,945/8 years = $1,618.13 per year. Operating Expenses = $3,002 + $1,618.13 = $4,620.13. Operating Income = $5,334 - $4,620.13 = $713.88. Thus, ROI = $713.88/$12,945 = 0.0551 or 5.51%. Replace: Depreciation expense = $15,774/10 years = $1,577.40 per year. Operating expenses = $3,898 + $1,577.40 = $5,475.40. Operating Income = $6,782 - $5,475.40 = $1,306.60. ROI = $1,306.60/$15,774 = 0.0828 or 8.28%. b. For Repair, the RI is ($347.62), and for Replace, the RI is $13.13; For Repair, the EVA is ($264.52), and for Replace, the EVA is $22.68. These questions require familiarity with the formulas for Residual Income (RI): Operating Income - (Required Rate of Return × Investment), and EVA: After-Tax Operating Income (WACC × Investment). Use figures calculated in parts a and b to assist with parts b and c of this exercise. Repair: Residual Income = $713.88 - (0.082 × $12,945) = $713.88 - $1,061.49 = -$347.62. EVA = ($713.88 × (1 - 0.21)) - (0.064 × $12,945) = $563.96 - $828.48 = -$264.52. Replace: Residual Income = $1,306.60 - (0.082 × $15,774) = $1,306.60 - $1,293.47 = $13.13. EVA = ($1,306.60 × (1 - 0.21)) - (0.064 × $15,774) = $1,032.21 - $1,009.54 = $22.68. c. Each of the percentages and numbers calculated informs a different component of the overall picture for each investment. If they chose to repair, then they would not meet their minimum required rate of return, and that means that U-Link should not make the investment. Further, for Repair, both the RI and the EVA are negative, and that means that Repair will cost the company more than it will recoup or earn. Replace, on the other hand, has an ROI that exceeds the company required rate of return, so U-Link should make the investment. Both RI and EVA are positive, and that means the investment is outperforming the base targets set. Replace would be the better choice for U-Link. Diff: 3 LO: 1, 3 Bloom: E AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

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133) Tom and Jerry are both managers of sales teams at Journey Corp., a furniture company whose most popular item is a tweed couch. Tom and Jerry are very competitive and each attempt to outperform one another every year. Currently, Tom's department has better metrics, which has resulted in larger bonuses for Tom and his team. Journey Corp. evaluates both departments based upon their Return on Investment and Economic Value Added. The departments reported the following financial data during the most recent year:

Operating Income Sales Average Operating Assets Total Assets Current Liabilities

Jerry $126,700 $2,789,400 $953,762 $1,103,782 $208,630

Tom $184,320 $3,678,005 $1,320,991 $1,521,001 $296,755

It should be noted that Journey uses average operating assets as its definition of investment, and it has a minimum required rate of return of 8.72% and a tax rate of 22%. Journey has used a variety of ways to acquire capital and has the current makeup: Proportion of Equity is 38%, the Equity Rate is 6.5%, the Proportion of Debt is 62%, and the Debt rate is 9.3%. Use this information to answer the following questions. (Do not round intermediate calculations.) a. Based upon all of the information provided about Journey Corp, Tom, and Jerry, what type of responsibility center is run by each manager? Why do you believe this to be true, and what evidence exists to support your conclusion? b. What are the Return on Sales, Investment Turnover, and Return on Investment for each department? Note which department has performed better for each calculation. c. Determine the Weighted Average Cost of Capital, Residual Income, and Economic Value Added (EVA) for each department? Overall, which department had the best performance?

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Answer: a. Tom and Jerry are each running an investment center. Since it is noted that each is evaluated on ROI and EVA, this is a hallmark evaluation of an investment center. If a manager has authority, responsibility, and accountability for their department or division's asset, then ROI would be an appropriate way to evaluate them. Other types of responsibility centers rely on metrics like sales targets or target profit but are not focused on investments. In this question, Tom and Jerry are charged with investment decisions and are judged on these metrics, so this would be the more appropriate way in which to classify them. b. Return on Sales for Jerry is 4.54%, and for Tom is 5.01%, so Tom has the better Return on Sales. Investment Turnover for Jerry is 2.92 times, and for Tom is 2.78 times, so Jerry has the better Investment Turnover. ROI for Jerry is 13.28%, and for Tom is 13.95%, so Tom has the better Return on Investment. Return on Sales = Operating Income/Sales For Jerry: $126,700/$2,789,400 = 0.0454 or 4.54% For Tom: $184,320/$3,678,005 = 0.0501 or 5.01% Investment Turnover = Sales/Investment* *Investment for this company will be Average operating assets. For Jerry: $2,789,400/$953,762 = 2.92 times For Tom: $3,678,005/$1,320,991 = 2.78 times Return on Investment = The formula for ROI is Profit Margin × Investment Turnover. Profit Margin = Operating Income/Sales. Investment Turnover = Sales/Investment For Jerry: First, calculate Profit Margin. $126,700/$2,789,400 = 0.0454. Next, calculate Investment Turnover. $2,789,400/$953,762 = 2.925. Lastly, calculate ROI. ROI = 0.0454 × 2.925 = .1328 or 13.28%. For Tom: First, calculate Profit Margin as $184,320/$3,678,005 = 0.0501. Next, calculate Investment Turnover as $3,678,005/$1,320,991= 2.784. Lastly, calculate ROI as 0.0501 × 2.784 = 0.1395 or 13.95%.

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c. WACC = 8.24% Residual Income for Jerry is $43,531.95, and for Tom is $69,129.58, so Tom's department has a higher Residual Income. EVA for Jerry is $20,274.16, and for Tom is $34,972.78, so Tom's department has a higher EVA. Overall, Tom's department had the best overall performance during the year based on these metrics. Weighted Average Cost of Capital (WACC): The WACC is calculated with the following formula: (Cost of Debt × Proportion of Capital Financed with Debt) + (Cost of Equity × Proportion of Capital Financed with Equity) = (0.093 × 0.62) + (0.065 × 0.38) = 0.0577 + 0.0247 = 0.0824 or 8.24%. Residual Income is Operating Income - (Minimum Required Rate of Return × Investment) For Jerry: $126,700 - (0.0872 × $953,762) = $126,700 - $83,168.05 = $43,531.95 For Tom: $184,320 - (0.0872 × $1,320,991) = $184,320 - $115,190.42 = $69,129.58 EVA is After-Tax Operating Income - (WACC × Invested Capital) For Jerry: ($126,700 × (1 - 0.22)) - (0.0824 × $953,762) = $98,826 - $78,551.84 = $20,274.16 For Tom: ($184,320 × (1 - 0.22)) - (0.0824 × $1,320,991) = $143,769.60 - $108,796.82 = $34,972.78 Overall, Tom's department had the best overall performance during the year based upon these metrics. Diff: 3 LO: 1, 2, 3 Bloom: E AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

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134) Montana oversees the Coffee Bean Division at the Java Corp., and she is evaluating different options for the sale of their beans. In the past, the Coffee Bean Division has been selling to external customers only, and has been operating at full capacity. As the business grew and expanded, so did their production capacity. They are now operating with some idle capacity, and they have been debating whether to sell internally to another Business Unit. The Coffee Maker Division has recently decided that they will be giving away a free pound of coffee with each brewer machine purchase. They anticipate needing 12,500 pounds of coffee in the coming year and are obtaining quotes both internally and externally. The Coffee Bean Division has a capacity of 175,000 pounds of coffee and reported the following for their external sales: 160,000 pounds resulting in sales of $200,000, Variable Costs of $126,400, and Fixed Costs of $51,980. An external vendor has offered the Coffee Maker Division the following prices: $1.40 for the first 5,000 pounds, $1.20 for the next 5,000 pounds, $1.00 for any number of pounds above this, with an additional markup of 5% of the total. The Coffee Maker Division is evaluating their choices, and Montana is hopeful they will have the most appealing offer. a. What is the minimum acceptable transfer price for their internal purchase from the Coffee Bean Division? What is the overall price that would be quoted? b. What is the overall price offered by the external supplier to the Coffee Maker Division? c. Which offer should the Coffee Maker Division pursue? Are there any additional avenues they could pursue if they would prefer to go with the alternate vendor?

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Answer: a. The minimum acceptable transfer price is $0.79 per pound, and the overall price quoted is $9,875. This question requires determination of what amounts would factor into the minimum acceptable transfer price. Since the Coffee Bean Division is not currently operating at capacity, this would mean that internal buyers, such as the Coffee Maker Division, must pay the variable cost per unit on external sales. Variable cost per unit = $126,400/160,000 pounds = $0.79 per pound, and that is the minimum acceptable transfer price. The overall price quoted by the Coffee Bean Division would be $0.79 × 12,500 pounds = $9,875. b. The overall price quoted from the external supplier is $16,275 The overall price offer to the Coffee Maker Division by the external supplier has to be calculated in layers. The first 5,000 pounds sold will be $1.40 per pound, the next 5,000 pounds will be $1.20 per pound, and the remaining 2,500 pounds will sold at be $1.00 per pound. (5,000 × $1.40) + (5,000 × $1.20) + (2,500 × $1.00) = $7,000 + $6,000 + $2,500 = $15,500. The final step is to add the 5% markup to that total: $15,500 × 1.05 = $16,275. c. If the Coffee Maker is basing their decision solely on price, then they would select the internal division's offer from the Coffee Bean Division. They may also want to consider the benefits of working within the same organization rather than purchasing from an external vendor. If they would prefer to use the external vendor, then they may want to consider asking them to negotiate their first offer. This could involve a change in the prices being asked, the removal of the markup, or some combination of these things. Additionally, the Coffee Maker Division could continue to seek other offers and options from more external vendors for further analysis and comparison. Diff: 2 LO: 4 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

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135) Karen owns a small company that has several business units. The main product of this company is jackets sewn with a special insulated lining that can withstand extremely cold temperatures. One of her business units at the company is responsible for the production of the fancy decorative buttons sewn onto the front of this jacket. The button division has the capacity to meet both internal and external demand with an overall production capacity of 15,000 buttons annually. The company manufactured and sold 12,479 of its available units to the external companies. The Jacket Division just lost its main external button supplier and is in need of 8,788 buttons as soon as possible. The Jacket Division has been collecting external bids but has also requested that the Button Division provide a quote prior to making a final decision. The Button Division has produced the following numbers so far (all based upon sales to external customers): Sales Variable Costs Fixed Costs

$10,798 $ 4,675 $ 4,227

The jacket division has been given the following offers from external suppliers Supplier A: $1.09 per button plus a 2% markup to cover shipping Supplier B: $1.14 per button plus a $250 total shipping rate a. What is the minimum acceptable transfer price for their internal purchase from the Button Division? What is the overall price they would need to pay for these buttons? b. What is the overall price for Supplier A? What is the overall price for Supplier B? Which supplier has created the more appealing offer? c. Since the jacket division needs these buttons quickly, what option should they select? Would your answer change if Supplier A and Supplier B both waived their shipping charges?

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Answer: a. The minimum acceptable transfer price: idle capacity = $0.37 per button and no idle capacity = $0.86; therefore, the overall price is $6,322.39. This problem requires familiarity with the formula for the minimum acceptable transfer price when a factory has both idle capacity and when it has no idle capacity. This will result in two different minimum acceptable transfer prices. To determine how many are subject to each price, subtract the current production from the high threshold of the capacity. 15,000 - 12,479 = 2,521 buttons can still be produced using existing idle capacity. The minimum acceptable transfer price of these 2,521 buttons is the variable cost per unit, and that is equal to $4,675/12,479 buttons = $0.37 per button. The number of units charged at a different price other than the variable cost will be the total requested units minus the units able to be made before hitting capacity = 8,788 2,521 = 6,267 buttons. The minimum acceptable transfer price of these remaining 6,267 buttons will be the variable manufacturing cost per unit plus contribution margin per unit on external sales. Contribution margin = Sales - Variable Costs = $10,798 - $4,675 = $6,123. Now, divide this by the units sold externally: $6,123/12,479 buttons = $0.49 per button. The minimum acceptable transfer price = $0.37 + $0.49 = $0.86 per button. The total price that will be quoted is: (2,521 × $0.37) + (6,267 × $0.86) = $932.77 + $5,389.62 = $6,322.39. b. Supplier A = $9,770.50, Supplier B = $10,268.32. Supplier A has created a more appealing offer between these two external vendors since their overall price is much lower even after the 2% markup Supplier A = 8,788 buttons times $1.09 per button plus a 2% markup. (8,788 × $1.09) × 1.02 = $9,578.92 × 1.02 = $9,770.50. Supplier B = 8,788 buttons times $1.14 per button plus a $250 shipping fee. (8,788 × $1.14) + $250 = $10,018.32 + $250 = $10,268.32. c. Since the Jacket Division is in a hurry and must decide quickly, they are likely to select the offer from the Internal Button Division, assuming they can receive their order as soon as possible. If the Button Division is not able to deliver the buttons in an acceptable time frame, then the Jacket Division would then look more seriously at the offer from Supplier A. Even if Supplier A and Supplier B dropped their shipping surcharges, the internal Button Division would still offer a better price than either Supplier A or Supplier B. However, should the Button Division fall through, then the lack of shipping charges would make the offer from Supplier A more appealing than that quoted by Supplier B as the overall price would then be lower. Diff: 3 LO: 4 Bloom: E AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

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136) The Fizzy Drink Company is a large factory that produces soft drinks in a variety of flavors. Recently the Diet Drink division has been increasing production and is looking to obtain pricing on materials from a variety of vendors, both internally and externally for their bottling needs. Supplier A offered to sell them bottles for $0.80 per bottle for the first 10,000, $0.78 for the next 10,000 bottles, $0.76 for the next 15,000, and $0.73 for any remaining bottles. Supplier B offered to sell them bottles for $0.75 for the first 50,000 bottles and $0.74 for any remaining bottles. Supplier A is going to add 2% surcharge for shipping and handling costs, and Supplier B is going to add a 1.5% surcharge for shipping and handling costs. The Diet Drink division has also put in an inquiry with their internal Bottle division who currently has a capacity of 233,600 bottles, leaving some capacity idle. They have reported the following numbers for the year: Sales (200,000 bottles) Direct Labor Direct Material Variable Overhead Fixed Overhead

$223,780 $52,000 $30,000 $24,000 $38,000

The Diet Drink division is looking to order 76,430 bottles and will need to perform an analysis before making a final decision. (Do not round intermediate calculations.) a. What is the variable cost, contribution margin, and absorption cost of each unit sold by the Bottle Division? What is the minimum acceptable transfer price if the internal Bottle division agrees to supply required bottles to the Diet Drink division? b. What are the overall prices quoted by Supplier A and Supplier B for 76,430 bottles? c. What is the overall price quoted by the Internal Bottle Division? Which offer is the Diet Division most likely to pursue, and why? Support your conclusion.

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Answer: a. Variable Cost per unit is $0.53, Contribution Margin per unit is $0.59, Absorption Cost per unit is $0.72, Minimum acceptable transfer price for Idle capacity units is $0.53 per bottle, and no idle capacity units is $1.12 per bottle. The variable cost per unit will be equal to the variable costs for units sold externally divided by the units sold externally. (Direct Labor + Direct Materials + Variable Overhead)/Units Sold Externally. ($52,000 + $30,000 + $24,000)/200,000 bottles = $0.53 per bottle. Contribution Margin per Unit will equal: (Sales made externally - Variable Costs)/Units sold externally. ($223,780 - ($52,000 + $30,000 + $24,000))/200,000 bottles = ($223,780 - $106,000)/200,000 bottles = $117,780/200,000 bottles = $0.59 per bottle. Absorption cost per unit will equal: (Variable Costs + Fixed Costs)/Units sold externally. [($52,000 + $30,000 + $24,000) + $38,000]/200,000 bottles = ($106,000 + $38,000)/200,000 bottles = $144,000/200,000 bottles = $0.72 per bottle. The minimum acceptable transfer price will have two different prices assigned: one for units produced with idle capacity and one for units produced with no idle capacity. Minimum transfer price in idle capacity will equal to variable cost per unit calculated above at $0.53 per bottle. Minimum transfer price when there is no idle capacity will be equal to the variable cost per unit plus the contribution margin per unit = $0.53 per bottle + $0.59 per bottle = $1.12 per bottle. b. Overall Price for Supplier A is $58,592.78 and for Supplier B is $57,914.07. Supplier A: The overall price offer to the Diet Drink division by Supplier A has to be calculated in layers. The first 10,000 bottles sold will be $0.80 per bottle, the next 10,000 bottles will be $0.78 per bottle, the next 15,000 bottles will be $0.76 per bottle, and the remaining bottles will be $0.73 per bottle. (10,000 × $0.8) + (10,000 × $0.78) + (15,000 × $0.76) + ((76,430 - 35,000) × $0.73) = $8,000 + $7,800 + $11,400 + $30,243.90 = $57,443.90. The last step will be to add the 2% surcharge: $57,443.90 × 1.02 = $58,592.78. Supplier B: The overall price offer to the Diet Drink division by Supplier B has to be calculated in layers. The first 50,000 bottles sold at $0.75 per bottle and the remaining bottles at $0.74 per bottle. (50,000 × $0.75) + ((76,430 - 50,000) × $0.74) = $37,500 + $19,558.2 = $57,058.2. The last step will be to add the 1.5% surcharge: $57,058.2 × 1.015 = $57,914.07.

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c. With an overall price of $65,777.60, they are more likely to pursue the offer from Supplier A. The overall price quoted by the internal division has to be calculated in layers- No idle capacity and idle capacity. Idle capacity units = 233,600 - 200,000 = 33,600 units. These units will have the minimum acceptable transfer price calculated in part a) of $0.53 per bottle, which is the variable cost per unit. The remaining units will be calculated as no idle capacity units = 76,430 33,600 = 42,830 units. These units will have the minimum acceptable transfer price calculated in part a) of $1.12 per bottle. Overall price = (33,600 × $0.53) + (42,830 × $1.12) = $17,808.00 + $47,922.49 = $65,730.49. The Diet Drink division is likely to pursue the offer from Supplier B as it has the lowest overall cost as supported by the calculations above and what is shown in part b). They could also ask Supplier B to drop their 1.5% surcharge to make that offer more competitive. Lastly, they could try to negotiate further with the internal division, using the external supplier quotes as leverage to attempt a lower quote. Diff: 3 LO: 4 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

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137) Ingen Production manufactures a top-of-the-line record player, and the Needle division manufactures one of many of the components needed to create the final product. The Needle division has an overall capacity of 150,000 units, which covers all internal needs and leaves enough capacity to sell directly to the external market. Thanks to proper planning, the Needle division has been able to successfully meet all of its production orders, both internally and externally. Ingen evaluates its management on the profitability of their respective divisions, so the managers are very interested in performing analysis on a regular basis. The manager of the Needle division has determined the following costs to be associated with the production of one needle (unit): Direct Material Direct Labor Variable-MOH Fixed-MOH

$0.50 $0.89 $0.46 $1.15

The manager of the Record Player division mentioned that they can purchase needles externally for $3.70. Use this information to answer the following questions. a. If the Needle Division sets the transfer price at $3.30, then would this be a good deal for both the Needle division and the Record Player division? Does this transfer price reflect variable cost, absorption cost, cost plus, market, or a cost of a different kind? b. If the market price were to drop to $2.90, then would this still be a deal that the Needle division would find beneficial? Would they keep the same transfer price established in part a) or would they calculate a new one? Support your response with the appropriate calculations. c. Assume the market continues to decrease in price. What is the lowest acceptable transfer price that the Needle division could accept? If this came to fruition, then what other measures could the Needle division take in order to try and increase their revenue or reduce their other costs?

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Answer: a. Prior to determining whether or not this is a good deal, it would be beneficial to calculate how much of the costs that $3.30 would cover. The overall costs incurred by the Needle division to produce one unit are: $0.50 + $0.89 + $0.46 + $1.15 = $3.00. At the transfer price of $3.30, this would be a good deal for the Needle division since they are not only covering the full absorption cost but also earning an extra $0.30 per unit sold internally. This is also a good deal for the Record Player division since they are paying $0.40 less per needle than they would be by purchasing the needles externally. b. If the market price dropped to $2.90, then this would still cover most of the costs incurred by the Needle division. With the new market price being lower than the transfer price established in part (a), they would not keep the transfer price of $3.30 and would have to establish a new one. Their variable costs are: $0.50 + $0.89 + $0.46 = $1.85. The new market price would cover all of the variable costs while also adding an extra $1.05 in revenue per needle that would almost cover the full absorption cost. The new transfer price could now be in a range from $1.85 at the low end up to $2.90 at the high end per unit. Anything less than $2.90 is likely to be enticing for the Record Player division as it is still less than they would have to pay if they were purchasing externally. c. If the market continues to decrease in price, then they would have to adjust their minimum acceptable transfer price as well. The lowest they would be able to accept would be their variable cost: $0.50 + $0.89 + $0.46 = $1.85. If the market price eventually dropped below $1.85, then this would present a difficult challenge for the Needle division. In order to increase revenues, they would have to seek out additional vendors that would want or need their product. To reduce their variable costs, they could also seek out a reduction in their direct materials cost if they were able to negotiate this with the supplier they buy from. Diff: 3 LO: 1, 4 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

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138) Spiral Company is a pasta company that specializes in fun-shaped pasta specifically marketed towards kids. Currently, they manufacture all of their pasta internally and purchase boxes from an external vendor for $0.58 per box. Carol, the manager of the Pasta department has big decisions to make for her department for the New Year as she creates a budget. One of their largest pasta-cutting machines will need to be replaced, and she finally found a great vendor who has offered to sell them a new model for $14,600. Carol has calculated the following estimates for the new machine: Expected Sales (2,578 units) Expected Operating Expenses (including depreciation)

$3,428 2,040

Each unit contains 16 ounces of pasta and requires one cardboard box in which it will be packaged and shipped. Carol has also been speaking with their internal packaging department about purchasing boxes from them. The manager of that department is going to put together a sales quote and has gathered the following information about their sales for the year: Sales (7,000 units) Variable Expenses Fixed Costs Operating Capacity

$3,920 $1,540 $1,904 7,000 units

The negotiated price will be the minimum acceptable transfer cost. Spiral Company has a tax rate of 25%, a weighted average cost of capital of 6.6%, and a minimum required rate of return of 8.1%. Use the above information to answer the following questions. a. What is the Return on Investment and Economic Value Added from the new machine? If repairing the existing machine would also cost $14,600 but it had no Economic Value Added, then which deal should Carol select? b. What is the per-unit minimum acceptable transfer price and overall price quoted by the internal packaging department? Calculate the percentage difference between the quotes from the internal packaging department and the external vendor. c. Which offer will Carol select for her department? What is the highest amount Carol should be willing to pay internally per unit before she should consider it to be a bad decision?

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Answer: a. Return on investment is 9.51%, and economic value added is $77.40, so Carol should select the new machine. ROI—This question requires familiarity with the formula for ROI which is Operating Income/Investment: $1,388/$14,600 = 0.0951 or 9.51%. EVA—This question requires familiarity with the formula for EVA which is After-Tax Operating Income - (WACC × Invested capital): ($1,388 × (1 - 0.25)) - (0.066 × $14,600) = $1,041.00 - $963.60 = $77.40. Carol would likely select the new machine as it does have a positive economic value added. The repair of the new machine is the same cost but adds nothing else, so it is a less appealing deal. b. The minimum acceptable transfer price is $0.56 per box, and the internal price quote = $1,443.68. The external vendor's quote is 3.6% higher than that of the internal department. This question requires determination of the amounts would factor into the minimum acceptable transfer price. Since Spiral Company is currently operating at capacity and has no idle capacity, this would mean that any internal buyers, including the Pasta department, must pay the equivalent of the market price, and that is variable cost per unit plus the contribution margin per unit on external sales. To solve for the contribution margin, subtract the variable costs from the sales and divide by the number of units sold externally. ($3,920 - $1,540)/7,000 boxes = $2,380/7,000 boxes = $0.34 contribution margin per box. Variable cost per unit = $1,540/7,000 boxes = $0.22 per box. Minimum acceptable transfer price = $0.34 + $0.22 = $0.56 per box. The overall price quote from the internal vendor will equal the negotiated price (the minimum acceptable transfer price) times the number of units to be purchased. $0.56 × 2,578 boxes = $1,443.68. To calculate the difference in quotes, calculate the quote from the external vendor which is $0.58 per box. $0.58 × 2,578 boxes = $1,495.24. The percentage difference can be calculated using horizontal analysis. ($1,495.24 - $1,443.68)/$1,443.68 = 0.0357 or 3.57% higher with the external vendor. Carol has had a productive round of analysis and has found some interesting information. Based on the analysis she performed, Carol is likely to move forward with purchasing the new machine and to purchase the boxes needed for packaging from their internal department. Carol would likely be willing to pay at most $0.58 per box, which is the current quoted price by the external vendor. Any price above this would be considered a counter-productive decision and should lead Carol to select an external vendor. Diff: 3 LO: 1, 2, 3, 4 Bloom: AN AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis. 128

139) Comfy Critters is a factory that creates stylish and comfortable bedding for dogs of all sizes. They are entering their 6th year of business, and they have decided that one of their largest sewing machines is nearing the end of its useful life. Their production manager, Todd, is trying to help management decide how best to proceed with their next steps. Todd has the choices narrowed down to repairing the current machine (Repair), or replacing the machine with one of two different replacement options (New Machine 1 or New Machine 2). The numbers associated with each of these options are as follows:

Cost Useful Life Sales Operating Expenses (does not include depreciation)

Repair New Machine 1 New Machine 2 $8,876 $14,268 $16,155 8 years 10 years 11 years $7,423 $13,964 $15,897 $6,163 $10,402 $12,705

The company has chosen to utilize the straight-line method of depreciation calculation. The company has utilized a variety means to raise capital, and it is allocated as follows: Cost of Debt Proportion of Debt Cost of Equity Proportion of Equity

5.3% 73.0% 7.2% 27.0%

Comfy Critters has a tax rate of 25% and a Required Rate of Return of 8.4%. (Do not round your calculations.) a. What is the Weighted Average Cost of Capital (WACC) for Comfy Critters? b. What are the Return on Investment (ROI), Residual Income (RI), and Economic Value Added (EVA) for the Repair option? c. What are the Return on Investment, Residual Income, and Economic Value Added for the New Machine 1 option? d. What are the Return on Investment, Residual Income, and Economic Value Added for the New Machine 2 option? e. What should Todd recommend to management based on the analyses in parts b, c, and d? Provide as much detail as possible to support that decision.

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Answer: a. WACC = 5.81% This question requires familiarity with the formula for WACC. This formula will be used to determine other figures as well. WACC = (Cost of Debt × Proportion of Capital Financed with Debt) + (Cost of Equity × Proportion of Capital Financed with Equity). WACC = (0.053 × 0.73) + (0.072 × 0.27) = 0.0387 + 0.0194 = 0.0581 or 5.81%. b. For Repair: ROI = 1.70%, RI = ($595.08), and EVA = ($403.09) This question requires familiarity with three different formulas: ROI, which is Operating Income divided by Investment; RI, which is Operating Income - (Required Rate of Return × Investment); and EVA, which is After-Tax Operating Income - (WACC × Investment). First, Operating Income must be calculated, and that also includes updating operating expenses to include the depreciation expenses. $8,876/8 years = $1,109.50. Operating Income = $7,423.00 - ($6,163.00 + $1,109.50) = $7,423.00 - $7,272.50 = $150.50. Now, calculate the ROI: ($150.50/$8,876.00) = 0.0170 or 1.70%; RI: $150.50 - (0.084 × $8,876.00) = $150.50 - $745.58 = -$595.08; and EVA: ($150.50 × (1 - 0.25)) - (0.0581 × $8,876.00) = $112.88 - $515.96 = -$403.09. c. For New Machine 1: ROI = 14.96%, RI = $936.69, and EVA = $772 This question requires familiarity with three different formulas: ROI, which is Operating Income divided by Investment; RI, which is Operating Income - (Required Rate of Return × Investment); and EVA, which is After-Tax Operating Income - (WACC × Investment). First, Operating Income must be calculated, and that also includes updating operating expenses to include the depreciation expenses. $14,268/10 years = $1,426.80. Operating Income = $13,964.00 ($10,402.00 + $1,426.80) = $13,964.00 - $11,828.80 = $2,135.20. Now, calculate the ROI: $2,135.20/$14,268.00 = 0.1496 or 14.96%; RI: $2,135.20 - (0.084 × $14,268.00) = $2,135.20 $1,198.51 = $936.69; and EVA: ($2,135.20 × (1 - 0.25)) - (0.0581 × $14,268.00) = $1,601.40 $829.40 = $772.00. d. For New Machine 2: ROI = 10.67%, RI = $366.34, and EVA = $353.43 This question requires familiarity with three different formulas: ROI, which is Operating Income divided by Investment; RI, which is Operating Income - (Required Rate of Return × Investment); and EVA, which is After-Tax Operating Income - (WACC × Investment). First, Operating Income must be calculated, and that also includes updating operating expenses to include the depreciation expenses. $16,155/11 years = $1,468.64. Operating Income = $15,897.00 ($12,705.00 + $1,468.64) = $15,897.00 - $14,173.64 = $1,723.36. Now, calculate the ROI: $1,723.36/$16,155.00 = 0.1067 or 10.67%; RI: $1,723.36 - (0.084 × $16,155.00) = $1,723.36 $1,357.02 = $366.34; and EVA: ($1,723.36 × (1 - 0.25)) - (0.0581 × $16,155.00) = $1,292.52 $939.09 = $353.43.

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e. Todd's analysis has helped management decide which of the three options is best for the company. Repair is not a viable option because it not only fails to meet the Required Rate of Return for the company of 8.4% but both its RI and EVA are negative. New Machine 2 is the second least likely option. This option did surpass the company's Required Rate of Return and produced a positive RI and EVA, but New Machine 1 produced better numbers in all three categories. New Machine 1 would be the best option to recommend to management as the best performer of the three. Diff: 3 LO: 1, 2, 3 Bloom: E AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

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140) Fabulous Fanny Packs Co. has two divisions that are both profit centers: Materials and Sewing. Fabulous Fanny Packs is known for their luxurious, unique, handmade fanny packs, which is also its only product. In addition to external vendors, the Materials division sells some of its fabric to the Sewing division. The Sewing division uses this fabric to create the fanny packs. Yearly operating income generated from external sales is calculated as follows:

Sales Variable Expenses Contribution Margin Fixed Expenses Operating Income

Materials Division $119,600 85,544 $34,056 25,762 $8,294

Sewing Division $207,854 146,590 $61,264 37,868 $23,396

One yard of fabric is needed to create each fanny pack. Although the fabric is very unique, the Materials division was able to find an intermediate market where they also sell to external vendors, as reflected in the numbers above. Their operating capacity is 100,000 yards of fabric and they sold 76,420 yards to external vendors. The Materials division received an order from the Sewing division for 20,000 yards of fabric. Fabulous Fanny Packs has been considering whether or not to vertically integrate further by purchasing a retailer so the Sewing division could sell their products internally and sell to external vendors. Use all of this information to answer the following questions. (Do not round your calculations.) a. What is the minimum acceptable transfer price for the sale of yards to the Sewing division? What is the overall price for the yards of fabric being sold to the Sewing division? b. Now assume the Sewing division had sought external quotes for 20,000 yards of fabric they needed to purchase and were given a quote of $1.10 per yard plus an additional charge of 2.5% (of initial price) to cover packaging, shipping, and handling. What would the overall price be for this quote? What is the percentage difference between this option and the one calculated in part a)? c. Which offer should the Sewing division pursue? What factors should be considered when making this decision, and are there any other things they could do that may impact that decision one way or the other? d. Assume that the sewing department was actually looking to purchase 40,000 yards of fabric from the Materials division. What would the per-unit minimum acceptable transfer price be, and what would the new overall price be? e. If the market shifted and the external vendors that the Materials division sells to are now going to be offered at $1.72 per yard, would this impact either of the responses provided in part a) or d)? Support this response with the appropriate calculations.

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Answer: a. The minimum acceptable transfer price is $1.12 per yard of fabric, so the overall price quoted is $22,387.86. This question requires determination of what amounts would factor into the minimum acceptable transfer price. The Materials division has idle capacity, so this means that the Sewing division would be charged the variable cost per unit on external sales as the minimum acceptable transfer price. Variable cost per unit = $85,544/76,420 yards = $1.12 per yard, so that is the minimum acceptable transfer price. The overall price quoted by the Materials division would be $1.12 × 20,000 yards = $22,387.86. b. The External Price Quote is $22,550; the external vendor's quote is 0.72% higher than the price quoted by the Materials division. External Supplier = 20,000 yards times $1.10 per yard plus 2.5% of that in additional charges. (20,000 × $1.10) × 1.025 = $22,000 × 1.025 = $22,550. To calculate the percentage difference in price, compare the overall quotes from the Materials division and the external vendor. ($22,550 $22,387.86)/$22,387.86 = 0.72%. The external vendor's overall price quote is 0.72% higher than the quote from the Materials division. c. One of the largest considerations when deciding which offer to pursue will be the overall cost. The Materials division offers the lowest overall price, and they will likely be the most appealing offer for the Sewing division. Other things that may factor in could be the convenience of using a department that is vertically integrated within the company and a quicker turnaround time on order fulfillment. The Sewing division could also attempt to negotiate with the external vendor and ask them to reduce their per-yard cost or to waive the 2.5% additional charges. Doing the latter would reduce the overall price to $22,000, and that is lower than the overall price quoted from the Materials Division. d. Minimum acceptable transfer price while using idle capacity is $1.12 per yard, and when there is no idle capacity is $1.57; so, the overall price is $52,093.16. If the Sewing division is now looking to purchase 40,000 yards, this would stretch beyond the capacity that the Materials division has. This problem requires familiarity with the formula for the minimum acceptable transfer price when a factory has both idle capacity and when it has no idle capacity. This will result in two different minimum acceptable transfer prices. To determine how many are subject to each price, subtract the current production from the high threshold of the capacity. 100,000 - 76,420 = 23,580 yards can still be produced before hitting capacity. The minimum acceptable transfer price of 23,580 yards will be equal to the variable cost per unit, which is equal to $85,544/76,420 yards = $1.12 per yard. The number of units that will be charged at a different price other than the variable cost will be the total requested units minus the units below capacity = 40,000 - 23,580 = 16,420 yards. The minimum acceptable transfer price of 16,420 yards will be the variable manufacturing cost per unit plus contribution margin per unit on external sales. Contribution margin = Sales - Variable Costs = $119,600 - $85,544 = $34,056. Now, divide this by the units sold externally: $34,056/76,420 yards = $0.45 per yard. The minimum acceptable transfer price is $1.12 + $0.45 = $1.57 per yard. The total price that will be quoted is: (23,580 × $1.12) + (16,420 × $1.57) = $26,395.28 + $25,697.88 = $52,093.16. 133

e. If the market price shifted to $1.72 per yard, then this would affect the overall sales generated by the Materials division in addition to the contribution margin. In part (a), there was idle capacity, and that meant that the minimum transfer price on their sale to the Sewing division would be the variable cost per unit. The change in sales price to the external vendors would not affect or impact the price quote in part (a). The answer to part (d) would be impacted, though. The quote for work done when there is no idle capacity will change. First, recalculate sales and the contribution margin. 76,420 yards sold × $1.72 per yard = $131,442.40. The new contribution margin will equal sales minus variable costs = $131,442.40 - $85,544 = $45,898.40. New minimum transfer price = ($85,544/76,420 yards) + ($45,898.40/76,420 yards) = $1.12 + $0.60 = $1.72 (the same as the per unit sales price). Now, recalculate the overall price quote with the new figure. (23,580 × $1.12) + (16,420 × $1.72) = $26,395.28 + $28,242.40 = $54,637.68. This price is ($54,637.68 - $52,093.16) which is $2,544.52 more than it was before the external price increase. Diff: 3 LO: 1, 2, 4 Bloom: E AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

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141) Sandra has had a very busy year as the production manager for the Patio Chair Department for Younique Patio Designs, Inc. In addition to expanding into new markets, Sandra has been working with the design team to bring her dream of adding a wicker patio chair to their current list of offerings. The design team has provided a list of requirements that must be met in order to be able to produce the chairs, including a machine that will enable assembly workers to cut and weave the wicker material. After speaking with several vendors, Sandra was given the following quotes: Machine A: $50,500 (10-year useful life) Machine B: $44,600 (9-year useful life) Machine C: $43,420 (8-year useful life) Younique would use straight-line depreciation for their calculations. She used this information and her own data to assemble the following predictions:

Sales Operating Expenses (not including depreciation) Cost of Equity Proportion of Equity Cost of Debt Proportion of Debt Income tax rate Required rate of return

Machine A $17,423 $ 4,663

Machine B $23,964 $10,402

Machine C $25,897 $12,705

8.10% 23% 5.7% 77% 24% 8.3%

Sandra has the option to purchase the wicker material from an external vendor for $2.16 per sheet with a 5% surcharge to deliver the sheets. Each chair will need 1 sheet of wicker to be completed. Younique wants to purchase 16,783 sheets of wicker to meet their production projections. They could also get the supply from Younique's internal Materials Department. Their Materials Department has provided the following information about their production: Sales (external sales of 98,000 sheets) Variable Costs Fixed Costs

$226,800 157,420 62,340

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The Materials Department has a production capacity of 110,000 units so they currently have idle capacity. Use all of this information to answer the following questions. (Do not round your calculations.) a. What are the Profit Margins and Investment Turnovers for Machines A, B, and C? b. What are the Returns on Investment (ROIs) and Residual Incomes (RIs) for Machines A, B, and C? b. What are the Economic Values Added (EVAs) for Machines A, B, and C? What is the percentage difference between the Machine with the highest EVA and the lowest EVA? c. What is the minimum acceptable transfer price for using the internal Materials Department for purchasing the wicker sheets? What is the overall price quoted by this department to the Patio Chair Division? d. Which machine will be the best choice for the Patio Chair Department? Which supplier would provide the best option for them to pursue? Please explain all answers.

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Answer: a. Machine A: Profit Margin is 0.4425, and Investment Turnover is 0.3450; Machine B: Profit Margin is 0.3591, and Investment Turnover is 0.5373; Machine C: Profit Margin is 0.2998, and Investment Turnover is 0.5964 This question requires familiarity with the formulas for Return on Sales (Profit Margin): Operating Income/Sales, and Investment Turnover: Sales/Investment. First, calculate Operating Income: Sales - Operating Expenses. The total for operating expenses is not provided, so it must be calculated and that should include a calculation for depreciation. Machine A: Depreciation = $50,500/10 years = $5,050 per year. Operating Income = $17,423 $4,663 - $5,050 = $7,710. Profit Margin = $7,710/$17,423 = 0.4425. Investment Turnover = $17,423/$50,500 = 0.3450. Machine B: Depreciation = $44,600/9 years = $4,955.56 per year. Operating Income = $23,964 $10,402 - $4,955.56 = $8,606.44. Profit Margin = $8,606.44/$23,964 = 0.3591. Investment Turnover = $23,964/$44,600 = 0.5373. Machine C: Depreciation = $43,420/8 years = $5,427.50 per year. Operating Income = $25,897 $12,705 - $5,427.50 = $7,764.50. Profit Margin = $7,764.50/$25,897 = 0.2998. Investment Turnover = $25,897/$43,420 = 0.5964. b. Machine A: ROI is 0.1527, and RI is $3,518.50; Machine B: ROI is 0.1930, and RI is $4,904.64; Machine C: ROI is 0.1788, and RI is $4,160.64 This question requires familiarity with the formula for ROI: Profit Margin × Investment Turnover, and Residual Income: Operating Income - (Required Rate of Return × Investment). Profit Margin and Investment Turnover were calculated in part (a) for each Machine, so those numbers can be used here as well. Machine A: Return on Investment = 0.4425 × 0.3450 = 0.1527. Residual Income = $7,710 (0.083 × $50,500) = $7,710 - $4,191.50 = $3,518.50. Machine B: Return on Investment = 0.3591 × 0.5373 = 0.1930. Residual Income = $8,606.44 (0.083 × $44,600) = $8,606.44 - $3,701.80 = $4,904.64. Machine C: Return on Investment = 0.2998 × 0.5964 = 0.1788. Residual Income = $7,764.50 (0.083 × $43,420) = $7,764.50 - $3,603.86 = $4,160.64.

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c. EVA for Machine A is $2,702.34, EVA for Machine B is $3,752.51, and EVA for Machine C is $3,186.40. Machine B has an EVA that is 38.86% higher than the EVA of Machine A These questions require familiarity with the formulas for EVA: After-Tax Operating Income (WACC × Investment) and for the Weighted Average Cost of Capital (WACC): (Cost of Debt × proportion of Capital Financed with Debt) + (Cost of Equity × Proportion of Capital Financed with Equity). WACC = (0.057 × 0.77) + (0.081 × 0.23) = 0.04389 + 0.01863 = 0.06252 Machine A: ($7,710.00 × (1 - 0.24)) - (0.06252 × $50,500) = $5,859.60 - $3,157.26 = $2,702.34. Machine B: ($8,606.44 × (1 - 0.24)) - (0.06252 × $44,600) = $6,540.90 - $2,788.39 = $3,752.51. Machine C: ($7,764.50 × (1 - 0.24)) - (0.06252 × $43,420) = $5,901.02 - $2,714.62 = $3,186.40. The Machine with the highest EVA is Machine B, and the Machine with the lowest EVA is Machine A. Use horizontal analysis to calculate their percentage difference. The formula would be: (Machine B EVA - Machine A EVA)/Machine A EVA = ($3,752.51 - $2,702.34)/$2,702.34 = 0.3886 or 38.86%. d. Minimum acceptable transfer price: idle capacity = $1.61, No idle capacity = $2.31; therefore, the overall price = $30,345.15. This problem requires familiarity with the formula for the minimum acceptable transfer price when a factory has both idle capacity and when it has no idle capacity. This will result in two different minimum acceptable transfer prices. To determine how many are subject to each price, subtract the current production from the high threshold of the capacity. 110,000 - 98,000 = 12,000 units can still be produced before hitting capacity. The minimum acceptable transfer price of those 12,000 wicker sheets will be equal to the variable cost per unit, which is equal to $157,420/98,000 = $1.61 per sheet. Any sheets produced when there is no idle capacity will have a minimum acceptable transfer price of the variable cost per unit plus the contribution margin per unit. Contribution margin = Sales - Variable Costs = $226,800 - $157,420 = $69,380. Now, divide this by the units sold externally: $69,380/98,000 sheets = $0.71 per sheet. The minimum acceptable transfer price = $1.61 + $0.71 = $2.31 per sheet. The number of units that will be charged at this price will be the total requested minus the units produced before hitting capacity which is 16,783 - 12,000 = 4,783 units. The total price that will be quoted is: (12,000 × $1.61) + (4,783 × $2.31) = $19,275.92 + $11,069.23 = $30,345.15.

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e. The Machine that would be the best choice for Younique to purchase would be Machine B since it had higher ROI, RI, and EVA when compared to the other two choices. All three Machines would yield positive results for Younique, so Sandra could comfortably suggest any of them. Should Machine B not work out, then her next likely suggestion would be Machine C since it produced the second highest results. Before deciding what supplier they select, calculate the overall price offered by the external vendor. They want $2.16 per sheet with a 5% surcharge to cover shipping. (16,783 sheets × $2.16 per sheet) × 1.05 = $36,251.28 × 1.05 = $38,063.84. At this price, it would make the most sense for Younique to select their internal Materials Department as the overall price they would be obligated to pay is ($38,063.84 - $30,345.15) = $7,718.70 less. Diff: 3 LO: 1, 3, 4 Bloom: E AACSB: Analytic AICPA: AC: Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Decision Analysis.

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Cost Accounting, 1e (Farmer) Chapter 18 Business Strategy, Performance Measurement, and the Balanced Scorecard 1) When an organization starts up, they decide on their mission and vision, and these two components inform every step of their goal achievement. Which of the following best represents the component that determines the path they take to move towards implementing their long-term vision? A) Goals and objectives B) Measures and targets C) Results D) Strategies and initiatives Answer: D Explanation: This question requires understanding of the five components of a strategic plan. Choice D is the correct choice since this component of a strategic plan helps a business create a path and then adjust that as needed to overcome barriers and move towards achieving long-term goals. The remaining choices are components of a strategic plan, but they do not determine the path. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 2) When an organization starts up, they decide on their mission and vision, and these two components inform every step of their goal achievement. Which of the following best represents the component that results from coordination of business units across the organization tracking dollars and dates? A) Goals and objectives B) Measures and targets C) Results D) Strategies and initiatives Answer: B Explanation: This question requires understanding of the five components of a strategic plan. Choice B is the correct choice since this component results in the business's Master Budget, i.e., their companywide plans for dollars and dates. The remaining choices are components of a strategic plan, but they do not correctly answer the question. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

3) When a company is in its planning stage, it must analyze the existing market to plan its path to success. According to Porter, there are five forces that shape the industry a business operates within. Which of the following is one of those five forces? A) Existing entrants B) Power of managers C) Threat of substitutes D) Threat of suppliers Answer: C Explanation: This question requires understanding of the Porter's Five Forces. Choice C is the correct choice since it is the only choice listed that is one of the Five Forces. The remaining three choices are incorrect variations of Porter's Five Forces. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 4) When a company is in its planning stage, it must analyze the existing market to plan its path to success. According to Porter, there are five forces that shape the industry a business operates within. Which of the following is least likely to be considered one of these five forces? A) Mission and Vision B) New entrants C) Power of customers D) Threat of substitutes Answer: A Explanation: This question requires understanding of the Porter's Five Forces. Choice A is the correct choice since it is the only choice listed that is not one of the Five Forces. In fact, it is a component of the strategic planning process. The other three choices are representative of Porter's Five Forces. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

5) Once a company has identified various industry challenges and starts to overcome them, they may choose to use a SWOT analysis. Ideally, this will help the company determine important internal and external areas of concerns. Which of the following represents the correct breakdown of the acronym SWOT? A) Strengths, Weaknesses, Opportunities, Threats B) Strengths, Weaknesses, Opportunities, Treats C) Strengths, Worries, Opportunities, Threats D) Summaries, Weaknesses, Opportunities, Threats Answer: A Explanation: This question requires familiarity with SWOT analysis and what the acronym stands for. Choice A is the only choice that correctly identifies what each of the letters of SWOT represents. The remaining choices all contain one item that is incorrect. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 6) Cost accounting principles are an important component for any organization that assist management in their decision-making. Additionally, managers rely on accountants to interpret data and provide information to help them understand their business in greater depth. Which of the following choices best represents a strategic plan? A) Derek is an accountant who has compiled some data for management so that they can increase production over the next year. B) Shawn is a manager who would like to reduce employee turnover and is meeting with human resources to gather data. C) Suzanne is an accountant who has compiled an expansion plan for a restaurant to franchise locations and eventually operate in five states. D) Terrance is a manager who would like to see the retail store where he works implement measures to reduce shrinkage and is estimating the cost to do so. Answer: C Explanation: This question requires familiarity with the differences between a strategic plan and an operating plan. Choice C is the correct choice because it identifies a strategic plan that is a comprehensive likely multi-year plan for an organization. An operating plan is more likely to focus on specific outcomes for a year, and the other three choices fall into that category. Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

7) Cost accounting principles are an important component of any organization that assist management in their decision-making. Additionally, managers rely on accountants to interpret data and provide information to help them understand their business in greater depth. Which of the following choices best represents an operating plan? A) Nathan is the manager of an automotive shop who knows that the shop needs more mechanics on staff to expand their service offerings. B) Susan is a therapist and would like to expand her practice by hiring new therapists over the next few years. C) Tara is a florist who would eventually like to retire and has enlisted the help of her children to formulate a plan by which they take over control within the next 5 years. D) Theodore is the manager of a local football team and is using last year's ticket sales data to create a plan to increase ticket sales for the coming year. Answer: D Explanation: This question requires familiarity with the differences between a strategic plan and an operating plan. Choice D is the correct choice because that plan is likely focused on an immediately upcoming year's specific outcome. The other three choices are closer to strategic plans in that they are comprehensive, likely multi-year, plans for an organization. Diff: 2 LO: 1 Bloom: C AACSB: Knowledge AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 8) A company's strategic plan is an integral part of their initial planning and is comprised of five components. Management builds their strategic plan around five specific components to meet their objectives. Which of the following best represents some aspects of a strategic plan in the correct order? A) Goals and Objectives, Measures and Targets, and Results B) Goals and Objectives, Strategies and Initiatives, and Mission and Vision C) Measures and Targets, Results, and Goals and Objectives D) Mission and Vision, Results, and Strategies and Initiatives Answer: A Explanation: This question requires familiarity with strategic plans and the five components that make them up. Choice A is correct because it lists three of the five components in the correct order they appear within the plan. The remaining choices represent some of the components, but they occur out of order. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

9) A company's strategic plan is an integral part of their initial planning and is comprised of five components. Management builds their strategic plan around five specific components to meet their objectives. Which of the following best represents an incorrect ordering of some of these aspects of a strategic plan? A) Goals and Objectives, Results, and Strategies and Initiatives B) Goals and Objectives, Strategies and Initiatives, and Results C) Mission and Vision, Goals and Objectives, and Measures and Targets D) Strategies and Initiatives, Measures and Targets, and Results Answer: A Explanation: This question requires familiarity with the five components of a strategic plan. Choice A is correct because it lists three of the five components in the wrong order. The remaining choices show some of the components in the correct order. Diff: 1 LO: 1 Bloom: K AACSB: Knowledge AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 10) As part of the process of creating a strategic plan, management will have to decide what is most important to them. Although industries may vary, the general components of a strategic plan have the same general structure. Which of the following best represents the vision component for an art gallery? A) To be the city's most visited and well-respected avenue of art promotion B) To connect artists with the communities they reside in C) To provide an avenue for artists to freely display their craft D) To use key performance indicators to determine how to best market their artists Answer: A Explanation: This question requires knowledge of what vision as part of the strategic planning process means. Choice A is correct because it identifies a reasonable vision for an art gallery rather than a mission which is what the other choices would represent. A vision is a narrative of something an organization would like to achieve in the future. Diff: 1 LO: 1 Bloom: C AACSB: Knowledge AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

11) As part of the process of creating a strategic plan, management will have to decide what is most important to them. Although industries may vary, the general components of a strategic plan have the same general structure. Which of the following best represents the vision component for a coffee shop? A) To create a welcoming and inviting environment where patrons spend their time working and connecting B) To provide a well-balanced work environment for baristas C) To serve the best coffee at the best price with friendly staff D) To work with local vendors and provide a way to locally source all products Answer: C Explanation: This question requires knowledge of what vision as part of the strategic planning process means. Choice C is correct in that it identifies a vision for a coffee shop rather than a mission which is what the other choices would represent. A vision is a narrative of something an organization would like to achieve in the future. Diff: 1 LO: 1 Bloom: C AACSB: Knowledge AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 12) A public university has an objective of increasing enrollment in its online programs. The university has an online division where each major program is represented, and they have a representative assigned to each program. How could the university most effectively implement this? A) Delegating additional enrollment responsibilities to the advisors in each college B) Delegating the monitoring of day-to-day data to the dean of each college C) Requiring each college's dean's managers encourage incoming students to consider an online program D) Requiring faculty engagement in persuading students to enroll in at least one online class per period Answer: A Explanation: This question requires familiarity with how to evaluate an organization's strategic plan based on its objectives. Choice A is correct because delegating enrollment of online programs to advisors is an effective use of existing resources that moves the university closer to achieving its goals. The remaining three choices would not be an effective use of existing resources in this scenario. Diff: 2 LO: 1 Bloom: AP AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

13) A public university has an objective of increasing enrollment in its online programs. The university has an online division where each major program is represented, and they have a representative assigned to each program. What is a relevant key performance indicator (KPI) that could be used to measure success? A) Percentage increase or decrease in number of students enrolled in each program this year compared to other programs B) Percentage increase or decrease in number of students enrolled in online programs as compared to last year C) Percentage of formerly enrolled non-online students from last year who have enrolled in an online program this year D) Percentage of students enrolled in the university who attend online versus taking classes oncampus. Answer: B Explanation: This question requires familiarity with how to measure success based on objectives. Choice B is correct because a percentage increase or decrease of students enrolled in online programs comparatively between years will provide a clear picture of whether the objective has been met. The remaining three choices would potentially provide some useful data but would not accurately measure the success of increasing enrollment in online programs. Diff: 2 LO: 1 Bloom: AP AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 14) The College of Business at a local college has an objective of generating a $500,000 surplus earmarked for a new technology center. The College's technology is severely lacking compared to other area schools. Who would be responsible for ensuring the College of Business meets its objectives? A) The Accounting and Budget Department of the College of Business B) The Dean of the College of Business C) The Department Chairs of the College of Business D) The President of the University Answer: B Explanation: Choice B is correct as the Dean of the College of Business represents the appropriate level of management to be responsible for tracking and meeting a budgetary goal for the college. The remaining three choices are inappropriate as they are likely focused on larger goals or at a level too low to be responsible for such a large financial goal. Diff: 1 LO: 1 Bloom: C AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

15) The College of Business at a local college has an objective of generating a $500,000 surplus earmarked for a new technology center. The College's technology is severely lacking compared to other area schools. How will the person in charge of meeting this goal be held accountable and with what potential result? A) Having a component built into an annual review with no incentivizing aside from potential job security B) Having a component built into an annual review with raises tied to successes and extensive explanation needed for an unfavorable performance C) Having an informal meeting with upper management at the end of the project with the potential for a bonus D) Holding informal meetings with upper management to discuss results with no raises tied to success Answer: B Explanation: This question requires familiarity with how to evaluate progress towards a financial goal. Choice B is correct because it is the only choice that provides an effective means to evaluate progress on a consistent basis and something that will incentivize the person responsible for the outcome. The remaining choices either contain an inconsistent basis for review and/or a lack of incentive for the responsible party. Diff: 2 LO: 1 Bloom: AP AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

16) Businesses use Porter's Five Forces to determine how well companies will be able to generate a profit. To create and implement a successful strategic route, companies will take these five forces into consideration. Which of the following is a good representation of the power of customers? A) A company changes its bill-payment policy to pay all vendors within 30 days and avoid surcharges. B) A company changes its return policy to allow a 90-day return window after customers' complaints. C) A local florist fears a new online florist, so they begin to offer same-day delivery for all bouquets. D) A sushi restaurant begins to offer home delivery after a local grocery store offers to deliver their own in-house sushi. Answer: B Explanation: This question requires familiarity with Porter's Five Forces. Choice B correctly identifies the power of customers. A company altered a return policy due to feedback received from their customers. The remaining choices represent other forces but not the power of customers. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 17) Businesses use Porter's Five Forces to determine how well companies will be able to generate a profit. To create and implement a successful strategic route, companies will take the five forces into consideration. Which of the following is a good representation of the threat of substitutes? A) A furniture store is worried about losing customers to a competitor because the competitor offers more favorable credit terms than they can offer. B) A local Italian restaurant is concerned about the trend of delivery-based meal kits. C) A local Thai food restaurant is concerned about a Thai food truck that services the same area. D) A veterinary office is concerned about a local pet store that sells puppies. Answer: B Explanation: This question requires familiarity with Porter's Five Forces. Choice B correctly identifies the threat of substitutes. The Italian restaurant is concerned about a different offering that could be a substitute for what they offer their customers. The remaining choices represent other forces but not the threat of substitutes. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

18) A company's chosen strategy is the route it uses to arrive its destination. A guiding set of principles for laying out the long-term goals is known as Porter's Five Forces. Which of the following best represents the threat of new entrants? A) A dress shop opens next to a local boutique that specializes in women's clothing. B) A fine jewelry store would like to open in a market where three other fine jewelry stores exist. C) Customers of a clothing boutique learn of an online shop that sells the same clothing. D) Thrifty Dresses, Inc. changed their credit terms to give preference to online vendors over brick-and-mortar stores. Answer: A Explanation: This question requires familiarity with Porter's Five Forces. Choice A is correct in that it represents a threat of new entrant to an existing market. A local boutique could potentially lose some of its market share once the new dress shop opens. The other three choices are either other elements of Porter's Five Forces or not examples of one of the threats identified in the framework. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 19) A company's chosen strategy is the route it uses to arrive its destination. A guiding set of principles for laying out the long-term goals is known as Porter's Five Forces. Which of the following best represents the bargaining power of a carrot farmer as a supplier? A) A carrot farmer gives first choice of their organic crops to the customer who pay their bills fastest. B) A carrot farmer notices that the farm next door has started to grow and sell beets. C) A carrot farmer's customers have the option to purchase from a new company that delivers in half the time. D) The new owner of a carrot farm has decided to switch from carrots to growing and selling tomatoes. Answer: A Explanation: This question requires that familiarity with Porter's Five Forces. Choice A is correct in that it represents the bargaining power of suppliers. A carrot farmer giving first choice to certain customers means that they hold the power to decide who receives preferential crops. The other three choices are either other elements of Porter's Five Forces or not examples of the bargaining power of suppliers identified in the framework. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

20) Lana is the owner of Leafy Greens, a smoothie store slated to open within the next six months. Lana is in the process of creating her strategic plan and needs to identify her furthestreaching goals. She knows that this process will take some time to get right and wants to do it properly. Which of the following is an example of a competitive rivalry for Leafy Greens according to Porter's Five Forces? A) A coffee shop that sells a variety of items including smoothies B) A farm that sells fresh strawberries to local vendors C) A health food store that sells hand-pressed juices D) An ice cream shop that sells ice cream-based drinks like milkshakes Answer: A Explanation: This question requires familiarity with Porter's Five Forces. Choice A is the correct choice because it represents a competitive rivalry for the identified business in the same market. A smoothie shop would need to look for other businesses who sell the same products as them. The remaining choices could be considered under other elements of Porter's Five Forces, but they do not represent a directly competitive rivalry. Diff: 2 LO: 1 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 21) Lana is the owner of Leafy Greens, a meal-replacement smoothie store slated to open within the next six months. Lana is in the process of creating her strategic plan and needs to identify her furthest-reaching goals. She knows that this process will take some time to get right and wants to do it properly. Which of the following is an example of a threat of substitutes for Leafy Greens according to Porter's Five Forces? A) A food truck that will sell smoothies and other items just opened in the area. B) A meal kit that is available for all meals, including breakfast. C) A meal kit that is available that allows customers to make fresh salads. D) A supplier of bananas has decided to offer new credit terms for existing customers. Answer: B Explanation: This question requires familiarity with Porter's Five Forces. Choice B is correct in that a meal kit that would allow customers to make breakfast items would present a threat of substitution to a smoothie store since the meal kits could replace breakfast smoothies for some existing customers. The remaining choices are also elements of Porter's Five Forces but are not likely to be considered a threat of substitutes. Diff: 2 LO: 1 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

22) Once a business is ready to move from identifying industry challenges to overcoming them, the company may choose to complete a SWOT analysis. This tool helps the organization identify internal and external factors affecting them. Which of the following is the best breakdown of Internal and External forces in a SWOT analysis? A) Internal: Opportunities, Threats; and External: Strengths, Weaknesses B) Internal: Opportunities, Weaknesses; and External: Strengths, Threats C) Internal: Strengths, Opportunities; and External: Weaknesses, Threats D) Internal: Strengths, Weaknesses; and External: Opportunities, Threats Answer: D Explanation: This question requires familiarity with the components of a SWOT analysis. Choice D correctly stratifies the elements of SWOT into Internal or External factors. The remaining three choices have incorrectly placed an element in each category. Diff: 1 LO: 1 Bloom: K AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 23) As a company begins to fine tune its strategy, it is prudent to identify their strengths and weaknesses in addition to outside opportunities and threats. This SWOT analysis will ensure they can effectively evaluate and deal with items that will either help or hurt their chances of success. Which of the following represents a Strength for a mobile dog grooming business? A) The business is mobile and can move to different markets. B) The fixed size of the truck used for grooming is limited in space. C) The mobile grooming business can be expanded without excessive entrance costs. D) The mobile grooming business can be franchised. Answer: A Explanation: This question requires familiarity with the components of a SWOT analysis. Choice A correctly identifies a strength for a mobile dog grooming business. The fact that the business is mobile is a strength while the remaining choices represent other SWOT elements that apply to the business. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

24) As a company begins to fine tune its strategy, it is prudent to identify their strengths and weaknesses in addition to outside opportunities and threats. This SWOT analysis will ensure they can effectively evaluate and deal with items that will either help or hurt their chances of success. Which of the following represents an Opportunity for a mobile dog grooming business? A) The mobile dog groomer has a great relationship with their existing suppliers. B) The mobile grooming business is not able to offer all the services that are available at their physical location in the suburbs. C) Their brick-and-mortar store is in a suburb, and the truck can now travel to local fairs and events in the city. D) There are existing mobile dog groomers in the area who have older model trucks and grooming technologies. Answer: C Explanation: This question requires familiarity with the components of a SWOT analysis. Choice C correctly identifies an opportunity for a mobile dog grooming business. The fact that the business has an established brick-and-mortar location from which it can deploy a mobile team is an opportunity while the remaining choices represent other SWOT elements that apply to the business. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 25) According to Porter, there are five forces that must be assessed and acknowledged by any business who wishes to successfully create an effective strategy. Which of the following best demonstrates the threat of substitutes for a handmade furniture manufacturer? A) A furniture store that sells ready-to-build pieces from unique designs. B) A handmade home décor store. C) A supplier who sells mahogany wood and determines the terms that a potential buyer must meet to buy from them. D) Another furniture store who also sells handmade furniture. Answer: A Explanation: This question requires familiarity with Porter's Five Forces and the impact of each on a business. Choice A is correct because it is the only choice that represents a threat of a substitute product. A furniture store that sells ready-to-build furniture may pull some of the business from a handmade furniture store. The other three choices are incorrect as they represent other threats to the furniture store. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

26) According to Porter, there are five forces that must be assessed and acknowledged by any business who wishes to successfully create an effective strategy. Which of the following best demonstrates the power of a handmade furniture store as a customer? A) The furniture store can choose credit customers based upon their credit scores. B) The furniture store will only buy from a supplier who will give them credit terms of 30 days. C) The furniture store will only sell to customers who can pay in cash. D) The furniture store will require a down payment from all potential customers on pre-orders. Answer: B Explanation: This question requires familiarity with Porter's Five Forces and the impact of each on a business. Choice B is correct because it is the only choice that represents the power of the furniture store when acting as a customer. By dictating the terms that require to become a customer, they demonstrate the power they hold in that as a customer. The remaining three choices are incorrect as they represent other powers. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 27) After completing a SWOT analysis, a company begins to set its strategy to advance from its current position. Porter describes a strategy spectrum whereby a company has two choices: cost leadership and product differentiation. Which of the following is a company who has selected a cost leadership strategy? A) Beauty You is a salon that specializes in trendy haircuts tailored to each client. B) Cost Mart is a big box store that sells items at the cheapest price in town. C) Itsy is an online marketplace where vendors sell unique handmade items. D) Oldies is a vintage car dealership that sells high-end vintage vehicles. Answer: B Explanation: This question requires familiarity with SWOT analysis and the associated strategies. Choice B is correct since Cost Mart is using a cost leadership strategy by focusing on minimizing the cost of what they sell as compared to offering the variety or uniqueness of what they sell. The remaining three choices are incorrect as they are either a product differentiation strategy or a company that sits somewhere on the spectrum between the two options. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

28) After completing a SWOT analysis, a company begins to set its strategy to advance from its current position. Porter describes a strategy spectrum whereby a company has two choices: cost leadership and product differentiation. Which of the following is a company who is not purely a cost leader or a product differentiator but somewhere in the middle of the spectrum? A) Feltz is a factory that produces felt fabric at the lowest cost possible by using as much automated machining as possible. B) Freshies is a grocery store that carries unique products and strives to keep their costs as low as possible. C) Paisley, Inc., is an upscale jewelry store that specializes in the sale of one-of-a-kind necklaces. D) Turnips is a grocery store that sells product in bulk so it can offer lower per-unit costs to customers. Answer: B Explanation: This question requires familiarity with SWOT analysis and the associated strategies. Choice B is correct as Freshies is using both a product differentiation strategy by focusing on the variety or uniqueness of what they sell and a cost leadership strategy by offering products at their lowest possible cost. The remaining three choices are incorrect since they are either strictly a cost leadership strategy or strictly a company that uses a product differentiation strategy. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 29) After completing a SWOT analysis, a company begins to set its strategy to advance from its current position. Porter describes a strategy spectrum whereby a company has two choices: cost leadership and product differentiation. Which of the following is a company who selected a product differentiation strategy? A) Collectibles, Etc., is a collectibles store that specializes in hard-to-find collectibles. B) IShadows is a makeup line that makes unique palettes combinations sold at drug stores. C) Society 12 is an online art store that sells art prints for a reasonable price. D) Woolies is a factory that strives to make affordable and practical wool socks. Answer: A Explanation: This question requires familiarity with SWOT analysis and the associated strategies. Choice A is correct since Collectibles, Etc. is using a product differentiation strategy by focusing on the variety and uniqueness of what they sell instead of trying to minimize the cost of what they sell. The other three choices are incorrect because they are either a cost leadership strategy or a company that sits on the spectrum between the two. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 15

30) In addition to Porter's Five Forces and related strategy spectrum, a company could choose to use the complementary framework of customer value proposition. This method requires that each company detail their mix of products, prices, services, relationships, and image. In what way is this strategy like Porter's strategic choices? A) Both strategic plans contain a subset of additional identification. B) Both strategies strictly focus on maintaining the best pricing in the market. C) Both strategies strictly focus on providing the most unique products to their customers. D) The company must define a mix of what makes up their business. Answer: A Explanation: This question requires familiarity with both Porter's Five Forces and the complementary framework of customer value proposition. Choice A is the correct choice as it identifies the appropriate way in which the two strategies are similar. Porter's Five Forces has a subset of cost leadership and product differentiation, and the complementary framework of customer value proposition has a subset of operational excellence and product leadership. The remaining choices are incorrect as they do not correctly identify ways the two are similar. Diff: 1 LO: 1 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 31) Once a business is ready to move from identifying industry challenges to overcoming them, the company may choose to complete a SWOT analysis. This tool helps the organization identify internal and external factors affecting them. Which of the following correctly aligns with the elements of SWOT? A) Opportunities: Good relationship with customers. B) Strengths: The business can franchise its operations. C) Threats: The business is mobile-only with no brick-and-mortar location. D) Weaknesses: The business is limited in capacity due to owning a small amount of equipment. Answer: D Explanation: This question requires familiarity with a SWOT analysis and its components. Choice D correctly identifies a factor that is aligned with an element of SWOT analysis. The other three choices all contain at least one incorrect representation. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

32) In addition to Porter's Five Forces and related strategy spectrum, a company could choose to use the complementary framework of customer value proposition. This method requires that each company make a choice between operational excellence and product leadership. Which of the following represents the mix of items that a company should detail under the framework of customer value proposition? A) Image, Relationship, Services, Prices, Profits B) Prices, Services, Profits, Relationship, Products C) Products, Services, Prices, Image, Power D) Services, Prices, Image, Products, Relationship Answer: D Explanation: This question requires familiarity with both Porter's Five Forces and the complementary framework of customer value proposition. Choice D is correct since it accurately identifies the mix of items the company needs to detail if it chooses the customer value proposition. The remaining choices are incorrect as they each contain at least one incorrect item in the mix. Diff: 1 LO: 1 Bloom: C AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 33) Jones Corp. is a newly formed organization that will produce 10-key calculators that it intends to sell to office supply stores and directly from its own online platform. Jones is in the planning stages of their business and are formulating a strategic plan. As part of this initial planning, the owners know that they must first identify a mission and vision. Which of the following best represents a mission for Jones? A) Jones Corp. calculator will be the calculator of choice for Accountants and CPAs. B) Jones will be the largest provider of calculators in the US. C) Jones will produce the best calculators in the world. D) Jones will provide a calculator that is reliable and cost-efficient. Answer: D Explanation: This question requires understanding the difference between mission and vision, and that can be difficult since they are similar. Choice D is correct because it provides a purpose for the organization. The other three choices are potential visions and not missions since they are more narrative in nature and outline what Jones Corp. would like to accomplish or be known for in the future. Diff: 3 LO: 1 Bloom: C AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

34) Jones Corp. is a newly formed organization that will produce 10-key calculators that it intends to sell to office supply stores and directly from its own online platform. Jones is in the planning stages of their business and are formulating a strategic plan. As part of this initial planning, the owners know that they must first identify a mission and vision. Which of the following best represents a vision for Jones? A) Jones will connect accountants through their shared love of 10-key calculators. B) Jones will have a Jones Corp. calculator in every accountant's office. C) Jones will make 10-key calculators user-friendly and accessible. D) Jones will provide financial literacy through the advancement in their technology. Answer: B Explanation: This question requires understanding the difference between mission and vision, and that can be difficult since they are similar. Choice B is correct because it provides a more narrative statement and demonstrates what Jones Corp. would like accomplish or be known for in the future. The other three choices are potential missions since they describe a purpose for the organization rather than a larger description for the future. Diff: 3 LO: 1 Bloom: C AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 35) Trevor is an aspiring baker who eventually hopes to leave his current full-time job and bake instead. He knows that planning now will make all the difference as he moves towards making his dream a reality. He plans to begin by baking out of his house and eventually open a small brick-and-mortar location. According to Porter's Five Forces, which of the following represents the threat of substitutes for Trevor? A) Gonuts Donuts is a bakery that his friend Jerry wants to open sometime in the next few years. B) Poofy Pastries is a small bakery that is in the same town as Trevor. C) Tasty Bites delivers an at-home baking kit available at a local grocery. D) Treats on the Go is a mobile bakery truck that frequents a nearby farmer's market. Answer: C Explanation: This question requires familiarity with Porter's Five Forces and the framework each encompasses. Choice C is correct because it represents a threat of substitutes for Trevor since customers would have a different way to satisfy their needs and wants without visiting Trevor's bakery when it opens. The remaining choices are incorrect as they represent elements of Porter's Five Forces other than the threat of substitutes. Diff: 3 LO: 1 Bloom: AP AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

36) Trevor is an aspiring baker who eventually hopes to leave his current full-time job and bake instead. He knows that planning now will make all the difference as he moves towards making his dream a reality. He plans to begin by baking out of his house and eventually open a small brick-and-mortar location. According to Porter's Five Forces, which of the following represents competitive rivalry for Trevor? A) Delicious Desserts sells a pre-packaged box of gluten-free cake mix available at the grocery store. B) Lars is a local baker would also like to start a bakery, Lars' Treats, in the same timeframe as Trevor. C) Lisa is a local baker with a shop, Lisa's Pastries, near Trevor's home. D) You Bake It! sells a take-home kit that contains ingredients to make cookies at home. Answer: C Explanation: This question requires familiarity with Porter's Five Forces and the framework each encompasses. Choice C is correct because it represents a competitive rivalry for Trevor because it is an existing business that operates in the same industry as Trevor plans to and could take away some of his future potential customers. The remaining choices are incorrect as they represent elements of Porter's Five Forces other than competitive rivalry. Diff: 3 LO: 1 Bloom: AP AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 37) As an organization fine-tunes its strategies and defines its objectives, management will disseminate these strategies and objectives to various levels of the organization. While distributing tasks to other employees, management should ensure outcomes remain congruent with their intentions. Which of the following best represents one of the steps used to make sure this succeeds? A) Employees constantly undertake tasks to move the company closer to its vision. B) Employees occasionally undertake tasks to move the company closer to its vision. C) Responsibilities and the authority to fulfill these are assigned solely by seniority. D) Responsibilities and the authority to fulfill these are assigned by both seniority and job description. Answer: A Explanation: This question requires familiarity with goal congruence and tasking employees correctly to keep everything aligned. Choice A is correct because it accurately represents a step that makes sure goals remain congruent. The other three choices are not correct as they do not ensure goal congruence. Diff: 2 LO: 2 Bloom: AP AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

38) An insurance company owns and operates an office building downtown. The company employs its own staff to perform tasks including building cleaning and maintenance. This organization also operates its insurance business unit from within that building. Management is evaluating the type of compensation offered to individuals with various roles within the company. Which of the following would be the most appropriate type of compensation for the janitorial staff who are utilized to clean and maintain the building? A) Commission B) Hourly wage C) Piece rate D) Salary Answer: B Explanation: This question requires familiarity with the various types of compensation available to companies to utilize for their employees and the appropriate use of each type. In the case of the janitorial staff, Choice B is the correct choice. Hourly wages are the most appropriate for positions requiring fewer skills with an option for overtime pay if hours worked exceed a set limit. The remaining three choices would not be appropriate choices for janitorial staff. Diff: 1 LO: 2 Bloom: C AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 39) An insurance company owns and operates an office building downtown. The company employs its own staff to perform tasks including building cleaning and maintenance. This organization also operates its insurance business unit from within that building. Management is evaluating the type of compensation offered to individuals with various roles within the company. Which of the following is the most appropriate type of compensation for the insurance agents charged with selling policies? A) Commission B) Hourly wage C) Piece rate D) Salary Answer: A Explanation: This question requires familiarity with the various types of compensation available to companies to utilize for their employees and the appropriate use of each type. In the case of the insurance agents, Choice A is the correct choice. Commissions are most appropriate for positions motivated by generating sales and revenue. The remaining three choices would not be the appropriate choice for insurance agents. Diff: 1 LO: 2 Bloom: C AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

40) Nonfinancial performance measures are often helpful to organizations when they evaluate actions that are being taken now to achieve success later. Which of the following is most likely to be a nonfinancial performance measure utilized by the Sales and Marketing Department? A) Employee satisfaction as an indicator of how satisfied employees are with the company B) Internal promotion rate as a measure of how quickly high-performing employees advance within the company C) Net promoter score as a score based on how likely it is a customer will recommend this company to others D) Vacation days earned versus used as a measure of whether staff takes time to enjoy their life outside of work Answer: C Explanation: This question requires familiarity with nonfinancial performance measures and how certain departments within an organization might utilize them. Choice C is the correct choice since it is the only choice listed utilized by the Sales and Marketing department. The other choices are also nonfinancial performance measures, but those would not likely be useful measures for the Sales and Marketing Department's performance. Diff: 1 LO: 2 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 41) Nonfinancial performance measures are often helpful to organizations when they evaluate actions that are being taken now to achieve success later. Which of the following is most likely to be a nonfinancial performance measure utilized by the Human Resources Department? A) Customer conversion rate to measure the percentage of interactions with customers that end with a sale B) Efficiency as a measure of the number of units that are being produced every hour C) Internal promotion rate to track the rate that high-performing employees advance within the company. D) Net promoter score to score how likely it is a customer will recommend this company to others. Answer: C Explanation: This question requires familiarity with nonfinancial performance measures and how certain departments within an organization might utilize them. Choice C is the correct choice since it is the only choice listed utilized by the Human Resource department. The other choices are also nonfinancial performance measures, but those would not likely be useful measures for the Human Resources Department. Diff: 1 LO: 2 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

42) A company wishes to assess certain financial performance measures to assess their operations for the current year. Management believes this will be an effective way to assess certain aspects as the financial measures are both objective and measurable. If the organization would like to evaluate how effective the organization is at collecting receivables, then which of the following performance measures should they use? A) Accounts receivable turnover B) Net income growth C) Gross margin D) Operating cash flow Answer: A Explanation: This question requires familiarity with financial performance measures and how to best use them. Choice A is the correct choice since that will directly measure the company's effectiveness at collecting receivables, unlike choice B that measures the number of days it takes to collect them rather than the efficiency. The other two choices are financial performance measures, but they do not measure the efficiency of collecting receivables. Diff: 1 LO: 2 Bloom: C AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 43) Kevin is an employee in the finance department at Easy Trader Co. and is performing some financial analysis on their current year's performance. Before he can begin looking at a variety of nonfinancial factors, including customer conversion rates and internal promotion scores, he will need to evaluate some financial performance measures. Which of the following provides the most accurate rationale for evaluating Residual Income? A) Comparing a company's return in relation to income for year-to-year analysis B) Determining a company's ability to mark-up from cost C) Evaluating a company's actual costs to its budgeted expectations D) Evaluating income earned beyond the minimum required return on investment Answer: D Explanation: This question requires familiarity with financial performance measures and an understanding of when it is appropriate to use each kind. Choice D is correct since this is the most accurate reason for why Kevin should evaluate the Residual Income. The remaining choices provide either an incorrect summary of Residual Income or provide the rationale for evaluating a different measure. Diff: 2 LO: 2 Bloom: AN AACSB: Analytic AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

44) Kevin is an employee in the finance department at Easy Trader Co. and is performing some financial analysis on their current year's performance. Before he can begin looking at a variety of nonfinancial factors, including customer conversion rates and internal promotion scores, he will need to evaluate some financial performance measures. Which of the following provides the most accurate rationale for evaluating Economic Value Added? A) Evaluating after-tax income earned beyond the company's cost of capital on its invested capital B) Evaluating income earned beyond the minimum required investment C) Evaluating profitability using a consistent measure like earnings without interest D) Understanding the cash implications of a company's primary operating activities Answer: A Explanation: This question requires familiarity with financial performance measures and an understanding of when it is appropriate to use each kind. Choice A is correct since this is the most accurate reason for why Kevin should evaluate the Economic Value Added. The remaining choices provide either an incorrect summary of Economic Value Added or provide the rationale for evaluating a different measure. Diff: 2 LO: 2 Bloom: AN AACSB: Analytic AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

45) The accounting department of Stryker Inc. is putting together a financial analysis for management. They are focusing on performance measures and pulled together information from the two most recent years. If the accounting department wants to focus solely on financial measures, then how would you respond? A) This is a great idea since a company's numerical performance plays a larger part in its success or failure than nonfinancial measures do. B) This is a great idea since the numbers and stories tell management about everything going on with the company. C) This is not a great idea since nonfinancial measures provide a much clearer and more accurate picture of how a company performed during the period under review. D) This is not a great idea since one form of measurement alone may not be enough to paint a complete picture of the company's performance. Answer: D Explanation: This question requires familiarity with financial and nonfinancial performance measures and knowledge about when to use each kind. Choice D is correct because it accurately points out that focusing on only one form of measurement may not be enough to paint a complete picture of an organization's performance. The remaining choices are incorrect because they place too much emphasis on one type of measurement or the other rather than emphasizing the value of and need for both. Diff: 2 LO: 2 Bloom: AN AACSB: Analytic AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 46) The accounting department of Stryker Inc. is putting together a financial analysis for management. They are focusing on performance measures and pulled together information from the two most recent years. If the accounting department would like to evaluate financial measures, then what is an appropriate choice for that evaluation? A) Evaluating all efforts exerted to drive financial results B) Evaluating the likelihood a customer would recommend Stryker to their friend C) Evaluating the operating, investing, and financing activities of the company D) Evaluating what markets are underserved in the industry Answer: C Explanation: This question requires familiarity with financial and nonfinancial performance measures and knowledge about when to use each kind. Choice C is correct because evaluating the operating, investing, and financing activities of the company is a good example of an appropriate use of those financial measures. The other choices are incorrect because they are all ways that you could evaluate nonfinancial measures. Diff: 2 LO: 2 Bloom: AN AACSB: Analytic AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 24

47) As an organization fine-tunes its strategies and defines its objectives, management will disseminate these strategies and objectives to various levels of the organization. While distributing tasks to other employees, management should ensure that outcomes remain congruent with their intentions. Which of the following best represents an example of goal congruence? A) Don is a salesperson tasked with double-checking payroll figures to diversify his skillset. B) John is an HR representative tasked with shadowing a salesperson to increase his understanding of that position. C) Sharon is an accountant tasked with creating a new ad campaign to attract customers. D) Tara is an administrative assistant tasked with teaching a new secretary the organization's required skillset for serving customers. Answer: D Explanation: This question requires familiarity with goal congruence and tasking assignments to achieve it. Choice D is correct because it accurately represents a task that ensures goals remain congruent. The remaining three choices are not correct since they would not ensure goal congruence. Diff: 2 LO: 2 Bloom: C AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 48) A football team knows that to accomplish their goals, those goals need to range from highlevel organizational thinking to each individual player. The team has the following levels: franchise, team, and individual. What is an objective that would likely appear at both the team and individual levels? A) Attract the best players from across the country. B) Play each game with the level of intensity of a championship. C) Reduce the penalty yardage per player. D) Win a major championship within five years. Answer: B Explanation: This question requires familiarity with the dissemination of tasks throughout an organization. Choice B is correct since it is an objective that could reasonably appear at both the team and individual levels. This would not likely be a goal at the franchise level. The remaining three choices are not correct because they would either occur at the franchise level or at only of the team or individual levels. Diff: 2 LO: 2 Bloom: C AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

49) A football team knows that to accomplish their goals, those goals need to range from highlevel organizational thinking to each individual player. The team has the following levels: franchise, team, and individual. What is an objective that would likely appear at the franchise level? A) Encourage team to ensure best outcome each game. B) Fill the stadium seats to at least 89% capacity for each game. C) Increase number of touchdowns per game. D) Play each game to win. Answer: B Explanation: This question requires familiarity with the dissemination of tasks throughout an organization. Choice B is correct since it is an objective that would likely appear at the franchise level. The remaining three choices are not correct because they would either occur at the team or individual levels. Diff: 2 LO: 2 Bloom: C AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 50) Once a business is ready to grow, they hire qualified candidates to work for them. The type of compensation offered and any additional offerings will vary depending on the job. Why is it important for companies to select the correct type of compensation? A) Appropriate compensation for each job ensures employees make just enough money to keep them from leaving. B) If compensation and performance align, then both act as motivators for employees. C) If compensation and performance are misaligned, then both will negatively motivate employees. D) The correct compensation for each job discourages employees from discussing compensation with one another. Answer: B Explanation: This question requires familiarity with compensation and its importance to both the employees and the company. Choice B is correct because it correctly identifies the reason it is imperative to choose the correct type of compensation for each job. The remaining three choices are incorrect because they do not fully or accurately represent why it is important to select the correct type of compensation. Diff: 2 LO: 2 Bloom: C AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

51) Once a business is ready to grow, they hire qualified candidates to work for them. The type of compensation offered and additional offerings will vary depending on the job. If a company is looking to hire sales staff, then what would the most appropriate form of compensation be? A) Commission will motivate sales employees to increase company revenues since their sales will directly tie to their income. B) Hourly wages will incentivize them to spend more time with potential clients. C) Salary will be most appropriate for them, as it is a long-term position where payment depends on outcomes rather than hours logged. D) Stock options will reward sales staff for making sales and also ensure their compensation is unpredictable. Answer: A Explanation: This question requires familiarity with compensation and its importance to employees and the company. Choice A is correct since it correctly identifies the most appropriate form of compensation for sales staff. This kind of position should aim to generate as much revenue as possible, so a commission-based system should prove most effective. The other three choices are incorrect because they are not the most appropriate type of compensation for sales staff. Diff: 2 LO: 2 Bloom: C AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 52) One of the most crucial components of having employees is to make sure their evaluations are both fair and appropriate. From an employee's perspective, there are five significant aspects of the performance evaluation process. Which of the following best represents the communication perspective? A) Dale receives an email from HR addressing his frequent absenteeism. B) John has an annual review process where he receives feedback about his performance. C) Sandra has sit-down meeting with her manager to discuss methods for increasing her effectiveness. D) Sheryl and her manager work together to establish her goals for the upcoming year. Answer: A Explanation: This question requires familiarity with the performance evaluation process from the employee perspective. Choice A is correct because it correctly identifies an example of the communication perspective that would include continuous communication about an employee's behavior. The remaining three choices are all representative of the other aspects of the performance evaluation process. Diff: 2 LO: 2 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

53) One of the most crucial components of having employees is to make sure their evaluations are both fair and appropriate. From an employee's perspective, there are five significant aspects of the performance evaluation process. Which of the following best represents the compensation perspective? A) Andrea's manager has set up a meeting to discuss a recent conflict with a coworker. B) Michael gives one of his employees some feedback on a recent project. C) Samantha is up for consideration for a promotion based upon her most recent sales metrics. D) Trevor is completing a self-evaluation form before his yearly performance review. Answer: C Explanation: This question requires familiarity with the performance evaluation process from the employee perspective. Choice C is correct since it correctly identifies an example of the compensation perspective that would include awarding raises and promotions as a result of good performance. The remaining three choices are all representative of the other aspects of the performance evaluation process. Diff: 2 LO: 2 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 54) From an employee's perspective, one of the most important aspects of working for an organization is to be evaluated fairly. For the performance evaluation process, there are aspects from this perspective and each is important. Which of the following best represents the mentoring perspective? A) Daisy received formal feedback from her manager on her work. B) Mark and his manager go out to eat occasionally to discuss his future. C) Mary reviewed her team's work and is documenting feedback with the intent of improving their performance. D) Stanley received a bonus for the year because he had record-setting sales this year. Answer: C Explanation: This question requires familiarity with the performance evaluation process from the employee perspective. Choice C is correct since it correctly identifies an example of the mentoring perspective that would include giving feedback on employees' work with the goal of increasing effectiveness. The remaining three choices are all representative of the other aspects of the performance evaluation process. Diff: 2 LO: 2 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

55) From an employee's perspective, one of the most important aspects of working for an organization is to be evaluated fairly. For the performance evaluation process, there are aspects from this perspective and each is important. Which of the following best represents the personal goals perspective? A) Angela requested a salary rather than an hourly wage since that is more in-line with her job duties. B) Austin schedules a meeting with his manager to ask for suggestions on improving his performance. C) HR emails Ryan a reminder about the company's paid time off policy since it changed recently. D) Tamara meets with her manager to discuss her goals for the next quarter and how those goals fit into the larger vision of the organization. Answer: D Explanation: This question requires familiarity with the performance evaluation process from the employee perspective. Choice D is correct because it gives a scenario from the personal goals perspective that would include employees setting goals with the guidance of management so they align with overall business goals and strategies. The remaining three choices are all representative of the other aspects of the performance evaluation process. Diff: 2 LO: 2 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 56) Performance measurement is an important pillar of an organization's management control system, and while these pillars are consistent, each business is likely to use different approaches for each one. Performance measurement is the fourth pillar and is an anchor in the process. Which of the following is representative of effective performance measurement in the setting of a college classroom? A) Clearly communicate requirements to students, but notify them that there are no further reminders of expectations. B) Ensure students receive timely feedback so they can adjust their behavior if needed. C) Shrink the scope of their responsibility as the students progress to avoid overwhelming them. D) Wait until midterms return grades to students and give them your feedback. Answer: B Explanation: This question requires familiarity with performance measurement and how to effectively implement it. Choice B is correct because when students get timely feedback, they can either continue their good behaviors or to make changes to improve. The remaining three choices are incorrect since they are not effective for performance in a college classroom setting and may actually create a negative impact. Diff: 2 LO: 2 Bloom: AP AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 29

57) Performance measurement is an important pillar of an organization's management control system, and while these pillars are consistent, each business is likely to use different approaches for each one. Performance measurement is the fourth pillar and is an anchor in the process. Which of the following is representative of effective performance measurement in a call center environment? A) Assign the most challenging calls to the newest employees to motivate them. B) Clearly communicate call center goals using posters and management correspondence. C) Give feedback about performance on an annual review. D) Make sure employees know all calls are recorded and reinforce the consequences for missing targets. Answer: B Explanation: This question requires familiarity with performance measurement and how to effectively implement it. Choice B is correct because the call center communicates their goals and expectations frequently and places reminders in locations where all employees will see them. The remaining three choices are incorrect because they are not effective for affecting performance in a call center setting and could create a negative environment. Diff: 2 LO: 2 Bloom: AP AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 58) One important aspect of performance measurement is appropriately assigning responsibility based on the level of employee in the hierarchy of the company. If done incorrectly or in an imbalanced fashion, then employees may feel as though they have an unfair work environment. Which of the following responsibilities would be more appropriate to assign to a staff-level employee? A) To increase sales by four percent within the next two months. B) To recruit new staff for the art department so that they can continue to internally promote. C) To reduce the company's employee turnover. D) To research and visit new potential markets. Answer: A Explanation: This question requires familiarity with responsibility assignment based on the level of employee. Choice A is correct as a short-term goal of two months to achieve a specific goal of a four percent increase in sales is in-line with a goal appropriate for a staff member. The remaining three choices are incorrect because they are either less specific or longer-term and would be more appropriate to assign to middle or upper management. Diff: 2 LO: 2 Bloom: AP AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

59) One important aspect of performance measurement is appropriately assigning responsibility based on the level of employee in the hierarchy of the company. If done incorrectly in an imbalanced fashion, then employees may feel as though they have an unfair work environment. Which of the following responsibilities would be more appropriate for upper management? A) Hire a new payroll employee within the next week to fill a vacancy. B) Increase gross margin by ten percent during the second quarter of the New Year. C) Perform an analysis based on last year's sales data, and compile a report. D) Reduce workforce shrinkage by five percent in next holiday season. Answer: C Explanation: This question requires familiarity with responsibility assignment based on the level of employee. Choice C is correct since it is a long-term goal with no specific time-frame for completion to achieve a less-specific performance measure, and that is in line with a goal that belongs in upper management. The other three choices are incorrect because they are either more specific or short-term or would be more appropriate to assign to staff or middle management. Diff: 2 LO: 2 Bloom: AP AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 60) Companies will investigate and integrate tools to effectively evaluate themselves from both a financial and nonfinancial perspective. Both perspectives come with advantages and can assist in painting a more complete picture of how a business has performed. Why would a company choose to look at a nonfinancial measure? A) The company is concerned with its performance during the last fiscal year. B) The company is evaluating their sales tactics to determine what is effective for them. C) The company is not concerned with changing events as they transpire. D) The company would like to investigate whether there has been an increase in Accounts Receivable turnover. Answer: B Explanation: This question requires familiarity with financial and nonfinancial measures used by a company to evaluate its performance. Choice B is the best answer since it is describing an action the company is taking rather than end results. The other three choices describe the use of financial measures for various tasks. Diff: 2 LO: 2 Bloom: AP AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

61) Companies will investigate and integrate tools to effectively evaluate themselves from both a financial and nonfinancial perspective. Both come with various advantages and can assist in painting a more complete picture of how a business has performed. Why would a company choose to look at a financial measure? A) The company has concerns about its Earnings per Share trends over the past five years. B) The company is more concerned with ongoing performance as compared to how numbers ended in the most recent fiscal year. C) The company would like to better understand why their inventory turnover has decreased. D) The company would like to determine whether it should increase spending on research and development to increase variety in customer offerings. Answer: A Explanation: This question requires familiarity with financial and nonfinancial measures used by a company to evaluate its performance. Choice A is correct because it is describing an evaluation of past results rather than something is currently ongoing, and it is a quantitative measure. The other three choices describe the use of nonfinancial measures for various tasks. Diff: 2 LO: 2 Bloom: AP AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

62) A small ceramics company is compiling data about its performance during the last two fiscal years. They reported the following:

Sales Variable Costs Fixed Costs Tax Rate

Year 1 $1,890,000 $923,023 $550,000 25%

Year 2 $2,150,000 $1,050,000 $600,000 25%

Using the information above, what is their after-tax income for year 1? A) $104,244.19 B) $241,744.19 C) $312,732.75 D) $416,977.00 Answer: C Explanation: This question requires familiarity with financial measures companies use to evaluate their performance. The formula for After-Tax Income is: Pre-Tax Income × (1 - Tax Rate), and Pre-Tax Income = Sales - Variable Costs - Fixed Costs = $1,890,000 - $923,023 $550,000 = $416,977. Therefore, the After-Tax Income = $416,977 × (1 - 0.25) = $312,732.75 (Choice C). Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

63) A small ceramics company is compiling data about its performance during the last two fiscal years. They reported the following:

Sales Variable Costs Fixed Costs Tax Rate

Year 1 $1,890,000 $923,023 $550,000 25%

Year 2 $2,150,000 $1,050,000 $600,000 25%

Using the information above, what is their after-tax income for year 2? A) $125,000.00 B) $275,000.00 C) $375,000.00 D) $500,000.00 Answer: C Explanation: This question requires familiarity with financial measures companies use to evaluate their performance. The formula for After-Tax Income is: Pre-Tax Income times (1 - Tax Rate), and Pre-Tax Income = Sales - Variable Costs - Fixed Costs = $2,150,000 - $1,050,000 $600,000 = $500,000. Therefore, the After-Tax Income = $500,000 × (1 - 0.25) = $375,000.00 (Choice C). Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

64) The owner of a local pet supply store fears their efforts to increase the store's gross profit and net income are futile. They have compiled the following information from their financial statements over the last 2 years: Year 1 Year 2 Sales $520,000 $550,000 Cost of Goods Sold $450,000 $398,000 Operating Expenses $49,400 $48,500 What is the percent difference in the Gross Margin ratio for year 2 compared to year 1? (Round the gross margin for years 1 and 2 to two decimal places.) A) The percentage differs between years 1 and 2 by 12.35%. B) The percentage differs between years 1 and 2 by 14.18%. C) The percentage differs between years 1 and 2 by 14.86%. D) There is no difference in the Gross Margin ratio percentage between those two years. Answer: B Explanation: This question requires familiarity with gross profit and its related financial performance metrics including gross margin and knowledge about how these items are expressed as a percentage of sales. First, calculate the gross margin ratio. That will equal the gross profit divided by the total sales. Year 2's Gross Margin ratio is: ($550,000 - $398,000)/$550,000 = $152,000/$550,000 = 0.2764 or 27.64%. Year 1's Gross Margin ratio is: ($520,000 $450,000)/$520,000 = $70,000/$520,000 = 0.1346 or 13.46%. The difference between those percentages is: Percentage in Year 2 - Percentage in Year 1 or 27.64% - 13.46% = 14.18% (Choice B). Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

65) The owner of a local pet supply store fears their efforts to increase the store's gross profit and net income are futile. They compiled the following information from their financial statements over the last 2 years: Year 1 Year 2 Sales $520,000 $550,000 Cost of Goods Sold $450,000 $398,000 Operating Expenses $49,400 $48,500 Using horizontal analysis, what is the percent change in the Profit Margin ratio for year 2 compared to year 1? (Round profit margin ratios for years 1 and 2 to two decimal places.) A) The store reported 10.09% change in its profit margin ratio from Year 2 compared to Year 1. B) The store reported 14.18% change in its profit margin ratio from Year 2 compared to Year 1. C) The store reported 14.09% change in its profit margin ratio from Year 2 compared to Year 1. D) The store reported 14.86% change in its profit margin ratio from Year 2 compared to year 1. Answer: D Explanation: This question requires familiarity with net income and its related financial performance metrics including profit margin and knowledge about how these items are expressed as a percentage of sales. First, calculate the profit margin ratio. The profit margin ratio will equal net income divided by total sales. Year 2's Net Income equals $550,000 - $398,000 - $48,500 = $103,500. Now, divide by sales to determine the percentages using horizontal analysis. $103,500/$550,000 = .1882 or 18.82%. Year 1 Net Income is $520,000 - $450,000 - $49,400 = $20,600. Now, divide that amount by sales to determine its percentage using horizontal analysis. $20,600/$520,000 = .0396 or 3.96%. The percent change is: Percentage in Year 2 - Percentage in Year 1 or 18.82% - 3.96% = 14.86% (Choice D). Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

66) A local lawn care business is considering changing their credit policy for customers. Their accountant gathered the following information to help management decide.

Operating Expenses Net Credit Sales Cash Sales

Year 1 $901,768 $608,550 $683,200

Year 2 $942,680 $793,400 $864,320

The lawn care business would like to switch to an all-cash sales system since they currently collect only 72% of their credit sales. If they implement this change, then how would that impact the business? A) The company would experience an increase in cash collections since they have switched to all-cash sales system. B) The business would likely acquire new customers that like a business who sets strict terms. C) The company would experience an increase in net income since they would have increased collection of sales. D) The company would experience an increase in gross profit since they would have increased collection of sales. Answer: A Explanation: This question requires familiarity with financial performance measures including how various changes in company policies impact an organization's financial position. Choice A is correct because having an-all cash sales system would lead to an increase in cash flow as sales would no longer remain in accounts receivable or potentially uncollected. The remaining choices are incorrect since they falsely associate an increase in cash sales with an increase in total sales or assume that a stricter policy would attract new customers. Diff: 2 LO: 2 Bloom: AN AACSB: Analytic AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

67) A local lawn care business is considering changing their credit policy for customers. Their accountant gathered the following information to help management decide.

Operating expenses Net Credit Sales Cash Sales

Year 1 $901,768 $608,550 $683,200

Year 2 $942,680 $793,400 $864,320

The lawn care business would like to switch to an all-cash sales system since they are collecting only 72% of their credit sales. The management team is not unanimously on board with the idea of making this change. Which of the following reasons is the most likely reason the management team is not on the same page? A) Existing customers may choose to take their business elsewhere since they like the product offerings of a competitor. B) Existing customers may choose to take their business elsewhere so they can have more generous terms and will not have to rely on cash for transactions. C) New customers may choose to go with a competitor due to a more desirable delivery schedule. D) New customers may choose to go with a competitor due to better discounts offered as part of a promotional credit. Answer: B Explanation: This question requires familiarity with financial performance measures including how various changes in company policies can impact an organization's ability to attract or retain customers. Choice B is correct because having a more stringent cash-only sale policy may drive existing customers to take their business elsewhere so they have more generous terms. The remaining choices are incorrect because they are not likely reasons that management would disagree with this potential new policy. The incorrect choices all represent valid reasons a competitor might attract customers, but none are due to the potential cash-only policy. Diff: 2 LO: 2 Bloom: AN AACSB: Analytic AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

68) Global Dynamics is a large corporation with offices throughout the United States. They specialize in helping businesses grow and tackle issues with staffing and overall logistics. Global Dynamics has a variety of departments including accounting, human resources, sales, and customer service. Which of the following best represents a task for a staff accountant at Global Dynamics? A) Devise a plan for a ten percent improvement in the collection of Accounts Receivable over the next five years. B) Implement a plan for a five percent reduction in the days' sales in receivables over the next month. C) Reduce employee turnover in the accounting department within the next six months. D) Reduce the number of days the monthly closing process takes over the next few months. Answer: B Explanation: This question requires familiarity with work responsibilities for various employees at different levels and in different areas of the organizational hierarchy. Choice B is correct because it assigns a short-term objective with a specific performance measure to someone at a staff level. The remaining three choices are incorrect because they contain a mixture of longterm objectives or less-specific performance measures in addition to more short-term and specific performance measures. Diff: 3 LO: 2 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

69) Global Dynamics is a large corporation with offices throughout the United States. They specialize in helping businesses grow and tackle issues with staffing and overall logistics. Global Dynamics has a variety of departments including accounting, human resources, sales, and customer service. Which of the following best represents a task for the Chief Information Officer at Global Dynamics? A) Create a new company policy to enhance security and reduce the likelihood of employees falling prey to cyberthreats. B) Create a new company policy to enhance security and reduce the likelihood of cyberthreats to employees by ten percent. C) Distribute a new communication policy within a week that disseminates information about appropriate company computer usage. D) Gather estimates for new anti-virus software that the company would like to purchase and install by the end of the year. Answer: A Explanation: This question requires familiarity with work responsibilities for various employees at different levels and within different parts of the organizational hierarchy. Choice A is correct because it assigns a long-term objective with less-specific performance measures to someone at the upper management level. The remaining three choices are incorrect because they contain a mixture of long-term objectives and less-specific performance measures in addition to more short-term or specific performance measures. Diff: 3 LO: 2 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

70) Stucker Corp. just started their annual company-wide evaluation of the most recent year's performance. Management will look at many financial and nonfinancial measures as part of this comprehensive review. Their accountant compiled the following information: Sales: $9,320,568 Operating Expenses: $7,623,004 Weighted Average Common Shares Outstanding ($2 per share): $12,467,200 If the company does not have preference shares and there is no income tax, then how much will their earnings per share (EPS) be for the year? A) $0.14 B) $0.27 C) $0.75 D) $1.50 Answer: B Explanation: This question requires familiarity with the formula for EPS: Net Income minus Preferred Dividends divided by the Number of Weighted Average Common Shares Outstanding. Before using this formula, solve for Net Income amount and the Number of Weighted Average Common Shares Outstanding. Net Income = Sales - Operating Expenses = $9,320,568 $7,623,004 = $1,697,564. The Number of Weighted Average Common Shares Outstanding = $12,467,200/$2 = 6,233,600 shares. EPS = $1,697,564/6,233,600 shares = $0.27 per share (Choice B). Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

71) Stucker Corp. just started their annual company-wide evaluation of the most recent year's performance. Management looks at many financial and nonfinancial measures as part of this comprehensive review. Their accountant compiled the following information: Sales: $9,320,568 Operating Expenses: $7,623,004 Weighted Average Common Shares Outstanding ($2 per share): $12,467,200 If the company has $52,000 of preferred dividends and there is no income tax, then how much will their earnings per share be for the year? A) $0.26 B) $0.27 C) $0.75 D) $1.49 Answer: A Explanation: This question requires familiarity with the formula for earnings per share (EPS), which is Net Income minus Preferred Dividends divided by Weighted Average Common Shares Outstanding. Before using this formula, you must first solve for both Net Income and the Number of Weighted Average Common Shares Outstanding. Net Income = Sales - Operating Expenses = $9,320,568 - $7,623,004 = $1,697,564. Weighted Average Common Shares Outstanding = $12,467,200/$2 = 6,233,600 shares. EPS = ($1,697,564 - $52,000)/6,233,600 shares = $1,645,564/6,233,600 = $0.26 per share (Choice A). Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

72) Simone is a staff accountant for a local factory and has been asked to gather data and perform some analysis by the end of the week for the annual financial performance review. She compiled the following information:

Sales Expenses Depreciation Amortization Interest Taxes

Year 1 $1,256,002 $883,458 $82,344 $9,002 $15,706 $45,000

Year 2 $1,439,754 $993,200 $100,420 $10,430 $18,722 $60,000

Assume that expenses do not include depreciation, amortization, or interest. What is the difference between earnings before interest and taxes (EBIT) for Years 1 and 2? A) $36,490 decrease B) $51,490 increase C) $54,506 decrease D) $54,506 increase Answer: D Explanation: This question requires familiarity with the calculation of EBIT: Sales - Expenses Depreciation - Amortization. EBIT, Year 1 = $1,256,002 - $883,458 - $82,344 - $9,002 = $281,198. EBIT, Year 2 = $1,439,754 - $993,200 - $100,420 - $10,430 = $335,704. The difference is ($335,704 - $281,198) = $54,506 Increase (Choice D). Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

73) Simone is a staff accountant for a local factory, and she has been asked to gather data and perform some analysis by the end of the week for the annual financial performance evaluation. She compiled the following information:

Sales Expenses Depreciation Amortization Interest Taxes

Year 1 $1,256,002 $883,458 $82,344 $9,002 $15,706 $45,000

Year 2 $1,439,754 $993,200 $100,420 $10,430 $18,722 $60,000

Assume that expenses do not include depreciation, amortization, or interest. What is the difference between earnings before interest, taxes, depreciation, and amortization (EBITDA) for Years 1 and 2? A) $36,490 increase B) $51,490 decrease C) $54,506 decrease D) $74,010 increase Answer: D Explanation: This question requires familiarity with the calculation of EBITDA: Sales Expenses (excluding certain items). EBITDA, Year 1 = $1,256,002 - $883,458 = $372,544. EBITDA, Year 2 = $1,439,754 - $993,200 = $446,554. The difference is ($446,554 - $372,544) = $74,010 Increase (Choice D). Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

74) Carrie is currently a full-time employee at a law firm, and she also makes and sells jewelry online in her personal time. She is trying to evaluate her side business in terms of financial measures. The online shop generated the following numbers on average per month: Sales, $4,316.00; Variable Costs, $1,809.00; and Fixed Costs, $762.00. Carrie sold 1,144 units per month. What is Carrie's annualized operating margin? (Round your answer to two decimal places.) A) 40.36% B) 40.43% C) 58.09% D) 82.34% Answer: B Explanation: This question requires familiarity with the formula for operating margin: operating income divided by sales. First, calculate the monthly operating income which is sales variable costs - fixed costs = $4,316.00 - $1,809.00 - $762.00 = $1,745.00 per month. Next, annualize that operating income: $1,745.00 × 12 = $20,940. Also annualize the sales: $4,316.00 × 12 = $51,792.00. In conclusion, calculate the operating margin using this equation: $20,940.00/$51,792.00 = 0.4043 or 40.43% (Choice B). Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

75) Carrie is currently a full-time employee at a law firm, and she also makes and sells jewelry online in her personal time. She is trying to evaluate her side business in terms of financial measures. The online shop has generated the following numbers on average per month: Sales, $4,316.00; Variable Costs, $1,809.00; and Fixed Costs, $762.00. Carrie sold 1,144 units per month. What is Carrie's annualized operating income if Carrie sold 1,200 units per month instead of her current monthly average? (Round intermediate calculations to two decimal places.) A) $20,940.00 B) $22,392.00 C) $31,536.00 D) $45,144.00 Answer: B Explanation: This question requires familiarity with the formula for operating income: sales variable costs - fixed costs. First, recalculate the sales per unit and variable cost per unit, and recalculate the aggregates for each with the new unit quantity, 1,200. Sales per unit = $4,316/1,144 units = $3.77 per unit. Variable Costs per unit = $1,809/1,144 units = $1.58 per unit. Updated Sales = $3.77 × 1,200 units = $4,524.00. Updated Variable Costs = $1.58 × 1,200 units = $1,896.00. Operating income per month = $4,524.00 - $1,896.00 - $762.00 = $1,866.00. To finish, annualize the operating income by multiplying this value by 12: $1,866.00 × 12 = $22,392.00 (Choice B). Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

76) Kelsey has been making soy candles for friends and family for many years. Recently she debated making an official website to sell her candles to the general public. Her variable cost is $4.20 per unit, and she would sell each candle for $10.00. Her fixed costs will be $418.00 per month. How many units would she need to sell per year to completely replace her current annual salary of $36,450? Round your final answer to the nearest whole unit. A) 4,941 units B) 5,419 units C) 7,150 units D) 36,450 units Answer: C Explanation: This question requires familiarity with calculating various components of operating income using the following formula: Sales - Variable Costs - Fixed Costs = Operating Income. In this question, the operating income is not given, but the annual operating income would have to be at least equal to her annual salary of $36,450. First, annualize her costs. Fixed Costs = $418.00 × 12 = $5,016.00. Now, solve for her sales: Sales - Variable Costs - Fixed Costs = Operating Income. ($10.00 - $4.20)X - $5,016.00 = $36,450. $5.80X = $41,466. To calculate the units, she would need to sell: X = $41,466/$5.80 = 7,149.31 or 7,150 units (Choice C). Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 77) Kelsey has been making soy candles for friends and family for many years. Recently she debated making an official website to sell her candles to the general public. Her variable cost is $4.20 per unit, and she would sell each candle for $10.00. Her fixed costs will be $418.00 per month. How many units would she need to sell per month, on average, to completely replace her monthly salary of $4,268? Round your final answer to the nearest whole unit. A) 370 units B) 663 units C) 664 units D) 808 units Answer: D Explanation: This question requires familiarity with calculating various components of operating income using the following formula: Sales - Variable Costs - Fixed Costs = Operating Income. In this question, the operating income is not known, but the operating income would have to be at least equal to her monthly salary of $4,268. Now, solve for sales: ($10.00 - $4.20) X - $418.00 = $4,268. To calculate the units that would need to be sold: X = $4,686.00/$5.80 = 807.93 or 808 units (Choice D). Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 47

78) Trevor sculpts unique vases for houseplant when he is not working as a full-time vet technician at a small, family practice. Trevor's side business has grown exponentially, and he would like to hire someone to help manage the online ordering system and pack orders for shipment. Currently, the monthly costs of his business include: Variable Costs of $10.00 per unit and fixed costs of $773.00. Hiring an assistant would increase his monthly costs by $5,423.00. If Trevor decides to hire the assistant, then how many additional units would he have to sell in a year to generate an annual operating income of $37,823 if the sales price is $18.00 per unit? Round final answer to the nearest whole unit. A) 519 units B) 6,228 units C) 9,527 units D) 14,022 units Answer: D Explanation: This question requires familiarity with calculating various components of operating income using the following formula: Sales - Variable Costs - Fixed Costs = Operating Income. To calculate this, assume that the annual sales amount is X. Hence, ($18.00 - $10.00) X - ($5,423 × 12) - ($773.00 × 12) = $37,823. $8.00X - $65,076 - $9,276 = $37,823. Annual Sales, X = ($37,823 + $65,076 + $9,276)/$8.00 = 14,021.88 or 14,022 units (Choice D). Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

79) Trevor sculpts unique vases for houseplant when he is not working as a full-time vet technician at a small, family practice. Trevor's side business has grown exponentially, and he would like to hire someone to help manage the online ordering system and pack orders for shipment. Currently, the monthly costs of his business include: Variable Costs of $10.00 per unit and fixed costs of $773.00. Trevor wants to make an annual operating income of $37,823 at a sales price of $18.00 per unit. How many of these units would Trevor have to sale working on his own? Round final answer to the nearest whole unit. A) 2,102 units B) 5,888 units C) 5,911 units D) 6,232 units Answer: B Explanation: This question requires familiarity with calculating various components of operating income utilizing the following formula: Sales - Variable Costs - Fixed Costs = Operating Income. To calculate this, first assume annual sales is X. Hence, ($18.00 - $10.00) X ($773.00 × 12) = $37,823. $8.00X - $9,276 = $37,823. Annual Sales, X = ($37,823 + $9,276)/$8.00 = 5,887.375 or 5,888 units (Choice B). Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 80) In an effort to balance financial and nonfinancial performance measures, an organization may choose a balanced scorecard (BSC). Manufacturers, service entities, and governmental organizations often use this tool to assess performance. Which of the following best represents the four traditional perspectives provided by BSC? A) Financial, Customer, External Business Process, Learning and Growth B) Financial, Customer, Internal Business Process, Learning and Growth C) Financial, Customer, Internal Business Purpose, Learning and Growth D) Financial, Vendor, Internal Business Process, Learning and Growth Answer: B Explanation: This question requires familiarity with balanced scorecards and the four perspectives they utilize. Choice B is correct because it correctly identifies the four traditional perspectives. The other choices list four perspectives where at least one of the choices is incorrect. Diff: 1 LO: 3 Bloom: K AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

81) In an effort to balance financial and nonfinancial performance measures, an organization may complete a balanced scorecard (BSC). Manufacturers, service entities, and governmental organizations often use this tool to assess performance. Which of the following best represents the correct ordering from lowest to highest level of the four traditional perspectives? A) Customer, Financial, Internal Business Process, Learning and Growth B) Financial, Customer, Learning and Growth, Internal Business Process C) Financial, Internal Business Process, Customer, Learning and Growth D) Learning and Growth, Internal Business Process, Customer, Financial Answer: D Explanation: This question requires familiarity with balanced scorecards and their four perspectives. Choice D is correct in that it both identifies the four perspectives correctly and lists them in the correct order. The other choices list the four perspectives in the incorrect order. Diff: 1 LO: 3 Bloom: K AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 82) Sarah is the general manager for an electronics company, and they are currently evaluating company's performance for the year. Sarah decided to use a balanced scorecard (BSC) to look at both financial and nonfinancial metrics. Which of the following would be an appropriate objective to be implemented under the learning and growth perspective? A) Hire an experienced sales manager B) Improve efficiency of collecting outstanding accounts C) Increase market share for the computer division D) Increase operating cash flows Answer: A Explanation: This question requires familiarity with balanced scorecards and the appropriate objective to use for one of the perspectives. Choice A is correct as it correctly identifies an objective appropriate from the learning and growth perspective for an electronics company. The other choices contain an objective of one of the other perspectives of the BSC. Diff: 2 LO: 3 Bloom: AP AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

83) Robert Kaplan and David Norton created the balanced scorecard (BSC) back in 1992 to help companies balance both financial and nonfinancial measures. Which of the following is one of the four perspectives in the BSC? A) Accounting perspective B) External business process perspective C) Learning and growth perspective D) Supplier perspective Answer: C Explanation: This question requires familiarity with the four perspectives of the BSC. Choice C is the correct choice since it is the only choice listed that is one of the four perspectives. The other three choices are all incorrect variations of the four perspectives. Diff: 1 LO: 3 Bloom: K AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 84) Robert Kaplan and David Norton created the balanced scorecard (BSC) back in 1992 to help companies balance both financial and nonfinancial measures. Which of the following is unlikely to be considered one of the four perspectives in the BSC? A) Accounting perspective B) Customer perspective C) Financial perspective D) Internal business process perspective Answer: A Explanation: This question requires familiarity with the four perspectives of the BSC. Choice A is the correct choice since it is the only choice listed that is not one of the four perspectives. The other three choices are in the four perspectives of the BSC. Diff: 1 LO: 3 Bloom: K AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

85) The balanced scorecard (BSC) commonly measures what a company considers important from four different perspectives. The BSC must integrate with the organization's mission, vision, and strategy, but it is predominantly a performance measurement tool to compare actual results against desired objectives. Which of the following phrases supports the rationale for using the financial perspective? A) Considers how an organization supports its people and infrastructure to drive and maintain growth B) Considers internal processes that are responsible for creating customer and shareholder value C) Considers the customer's perspective and includes metrics that create and retain customer value and satisfaction D) Considers the shareholder's perspective about various metrics such as growth and risk Answer: D Explanation: This question requires familiarity with the four perspectives in the BSC and knowledge about the rational that supports them. Choice D is the only choice of the four that supports the rationale for the financial perspective. The other three choices support the other three perspectives. Diff: 1 LO: 3 Bloom: AP AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 86) The balanced scorecard (BSC) commonly measures what a company considers important from four different perspectives. The BSC must integrate with the organization's mission, vision, and strategy, but it is predominantly a performance measurement tool to compare actual results against desired objectives. Which of the following questions would address the customer perspective? A) At what processes must we excel in order to satisfy customers? B) How must the organization learn and improve to achieve our vision? C) How must we look to our customers in order to achieve our vision? D) How must we look to our shareholders in order to succeed? Answer: C Explanation: This question requires familiarity with the four perspectives of the BSC and knowledge of what would support a rationale for one of them. Choice C is the only choice of the four that supports a question raised to address the customer perspective. The other three choices support one of the other three perspectives. Diff: 1 LO: 3 Bloom: AP AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

87) The balanced scorecard (BSC) commonly measures what a company considers important from four different perspectives. The BSC must integrate with the organization's mission, vision, and strategy, but it is predominantly a performance measurement tool to compare actual results against desired objectives. Which of the following supports the rationale for the learning and growth perspective? A) A happy customer will share their recommendation with others. B) A happy employee is a productive employee. C) A shareholder will be happy when we strive to increase company value. D) A well-functioning process will help the company achieve it operational goals. Answer: B Explanation: This question requires familiarity with the four perspectives in the BSC and knowledge of what would support a rationale for one of them. Choice B is the only choice of the four that supports the rationale for the learning and growth perspective. The other three choices support one of the other three perspectives. Diff: 1 LO: 3 Bloom: AP AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 88) Sarah is the general manager for an electronics company, and they are currently evaluating company's performance for the year. Sarah decided to use a balanced scorecard (BSC) to look at both financial and nonfinancial metrics. Which of the following would be an appropriate objective to be implemented from the internal business process perspective? A) Increase operating income growth B) Increase quality and decrease timing of shipping online orders C) Increase revenue per department D) Staff training for superior customer service Answer: B Explanation: This question requires familiarity with balanced scorecards and the appropriate objective to use for one of the perspectives. Choice B is correct since it correctly identifies an objective appropriate from the internal business process perspective for an electronics company. The other choices contain an objective of one of the other three perspectives of the BSC. Diff: 2 LO: 3 Bloom: AP AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

89) Cameron would like to improve the overall performance for the factory where he works. He has decided to use a balanced scorecard (BSC) so he can take both financial and nonfinancial performance into consideration. Which of the following would be an appropriate objective to implement from the customer perspective? A) Hire experienced customer service manager B) Increase market share C) Increase revenue per customer D) Reduce rework on assembly line Answer: B Explanation: This question requires familiarity with balanced scorecards and choosing appropriate objectives for one of the perspectives. Choice B is correct since it correctly identifies an objective appropriate from the customer perspective for a factory. The other choices contain an objective of one of the other perspectives of the BSC. Diff: 1 LO: 3 Bloom: AP AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 90) Cameron would like to improve the overall performance for the factory where he works. He has decided to use a balanced scorecard (BSC) so he can take both financial and nonfinancial performance into consideration. Which of the following would be an appropriate objective to implement from the financial perspective? A) Increase customer retention B) Increase quality of end product C) Increase revenue per customer D) Reduce overtime for assembly line workers Answer: C Explanation: This question requires familiarity with balanced scorecards and choosing an appropriate objective for one of the perspectives. Choice C correctly identifies an objective appropriate from the financial perspective for the factory. The other choices contain an objective of one of the other perspectives of the BSC. Diff: 1 LO: 3 Bloom: AP AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

91) At the completion of the most recent fiscal year, the management of Fast Cars, Inc., a dealership firm, is evaluating their performance. They created a balanced scorecard at the beginning of the year and identified an objective of increasing customer satisfaction. As part of their review process at the end of the year, what could they do next? A) Gather the actual data, compare it to the targets, and fire anyone in the customer service department who missed the target. B) Gather the actual data, compare it to the targets, and then adjust their strategy accordingly. C) Gather the actual data, compare it to the targets, and wait for an annual review to discuss what happened with management. D) Gather this year's data, compare it to last year's data, and adjust their strategy accordingly. Answer: B Explanation: This question requires familiarity with balanced scorecards, different perspectives, and the elements that comprise each. Choice B is correct because it identifies the appropriate steps to take during the review process to ensure success. The other choices are all incorrect due to a missing element that is critical to a successful review. Diff: 2 LO: 3 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 92) At the completion of its most recent fiscal year, the management of Fast Cars, Inc., a dealership firm, is evaluating their performance. They created a balanced scorecard at the beginning of the year and identified an objective of increasing customer satisfaction. What could they measure to see if they succeeded in their objective? A) Analyze the average customer satisfaction rating on distributed surveys. B) Calculate the percentage of employees who have completed the new customer service training implemented by HR. C) Calculate the total revenues generated by new clients. D) Evaluate the amount of time that it takes to process paperwork for new purchases. Answer: A Explanation: This question requires familiarity with balanced scorecards, different perspectives, and the elements that comprise each. Choice A is correct because it is an appropriate measure based on an objective of increasing customer satisfaction. The remaining three choices are incorrect since they measure other things that are not related to customer satisfaction. Diff: 2 LO: 3 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

93) To improve overall performance, the management of Bella, an Italian restaurant, has begun their yearly review process. They have gathered actual data and are working their way through the balanced scorecard to evaluate the progress toward their objectives for the year. One of the big objectives was to decrease time from order placement to meal service. Their goal was 18 minutes or less, but their average for the year came out to 21 minutes. How should management handle this situation? A) Analyze data for which servers had the longest times and reprimand them. B) Fire the floor manager for failing to meet the objective on the balanced scorecard. C) Leave the target at 18 minutes, and insist the manager to meet this goal without revisiting the matter further. D) Revisit the initial goal of 18 minutes, and determine if it was reasonable now that there is more data available. Answer: D Explanation: This question requires familiarity with balanced scorecards, different perspectives, and the elements that comprise each. Choice D is correct because it represents an appropriate reaction by management for missing a goal set forth on a balanced scorecard. The remaining choices are incorrect as they represent a managerial mishandling of the missed target. Diff: 2 LO: 3 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

94) To improve overall performance, the management of Bella, an Italian restaurant, has begun their yearly review process. They have gathered actual data and are working their way through the balanced scorecard to evaluate the progress toward their objectives for the year. One of the big objectives was to decrease time from order placement to meal service. Their goal was 18 minutes or less, but their average for the year came out to 21 minutes, and they have asked the floor manager for comments. What is a reasonable explanation for the difference between their target time and the actual timing they achieved? A) The restaurant had high turnover and new staff do not seem to fulfill their duties. B) The restaurant had high turnover, and new servers were slow to collect and close out checks. C) The restaurant recently increased its marketing efforts and saw a 25% increase in sales. D) The restaurant relies on a handwritten ticket system, and tickets sometimes get lost of delayed between order placement and food preparation or delivery. Answer: D Explanation: This question requires familiarity with balanced scorecards, different perspectives, and the elements that comprise each. Choice D is correct since it presents an issue that would have been present in the restaurant that also would have directly impacted the time from order placement to meal service. The remaining choices are incorrect as they are likely to impact other objectives that the company may have identified in the various perspectives. Diff: 2 LO: 3 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

95) A local salon has reached the end of its second quarter of the current year and is evaluating the financial perspective of its balanced scorecard. The salon has decided to make some changes this year to become more competitive in their local market. One of their objectives is to increase their margins. What is an initiative and respective measure that management can put in place to try and achieve this? A) Serve more customers, drive revenue up, and measure the average customer satisfaction rating. B) Serve more customers, drive revenue up, and measure the percentage of new customers. C) Study competitors' prices to observe trends, and measure change in their operating profit margin. D) Study competitors' prices to observe trends, and measure change in the percentage of new customers served. Answer: C Explanation: This question requires familiarity with balanced scorecards, different perspectives, and the elements that comprise each. Choice C is correct because the initiative of studying competitors' prices to observe trends and then measuring the change in operating profit margin would be the most effective way to try and achieve their objective. The remaining choices might help meet other objectives the company is interested in but not the one specified in the problem. Diff: 2 LO: 3 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 96) A local salon has reached the end of its second quarter of the fiscal year and is evaluating the financial perspective of its balanced scorecard. The salon has decided to make some changes this year to become more competitive in their local market. One of their objectives is to increase their revenues. What is an initiative that management can put in place to achieve this? A) Increase add-on offerings to customers, and measure total revenues. B) Increase the number of hours of operation, and measure the increased number of customers per week. C) Research appropriate pricing models, and measure operating income margin. D) Serve more customers, and measure the average customer satisfaction rating. Answer: A Explanation: This question requires familiarity with balanced scorecards, different perspectives, and the elements that comprise each. Choice A is correct because the initiative of increasing addon offerings and then measuring the change in total revenues is the most effective way to achieve their objective. The remaining choices might help meet other objectives the company is interested in but not the one specified in the problem. Diff: 2 LO: 3 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 58

97) Karen is the sales manager for a local car dealership firm and is working on a balanced scorecard (BSC) to evaluate the firm's performance. Her current focus in on the financial perspective. Which of the following would be an appropriate initiative and measure if the firm's objective is to increase revenue? A) Initiative: Implement differentiated customer selling prices, and Measure: Total revenues B) Initiative: Serve more customers through targeted marketing, and Measure: Total revenues C) Initiative: Serve more customers, and Measure: Operating cash flows D) Initiative: Serve only customers who have certain income levels, and Measure: Total revenues Answer: B Explanation: This question requires familiarity with the BSC and appropriate initiatives to take and measures to use to achieve objectives as seen from given perspectives. Choice B correctly identifies both an initiative and a measure that are appropriate for increasing revenue for a car dealership firm. The remaining three choices contain a combination of initiatives and measures that are inappropriate for increasing revenues of a car dealership firm. Diff: 2 LO: 3 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 98) Karen is the sales manager for a local car dealership firm and is working on a balanced scorecard (BSC) to evaluate the firm's performance. Her current focus in on the customer perspective. Which of the following would be an appropriate initiative and measure if the firm's objective is to increase customer satisfaction? A) Initiative: Continue customer feedback activity, and Measure: Average customer satisfaction rating B) Initiative: Continue customer feedback activity, and Measure: Customer Conversion Rate C) Initiative: Initiate new customer interactions, and Measure: Average customer satisfaction rating D) Initiative: Initiate new customer interactions, and Measure: Customer Conversion Rate Answer: A Explanation: This question requires familiarity with the BSC and appropriate initiatives to take and measures to use to achieve objectives as seen from given perspectives. Choice A correctly identifies both an initiative and a measure that are appropriate for increasing customer satisfaction for a car dealership firm. The remaining three choices contain a combination of initiatives and measures that are inappropriate for increasing customer satisfaction of a car dealership firm. Diff: 2 LO: 3 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

99) The management team for an Italian restaurant has started its annual review of the overall performance of the organization. In an effort to include both financial and nonfinancial measures, they will complete a balanced scorecard (BSC). If they are focusing on the internal business process perspective, then which of the following would be an appropriate initiative and measure to decrease time from order placement to meal service? A) Initiative: Conduct efficiency study, and Measure: Percent of meals sent back per week B) Initiative: Conduct efficiency study, and Measure: Time from order placement to meal service C) Initiative: Hire new wait staff, and Measure: Percent of meals sent back per week D) Initiative: Hire new wait staff, and Measure: Time from order placement to meal service Answer: B Explanation: This question requires familiarity with balanced scorecards and appropriate initiatives to take and measures to use to achieve objectives as seen from given perspectives. Choice B correctly identifies both an initiative and a measure that are appropriate for decreasing time from order placement to meal service for this Italian restaurant. The remaining three choices contain a combination of initiatives and measures that are inappropriate for decreasing time from order placement to meal service for this Italian restaurant. Diff: 2 LO: 3 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

100) The management team for an Italian restaurant has started its annual review of the overall performance of the organization. In an effort to include both financial and nonfinancial measures, they will complete a balanced scorecard (BSC). If they are focusing on the learning and growth perspective, then which of the following would be an appropriate initiative and measure to increase employee satisfaction? A) Initiative: Implement employee wellbeing program, and Measure: Average employee satisfaction rating B) Initiative: Implement employee wellbeing program, and Measure: Percent of employees who complete the program C) Initiative: Implement training program, and Measure: Average employee satisfaction rating D) Initiative: Implement training program, and Measure: Percent of employees who complete the program Answer: A Explanation: This question requires familiarity with balanced scorecards and appropriate initiatives to take and measures to use to achieve objectives as seen from given perspectives. Choice A correctly identifies both an initiative and a measure that are appropriate for employee satisfaction for an Italian restaurant. The remaining three choices contain a combination of initiatives and measures that are inappropriate for increasing employee satisfaction for an Italian restaurant. Diff: 2 LO: 3 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 101) Alison is a baker who specializes in gluten-free cakes. She wants to determine what strategy makes sense for her business and has created the following options: 1) a regular cake at $25.00 per cake or 2) a cake with a base price of $30.00 with modifications costing extra. If Alison decides to proceed with option 1, then what is an appropriate internal business process perspective goal for Alison? A) Create a customer loyalty program with points awarded for each purchase. B) Create an employee wellness program for all employees, present and future, to encourage a better work environment. C) Increase social media marketing efforts to attract new customers. D) Reach out to new vendors to secure sourcing of raw materials and reduce internal costs. Answer: D Explanation: This question requires familiarity with a BSC and how to identify appropriate perspectives. Choice D is correct because reaching out to new vendors to secure reduced cost materials would be an internal business process that aligns with Option 1. The remaining three choices could all be objectives and initiatives but align with other aspects of the BSC. Diff: 2 LO: 3 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 61

102) Alison is a baker who specializes in gluten-free cakes. She wants to determine what strategy makes sense for her business and has created the following options: 1) a regular cake at $25.00 per cake or 2) a cake with a base price of $30.00 with modifications costing extra. If Alison decides to proceed with option 2, then what is an appropriate internal business process perspective goal for Alison? A) Create a training program for employees to learn new frosting techniques. B) Create weekly cake themes that utilize on-hand perishables and reduce waste. C) Distribute a customer satisfaction survey to gather data and feedback. D) Purchase a new oven to reduce baking times and improve order turnaround times. Answer: D Explanation: This question requires familiarity with a BSC and how to identify appropriate perspectives. Choice D is correct because purchasing an oven to reduce baking times and improve turnaround times would be an internal business process perspective goal that aligns with Option 2. The remaining three choices could all be objectives and initiatives but align with other aspects of the BSC. Diff: 2 LO: 3 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 103) Happy Occasions is a small florist slated to open later this year. In preparation for the business launch, the owner is evaluating strategies to optimize their potential for success. If the owner wishes to focus on maximizing customer satisfaction, then what would an appropriate customer perspective initiative be? A) Create weekly bouquet specials with different discounts available on different days. B) Establish a customer loyalty program with points and incentives. C) Optimize their ordering system to reduce incorrect orders and customer returns. D) Provide training to employees to reduce turnaround times on orders. Answer: B Explanation: This question requires familiarity with a BSC and how to identify appropriate perspectives. Choice B is correct because the establishment of a customer loyalty program aligns with the objective of maximizing customer satisfaction. The remaining three choices are also initiatives the company could use to change aspects of their organization but align with other perspectives. Diff: 2 LO: 3 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

104) Happy Occasions is a small florist slated to open later this year. In preparation for the business launch, the owner is evaluating strategies to optimize their potential for success. If the owner wishes to focus on maximizing the number of new customers, then what would an appropriate customer perspective initiative be? A) Create a customer referral program with points and incentives. B) Distribute customer satisfaction surveys to gather data. C) Hire an experienced customer service manager. D) Maximize unique offerings and new arrangements Answer: A Explanation: This question requires familiarity with a BSC and how to identify appropriate perspectives. Choice A is correct because the creation of a customer referral program aligns with the objective of maximizing the number of new customers. The remaining three choices are also initiatives the company could use to change aspects of their organization but align with other perspectives. Diff: 2 LO: 3 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 105) As companies become established and wish to improve upon their operations, they will seek out tools to assist them. One tool, the balanced scorecard (BSC), is often used to summarize and evaluate both financial and nonfinancial information. Which of the following represents an appropriate usage of the data gathered from a BSC? A) After learning that employee turnover was higher than desired, management would like to fire existing staff and hire new employees. B) After learning that employees have a low satisfaction rating, the company will implement a well-being program. C) After receiving the desired customer satisfaction rating, management has removed their loyalty program because they believe customers will stay at their current levels of satisfaction. D) After successfully increasing market share, management has canceled all new social media campaigns. Answer: B Explanation: This question requires familiarity with a BSC and how to identify appropriate perspectives. Choice B is correct because management identified an area in need of improvement and plans to implement a new program to improve the issues identified by the employees. The remaining three choices are not appropriate uses of or reactions to information gathered from the BSC. Diff: 2 LO: 3 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

106) As companies become established and wish to improve upon their operations, they will seek out tools to assist them. One tool, the balanced scorecard (BSC), is often used to summarize and evaluate both financial and nonfinancial information. Which of the following represents an inappropriate usage of the data gathered from a BSC? A) After receiving low quality ratings on individual products, management will improve their machining qualities. B) After reviewing customer conversion rates, management decided to initiate new customer interactions. C) After reviewing the customer satisfaction surveys, management will be implementing new measures to increase satisfaction. D) After reviewing the employee satisfaction survey, management decided to reprimand employees who gave a low rating. Answer: D Explanation: This question requires familiarity with a BSC and how to identify appropriate perspectives. Choice D is correct as this is an inappropriate use of the knowledge gained from the employee satisfaction surveys. The remaining three choices would be appropriate uses of the data gathered from a BSC. Diff: 2 LO: 3 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

107) A grocery store just finished another year of operations. As part of their annual wind-down process, they will compile the actual performance metrics to be used in their balanced scorecard (BSC). One of their objectives this year was to increase revenue as measured by total revenue. Which of the following could be a red flag that someone used unethical behavior to achieve this goal? A) A cashier chooses not to ring up a candy bar for a small child who did not have the correct change. B) A cashier voids out small cash transactions and keeps the money handed over by the customer. C) A manager records a sale twice at the end of the year and then reverses it out the subsequent year. D) A store clerk pockets an expensive cut of steak to take home and writes it off as damaged. Answer: C Explanation: This question requires familiarity with the objectives used to achieve various perspectives on a BSC and what actions are unethical when trying to achieve those objectives. Choice C is the best response because the behavior is both unethical and the nature of the action aligns with the goal of increasing revenue for the current year. The remaining three choices are also unethical, but each would likely impact other goals the company or an individual may have. Diff: 2 LO: 3 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

108) A grocery store just finished another year of operations. As part of their annual wind-down process, they will compile the actual performance metrics to be used in their balanced scorecard (BSC). One of their objectives this year was to increase customer satisfaction as measured by an increase in the average customer satisfaction rating. Which of the following could be a red flag that someone used unethical behavior to achieve this goal? A) A cashier rings up an order twice and immediately corrects the mistaken, hoping the customer is satisfied by the interaction. B) A manager creates several new email addresses so they can falsely complete multiple customer satisfaction surveys. C) A manager gets kickbacks to promote a new product that will likely make customers more excited to shop at the store. D) A store clerk decides to help a customer to their vehicle with their groceries in the hopes that the customer will give the store a better rating on a survey. Answer: B Explanation: This question requires familiarity with the objectives used to achieve various perspectives on a BSC and what actions are unethical when trying to achieve those objectives. Choice B is correct because the behavior is both unethical and it aligns with the goal of increasing the reported ratings for customer satisfaction in the current year. The remaining three choices are a mix of unethical or ethical, but none are both unethical and aligned with increasing the customer survey satisfaction ratings. Diff: 2 LO: 3 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

109) A small textile manufacturer just completed their balanced scorecard (BSC) for the upcoming year. After evaluating feedback from customers and employees, they have decided to focus their efforts on several areas. If the company wishes to improve employee satisfaction, then which of the following pairs would be the most effective initiative and the best measure to use? A) Initiative: Conduct an employee satisfaction survey; and Measure: Average employee satisfaction rating B) Initiative: Conduct an employee satisfaction survey; and Measure: Employee turnover C) Initiative: Hire an experienced manager; and Measure: Average employee satisfaction rating D) Initiative: Hire an experienced manager; and Measure: Employee turnover Answer: A Explanation: This question requires familiarity with perspectives of a BSC and establishing the correct initiatives and measures to achieve certain objectives. Choice A is correct since it contains the appropriate combination of an initiative and a measure that focus on improving employee satisfaction. The other three choices are also within the learning and growth perspective, but they would not achieve the goal of improving employee satisfaction. Diff: 2 LO: 3 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 110) A small textile manufacturer just completed their balanced scorecard (BSC) for the upcoming year. After evaluating feedback from customers and employees, they have decided to focus their efforts on several areas. If the company wishes to increase their unique fabric offerings, then which of the following pairs would be the most effective initiative and the best measure to use? A) Initiative: Conduct efficiency study; and Measure: Number of new vendor relationships B) Initiative: Establish relationships with new vendors; and Measure: Number of new vendor relationships C) Initiative: Establish relationships with new vendors; and Measure: Quality rating of new vendors D) Initiative: Improve machining capabilities; and Measure: Quality rating of new offerings Answer: B Explanation: This question requires familiarity with perspectives of a BSC and establishing the correct initiatives and measures to achieve certain objectives. Choice B is correct since it contains the appropriate combination of an initiative and a measure that would focus on increasing the number of unique fabric offerings. The remaining other choices are also within the internal business process perspective, but they would not achieve the goal of increasing unique fabric offerings. Diff: 2 LO: 3 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 67

111) What is a strategic plan? How do businesses use strategic plans to achieve success? What are the five components of a strategic plan, and what do they entail? Answer: A strategic plan is a comprehensive, potentially multi-year plan for an organization that also contains an operating plan. Businesses use strategic plans to set both the short-term objectives and the long-term goals that they strive to achieve on multiple levels. The first component of a strategic plan is "Mission and Vision." A business's mission comes first since it defines the business's purpose or reason for existence. A business's vision is a narrative that outlines a picture of what an organization will look like after it has achieved its objectives. The second component of a strategic plan is "Goals and Objectives." This is where the business sets its long-term goals. These long-term goals are broken into sets of tangible short-term objectives for the upcoming year. The third component of a strategic plan is "Strategies and Initiatives." Strategies and initiatives are the chosen methods and techniques the organization will implement to achieve both their short-term objectives and their long-term goals. The fourth component of a strategic plan is "Measures and Targets." This section involves taking information gathered from across the organization and putting that information into a meaningful and measurable form that the business can use to measure performance throughout the organization. The fifth and final component is "Results." This section summarizes a company's actual performance, whether financial or nonfinancial, and compares the actual performance to predetermined performance targets. Diff: 2 LO: 1 Bloom: K AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

112) What is the overall goal of a business organization? What are Porter's Five Forces? How can these help a business achieve its overall goal? Answer: The overall goal of a business organization is to generate a profit while also creating value. Porter's Five Forces is a framework for evaluating an organization's competitive landscape by examining (1) competitive rivalry, (2) threats of substitutes, (3) threats of new entrants, (4) the power of customers, and (5) the bargaining power of suppliers. Evaluating competitive rivalry involves looking at whether there are existing competitors who may provide potential customers with alternative suppliers. It is important to be aware of any threats of substitutes so the organization can plan for what actions to take if a substitute is available to potential customers. New entrants to the industry can create a more competitive landscape as well by giving potential customers other options. The power of customers must consider to determine how to segment customers in a manner that allows the business to offer appropriate products to different customers. Finally, the power of suppliers is a measure of the amount of influence that suppliers can have on an industry by controlling things like sales price and quantities available. By assessing these five forces in the planning phase of an organization, a business is more likely to achieve its goal of generating a profit by optimally assessing and controlling the variables that are within their own power to control. Diff: 2 LO: 1 Bloom: K AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 113) What is SWOT analysis, and how it most often used by businesses? Are these elements most likely to be internal or external? In your response, please make sure to discuss each component. Answer: When an organization has identified the challenges, they are likely to encounter within their industry, they will want to develop ways to overcome them. SWOT analysis is one tool that can be used to begin this process. SWOT is an acronym that stands for Strengths, Weaknesses, Opportunities, and Threats. The strengths analysis is an internal assessment of areas where the organization feels it does well in working towards their goals. The weaknesses analysis is an internal assessment wherein the organization takes a serious look at areas that need improvement because they negatively impact their chances of success. Opportunities exist externally and represent current prospects or future endeavors that could benefit the organization. Threats exist externally and represent any current or forecasted challenges that may be unfavorable. These four elements are split with strengths and weaknesses being internal and opportunities and threats being external. Diff: 2 LO: 1 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

114) While performing analysis of their overall performance, organizations will often evaluate both financial and nonfinancial factors. What are some ways that an organization can evaluate their performance from a financial perspective? What about from a nonfinancial perspective? Answer: For financial performance, results are compared to past performance for relevant metrics. These measurements are common because they are both objective and measurable. Some commonly used financial measurements include: the company's gross margin to determine a firm's ability to mark-up from cost; the company's earnings-per-share to evaluate the return on a single share of stock; and the company's turnover ratios to evaluate a company's effectiveness at collecting accounts receivables or selling inventory. There are many other values used as well. Nonfinancial performance is different than financial performance in that it focuses on what is happening right now as compared to what has already transpired. An organization can use different nonfinancial measurement for different departments to measure performance. For example, a Human Resources department could use employee training satisfaction to measure how satisfied employees are with the training provided, and an Accounting department could look at vacation days earned versus vacation days used to determine if employees are taking adequate time to relax. Diff: 2 LO: 2 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 115) As a manager for a large organization, you may have to find a way to motivate employees. This could include evaluations in addition to compensation. What are four ways that employees can be compensated, and when it is most effective to use each? Answer: When it comes to motivation, people will have different reactions to what is being offered to them, so it is important for management to assess what is appropriate to offer. Four ways of offering compensation include: hourly wages, salaries, commissions, and bonuses. Hourly wages are best for positions that require fewer skills, but employees who work for hourly pay should also expect to receive overtime pay when they work over a base number of hours. Salaries are most effective for positions with larger skillsets where long-term employment is the expectation. Employees who have salaried compensation are typically tasked to produce certain outcomes or meet certain deadlines rather working a specific number of hours. Commissions are generally used as a motivation tactic for employees in sales positions. The goal here is to encourage the employee to increase revenues, so their compensation is partially based on a percentage of their total revenues or sales. Bonuses are effective as occasional offerings. Employers may give these on a yearly basis or more frequently, but the bonuses will typically be tied to a performance metric determined by management. Diff: 2 LO: 2 Bloom: C AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

116) What is a balanced scorecard (BSC), and why was it created? Discuss the four traditional areas the framework divides an organization's objectives and metrics into. Answer: A BSC balances a company's financial and nonfinancial performance measures and looks at these factors from multiple perspectives. A BSC divides an organization's objectives and metrics into four traditional perspectives: a financial perspective, a customer perspective, an internal business process perspective, and a learning and growth perspective. The financial perspective looks at the company's performance from the perspective of a shareholder and addresses metrics they might find important like risk, growth, or profits. The customer perspective takes a hypothetical customer's view of the performance of the company and evaluates metrics that create value for that customer. The internal business process perspective considers processes internal to an organization that create value for both customers and shareholders. The learning and growth perspective focuses on how a company chooses to support its people and on its infrastructure with the goal of keeping employees both productive and happy. A BSC is a useful management tool that helps an organization reach its overall goal of generating a profit. Diff: 2 LO: 3 Bloom: K AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 117) When a new business starts up, a time will come when its creators must determine what makes up the core of that business. Take a moment to reflect on the role that mission and vision play in a strategic plan created for an organization. Briefly describe why these components are such a crucial and integral part of a business. Answer: The mission and vision of a business will inform and direct all steps towards goal achievement. Once an organization sets its mission and vision, the organization can craft a strategic plan and an operating plan from there. Setting the mission and vision at the inception of an organization is crucial because that sets the tone for what the business wants to achieve and how it will propel itself forward. Diff: 2 LO: 1 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

118) A metaphor for the strategic planning process for a business could be a long and winding road where changes are unavoidable despite the best laid plans. In the beginning, management and/or the owners will strive to define the business mission and vision to outline how they plan to achieve this. What is a strategic plan, and what are the components it contains? Answer: A strategic plan is a comprehensive plan for an organization that also contains an operating plan and may span multiple years. The strategic plan normally contains an operating plan that outlines outcomes for the year ahead and plans to achieve them. The components of a strategic plan are: mission and vision, goals and objectives, strategies and initiatives, measures and targets, and results. Diff: 2 LO: 1 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 119) Sharon needs to travel from Los Angeles to a client site in San Diego that is 120 miles away. The company will be paying for her travel, and they asked her to choose one of the following options (listed from most to least expensive): Airplane (50 minutes), train (2 hours and 55 minutes), rental car (2 hours), or bus (3 hours and 15 minutes). If the customer's value proposition is to obtain the fastest mode of transportation without regard to price, then which two options is she most likely to consider? Answer: Sharon's customer's value proposition is to consider the fastest transportation, so on the list provided, that is airplane or rental car. While there are possibly cheaper options, the airplane and rental car will probably get her to her destination the fastest. The customer value proposition requires that she choose between operation excellence and product leadership. In this case, the airplane or the rental car will achieve the product leadership that Sharon needs. Diff: 2 LO: 1 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

120) The following objectives are items of continuous improvement appropriate for many companies in different industries. 1. Reduce employee's time wasted 2. Reduce product damages 3. Increase market share 4. Increase customer retention

5. Increase the number of new product offerings 6. Reduce launch times for new products 7. Increase profit margin 8. Improve coordination to reduce delivery times

Categorize each of these 8 objectives as a product differentiation or cost leadership strategy. If any of the objectives fit both categories, then briefly explain why. Answer: The following objectives are product differentiation strategies: 3, 4, 5, 6, and 7. The following objectives are cost leadership strategies: 1, 2, 3, 7, and 8. Numbers 3 and 7 comfortably fit in both categories since both objectives can be accomplished by being costefficient or offering a unique product or both. Others could arguably be both, but this cannot be determined without more information about the companies. Diff: 2 LO: 1 Bloom: C AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

121) Sarah is a receptionist at a doctor's office and collects a salary of $48,500 per year. Last year, she started a gourmet cupcake business where she runs a small stand on weekends and takes online orders during the week with the help of a part-time assistant. Demand for the bakery continues to increase, and she is considering whether to leave her receptionist job and start baking full-time. Making this her full-time career would allow her to grow her business, but she would no longer be able to keep her additional part-time assistant. Below are her average monthly results based on sales of 1,305 units: Sales $7,830.00 Variable Costs (includes assistant wages of $2.05 per unit) 5,376.60 Contribution Margin $2,453.40 Fixed Costs 678.00 Operating Income $1,775.40 Does it make financial sense for Sarah to leave her full-time job and pursue being a full-time baker? Answer: Yes, based on the information available, it makes financial sense to make the change since she would earn $53,407.80 annually after the change. This question requires familiarity with annualizing monthly income and accounting for the direct labor Sarah would not be able to keep. The monthly Direct Labor earned is $2.05 × 1,305 = $2,675.25. To annualize that, will multiply the monthly amount by 12: $2,675.25 × 12 = $32,103.00. Her annualized operating income = $1,775.40 × 12 = $21,304.80. When you combine these amounts, $32,103.00 + $21,304.80 = $53,407.80. This amount is more than her current salary, so it would make sense for her to leave her receptionist position and bake fulltime. Diff: 2 LO: 2 Bloom: AN AACSB: Analytic AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

122) Johnson Lawncare Company is deciding whether they need to change their credit policies for new and existing customers. Management feels the company is not as liquid as they should be because of a perceived increase in collection times. To check that perception, they pulled the following information from their past two balance sheets:

Net Credit Sales Accounts Receivable, beginning Accounts Receivable, ending

Year 1 $820,000 123,000 106,600

Year 2 $900,600 106,600 77,400

What are the accounts receivable turnover in each year? Is management justified in believing that collections have become less effective? Answer: Accounts Receivable Turnover: Year 1, 7.14; Year 2, 9.79. Year 2 is higher, so that means that the company is collecting faster than it previously had. Management is not justified in believing that collections have become less effective. This question is using financial measures to evaluate a company's performance and requires calculation of accounts receivable turnover. The formula for accounts receivable turnover is: Net Credit Sales/Average Accounts Receivable. So, for Year 1 this is $820,000/(($123,000 + $106,600)/2) = $820,000/$114,800 = 7.14. And, for Year 2 this is $900,600/(($106,600 + $77,400)/2) = $900,600/$92,000 = 9.79. Year 2 has the higher turnover meaning the company collected its accounts receivable faster in Year 2 than in Year 1, so the perception is incorrect. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

123) Fabulous You, Inc. sells women's clothing online with a target demographic of young professionals entering the workforce after graduation. Within the past year, management has noticed a decline in sales for items including t-shirts and maxi dresses, while suits and leggings have seen an increase in sales. Year 1 Year 2 Sales $2,424,000 $2,909,500 Cost of Goods Sold 989,250 1,101,360 Inventory, beginning 88,468 212,632 Inventory, ending 212,632 163,450 They want to evaluate the overall financial health of the company, so they look at their inventory and their efficiency at managing that inventory through fluctuations in sales. Management wants to know if decreases in sales for some items are of concern or if increases in sales of other items offset them. What is the inventory turnover for each year, and how should management interpret this? Answer: Inventory Turnover: Year 1, 6.57; Year 2, 5.86. Year 2 has a lower inventory turnover, and that means that the company is turning over its inventory slower than it had in year 1. Management is correct to conclude that decreased sales of some items has adversely impacted their ability to sell their inventory despite increased sale of other items. This question uses financial measures to evaluate a company's performance and requires calculation of inventory turnover. The formula for inventory turnover is Cost of Goods Sold/Average Inventory. The sales values given are not needed to solve this problem. For Year 1, the turnover is $989,250/(($88,468 + $212,632)/2) = $989,250/$150,550 = 6.57. And, for Year 2 the turnover is $1,101,360/(($212,632 + $163,450)/2) = $1,101,360/$188,041 = 5.86. Year 2 has a lower inventory turnover, and that means the company turns its inventory slower than Year 1. Diff: 2 LO: 2 Bloom: AP AACSB: Analytic AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

124) Below is a list of measures used by organizations to evaluate their objectives: Employee sick time accrued versus used Earnings per share Period cost per unit Internal promotion rate

Residual Income Gross profit percentage Employee turnover Customer Satisfaction

The list contains both financial and nonfinancial measures and measures that are either quantitative or qualitative. What categories do each of the objectives fall into: financial or nonfinancial and quantitative or qualitative? (Choose one from each set.) If a company wanted to evaluate employee satisfaction, then would any of the objectives above help measure that? Answer: Employee sick time accrued versus used: Nonfinancial and Quantitative Earnings per Share: Financial and Quantitative Period Cost per unit: Financial and Quantitative Internal promotion rate: Nonfinancial and Quantitative Residual Income: Financial and Quantitative Gross Profit Percentage: Financial and Quantitative Employee turnover: Nonfinancial and Quantitative Customer satisfaction: Nonfinancial and Qualitative If the company wanted to evaluate employee satisfaction, then they could use employee sick time accrued versus used to determine whether employees were taking advantage of their time outside of work to take care of their health. They could also use employee turnover rate to determine if employees leave and how soon after hire they do so. If the employee turnover is low, then they could talk to employees about why they are satisfied to determine what is working well. Diff: 2 LO: 2 Bloom: K AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

125) Here are some objectives commonly found on strategy maps for companies in a variety of fields and industries: Decrease product defects Increase employee satisfaction Increase margins Expand product offerings

Reduce employee turnover Increase customer satisfaction Increase employee well-being Increase sales growth

Which of the choices provided are important to most organizations and why? Would each organization follow the same trajectory to achieve their desired outcomes? Answer: The following objectives would likely be important to most organizations, regardless of industry: Increase employee satisfaction, increase margins, reduce employee turnover, increase customer satisfaction, increase employee well-being, and increase sales growth. These are all goals applicable to most businesses whereas the following would apply to less businesses: Decrease product defects and expand product offerings are both objectives that apply to a business manufacturing product that is looking to diversify its offerings. Each organization is likely to create their own unique trajectory to achieve their desired results because each business has members, missions, and visions that make it different from other businesses, even those within the same industry. Diff: 2 LO: 3 Bloom: C AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

126) Braxton Inc. is a factory that produces trendy and decorative kitchen cabinet hardware. They just finished their third year of operations, so management decided it would like to thoroughly evaluate the performance of the organization, both financial and nonfinancial. They are planning to use a balanced scorecard (BSC) for the first time, and they are currently working on the customer perspective. What are two appropriate objectives Braxton could identify for the year? Additionally, what initiatives, measures, and targets would help them to evaluate their performance? Answer: In evaluating the customer perspective, Braxton Inc. will want to consider what matters to their customer base while also creating value for them. Assuming they can keep their customers happy, they should be able to retain existing customers while attracting new customers. The following objectives would be appropriate for Braxton Inc. to focus on along with some possible initiatives, measures, and targets that could help the evaluation: 1. Increase customer satisfaction • Initiative: Continue customer feedback activity • Measure: Average customer satisfaction rating • Target: 9.8 out of 10 2. Increase the number of new customers • Initiative: Begin new customer interactions • Measure: Customer conversion rate • Target: Increase number of new customers by 25% or of more Both objectives could be great choices to assist Braxton in their efforts. The first objective will keep them focused on keeping their customers happy. Focusing on the second will help them grow their customer base and increase the number of new customers. Diff: 2 LO: 3 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

127) Miguel's Pizzeria creates and sells handmade individual pan pizzas that are available with variety of sauce and topping options. The company is evaluating its key operating activities and has specified the following two objectives as internal business process goals on their balanced scorecard (BSC). Objectives 1. Reduce average time from order to table delivery 2. Increase quality of ingredients

Initiatives Measures Targets Actual

Complete the above chart by identifying an appropriate initiative, measure, and target for each of these objectives. Please also explain why each is appropriate. Answer: 1. Reduce average time from order to table delivery • Initiative: Conduct efficiency study • Measure: Time from order placed to pizza served on the table • Target: 12 minutes maximum This is an appropriate metric to evaluate because the time between order to table delivery is an internal process that can be controlled by the company. By setting a maximum time of 12 minutes, they can measure the efficiency of the current system, and that help them determine how close they are to achieving this metric. 2. Increase quality of ingredients • Initiative: Conduct a rotation procedure for perishable items • Measure: Number of days perishable items are open before used • Target: 4 days or less This is an appropriate metric to evaluate because the rotational use of perishable items, such as produce, is an internal process that can be controlled by the company. By setting a target time of 4 days, tracking the current system's rotation paradigm will help them determine how close they are to achieving this metric. Diff: 2 LO: 3 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

128) A salon is working to update and revitalize their positioning within the market. They will be completing a balanced scorecard (BSC) and are starting with a couple of objectives from the learning and growth perspective. Objectives 1. Increase employee knowledge with new techniques 2. Train and recruit at least one new stylist from the local beauty school

Initiatives Measures Targets Actual

Why is each objective above important in this perspective? What would an appropriate initiative, measure, and target for each objective be? Answer: 1. Increase employee knowledge with new techniques This objective is important to the learning and growth perspective because it affords the company the opportunity to be able to assist their employees with obtaining new knowledge. • • •

Initiative: Improve employee training program Measure: Number of hours logged per employee Target: 30 training hours per employee

2. Train and recruit at least one new stylist from the local beauty school This objective is important to the learning and growth perspective because it affords the company the opportunity to recruit new stylists and grow the business and the industry. • Initiative: Implement a recruitment program at local beauty school • Measure: Number of stylists hired per school cycle • Target: 1 per semester Diff: 2 LO: 3 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

129) Shawn is a chef who has been working at a local French restaurant. He has finally saved enough money and secured additional external financing to open his own restaurant. He decided to specialize in plant-based food with choices that include veggie burgers, salads, smoothie bowls, soups, and pasta. He is confident his skills will lend themselves to crafting desirable products that will garner a lot of support and interest from his community. Currently, there are no restaurants that are solely plant-based in his area. He would like to open a brick-and-mortar store in the next six months, and he is fully aware that much work must be done before that. As part of his planning, he enlisted the help of a business manager, Chris. The first step of their analysis will be to identify factors that shape this industry and to use this information to create a unique and well-developed strategy. Chris would like to sit down with Shawn and discuss these items together before proceeding. With this in mind, please answer the following questions. a. What would an appropriate element of each of Porter's Five Forces that this new restaurant business is likely to encounter be? b. Is the company using a cost leadership or product differentiation strategy, and what is the difference between these strategies? c. If you were helping Chris and Shawn develop a strategy, what advice would you give them, and are there any additional considerations they should be aware of?

Answer: a. The following is a list of Porter's Five Forces and elements that Shawn is likely to encounter in his business: • Competitive rivalry — Shawn is in the restaurant business, so his competitive rivalry would be other restaurants in the area. While he specializes in plant-based food, he may be competing with other non-plant-based restaurants as well. • Power of customers — This force will require Shawn to determine what he offers that makes him unique and appealing to customers. His demographic is most likely to be younger and some may have health concerns. He would be wise to continue investigating what motivates these customers to select where they dine. • Threat of substitutes — Shawn must be aware that customers choosing his restaurant may also be satisfied by mail-order delivery kits that specialize in plant-based meal preparation, prepared foods from a local grocer, and websites dedicated to providing frozen versions of the items like those that he prepares in his restaurant. • Threat of new entrants — Shawn should be aware that food trucks and other restaurants that begin to offer plant-based options are likely to syphon some of his business away, giving his customers alternative selections. • Bargaining power of suppliers — Shawn will have to decide how to source his produce and goods. He might be best served by either purchasing from a national chain with a wide range of offerings or dealing with a local provider and advertising the use of locally sourced products. b. Shawn appears to be leaning towards a product differentiation strategy as his focus is on providing unique product offerings. Product differentiation requires a company to focus on uniqueness, customization, and quality of the products to set them apart. By comparison, a cost leadership strategy requires a company to focus predominately on cost effectiveness and cost reduction for both the business and its customers. There is a possibility for a business to adopt a strategy that falls between these strategies on a spectrum, but that does not appear to be the case with Shawn's restaurant. c. If I were helping Chris and Shawn develop their strategy, I would encourage them to continue to examine Porter's Five Forces in more detail. If the threat of competitive rivalry or new entrants is a large concern, then they could speak with local officials and determine if any new businesses have filed for registration in the area. A plan like this would give them perspective about what the general market appears to be doing. They may also want to look into what, if any, restaurants have closed within the last 6 to 12 months to determine what may have hampered their success. Taking the appropriate amount of time upfront to do this kind of research will lend itself to creating a successful strategy. Diff: 2 LO: 1 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

130) Teresa is a dog groomer who has recently become licensed and is now able to take on clients. She decided to go out on her own at the end of the current year and start her own business, Happy Wags Dog Grooming. The goal of Happy Wags will be to provide a spa-like experience for dogs where they will be pampered and groomed and given a fun experience while in Teresa's care. She is aware that there will be challenges to starting her own business, and she wants to be sure she gets it right. When Teresa took a business class in college, she learned about SWOT analysis and how it helps create a strategy for new businesses. Teresa secured a location in an up-and-coming downtown neighborhood that has attracted many other new businesses recently. She would like to have her business strategy and SWOT analysis completed in the next couple of months. Taking all of this into consideration, answer the following questions. a. As part of the SWOT analysis, what are some examples of Happy Wags' internal strengths and weaknesses? b. As part of the SWOT analysis, what are some examples of external opportunities and threats for Happy Wags? c. Why do companies use a SWOT analysis as part of their strategy, and what are some advantages and disadvantages of opting to use this method?

Answer: a. As part of the SWOT analysis, Happy Wags may have the following internal strengths and weaknesses: Strengths • Teresa is a licensed groomer who can operate independently. • Teresa is offering an immersive spa experience for dogs that exceeds that of her competitors. • Teresa has an existing client base that is strong. Weaknesses • Not having a mobile platform for her services will make her less available. • Costs will be higher with additional services being offered. • Teresa cannot afford to hire anyone else to work with her. b. As part of the SWOT analysis, Happy Wags may have the following external opportunities and threats: Opportunities • Happy Wags could become the premiere dog groomer in the area. • They could also retain existing clients and grow the business through referrals. • Teresa can eventually hire additional groomers to expand her business. • Being in an up-and-coming location could garner a lot of interest from the local community. Threats • Existing groomers are already in nearby locations. • Customers may seek a lower priced grooming option even if it is a less spa-like offering. • Groomers could copy her model and open similar competing businesses. • There is a possibility of the city or state implementing new taxes for service businesses. c. Companies often use SWOT analyses to help them move from identifying obstacles and challenges to determining how to overcome them. By identifying internal strengths and weaknesses, the company can generate ideas about how to overcome them. By identifying external opportunities and threats, they can analyze and determine how to best approach each of these issues and formulate a plan to overcome them. Some advantages of SWOT analysis are its simplicity, cost, and applicability. A SWOT analysis is done by gathering employees and having a brainstorming session where input can be solicited from many people and perspectives. Some disadvantages of SWOT analysis are the fact that by design, it does not weight items on the list by any type of priority, and in some cases an organization's strengths can also be its weaknesses. If management is aware of these factors, then a SWOT analysis can be a useful tool for strategizing. Diff: 2 LO: 1 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

131) Turner Company sells new and used instruments and has a full-service instrument repair and maintenance department on site. Turner appreciates its customers, many of whom have remained very loyal over the course of Turner's existence. The company provides free guitar tuning for anyone that purchases a guitar from them. They also have a membership program available at a low cost that rewards customers with a free set of strings for their preferred instrument every month. When a customer chooses Turner for their repair and maintenance needs, the company ensures that all issues, known and potentially unknown, are addressed before the instrument leaves the repair department. Many customers have purchased a variety of instruments over the years from Turner, and others that bought their instruments elsewhere still utilize Turner for their top-notch customer service and maintenance offerings. With this in mind, please answer the following questions. a. As it pertains to their operating strategy, which side of Porter's spectrum would Turner reside on: product differentiation or cost leadership? What led you to this conclusion? b. What if Turner operated on the other side of the spectrum from what you selected for part (a)? How would their strategy be different, and what would distinguish this approach from your original choice? c. How would either strategy identified in parts (a) and (b) provide an advantage for Turner in the marketplace? Do you have any other suggestions as to how they can improve their operations?

Answer: a. Turner Company's operating strategy resides on the product differentiation side of Porter's spectrum since their primary focus is on creating a memorable experience and product for their customers. Their customer base specifically seeks them out because of the exceptional experiences they provide, whether those experiences are procuring a new or used instrument, having an item serviced, or being a member of their loyalty program. Their focus is not on providing the lowest cost or the eliminating non-value-added activities, so they would not be classified as cost leadership. b. If Turner were operating on the cost leadership side of the spectrum rather than the product differentiation side of the spectrum, then there would be a much larger focus on low cost rather than strictly on high quality. If they were to implement that sort of strategy, then they would likely include items such as coupons, member discounts, clearance and sale items, and place more emphasis on offering the most cost-efficient service possible to customers. It is possible that this approach may create an entirely different client-base than they currently serve by attracting customers who more concerned with price and cost-savings than they are with the level of service that Turner currently provides. c. With the model of business Turner selected, their best choice is to continue focusing on a product differentiation strategy. This perspective attracted new customers for them and keeps existing customers happy and willing to return. They may eventually consider implementing some strategies more aligned with cost leadership goals, but I would recommend against a shift fully to that side of the spectrum. Overall, Turner has done an excellent job of creating a sustainable and desirable service. They may want to consider offering additional membership benefits or discounts to regularly create renewed interest in their offerings. Diff: 2 LO: 1 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

132) An organization is designing a system to evaluate its performance. Below is a list of various measures that could accomplish this goal. 1. Net promoter score 6. Vacation days earned vs. used 2. Accounts receivable turnover 7. Days in financial statement close process 3. Overdue project percentage 8. Gross margin 4. Operating cash flow 9. Residual income 5. Average time to hire 10. Earnings per share Please follow the instructions and answer the following questions. a. Classify each measure as financial or nonfinancial and as leading or lagging. When is it appropriate to use each? b. Classify each measure according to the functional area of the organization that would find it most relevant and applicable — for example, sales and marketing, manufacturing, human resource, accounting and finance, and upper management. c. How are companies able to use these measures to evaluate performances at both the individual and company-wide levels? Answer: a. The following measures are both financial and lagging: 2. Accounts Receivable Turnover, 4. Operating Cash Flow, 8. Gross Margin, 9. Residual Income, and 10. Earnings per Share. The following measures are both nonfinancial and leading: 1. Net Promoter Score, 3. Overdue project percentage, 5. Average time to hire, 6. Vacation days earned vs. used, and 7. Days in financial statement close process. b. The Accounting and Finance Department would use the following measures: 2. Accounts Receivable Turnover, 6. Vacation days earned vs. used, and 7. Days in financial statement close process. 1. The Sales and Marketing Department would use: Net Promoter Score. The Manufacturing Department would have an interest in: 3. Overdue project percentage. The Human Resource Department would use: 5. Average time to hire. The Upper Management (or department-level management) would use: 4. Operating cash flow, 8. Gross Margin, 9. Residual Income, and 10. Earnings per Share. Other departments may use some of these measures, but these measures are likely to best serve the departments as they appear here. c. Companies use certain measures to determine performance outcome after events have transpired using lagging indicators. These indicators use information that has already transpired and are the results of past decisions. Management must be mindful that to rely solely upon lagging indicators will not assist them in accounting for data as it happens in real-time. By using leading indicators, companies can measure the results of company actions as they stand. Meaningful changes can be implemented proactively, and changes can be made to impact the outcome. Diff: 2 LO: 2 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 88

133) Under a well-constructed management control system, an organization needs to make some decisions about its Performance Measurement Process (PMP). Sarah is a manager for a small toy factory, and she knows she must be mindful of the role the management control system will play in motivating employees to head in the same direction while also aligning with company goals. Sarah is in the early phases of her design, but she knows that upper management would like the company to be extremely profitable while also keeping employees satisfied. With this in mind, please answer the following questions. a. In addition to acknowledging the complexity of the design for this process, what are some additional considerations that Sarah should make? b. How does responsibility change for employees as they move into upper-level management positions? What should Sarah keep in mind while setting up the PMP? c. What are the most significant aspects of the performance evaluation process from an employee's perspective? How can Sarah ensure her PMP considers all these aspects?

Answer: a. In addition to keeping the complexity of the design in mind, Sarah could additionally consider the following: • Strengthen the clarity of employee evaluation measures by clearly communicating the organization's mission, vision, goals, objectives, and benchmarks. This would strengthen employer and employee outcomes because all parties would be well-informed about their expectations. • Set a realistic and well-documented timeline for performance evaluations with enough time built in for constructive criticism and praise. • Make sure to measure things that matter and are effective indicators of the organization's performance. • Assure that evaluation measures are rigorous enough to motivate employees but are also both realistic and attainable. b. When employees join an organization at the lowest level of the employment hierarchy, their responsibilities will likely include short-term objectives with specific performance measures. As employees progress through the hierarchy and move into middle and upper-management, they are likely to have responsibilities that are more oriented towards long-term objectives with lessspecific performance measures. Sarah will want to keep in mind the potential number of employees at each of level of the hierarchy to ensure equitable distribution of the work and responsibilities. c. From an employee's perspective, the following are the most significant aspects of performance evaluations: • Personal goals: Management guides and assists employees in goal setting so their goals align with overall business goals and strategies. • Communication: Offer continuous communication between employees and managers about the work and behavior of the employees. • Mentoring: Give employees feedback on their work with the overall goal of increasing effectiveness. • Evaluation: Utilize employees' input to provide more formal feedback on their work. • Compensation: Ensure good performance results in promotions and raises as warranted. Sarah can consider all aspects by creating an evaluation plan using these aspects as starting points during her design. Diff: 2 LO: 2 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

134) Baldwin Landscaping Services is entering its fifth year of operations and is currently performing its year-end analysis. Organizational management evaluates both financial and nonfinancial measures to determine what areas may need improvement. They asked Karen, a staff accountant, to collect some data and perform an analysis on their accounts receivable. Karen has gathered the following information:

Accounts Receivable, beginning Accounts Receivable, ending Net Credit Sales

Year 1 $97,832 $95,600 $1,020,410

Year 2 $95,600 $110,880 10% increase over last year

Use the information above to answer the following questions. (Use 365 days in each year, and round all calculations to two decimal places.) a. What are the Accounts Receivable Turnovers in Years 1 and 2, and what is the percentage change between years? b. What are the Days' Sales in Receivables in Years 1 and 2, and what is the change between years? c. Based on this initial analysis, which year was more efficient at collection of accounts receivables, and what changes could the organization make (if any) to improve these financial metrics?

Answer: a. Accounts Receivable Turnover: Year 1 = 10.55, Year 2 = 10.87. Change = 3.03% increase in year 2 The Accounts Receivable Turnover is calculated with the following formula: Net Credit Sales/Average Accounts Receivable. Net Credit Sales in Year 2 = $1,020,410 × 1.10 = $1,122,451. Year 1 = $1,020,410/(($97,832 + $95,600)/2) = $1,020,410/$96,716 = 10.55 Year 2 = $1,122,451/(($95,600 + $110,880)/2) = $1,122,451/$103,240 = 10.87 % change in accounts receivable turnover = (10.87 - 10.55)/10.55 = 3.03% increase in year 2 b. Days' sales in receivables: Year 1 = 34.60 days, Year 2 = 33.58 days. Change in days' sales in receivables = 1.02 days less in year 2 The Days' Sales in Receivables is calculated with the following formula: 365 days/Accounts Receivable Turnover (from part a). Year 1 = 365/10.55 = 34.60 days Year 2 = 365/10.87 = 33.58 days Change = 34.60 days - 33.58 days = 1.02 days less in year 2 c. Based on this initial analysis, the company did a more efficient job of collecting accounts receivable in Year 2. In that year, it took them 1.02 fewer days, on average, to collect than it did in the previous year. At an initial glance, it seems like the company's collection period has improved, but management may feel this improvement is not as significant as they would like to see. One suggestion would be to set a goal to have a collection time of less than 30 days. Management may choose to revisit their collection policies and consider utilizing penalties or charging interest on accounts that take longer to pay. Diff: 2 LO: 2 Bloom: AN AACSB: Analytic AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

135) Turner Electronics is a retail store that specializes in the sale of small electronics including televisions, computers, and stereo equipment. Management has been concerned that the company is both overordering and not turning over merchandise as quickly as they did in years prior. Once inventory has been available for sale for six months, the store marks the sales price down so that they can make room for new products. Management would like to perform some analysis and determine if their concerns are valid. Here is some partial information from their recent financial statements:

Inventory, beginning Inventory, ending Cost of Goods Sold

Year 1 $1,237,542 $1,450,682 $2,643,903

Year 2 $1,450,682 $1,832,327 $2,900,431

Use the information above to answer the following questions. (Use 365 days in each year, and round all calculations to two decimal places.) a. What is the Inventory Turnover in Years 1 and 2, and what is the percentage change between years? b. Based on the answer from part a, determine the Days' Sales in Inventory in Years 1 and 2, and calculate the change between the two years. c. Based on this initial analysis, which year was more efficient at turning over inventory, and what suggestions, if any, could be made to management to improve these financial metrics?

Answer: a. Turnover: Year 1 = 1.97, Year 2 = 1.77. Change = 10.15% decrease The Inventory Turnover is calculated with the following formula: Cost of Goods Sold/Average Inventory. Year 1 = $2,643,903/(($1,237,542 + $1,450,682)/2) = $2,643,903/$1,344,112 = 1.97 Year 2 = $2,900,431/(($1,450,682 + $1,832,327)/2) = 2,900,431/$1,641,504.50 = 1.77 % change = (1.77 - 1.97)/1.97 = 10.15% decrease in year 2 b. Days' Sales in Inventory: Year 1 = 185.28 days, Year 2 = 206.21 days. Change = 20.94 days more in year 2 The Days' Sales in inventory is calculated with the following formula: 365/Inventory Turnover (from part a). Year 1 = 365/1.97 = 185.28 days Year 2 = 365/1.77 = 206.21 days Change = 206.21 - 185.28 = 20.94 more days in year 2 c. Based on this initial analysis, the company did a less efficient job of turning over inventory in Year 2. It is taking them an average of 20.94 additional days compared to the previous year which is almost three full weeks. This increase also moves them farther from the six-month mark where they begin to discount their existing inventory. Management could order less inventory and keep less stock on hand or consider marking items down before the six-month mark to move inventory out faster. If they continue with their current behavior, then they will continue to take more days to turnover inventory, and this will only make matters more concerning. Diff: 2 LO: 2 Bloom: AN AACSB: Analytic AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

136) Florals Inc. is a specialty fabric store that services customers in the market for unique fabrics and patterns. They have an online presence and do not have any intention of opening a brick-and-mortar location, but they would like to increase sales over the next year. They have a small group of shareholders and are compiling information together so that they can set goals for the next fiscal year. Management would like to formulate a comprehensive plan within the next month. They have enlisted the assistance of department heads from across the organization. Please answer the following questions. a. What are the four perspectives of a balanced scorecard? Describe the general rationale for each. b. Provide one objective, initiative, measure, and target for each perspective in this scenario, and explain whether or not these perspectives must all be linked? c. What advice could you give to management about the goals and objectives you provided in part b, and are there any additional tools management could use to augment their balanced scorecard when setting company strategy?

Answer: a. The four perspectives of a balanced scorecard are: • Financial perspective — This perspective focuses on the shareholder's point of view and what financial metrics turn shareholder values into company objectives. A company will use this perspective do decide if they should make sales in new markets, increase sales to existing customers, or find ways to use their existing assets more effectively. Overall, the company wants to ensure their financial metrics are progressing in a way that benefits the company and its shareholders. • Customer perspective — This perspective focuses on how a customer perceives the company and the value they receive from interacting with the company. There is also a desire to measure customer satisfaction and not just customer retention. A company should always keep in mind that customers who have a positive experience with them are more likely to continue to support the business than ones that have a negative experience. • Internal business process perspective — This perspective focuses on the internal processes a company has that create value for both customers and shareholders. This perspective allows the company to look inward and determine whether there is any room for improvement in their established processes. • Learning and growth perspective — This perspective focuses on how an organization supports its people and the opportunities it provides to foster growth. Employee engagement and satisfaction reside within this perspective, and it is in the organization's best interest to keep its workforce satisfied, growing, and productive. b. Financial perspective: Objective — Increase revenue per customer, Initiative — Direct marketing to the chosen customer segment, Measure — Revenue per customer, and Target — 15% increase over last year. Customer perspective: Objective — Increase customer retention, Initiative — Initiate customer satisfaction surveys, Measure — Number of repeat customers, and Target — 35 repeat customers per month Internal business process perspective: Objective — Provide variety of offerings, Initiative — Research consumer trends and behaviors, Measure — Number of new offerings, and Target — Add one new offering per month Learning and growth perspective: Objective — Retain textile engineers, Initiative — Initiate comparative compensation study, Measure — Length of employment, and Target — Keep textile engineers for 5 or more years All the perspectives on the balanced scorecard should be linked, and they should all support one another. Not linking them all might cause certain parts of the business to strive towards a goal that does not support another part of the business.

c. Management should consider how they can ensure all four perspectives of the balanced scorecard remain linked and supportive of one another. A lot of the objectives for the upcoming year show a strong inclination towards increasing sales and revenue. Management's strategy should include a focus on customer satisfaction that may include soliciting feedback from customers in addition to already identified initiatives. An additional tool management could use might be a strategy map that would visually link their chosen objectives to the four perspectives. Diff: 2 LO: 3 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

137) Sarah is a dressmaker who operates a small online marketplace. Her business, Fancy Knits, has grown beyond Sarah's capacity to handmake all requested items herself. She knows she will soon have to outsource her sewing to another company or individual. When she outsources, she will be able to continue to grow her business and expand it into new markets. Sarah has a dedicated clientele she would like to engage with in more meaningful ways, so she is considering an increase in her social media presence. Sarah has big hopes and dreams, and she would like her business to continue to be successful without trying to expand too quickly. Sarah knows that proper planning and adoption of a strong strategy provide her with the best chance of success. a. What is a strategy map, and why do businesses use them? Would Fancy Knits be able to utilize a strategy map in their strategic planning? b. If the company decides that they would like to focus on customers during their next fiscal year, then what would an appropriate objective be on their balanced scorecard? Would this perspective directly impact any other balanced scorecard perspectives? c. Which strategy does the objective you created best reflect: cost leadership or product/service differentiation? If you were talking to Sarah, what current strategy would you recommend she keep using? Answer: a. A strategy map is a tool used by management in conjunction with or instead of a balanced scorecard (BSC). This map visually links chosen objectives to the four BSC perspectives focusing on the links between perspectives. The company's mission and vision should drive decisions that management makes to achieve its objectives as shown on the map. The map can make visible connections between objectives that may otherwise not naturally reveal themselves. Yes, Fancy Knits should be able to use a strategy map with a BSC or on its own. b. If Fancy Knits would like to focus on customers during the next fiscal year, then an appropriate objective on their BSC could be to increase or maintain customer satisfaction, or the objective could be to increase customer retention. Both of these objectives, which are within the customer perspective, will have an impact on the other BSC perspectives. If they are successful in increasing the customer retention or maintaining or increasing customer satisfaction, then this will also impact the financial perspective by increasing revenue. It will be important for Sarah to determine what the other perspectives are and how they connect as she finalizes her objectives. c. The objective(s) described in part (b) are more in line with a product differentiation strategy since the focus is on the quality and uniqueness of the dresses that Sarah makes and sells. If I were talking to Sarah, then I would encourage her to continue using this type strategy since her focus should not be on cost leadership. She is selling a unique product that appeals to her customers' desires to have something special rather than the least expensive choice. Sarah could eventually choose to integrate some cost leadership strategies if she wants to expand into additional markets. This may include adding a sale or discounted section to her website where less unique items sell for less. Diff: 2 LO: 3 Bloom: AN AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning. 98

138) Sacha is a manager for Foto Corp., a company that sells decorative and engravable picture frames. The company has just completed its fifth year in business. Management is very pleased to learn that the company has exceeded the financial goals it outlined at the beginning of last year. This was the first year the company chose to use a balanced scorecard to help their planning and strategy efforts. Below are two sections from their completed balanced scorecard along with the actual final value of the metric for each: Financial Objectives Initiatives Measures Increase revenues Increase sales per month Monthly revenue growth percentage Increase revenue Research customer Revenue per order per customer markets and increase direct marketing

Targets 4%

Actual 5.20%

$25

$27.50

Customer Objectives Initiatives Measures Targets Actual Increase customer Gather customer surveys Average customer 4.6 out of 5 4.3 satisfaction satisfaction rating Increase number of Initiate new customer Customer conversion 28% or higher 20% new customers interactions rate Use this information to answer the following questions. a. As you evaluate the results of the balanced scorecard, how would you say Foto performed on its financial objectives, and how did it perform on its customer objectives? Provide as much detail as possible for both. b. If a balanced scorecard was completed thoroughly, then should there be links connecting parts of the customer and financial perspectives? How well do Foto's customer objectives link or relate to its financial objectives? c. How was Foto able to produce the results shown in the financial perspective while generating the results in the customer perspective? Is this a combination that is likely to be present in future years?

Answer: a. After evaluating the balanced scorecard for Foto, it is clear they performed well and exceeded their financial targets as set. They wanted to increase revenues by 4% every month and managed to achieve an average of 5.2%. They also wanted to increase revenue per customer to a per-order average of $25 and ended the year with a per-order revenue of $27.50. The company exceeded their both targets in the financial perspective, and that indicates that the goals were both realistic and attainable and management was successful there. After reviewing the performance of the customer perspective, it appears that Foto did not meet their targets for either objective. Their average customer rating was 4.3 out of 5, and that is short of the 4.6 out of 5 goal they set for themselves. Their customer conversion rate was only 20%, but they were trying to achieve a target of 28%, a notable difference. b. If a balanced scorecard was completed thoroughly, then there should be links connecting the customer and financial perspectives. Ideally, a balanced scorecard aims to create objectives that support its perspective and align with the objectives from other perspective on the card. In the case of Foto's balanced scorecard, the customer-based objectives involved increasing the number of customers Foto has. This supports their financial objectives since having more customers and make a purchase also increases their revenue. Even though Foto was not able to achieve their targets in the customer perspective, they were still able to surpass the targets from their financial perspective section. Initially, this may seem incompatible since there was failure in one area but success in another area. This might be explained in multiple ways. It is possible Foto increased the amount of traffic through the store but failed to convert visitors into customers, but existing customers who did purchase, spent more on average than they did in previous past. The missed target of customer satisfaction could be due to the population of people submitting their responses being unhappy with something outweighing satisfied customers that did not submitting a survey. If Foto chooses not to change any of their current approaches, then they may find a similar performance for years to come, so these results would be likely to appear again. Diff: 2 LO: 3 Bloom: E AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

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139) Brian and Mark are in the early stages of planning for a café they would like to open. Brian has a strong business background and currently works as a staff accountant at the corporate office for a local restaurant chain. Mark has been the store manager for a small bakery for the past few years where he was started as a barista. The two of them believe that combining their complementary skill sets will provide them the best opportunity to succeed in the café industry. Their café will feature unique roasts of coffee and espresso sourced from a local coffee bean roastery. They would also like to bake gluten-free and vegan desserts to sell to their customers. Brian and Mark intend to market their offerings as a premium choice and are aware that the pricing will not appeal to all, especially those strictly seeking the cheapest option. They would also like the café to offer space for small community events and in-house events like trivia, book signings, or open mic nights. They have scouted locations and believe they will take over another café's lease since the current renters have chosen to close their shop after eleven years. The neighborhood where the building is located also features trendy shops, dog parks, bookstores, and local restaurants. Brian and Mark have tentatively decided to name their café Java City and would like to open within the next 9 months if possible. a. Are Brian and Mark using a cost leadership or product differentiation, and why? b. What is an appropriate strategic plan the company should set for themselves, and what is an appropriate way to measure their performance? c. Identify a factor for each of Porter's Five Forces that could impact the strategy for the company. d. If the company also decides to perform a SWOT Analysis, then what are the internal strengths and weaknesses and external opportunities and threats the company could encounter? e. If you needed to make a recommendation to management based on your analysis in parts a, b, c, and d, what would you select? Please provide as much detail as possible to support your decision.

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Answer: a. Brian and Mark are utilizing a product differentiation approach for Java City. They are opting to focus on the uniqueness and customizability of their products rather than lowering costs. As they get closer to open, they may choose to integrate some cost leadership strategies to entice new customers, and this would then put them in the middle of the strategy spectrum as described by Porter. b. An appropriate strategic plan for Java City would be to generate enough in sales to completely cover costs in their first year and to realize an increase in the following year. An appropriate performance measure for this plan would be the sales revenue. To be more precise, they could set a target for sales growth by 5% each year. Since this is the beginning of their operation, they may not focus on operating profit. But they may add operating profit as additional measure later. For this, the manager would have monthly and quarterly meetings to determine how well resources are being managed to accomplish the goal. An annual performance would provide an opportunity to provide raises or bonuses for a favorable performance or to detail what happened in the event of unfavorable performance. c. The following is a list of Porter's Five Forces and elements that Brian and Mark are likely to encounter in his business: • Competitive rivalry — Java City is a café that sells both coffee-based drinks and glutenfree and vegan desserts. This industry has a lot of existing competitors including other local coffeeshops and bakeries and large chains and franchises. • Power of customers — The demographic of Java City is likely to include customers of all ages looking to support a local business or with dietary needs that lead them there. Brian and Mark will want to eventually narrow down offerings to appeal to repeat customers to continue to draw them away from their competitors. • Threat of substitutes — Brian and Mark need to be cognizant that their customer base may also be satisfied making coffee-based drinks at home from a store-bought mix or having similar products delivered. • Threat of new entrants — Brian and Mark need to be aware that other coffee houses may open in the area and choose to offer similar products. Local bakeries or restaurants may choose to integrate gluten-free or plant-based items into their menu, and that may give Java City's customers different businesses to meet their needs. • Bargaining power of suppliers — Brian and Mark have decided to feature locally roasted coffee beans, but they must decide how to source the products that they will use for their baked goods. They might use a local provider for that as well contributing to their uniqueness, or they could use a larger chain that saves some money.

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d. As part of their SWOT analysis, Java City may have the following internal strengths and weaknesses and external opportunities and threats: Strengths • Brian has an extensive business background. • Mark has a lot of experience in the food and coffee industry. • They have good relationships with local suppliers. • Java City will be able to cater to clients’ unique needs and offer them gluten-free and vegan options. Weaknesses • An expensive menu may prove difficult to sustain. • The start-up costs are high since they must buy all products up front. • They are unable to run the business by themselves and will have to pay for labor. Opportunities • They will be a proud customer of locally sourced coffee beans for their coffee and espresso. • They could gain a following with customers in the area frequenting some of the other businesses. • Eventually, they might franchise this business or open another location. • There is an option to obtain a mobile truck once they establish name recognition in the area. Threats • There are already existing cafes in the area. • A wide variety of substitute products are on the market. • There are existing bakeries in the area that also sell gluten-free desserts. • A local ordinance could pass that heavily regulates how they bake their goods. e. If I were in charge of assisting in formulating a plan based upon the analysis performed thus far, I would highly recommend that Java City use a product differentiation strategy to begin. This would be an effective marketing tool to set the business apart from other competitors in the area by noting that Java City is a proud customer of locally sourced goods from the community. While the SWOT analysis revealed some areas that Brian and Mark can focus on, they could also spend some time prioritizing which of these areas to address first. The initial strategic plan and performance measure are adequate at this stage of the planning process, but I would recommend identifying an actual percentage to target. Diff: 2 LO: 1 Bloom: S AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

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140) Tracy is the Chief Financial Officer for Trendy in a Box, a publicly traded fashion delivery subscription-based company headquartered in New York City. Trendy is entering its fourth year in business and has experienced annual sales growth every year. Their customers vary in age, gender, and geographic location. Trendy's includes accountants, customer service reps, warehouse staff, and personal shoppers, personal shopper is the most sought-after position in the organization. All employees, except for warehouse workers and personal shoppers, have the option to work in-office or remotely and this has created some unique tax issues for Trendy in a Box to overcome. Tracy is preparing for the company's annual employee meeting where they discuss the past year and reveal plans for the upcoming year. Tracy is consulting all departments and asking each for data. Tracy would like to see Trendy continue growing and would like to present a plan to all Trendy's employees at the upcoming meeting. With all of this in mind, answer the following questions with the objective of preparing Tracy for the meeting. a. What are some examples of financial performance measures this company could use and why choose those? Would other companies use the same measures? b. What are some examples of nonfinancial performance measures that Trendy company could use and why choose those? Will all Trendy's departments use the same measures? c. One company-wide goal is to improve staff evaluation procedures. What are the five most important aspects of the staff performance evaluation process from the employee's perspective, and how can Trendy ensure they are thoroughly addressing each? d. The company is considering hiring new employees and must determine the best way to compensate the new hires. Based on the information provided above, what type of compensation would be the most sensible choice? e. If you were a manager at this company, how would you describe the importance of performance measurement to the rest of the management team, and how would you describe it to other employees?

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Answer: a. There are variety of financial performance measures a company can choose from including gross margin, operating margin, earnings per share, operating cash flow, growth ratios, turnover ratios, and returns on investments. Each of these measures can help a company analyze various aspects of their business and guide them toward reaching their goals. Some of these metrics will hold immense value for internal users like gross and operating margin, and turnover ratios. But, a metric like earnings per share would be incredibly valuable for external users. Not all companies use the same financial performance measures, but there could be some overlap depending on the overall objectives identified by different organizations. For example, earnings per share would not be a useful metric for a non-publicly traded company that has no shares. b. Nonfinancial measures can also help management make decisions and focus on leading indicators. These metrics assist decision-makers to make changes in real time as events unfold. Not all departments will use the same measures since they are trying to account for and manage varied aspects of the business. Trendy in a Box can use the following nonfinancial performance measures in the departments shown: Human Resources • Average time-to-hire • Employee training satisfaction • Internal promotion rate Manufacturing/Production • Efficiency of shipping completed orders • Product quality • Number of late shipments Sales and Marketing • Net promoter score • Customer retention rate • Organic website traffic Accounting • Duration of financial statement close process • Vacation days earned versus vacation days used • Timeliness of reports requested by other departments

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c. The five most important aspects of the performance evaluation process from the employee’s perspective: • Personal Goals: Employees work with management to set personal goals that align with those of the business. • Communication: Employees and managers engage in constant communication about the quality of their work. • Mentoring: Managers provide employees with feedback about their work and provide support so that they can work towards continuous improvement. • Evaluation: The company provides formal feedback and review for employees that includes their input as well. • Compensation: Good performance results in raises and/or bonuses. The company can ensure that all the requirements are met by using this list as a starting point to develop a more formal checklist. Having a structured format ensures all aspects get thoroughly addressed. d. Businesses have a variety of ways they could compensate their employees and will assign different types of pay based on the work performed. For warehouse workers, Trendy should go with an hourly wage that allows for overtime pay when the employees need to work more than their scheduled hours. Accountants, executives, and customer service workers are best served by receiving a salary since their positions require a more varied skillset where the outcomes, rather than the number of hours, are measured. Executives may receive bonuses and/or stock options to incentivize them meet certain financial performance measures. Personal shoppers should receive a commission-based pay where their compensation is based on the overall sales they make with an option for a bonus if they average more than a certain value per customer. Ensuring compensation is fair and aligns with expectations for the position will lend itself well to ensuring that employees remain happy. e. If describing performance measurements to management, then it is important to focus on the big picture with a lot of long-term objectives. As a person moves up the management ladder, their responsibilities tend to become more long-term and less specific. Understanding how management’s performance fits into the larger landscape of the business helps management understand why their leadership and the outcomes they are responsible for are so crucial. If describing performance measurement to other employees, then it will be important to focus on short-term objectives and very specific performance measures since this is typically the way staff and other employees are evaluated. Diff: 3 LO: 2 Bloom: S AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

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141) Artemis Corporation is a large, national company that manufactures and sells designer, vegan leather products. Their offerings include jackets, pants, dresses, tops, shoes, and accessories. In addition to being sold in high-end luxury stores, they also have a website where people from all over the country can purchase their goods. The management for Artemis has created the following list (in no particular order) of objectives, initiatives, measures, and targets for the upcoming year. Objectives Increase customer satisfaction Increase revenue per customer Retain top designers Reduce rework Increase access to new colors Hire experienced sales manager Increase operating cash flows Increase market share Increase employee training Reduce order fulfillment time Increase number of new customers Increase revenues

Initiatives Conduct employee satisfaction survey Conduct efficiency survey Hire headhunter to locate strong candidates Improve receivables collections process Launch new social media campaign Gather customer feedback on survey Establish relationships with new suppliers Serve more customers as throughput is increased Gather industry or market feedback Direct marketing to certain segments Implement training program Conduct quality checks of orders

Measures % of employees completed training Total revenue Turnover rate of best designers Average customer satisfaction rating Management satisfaction with chosen hires Time from order placement to shipment Revenue per order Market share Number of new supplier relationships % of new customers % of orders requiring correction Operating cash flows

Targets 1 or more per month $110 4.8 out of 5 25% or more of sales volume 5% or less of production $2,342,500 4% 0 24 hours or less 4.5 out of 5 $10,000,000 100% of employees

The managers for Artemis are completing the balanced scorecard using the objectives, initiatives, measures, and targets above.

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a. Sort the objectives, initiatives, measures, and targets and complete the financial perspective of the balanced scorecard. b. Sort the objectives, initiatives, measures, and targets and complete the customer perspective of the balanced scorecard. c. Sort the objectives, initiatives, measures, and targets and complete the internal business process perspective of the balanced scorecard. d. Sort the objectives, initiatives, measures, and targets and complete the learning and growth perspective of the balanced scorecard. e. Does the balanced scorecard prepared by Artemis align with what you would expect from a company in this industry? How will management use this information in the upcoming year? Are there any other considerations to make when a company decides to use a balanced scorecard?

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Answer: a. Financial Perspective Objectives Initiatives Measures Increase revenue per Direct marketing to Revenue per order customer certain segments Increase operating cash Improve receivables Operating cash flows collections process flows Increase revenues Serve more customers as Total revenue throughput is increased

Targets $110 $2,342,500 $10,000,000

b. Customer Perspective Objectives Initiatives Measures Increase customer Gather customer Average customer satisfaction feedback on survey satisfaction rating Increase market Launch new social Market Share share media campaign Increase number of Gather industry/market % of new customers new customers feedback

Targets 4.8 out of 5 4% 25% or more of sales volume

c. Objectives Reduce rework Increase access to new colors Reduce order fulfillment time

Internal Business Process Perspective Initiatives Measures Targets Conduct quality % of orders requiring 5% or less of checks of orders corrections production Establish Number of new supplier 1 or more per relationships with relationships month new suppliers Conduct efficiency Time from order 24 hours or survey placement to shipment less

d. Learning and Growth Perspective Initiatives Measures Conduct employee Turnover rate of best Retain best designers satisfaction survey designers Hire experienced Hire headhunter to Management sales manager locate strong candidates satisfaction with chosen hires Increase employee Implement training % of employees training program completed training Objectives

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Targets 0 4.5 out of 5

100% of employees

e. The balanced scorecard prepared by the management for Artemis aligns with what one would expect to see from a company operating in a high-end luxury goods market. They set objectives that make sense considering the importance of their customers, high amount spent per order, and their desire to continue growing their brand. Management can use this information to create the rest of their strategy for the year, and they can determine what role each department plays in realizing these goals. For example, increasing overall revenue for an organization takes the coordination and cooperation of all employees, and not only a single department like sales. When using a balanced scorecard, it is important to remember that these do not prioritize, and management will probably want to use this scorecard as a starting point. Then, they can outline a more specific plan for the company and the management team. Additionally, Artemis may want to incorporate the use of a strategy map that would connect some of the less obvious areas of the scorecard with the overall mission and vision of the company. Diff: 3 LO: 3 Bloom: S AACSB: Communication AICPA: BC: Strategic Perspective IMA: Strategy, Planning & Performance: Strategic and Tactical Planning.

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